WEX Inc. (then Wright Express Corporation) — Q2 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2012, compared with the same 2011 periods. WEX provides fleet and other business payment-processing and information-management services through Fleet Payment Solutions and Other Payment Solutions.
Key financial results
Amounts below are in millions of dollars except per-share data. Balance-sheet figures are as of June 30, 2012; income and cash-flow figures are for the stated periods.
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $153.1 | $141.3 | $293.2 | $261.4 |
| Operating income | $62.9 | $61.2 | $120.8 | $107.3 |
| Operating margin | 41.1% | 43.3% | 41.2% | 41.1% |
| Net income | $30.3 | $40.6 | $53.6 | $52.7 |
| Diluted EPS | $0.78 | $1.04 | $1.37 | $1.36 |
| Adjusted net income, company-defined | $39.1 | $35.5 | $74.6 | $64.7 |
- Q2 revenue rose 8.3% year over year, while operating income rose 2.8%. Net income fell 25.3%, primarily reflecting a large Australian tax charge; adjusted net income increased about 10%.
- First-half revenue increased 12.2% and adjusted net income increased about 15.4%. GAAP net income increased 1.6%.
- Other Payment Solutions was the faster-growing segment: Q2 revenue increased 39% to $38.4 million, with operating income up 21% to $11.5 million. Fleet Payment Solutions revenue rose 1% to $114.7 million; operating income was down 1% to $51.3 million.
- Q2 corporate charge-card purchase volume grew 49% to $2.8 billion. Fleet vehicles serviced increased 7% to approximately 6.7 million, and fleet transactions processed rose 3% to 83.3 million.
Cash flow, debt and liquidity
- First-half GAAP operating cash flow was a use of $50.6 million, versus a use of $108.8 million a year earlier. WEX’s non-GAAP “management operating cash” measure was an inflow of $210.5 million, compared with $79.8 million; it adds deposit and borrowed-federal-funds movements to GAAP operating cash flow.
- Cash and equivalents were $208.0 million, up from $25.8 million at year-end 2011. The company attributed its higher cash balance partly to deposit growth and its decision to hold more liquidity amid fluctuating cash needs. Accounts receivable, net, was $1.53 billion.
- Debt under revolving credit facilities and term loans totaled $320.7 million: $133.2 million drawn on the revolver and $187.5 million on the term loan. The revolver had $564.5 million of unused capacity; approximately $140 million of federal-funds lines were also available but undrawn. WEX reported compliance with material debt covenants.
- Deposits totaled $961.6 million, including $530.9 million of certificates of deposit, $123.1 million of interest-bearing money-market deposits, $295.6 million of Higher One non-interest-bearing NOW deposits and $12.0 million of other non-interest-bearing customer deposits. Deposits help finance receivables and are subject to regulatory capital requirements.
- Investing cash use was $43.2 million, including $27.8 million for CorporatePay and $15.9 million for property and equipment. Financing cash provided $276.1 million, including a $268.0 million net increase in deposits and $30.4 million of net revolving-credit borrowings; WEX also repurchased $11.3 million of shares.
Material changes, outlook and risks
- Australian tax item: legislation enacted June 29, 2012 affected deductions for certain amortizable intangibles. WEX recorded a $31.1 million tax charge, contributing to a 66.5% consolidated Q2 effective tax rate versus 36.4% a year earlier. The company also recorded a $9.75 million benefit from reducing a tax-refund payable to former RD Card Holdings Australia shareholders. Proposed Australian tax-consolidation changes could create further tax expense and raise future statutory tax rates.
- Acquisition: WEX acquired UK-based CorporatePay on May 11 for approximately £17 million ($27.8 million), net of cash acquired, to expand Other Payment Solutions. The agreement provides for potential additional consideration of up to £5.5 million based on performance milestones; no liability was recorded at acquisition, and management said it did not expect payment. Purchase-price valuations were preliminary.
- Fuel derivatives: Q2 reported net realized and unrealized gains were $20.8 million, compared with $6.2 million in Q2 2011; first-half results were a $2.0 million gain versus an $18.9 million loss. These instruments do not qualify for hedge accounting, so fair-value changes affect earnings. Q2 realized settlements were losses of $3.8 million. WEX expected to continue purchasing derivatives; it did not plan to hedge Australian fuel-price exposure.
- Operating drivers and costs: Q2 fleet payment-processing revenue was nearly flat, with lower average domestic fuel prices partly offset by transaction growth. Other Payment Solutions growth reflected higher card volume and cross-border fees, alongside increased service-fee expense. Credit-loss expense declined in Fleet; Other Payment Solutions’ first-half provision increased, including a $0.9 million bankruptcy loss from one customer.
- Management outlook: WEX said it believed cash needs could be adequately funded for at least the next 12 months. The filing provides no numerical earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Principal risks disclosed: economic and fleet-activity trends, fuel-price and foreign-exchange volatility, credit losses, interest rates, cybersecurity or technology disruption, customer and merchant agreement renewals, acquisition integration and expansion, regulation of the bank subsidiary, litigation, and possible derivative losses. Management said ordinary-course litigation was not expected to have a material adverse effect and reported no material legal proceedings as of filing.
Most important facts for investors to verify
- How much of reported earnings volatility is attributable to fuel-derivative fair-value accounting, and how do realized settlements compare with changes in payment-processing revenue?
- Whether Australian tax-law changes or the proposed tax-consolidation rules lead to additional charges or higher tax rates.
- CorporatePay’s final purchase-price allocation, operating contribution, and any contingent consideration ultimately payable.
- The sustainability and funding implications of deposit growth, particularly Higher One deposits, alongside receivables, regulatory capital needs and debt capacity.
- Whether Other Payment Solutions can sustain volume growth while managing service costs, interchange-rate pressure and customer credit risk.