WEX Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars. WEX provides payment and transaction processing across Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $460.0 million | $386.6 million | $1,283.6 million | $1,111.4 million |
| Operating income | $118.3 million | $102.6 million | $282.0 million | $286.8 million |
| Net income attributable to WEX | $43.1 million | $56.6 million | $90.7 million | $147.0 million |
| Net income attributable to shareholders | $14.6 million | $56.6 million | $44.6 million | $147.0 million |
| Diluted EPS attributable to shareholders | $0.33 | $1.30 | $1.02 | $3.38 |
| Cash provided by operating activities | — | $205.2 million | $187.7 million |
Q3 revenue grew 19% year over year, while operating income grew 15%. Operating margin was approximately 25.7%, versus 26.5% a year earlier. Shareholder-attributable net income fell sharply, principally reflecting $28.5 million of accretion on the redeemable non-controlling interest in the U.S. Health business, as well as higher financing expense and adverse foreign currency and derivative valuation movements. The accretion reduced shareholder-attributable earnings and EPS, not operating income.
Adjusted net income attributable to shareholders, a non-GAAP measure, was $113.5 million in Q3 2019 versus $97.1 million in Q3 2018, and $288.0 million for the first nine months versus $269.1 million. These adjusted figures exclude specified items; they are not substitutes for GAAP results.
- Segment revenue, Q3: Fleet Solutions $277.5 million (+11%); Travel and Corporate Solutions $99.1 million (+20%); Health and Employee Benefit Solutions $83.3 million (+54%).
- Balance sheet at September 30: Cash and cash equivalents $531.4 million; restricted cash $139.8 million; total assets $8.54 billion; gross debt $2.94 billion (net debt carrying value approximately $2.90 billion). Debt was $2.38 billion gross at December 31, 2018. Revolver availability was $718.7 million, subject to covenant compliance.
- Liquidity and cash flows: Nine-month investing cash outflow was $922.3 million, including $838.0 million for acquisitions and $79.1 million of property, equipment and software purchases. Financing activities provided $837.7 million, primarily reflecting acquisition-related borrowings and deposit growth. Cash, cash equivalents and restricted cash totaled $671.2 million at period end.
Changes and operating drivers
- Growth reflected acquisitions and business volumes. Fleet fuel transactions increased 14% and payment-processing transactions 15%; average vehicles serviced increased 22% to about 14.3 million. Average U.S. fuel price fell 8% to $2.80 per gallon.
- Travel and Corporate Solutions purchase volume rose 20% to $11.5 billion, driven by Noventis and corporate payment growth. A contract amendment shifted revenue from other revenue to payment-processing revenue; management expected lower other revenue for the remainder of 2019.
- Health and Employee Benefit Solutions revenue rose 54%, reflecting the Discovery Benefits acquisition and existing customer growth; average U.S. SaaS accounts grew 18% to about 13.0 million.
- 2019 acquisitions included Discovery Benefits, Noventis, Pavestone Capital and Go Fuel Card. Purchase accounting remained preliminary. Acquisition-related amortization, integration expenses and added debt increased costs.
- Credit-loss provision was $14.8 million in Q3, down from $22.5 million; management attributed the quarterly decline primarily to lower fraud losses. Nine-month provision was $47.5 million versus $50.4 million.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided in the supplied filing text. Management stated that cash generation, financial condition and operations, together with available funding sources, should be adequate for cash needs over at least the next 12 months.
- Management cited risks from acquisition integration and leverage, economic and fuel-price changes, foreign exchange and interest rates, credit losses, technology and cybersecurity, regulatory matters, and the ability to retain key agreements. The company had $2.4 billion outstanding under its variable-rate credit agreement; swaps were intended to fix rates on $1.4 billion. It reported compliance with material debt covenants.
- Internal control over financial reporting remained subject to previously identified material weaknesses, including deficiencies at the Brazilian subsidiary and corporate monitoring of certain subsidiaries. Remediation was ongoing; management targeted completion by issuance of year-end 2019 financial statements but cautioned that remediation was not yet established as effective.
- The company had revised prior-period statements for errors, including issues at its Brazilian subsidiary, and characterized the revisions as immaterial. It was cooperating with an SEC investigation related to the Brazil matters and financial and disclosure controls. Management said reasonably possible losses from legal proceedings were not material.
- Other notable items included a Q3 net foreign currency loss of $16.5 million and a $5.7 million unrealized loss on financial instruments. The nine-month unrealized loss was $39.1 million. The effective tax rate was 31.1% for Q3 versus 27.3%, mainly due to earnings mix and a higher valuation allowance related to state net operating losses.
Important facts for investors to verify
- How much of reported growth and adjusted earnings reflects acquired businesses versus organic performance, and whether preliminary acquisition valuations or integration costs change.
- Whether remediation of material weaknesses is completed, tested and judged effective, and any developments in the SEC investigation or Brazil-related reporting matters.
- Debt, interest costs, covenant headroom and liquidity needs as acquisition financing and receivables funding evolve.
- The durability of credit performance, late-fee revenue and customer payment trends, particularly as economic conditions and fuel prices change.
- The effect of the Travel and Corporate contract amendment on revenue mix and future revenue, and the sensitivity of earnings to foreign exchange and interest-rate movements.