WEX Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018. Amounts are in U.S. dollars. WEX provides corporate payment solutions through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $381.9 million | $354.0 million | +7.9% |
| Operating income | $68.9 million | $83.9 million | -17.8% |
| Operating margin | 18.1% | 23.7% | -5.6 percentage points |
| Net income attributable to WEX shareholders | $16.1 million | $52.0 million | -69.0% |
| Diluted EPS | $0.37 | $1.20 | -69.2% |
| Adjusted net income (non-GAAP) | $74.8 million | $82.0 million | -8.8% |
| Operating cash flow | $70.1 million | $87.8 million | -$17.7 million |
Revenue grew across Travel and Corporate (+22%) and Health and Employee Benefit Solutions (+19%); Fleet Solutions rose 1%. GAAP earnings were pressured by a $11.9 million unrealized loss on financial instruments (versus a $13.5 million gain in Q1 2018), a $3.9 million foreign-currency loss, higher financing interest, and acquisition-related and other costs. Total interest expense on financing was $31.1 million, up from $27.3 million. The effective tax rate was 26.4%, compared with 25.2%.
Credit-loss provision was $17.8 million, versus $14.2 million. Fleet fuel-related credit losses were 15.7 basis points of fuel expenditures, up from 12.5 basis points, reflecting discrete fraud losses and some deterioration in delinquency roll rates.
Liquidity, debt and cash flows
- At March 31, cash and cash equivalents were $387.3 million and restricted cash was $138.8 million. Combined cash, cash equivalents and restricted cash were $526.1 million, down $29.0 million from the start of the quarter. Restricted balances are not generally available for corporate purposes.
- Gross debt was $3.03 billion, up from $2.38 billion at year-end 2018, principally reflecting acquisition funding. Long-term debt, net, was $2.81 billion; short-term debt, net, was $184.4 million. Borrowings under the 2016 Credit Agreement totaled approximately $2.45 billion, at a 4.6% weighted-average effective rate.
- Revolver borrowings were $169.2 million, with $547.3 million of reported borrowing capacity, subject to covenant compliance. WEX was in compliance with material debt covenants. Interest-rate swaps were intended to fix rates on $1.5 billion of variable-rate borrowings.
- Investing cash outflow was $596.9 million, including $568.4 million of acquisition payments. Financing cash inflow was $496.1 million, largely reflecting increased borrowing. Operating cash flow was $70.1 million; the filing notes that working-capital movements materially affect cash needs.
- Management said available cash generation and financing sources were expected to cover cash needs for at least the next 12 months. WEX Bank was classified as well capitalized by regulators.
Business developments and material changes
- WEX acquired Noventis in January for $343.1 million, Discovery Benefits in March for $525.6 million (including $50 million payable in January 2020), and Pavestone Capital in February for $28.1 million. Purchase accounting remained preliminary. Discovery Benefits’ seller received a 4.9% interest in the U.S. Health business, reported as redeemable non-controlling interest.
- Noventis contributed $9.2 million of revenue and a $1.8 million pretax loss after acquisition; Discovery Benefits contributed $8.6 million of revenue and $1.1 million of pretax income. The acquisitions drove higher Travel and Health revenue and contributed to increased debt, goodwill and intangible assets.
- WEX agreed to acquire Go Fuel Card for €235 million (about $265.5 million at the agreement date), with closing expected in late Q2 or early Q3 2019, subject to approvals and other conditions. The filing said the acquisition was expected to strengthen WEX’s European position and reduce sensitivity to retail fuel prices.
- Fleet operating indicators included 13.1 million average vehicles serviced (+14%) and 140.5 million total fuel transactions (+7%). Average U.S. fuel price was $2.67 per gallon, down 4%. Travel and Corporate purchase volume was $8.4 billion (+6%); Health U.S. SaaS accounts averaged 12.7 million (+18%) and purchase volume was $1.66 billion (+10%).
- WEX’s amended Latin American receivables arrangement is accounted for as a sale; Q1 2019 sales generated a $3.7 million gain recorded in other revenue. A contract change in Travel and Corporate is expected to shift revenue classification, with lower international settlement fees and a corresponding increase in payment-processing revenue for the rest of 2019.
Outlook, risks and unusual items
- The filing provides no specific consolidated revenue, earnings or cash-flow guidance for 2019. Management’s stated liquidity view covers at least the next 12 months; quarterly results are not necessarily indicative of full-year results.
- Management disclosed material weaknesses in internal control over financial reporting identified at year-end 2018, involving the Brazilian subsidiary’s control environment and activities and corporate monitoring of certain subsidiaries. Remediation was ongoing; management targeted completion by issuance of the December 31, 2019 financial statements but gave no assurance of success. Prior-period statements were revised for errors management considered immaterial.
- Key disclosed risks include economic and fuel-price changes, foreign exchange and interest-rate movements, credit and fraud losses, acquisitions and integration, technology and cybersecurity, regulation, leverage, and the control weaknesses. The Australian securitization facility was extended after quarter-end through April 2020.
- Legal proceedings and reasonably possible loss contingencies were not considered material. The $150 million share-repurchase authorization remained unused at quarter-end; no shares were repurchased in Q1.
- The company adopted the new lease standard on January 1, 2019, recognizing $92.5 million of operating lease liabilities at March 31; adoption did not materially affect results or cash flows.
Important facts for investors to verify
- Whether acquisition integration, preliminary purchase accounting and the announced Go Fuel Card transaction affect future margins, cash needs and leverage as expected.
- Trends in credit losses and fraud, particularly the increase in Fleet loss rates and the reserve established for a Travel and Corporate customer.
- Progress and independent evidence of remediation of the material weaknesses, including whether controls are operating effectively by year-end 2019.
- How much of the reported earnings decline reflects recurring operations versus unrealized derivative losses, foreign exchange and acquisition-related items; review non-GAAP reconciliations alongside GAAP results.
- Debt levels, covenant headroom, variable-rate exposure and the availability and terms of funding sources, including restricted cash and receivables-factoring arrangements.