WEX Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. Amounts below are U.S. dollars; financial-statement figures are in millions unless noted.
Business context
WEX provides corporate payment solutions through Fleet Payment Solutions and Other Payment Solutions. Fleet accounted for about 69% of FY 2014 revenue; Other Payment Solutions, including travel and healthcare payments, accounted for about 31%. The company serviced more than 9.2 million vehicles at year-end.
Financial performance and key metrics
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $817.6 | $717.5 | +14.0% |
| Operating income | $306.2 | $276.7 | +10.7% |
| Net earnings attributable to WEX | $202.2 | $149.2 | +35.5% |
| Diluted EPS | $5.18 | $3.82 | +35.6% |
| Operating margin | 37.4% | 38.6% | Down 1.2 percentage points |
| Net cash from operating activities | $296.4 | $39.6 | +$256.9 |
| Capital expenditures | $58.1 | $39.5 | +$18.6 |
Fleet revenue rose 7% to $562.2 million; segment operating income rose 3% to $220.4 million. Other Payment Solutions revenue increased 34% to $255.5 million and operating income increased 35% to $85.8 million, driven partly by Evolution1 and higher virtual travel-card volume. Payment solutions purchase volume increased 38% to $18.0 billion.
Fourth-quarter revenue was $211.9 million versus $182.3 million a year earlier (+16.2%). Operating income declined to $61.8 million from $71.2 million (-13.2%); net earnings attributable to WEX rose to $47.9 million from $34.5 million, and diluted EPS was $1.23 versus $0.88.
Liquidity, debt and balance sheet
- Year-end cash and cash equivalents were $284.8 million; accounts receivable, net, were $1.866 billion, against a $13.9 million credit-loss reserve.
- Total assets were $4.118 billion and stockholders’ equity was $1.078 billion.
- Financing borrowings comprised $901.6 million under the credit facilities and $400 million of 4.75% senior notes due 2023. WEX Bank deposits were $979.6 million; other debt was $53.0 million.
- The $700 million secured revolving facility and $500 million term loan mature in January 2018. At year-end, approximately $279.5 million remained available under the credit agreement, subject to covenants. WEX reported compliance with material covenants.
- Management said available resources were adequate for operating, investing and financing needs and expected to fund cash needs for at least 12 months. Operating cash flow improved substantially, in part as accounts receivable provided cash rather than using it as in 2013.
Material changes and unusual items
- WEX acquired Evolution1, a healthcare payments provider, in July for approximately $532.2 million, and acquired ExxonMobil’s European commercial fleet-card portfolio in December for approximately $378.5 million. The latter contributed about $3.4 million of revenue and a $7.2 million loss attributable to WEX in December.
- WEX sold Pacific Pride in July for approximately $49.7 million and recorded a $27.5 million pretax gain. It sold rapid! PayCard in January 2015 for $20 million, subject to working-capital adjustment, with an estimated $4 million pretax gain.
- FY 2014 included a $46.2 million net gain on fuel derivatives, versus a $9.9 million loss in 2013. The gain included a $48.3 million unrealized gain; derivatives do not qualify for hedge accounting and their fair-value changes affect current earnings.
- Foreign-currency transactions produced a $13.4 million net loss, versus a $1.0 million gain in 2013. Foreign-currency translation also reduced accumulated other comprehensive income.
- Credit-loss provision rose to $32.1 million from $20.2 million. Fleet credit losses increased to 11.7 basis points of customer spend from 7.9 basis points; management tightened credit standards after testing less restrictive approvals.
- The effective tax rate fell to 33.7% from 37.8%. A tax review reduced third-quarter tax expense by approximately $11.3 million and year-to-date provision by $2.4 million.
Outlook, risks and contingencies
- No general revenue or earnings guidance is stated. Management expected 2015 capital expenditures of approximately $60–$65 million and estimated Esso integration investments would reduce 2015 earnings by $11–$14 million after tax.
- WEX suspended new fuel-derivative purchases in Q4 2014 amid unusually low commodity prices. Management said it would continue monitoring the market. About 37% of 2014 company revenue was estimated to depend on fees linked to fuel purchase prices; low fuel prices may pressure revenue, and suspension increases exposure.
- Key risks include fuel-price and foreign-exchange volatility, customer credit losses, interest-rate and funding costs, dependence on strategic relationships and brokered deposits, acquisition integration, competition and margin pressure, cybersecurity and service interruptions, and extensive banking, payment and healthcare regulation.
- Esso and Evolution1 purchase accounting remained preliminary at year-end. Management reported no material legal proceedings and no impairment in the 2014 annual goodwill and indefinite-lived intangible-asset tests.
- Management and Deloitte reported effective disclosure controls and internal control over financial reporting. The internal-control assessment excluded Evolution1 and Esso, together representing 6.9% of operating assets and 4.8% of revenue.
Important facts for investors to verify
- Whether the acquisitions deliver expected growth and returns, and whether Esso integration costs and timing remain consistent with management’s estimate.
- Whether fuel prices, the suspended hedge program, and derivative fair-value movements materially affect reported revenue and earnings.
- Whether credit-loss trends improve following the tightening of underwriting standards.
- Available liquidity and covenant headroom after acquisition financing, alongside reliance on WEX Bank deposits and the 2018 credit-facility maturity.
- How much annual earnings growth reflects core operations versus derivative marks, the Pacific Pride gain, acquisition effects and tax adjustments.