WEX Inc. 10-Q Summary
Business context and reporting period
WEX provides corporate payment solutions through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. This unaudited filing covers the three and nine months ended September 30, 2018; comparisons are to the same 2017 periods unless noted. WEX adopted revenue standard Topic 606 on January 1, 2018 using the modified retrospective method, so prior-year figures were not restated.
Financial and operating performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $382.7 million | $324.0 million | $1,108.4 million | $919.2 million |
| Operating income | $100.7 million | $63.7 million | $282.0 million | $172.1 million |
| Net income attributable to shareholders | $57.3 million | $34.0 million | $145.3 million | $80.5 million |
| Diluted EPS | $1.31 | $0.79 | $3.33 | $1.87 |
| Operating margin | 26.3% | 19.7% | 25.4% | 18.7% |
Q3 revenue rose 18%, operating income 58%, and shareholder net income 69%. Revenue growth reflected transaction volumes and fuel prices, acquisition-related contributions, and Topic 606 presentation changes. Q3 effective tax rate was 24.7%, down from 35.4%, primarily following the 2017 Tax Act’s reduction in the U.S. federal corporate rate.
Q3 segment revenue was $249.6 million for Fleet Solutions (+18%), $82.8 million for Travel and Corporate Solutions (+36%), and $50.3 million for Health and Employee Benefit Solutions (-1%). Fleet vehicle servicing averaged 11.7 million vehicles (+6%); Fleet payment transactions rose 7%. Travel and Corporate purchase volume was $9.6 billion (+11%). U.S. Health purchase volume increased 11%, and average SaaS accounts increased 16%.
- Cash flow: Nine-month operating cash flow was $183.1 million, versus cash used of $44.5 million in 2017. Investing cash use was $57.5 million, including $53.4 million of capital additions. Financing cash use was $81.0 million. Operating cash flow less capital additions was approximately $129.7 million; this is a simple calculation, not a company-reported non-GAAP measure.
- Liquidity and balance sheet: September 30 cash and cash equivalents were $533.4 million; restricted cash was $22.7 million. Total assets were $7.16 billion and total liabilities $5.31 billion. Accounts receivable, net, was $3.12 billion, up from $2.52 billion at year-end 2017.
- Debt: Gross debt was $2.41 billion, compared with $2.46 billion at year-end 2017. No revolving credit facility borrowings were outstanding; remaining borrowing capacity was $666.3 million after letters of credit. Credit Agreement borrowings carried a 4.3% weighted-average effective rate. The company reported compliance with material debt covenants.
- Credit and bank capital: Q3 Fleet fuel-related credit losses were 14.2 basis points of fuel expenditures, versus 23.5 basis points a year earlier. WEX Bank met the regulatory definition of well-capitalized.
Material changes and unusual items
- Topic 606 increased reported Q3 revenue and expense by approximately $10.4 million, and nine-month revenue and expense by approximately $31.6 million; its operating-income effect was small ($38,000 in Q3 and $208,000 year to date). Partner payments moved from contra-revenue to sales and marketing, while network fees moved from service fees to a reduction of revenue. These changes affect comparisons of reported revenue and expense growth.
- Foreign currency losses were $1.1 million in Q3 and $27.4 million for nine months, versus a $14.6 million Q3 gain and $33.6 million nine-month gain in 2017. Nine-month unrealized gains on financial instruments were $18.4 million, versus a loss of $0.8 million.
- Q3 included a $2.4 million non-cash impairment charge in Travel and Corporate Solutions. WEX Latin America amended its receivables securitization to qualify for sale accounting; it recognized a $3.2 million gain on receivables sales in Q3, with an immaterial income-statement effect from derecognizing the related balances.
- Debt facilities were repriced in January and August, reducing certain interest margins and extending the revolving facility and Tranche A maturity to July 2023. Nine-month results included debt restructuring costs.
- Subsequent to quarter-end, WEX paid approximately $200 million to acquire Chevron’s trade receivables portfolio, including a $160 million premium over estimated carrying value. It also agreed to acquire Noventis for approximately $310 million, with closing expected in the first half of 2019 subject to approvals and other conditions.
Outlook, commentary and risks
Management stated that cash generation, financing facilities, deposits and other funding sources should be adequate for cash needs for at least the next 12 months. The filing provides no numerical earnings or revenue guidance. Management cited organic fleet growth, higher travel and corporate volumes, and health-platform customer growth. It also noted that fuel prices, foreign exchange, interest rates, customer credit losses, acquisitions and integration, technology execution, competition, cybersecurity, regulation and continued access to funding could affect results or liquidity. Factoring capacity may be reduced or eliminated due to market or customer-credit conditions. Management said legal loss contingencies were not material; disclosure controls were effective and no material change in internal control was reported.
Important facts for investors to verify
- Separate underlying volume and pricing growth from Topic 606 presentation effects when assessing revenue and expense trends.
- Track receivables, credit-loss provisions and factoring activity, including the durability and terms of newly established receivables sales.
- Assess the financing and expected returns on the Chevron portfolio purchase, and the funding, approval and integration risks of the proposed Noventis acquisition.
- Monitor foreign-exchange exposure, variable-rate debt, deposit funding costs, covenant headroom and available borrowing capacity.
- Review the sustainability of reported earnings growth given currency movements, tax-rate changes, acquisition-related costs, impairments and non-GAAP adjustments.