WEX Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. WEX provides fleet and other corporate payment solutions. Unless noted, amounts below are USD millions.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $182.1 | $165.4 | +10.1% |
| Operating income | $61.5 | $60.5 | +1.7% |
| Operating margin | 33.8% | 36.6% | Down 2.8 percentage points |
| Net income attributable to WEX | $36.5 | $28.7 | +27.4% |
| Diluted EPS | $0.93 | $0.73 | +27.4% |
| Adjusted net income attributable to WEX (non-GAAP) | $41.6 | $39.8 | +4.4% |
| Operating cash flow | $(77.8) | $28.6 | Down $106.3 |
Revenue growth outpaced operating income growth as operating expenses rose 15.0%, notably due to higher credit-loss provision. The GAAP effective tax rate was 36.8% in both periods. The company changed its adjusted-net-income definition this quarter to exclude stock-based compensation and recast the comparative figure.
At March 31, cash and equivalents were $354.8, net accounts receivable $1,980.6, and total assets $3,700.4. Total deposits were $1,190.2. Debt consisted of a $281.3 term loan and $400.0 of 4.75% senior notes due 2023; the $700 million revolving facility was undrawn. Management said available funding and cash generation were adequate for at least the next 12 months and reported compliance with material debt covenants.
Operating cash use primarily reflected a $271.8 increase in accounts receivable, partly offset by a $131.4 increase in accounts payable and $101.3 of additional deposits. Investing cash use was $11.4, including $11.4 of capital additions; financing cash provided was $81.8. Cash declined $6.7 during the quarter. Management expected 2014 capital expenditures of approximately $45–$50 million.
Business trends and changes versus prior year
- Fleet Payment Solutions revenue rose 7% to $135.4; operating income fell 9% to $46.7. Higher finance-fee revenue, including increased minimum late fees, was offset in profitability by expense growth and higher credit losses.
- Other Payment Solutions revenue rose 19% to $46.6; operating income increased 58% to $14.8. Corporate purchase-card volume increased 39% to $3.67 billion, principally reflecting growth in virtual-card volume.
- Average vehicles serviced increased 4% to 7.8 million; fuel transactions rose 5.7% to 92.6 million. Payment-processing transactions increased 6.7% to 73.3 million, while average expenditure per transaction declined 2% to $85.94.
- Credit-loss provision increased to $9.1 from $3.8. Fleet credit losses were 14.1 basis points of fuel expenditures, versus 6.5 basis points a year earlier. The receivables reserve rose to $13.2 from $10.4 at year-end.
- Fuel-derivative results improved to a $1.8 gain from a $7.8 loss, supporting the increase in pretax income. Derivatives are not designated for hedge accounting, so fair-value changes affect current earnings.
Outlook, commentary, and risks
- After testing less restrictive approval standards beginning in Q3 2013, WEX returned to stricter standards starting in Q2 2014 following increased delinquency rates. Management said the early-stage delinquency increase among low-risk accounts was not expected to significantly affect the rest of the year.
- WEX planned to acquire ExxonMobil’s European commercial fuel-card program (Esso Card) through its 75%-owned WEX Europe Services subsidiary. Completion was not assured; the filing identifies failure to consummate or integrate acquisitions as a risk.
- Management expects to continue its North American fuel-derivatives program. Beginning in April 2014, it also initiated partial foreign-exchange hedging; unhedged currency exposure remains.
- Key stated risks include credit losses, fuel-price and foreign-exchange volatility, technology-system breaches, regulatory changes, key agreement renewals, acquisition execution, and litigation. Management did not expect ordinary-course litigation to materially affect results.
- The company repurchased 180,800 shares for approximately $16.9 million in Q1. A $150 million repurchase authorization runs through September 30, 2017.
Important facts for investors to verify
- Whether the higher fleet credit-loss rate and reserve prove adequate after the stricter credit standards took effect.
- Whether receivables growth and related working-capital needs persist, and how cash flow develops in subsequent quarters.
- Progress, financing, and integration risks for the proposed Esso Card acquisition.
- The sustainability of other-payment growth, including the impact of interchange-rate reductions and customer incentives.
- Debt covenants, borrowing capacity, and the effect of derivative and foreign-exchange movements on reported earnings.
- The filing provides no specific full-year revenue or earnings guidance; it does provide a capital-expenditure estimate of $45–$50 million for 2014.