WEX Inc. — FY2013 Form 10-K
Business context and reporting period: Annual report for the year ended December 31, 2013; quarterly figures below cover the three months ended December 31, 2013. WEX provides corporate payment solutions through Fleet Payment Solutions and Other Payment Solutions. Fleet represented about 74% of annual revenue and served more than 7.7 million vehicles; Other Payment Solutions includes virtual, purchase and paycard products.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $717.5 million | $623.2 million | +15% |
| Operating income | $276.7 million | $221.6 million | +25% |
| Net earnings attributable to WEX | $149.2 million | $96.9 million | +54% |
| Diluted EPS | $3.82 | $2.48 | +54% |
| Operating cash flow | $39.6 million | $71.8 million | −45% |
Operating margin was approximately 38.6%, versus 35.6% in 2012; net earnings attributable to WEX were about 20.8% of revenue, versus 15.6%. The GAAP effective tax rate was 37.8%, compared with 53.1% in 2012. The filing attributes much of the prior-year tax burden to Australian tax-law changes.
Fourth quarter: Revenue was $182.3 million versus $169.0 million in Q4 2012; operating income was $71.2 million versus $49.5 million; net earnings attributable to WEX were $34.5 million versus $29.1 million; and diluted EPS was $0.88 versus $0.74.
Segments and operating drivers
- Fleet Payment Solutions: Revenue rose 12% to $527.4 million; operating income increased 9% to $213.1 million. Payment-processing transactions grew 12% to 292.1 million, while average vehicles serviced rose 8% to 7.5 million. Lower domestic fuel prices partially offset volume growth.
- Other Payment Solutions: Revenue increased 25% to $190.0 million and operating income rose to $63.6 million from $25.3 million. Purchase-card volume increased 22% to $13.1 billion, primarily reflecting growth in single-use virtual cards for online travel. Prior-year results included a $16.2 million goodwill impairment.
Balance sheet, debt and liquidity
At December 31, 2013, cash and cash equivalents were $361.5 million, accounts receivable net of reserves were $1.712 billion, total assets were $3.433 billion, and stockholders’ equity was $903.3 million. About 95% of trade receivables were current and 99% were less than 60 days past due. The credit-loss reserve was $10.4 million; credit losses were 7.9 basis points of customer spend, down from 10.0 basis points in 2012.
Corporate funded debt was $685 million: $400 million of 4.75% senior notes due 2023 and $285 million under the credit agreement. The company reported $688 million of credit-facility availability, subject to covenants, and was in compliance with material covenants. WEX Bank deposits totaled $1.089 billion, including $276.4 million of non-interest-bearing NOW deposits; deposits are a funding source for receivables, not simply corporate borrowing. Operating cash flow less capital expenditures was approximately $0.1 million, calculated from reported figures. Cash flow from financing was $179.2 million, while investing used $51.3 million.
Material changes, outlook and risks
- Growth reflected organic fleet expansion and the full-year contribution of Fleet One, acquired in October 2012, as well as 2012 acquisitions CorporatePay and UNIK. WEX acquired Brazilian fleet-card provider FastCred for about $12.3 million in October 2013.
- WEX announced a proposed acquisition of ExxonMobil’s European commercial fuel-card program. Closing was expected in late 2014 or early 2015, subject to required processes and approvals. WEX estimated $10–$13 million of after-tax integration-related earnings impact in 2014 and approximately $35 million in annual revenue from the portfolio after completion. These are transaction estimates, not general company earnings guidance.
- Management identified 2014 priorities of organic growth and acquisitions, targeted international investment, and improving organizational scale. Estimated 2014 capital expenditures were $40–$45 million.
- Fuel exposure remains important: management estimated about 42% of 2013 revenue was tied to fuel-provider fees based on fuel purchase prices. The company hedged approximately 60% of U.S. fuel-price-sensitive earnings exposure, but derivatives do not qualify for hedge accounting; 2013 realized and unrealized derivative losses were $9.9 million.
- Key risks include fuel-price and interest-rate changes, customer and counterparty credit risk, reliance on strategic relationships and brokered deposits, bank regulation, competition and fee pressure, cybersecurity and service disruption, foreign exchange, and acquisition integration. The top five customers and strategic relationships generated about 23% of 2013 revenue; one Other Payment Solutions customer represented approximately 11% of total revenue.
- There were no material legal proceedings reported. Deloitte issued an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Reconcile the sharp increase in GAAP earnings with lower operating cash flow and the working-capital investment in receivables.
- Track the Esso transaction’s closing conditions, integration costs, timing and realized revenue against the estimates disclosed.
- Assess the sustainability of Other Payment Solutions growth and the concentration represented by its largest customer.
- Monitor fuel-price sensitivity, derivative mark-to-market losses, and the portion of exposure left unhedged.
- Review WEX Bank deposit stability, liquidity and regulatory capital, alongside corporate debt, covenant headroom and refinancing needs.