Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide information that will assist the reader with understanding our financial statements, the changes in key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting estimates affect our financial statements. The discussion also provides information about the financial results of the three segments of our business to provide a better understanding of how those segments and their results affect our financial condition and results of operations as a whole. Additionally, certain corporate costs not allocated to our operating segments are discussed below.
Our MD&A is presented in the following sections:
|
|
•
|
Liquidity and Capital Resources
|
|
|
•
|
Critical Accounting Policies and Estimates
|
|
|
•
|
Recently Adopted Accounting Standards
|
This discussion should be read in conjunction with our audited consolidated financial statements as of
December 31, 2017
, the notes accompanying those financial statements and MD&A as contained in our Annual Report on Form 10–K filed with the SEC on
March 1, 2018
and in conjunction with the unaudited condensed consolidated financial statements and notes in Part I – Item 1 of this report.
Overview
WEX Inc. is a leading provider of corporate payment solutions. We have expanded the scope of our business into a multi-channel provider of corporate payment solutions. We currently operate in three business segments: Fleet Solutions, Travel and Corporate Solutions and Health and Employee Benefit Solutions. Our business model enables us to provide exceptional payment security and control across a spectrum of payment sectors. The Fleet Solutions segment provides customers with fleet vehicle payment processing services specifically designed for the needs of commercial and government fleets. Fleet Solutions revenue is earned primarily from payment processing, account servicing and financing fees. Management estimates that WEX fleet cards are accepted at over 90 percent of fuel locations in each of the United States and Australia. The Travel and Corporate Solutions segment focuses on the complex payment environment of business-to-business payments, providing customers with payment processing solutions for their corporate payment and transaction monitoring needs. The Health and Employee Benefit Solutions segment provides healthcare payment products and SaaS platform consumer-directed healthcare payments, as well as payroll related benefits to customers in Brazil.
The Company’s U.S. operations include WEX Inc. and our wholly-owned subsidiaries WEX Bank, WEX FleetOne, EFS and WEX Health. Our international operations include our wholly-owned operations, WEX Fuel Cards Australia, WEX Prepaid Cards Australia, WEX Canada, WEX New Zealand, WEX Asia, WEX Europe Limited, WEX Latin America and a controlling interest in WEX Europe Services Limited and its subsidiaries.
Effective January 1, 2018, the Company modified the presentation of certain line items in its unaudited condensed consolidated statements of income. Under the new presentation, costs of services are segregated from other operating expenses. Operating expenses have been reclassified into functional categories in order to provide additional detail into the underlying drivers of changes in operating expenses and align its presentation with industry practice. This revised presentation did not result in a change to the presentation of revenues, non-operating expenses or other statement of income captions or a change to previously reported revenues, operating income, income before income taxes or net income.
Sources of Operating Expense
Cost of Services
|
|
•
|
Processing costs -
The Company’s processing costs consist of expenses related to processing transactions, servicing customers and merchants and cost of goods sold related to hardware and other product sales.
|
|
|
•
|
Service fees -
The Company incurs costs from third-party networks utilized to deliver payment solutions; additionally, other third-parties are utilized in performing services directly related to generating revenue. With the adoption of Topic 606 effective January 1, 2018, fees paid to third-party payment processing networks are no longer recorded as service fees and are now presented as a reduction of revenues.
|
|
|
•
|
Provision for credit losses -
Changes in the reserve for credit loss are the result of changes in management’s estimate of the losses in the Company’s outstanding portfolio of receivables, including losses from fraud.
|
|
|
•
|
Operating interest -
The Company incurs interest expense on the operating debt obtained to provide liquidity for its short-term receivables.
|
|
|
•
|
Depreciation and amortization -
The Company has identified those tangible and intangible assets directly associated with providing a service that generates revenue and records the depreciation and amortization associated with those assets under this category. Such assets include processing platforms and related infrastructure, acquired developed technology intangible assets and other similar asset types.
|
Other Operating Expenses
|
|
•
|
General and administrative -
General and administrative includes compensation and related expenses for executive, finance and accounting, other information technology, human resources, legal and other corporate functions. Also included are corporate facilities expenses, certain third-party professional service fees and other corporate expenses.
|
|
|
•
|
Sales and marketing -
The Company’s sales and marketing expenses relate primarily to compensation, benefits, sales commissions and related expenses for sales, marketing and other related activities. With the adoption of Topic 606 effective January 1, 2018, certain payments to partners are now classified as sales and marketing expenses.
|
|
|
•
|
Depreciation and amortization -
The depreciation and amortization associated with tangible and intangible assets that are not considered to be directly associated with providing a service that generates revenue are recorded as other operating expenses. Such assets include corporate facilities and information technology assets, and acquired intangible assets other than those included in cost of services.
|
Effective January 1, 2018, the Company changed how it allocates certain costs. These changes enhance the information reported to the users of our quarterly and annual filings. The primary change is how the Company allocates information technology and corporate-related costs to its segments. Certain information technology and corporate-related costs that support multiple segments, which were previously included entirely within the Fleet Solutions segment, are now being allocated to the segment that they support. Certain residual unallocated corporate costs represent the portion of expenses relating to general corporate functions including acquisition expenses, certain finance, legal, information technology, human resources, administrative and executive expenses and other expenses. These expenses are recorded in unallocated corporate expenses, as these items are centrally and directly controlled and are not included in internal measures of segment operating performance.
Summary
Below are selected items from the
third
quarter of
2018
:
|
|
•
|
Average number of vehicles serviced
increased
6 percent
from the
third
quarter of
2017
to approximately
11.7 million
for the
third
quarter of
2018
, resulting entirely from organic growth.
|
|
|
•
|
Total fuel transactions processed increased
7 percent
from the
third
quarter of
2017
to
141.7 million
for the
third
quarter of
2018
. Total payment processing transactions in our Fleet Solutions segment
increased
7 percent
to
117.7 million
for the
third
quarter of
2018
as compared to the same period last year resulting entirely from organic growth.
|
|
|
•
|
The average U.S. fuel price per gallon during the
third
quarter of
2018
was
$3.06
, a
22 percent
increase
from the same period last year.
|
|
|
•
|
Our Travel and Corporate Solutions’ purchase volume grew by approximately
$958.0 million
from the
third
quarter of
2017
to
$9.6 billion
for the
third
quarter of
2018
, an
increase
of
11 percent
, driven by higher customer purchase volumes, most significantly within the U.S. travel business.
|
|
|
•
|
Our Health and Employee Benefit Solutions’ average number of U.S. SaaS accounts grew by approximately
1.5 million
, a
16 percent
increase from the same period in the prior year, due primarily to customer signings. Likewise, U.S. purchase volume grew by
$105.6 million
, an
11 percent
increase from the same period of the prior year.
|
|
|
•
|
Our effective tax rate was
24.7 percent
for the
third
quarter of
2018
as compared to
35.4 percent
in the same period last year. The decline in our tax rate was primarily due to the 2017 Tax Act, which reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. Our effective rate may fluctuate due to changes in estimates made under the 2017 Tax Act as more guidance and clarification is released by the regulators, the mix of earnings among different tax jurisdictions, as well as from impacts that statutory tax rate and earnings mix changes have on our net deferred tax assets.
|
Results of Operations
The Company does not allocate foreign currency gains and losses, financing interest expense, unrealized and realized gains and losses on financial instruments, income taxes and net gains or losses from non-controlling interest to our operating segments as management believes these items are unpredictable and can obscure underlying trends. In addition, effective January 1, 2018, the Company does not allocate certain corporate expenses to our operating segments, as these items are centrally controlled and are not directly attributable to any reportable segment.
Certain information technology and corporate related costs that support multiple segments were previously included entirely within the Fleet Solutions segment. Effective January 1, 2018, such amounts are allocated to the operating segment that they support. Prior year amounts have been recast to conform with the changes in segment profitability described above.
Fleet Solutions
Revenues
The following table reflects comparative revenue and key operating statistics within Fleet Solutions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Increase (Decrease)
|
|
Nine Months Ended September 30,
|
|
Increase (Decrease)
|
(In thousands, except per transaction and per gallon data)
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment processing revenue
|
$
|
116,023
|
|
|
$
|
90,270
|
|
|
$
|
25,753
|
|
|
29
|
%
|
|
$
|
335,896
|
|
|
$
|
264,210
|
|
|
$
|
71,686
|
|
|
27
|
%
|
Account servicing revenue
|
42,810
|
|
|
44,858
|
|
|
(2,048
|
)
|
|
(5
|
)%
|
|
128,039
|
|
|
122,238
|
|
|
5,801
|
|
|
5
|
%
|
Finance fee revenue
|
51,644
|
|
|
40,773
|
|
|
10,871
|
|
|
27
|
%
|
|
140,436
|
|
|
113,754
|
|
|
26,682
|
|
|
23
|
%
|
Other revenue
|
39,135
|
|
|
36,177
|
|
|
2,958
|
|
|
8
|
%
|
|
117,076
|
|
|
103,003
|
|
|
14,073
|
|
|
14
|
%
|
Total revenues
|
$
|
249,612
|
|
|
$
|
212,078
|
|
|
$
|
37,534
|
|
|
18
|
%
|
|
$
|
721,447
|
|
|
$
|
603,205
|
|
|
$
|
118,242
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key operating statistics
(a)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment processing revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment processing transactions
|
117,680
|
|
|
110,047
|
|
|
7,633
|
|
|
7
|
%
|
|
343,426
|
|
|
320,946
|
|
|
22,480
|
|
|
7
|
%
|
Payment processing fuel spend
|
$
|
9,723,609
|
|
|
$
|
7,688,903
|
|
|
$
|
2,034,706
|
|
|
26
|
%
|
|
$
|
27,658,802
|
|
|
$
|
22,168,768
|
|
|
$
|
5,490,034
|
|
|
25
|
%
|
Average price per gallon of fuel – Domestic – ($USD/gal)
|
$
|
3.06
|
|
|
$
|
2.51
|
|
|
$
|
0.55
|
|
|
22
|
%
|
|
$
|
2.95
|
|
|
$
|
2.44
|
|
|
$
|
0.51
|
|
|
21
|
%
|
Net payment processing rate
|
1.19
|
%
|
|
1.17
|
%
|
|
0.02
|
%
|
|
2
|
%
|
|
1.21
|
%
|
|
1.19
|
%
|
|
0.02
|
%
|
|
2
|
%
|
(a)
Key operating statistics have been modified to provide added insight into segment revenue trends. Metrics for the
three and nine
months ended
September 30, 2017
have been conformed to the current year presentation.
(b)
The Company adopted the requirements of ASU 2014–09 (“the new revenue recognition standard”) as of January 1, 2018, utilizing the modified retrospective method of transition. Impacted non-financial metrics have been updated prospectively.
For the third quarter and the
nine months ended September 30, 2018
, the impact of foreign currency exchange rate fluctuations reduced revenue by
$1.7 million
and increased revenue by
$2.4 million
, respectively.
Payment processing revenue
increased
by
$25.8 million
for the
third
quarter of
2018
and
$71.7 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, primarily due to higher average domestic fuel prices, the impact from the adoption of the new revenue recognition standard and increased payment processing volumes due to organic growth. Upon adoption of the new revenue recognition standard, we reclassified certain amounts paid to partners from a reduction of revenue to selling expense and fees paid to third-party payment processing networks from service fees to a reduction of revenue.
Account servicing revenue
decreased
by
$2.0 million
for the
third
quarter of
2018
as compared to the same period of the prior year, primarily due to the divestiture of our Telapoint business during the fourth quarter of 2017. Account servicing revenue increased by
$5.8 million
for the
nine months ended September 30, 2018
as compared to the same period in the prior year, due primarily to an increase in fees to certain customers as part of domestic price modernization efforts over the course of the prior year, partly offset by the divestiture of our Telapoint business.
Other revenue
increased
by
$3.0 million
for the
third
quarter of
2018
as compared to the same period for the prior year, due primarily to the adoption of the new revenue recognition standard. Other revenue
increased
by
$14.1 million
for the
nine months ended September 30, 2018
as compared to the same period in the prior year, resulting from the adoption of the new
revenue recognition standard, benefits from our price modernization efforts and higher relative EFS transaction processing revenue.
Finance fee revenue is comprised of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Increase (Decrease)
|
|
Nine Months Ended September 30,
|
|
Increase (Decrease)
|
(In thousands)
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
Finance income
|
$
|
41,641
|
|
|
$
|
32,994
|
|
|
$
|
8,647
|
|
|
26
|
%
|
|
$
|
112,130
|
|
|
$
|
93,517
|
|
|
$
|
18,613
|
|
|
20
|
%
|
Factoring fee revenue
|
9,999
|
|
|
7,580
|
|
|
2,419
|
|
|
32
|
%
|
|
27,720
|
|
|
19,869
|
|
|
7,851
|
|
|
40
|
%
|
Cardholder interest income
|
4
|
|
|
199
|
|
|
(195
|
)
|
|
(98
|
)%
|
|
586
|
|
|
368
|
|
|
218
|
|
|
59
|
%
|
Finance fee revenue
|
$
|
51,644
|
|
|
$
|
40,773
|
|
|
$
|
10,871
|
|
|
27
|
%
|
|
$
|
140,436
|
|
|
$
|
113,754
|
|
|
$
|
26,682
|
|
|
23
|
%
|
Finance income primarily consists of late fees charged for receivables not paid within the terms of the customer agreement based upon the outstanding customer receivable balance. This revenue is earned when a customer’s receivable balance becomes delinquent and is calculated using the greater of a minimum charge or a stated late fee rate multiplied by the outstanding balance that is subject to a late fee charge. Changes in the absolute amount of such outstanding balances can be attributed to (i) changes in fuel prices; (ii) customer specific transaction volume; and (iii) customer specific delinquencies. Finance income can also be impacted by (i) changes in late fee rates and (ii) increases or decreases in customer overdue balances. Late fee rates are determined and set based primarily on the risk associated with our customers, coupled with a strategic view of standard rates within our industry. Periodically, we assess the market rates associated within our industry to determine appropriate late fee rates. We consider factors such as the Company’s overall financial model and strategic plan, the cost to our business from customers failing to pay timely and the impact such late payments have on our financial results. These assessments are typically conducted at least annually but may occur more often depending on macro-economic factors.
Finance income
increased
$8.6 million
for the
third
quarter of
2018
and
$18.6 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, primarily due to changes in overdue outstanding balances resulting from higher average domestic fuel prices and volumes. During both the
third
quarter and the
nine months ended September 30, 2018
and 2017, monthly late fee rates ranged from 0 to 7.99 percent with a minimum finance charge of up to $75. The weighted average rate, net of related charge-offs, was 4.4 percent and 4.5 percent for the
three and nine
months ended
September 30, 2018
, respectively, as compared to 4.3 percent for both the
three and nine
months ended
September 30, 2017
.
Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time to pay, placing a customer on a payment plan or granting waivers of late fees. There were no material concessions granted to customers during both the
three and nine
months ended
September 30, 2018
or
2017
.
The primary source of factoring fee revenue is calculated as a negotiated percentage fee of the receivable balance that we purchase. A secondary source of factoring fee revenue is a flat rate service fee to our customers that request a non-contractual same day funding of the receivable balance. Factoring fee revenue
increased
$2.4 million
for the
third
quarter of
2018
and
$7.9 million
the
nine months ended September 30, 2018
as compared to the same periods in the prior year, due to higher relative receivable balances purchased resulting from increased customer demand for our services.
Cardholder interest income was not material to Fleet Solutions’ operations for the
three and nine
months ended
September 30, 2018
or 2017.
Operating Expenses
The following table compares line items within operating income for Fleet Solutions for the
three and nine
months ended
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Increase (Decrease)
|
|
Nine Months Ended September 30,
|
|
Increase (Decrease)
|
(In thousands)
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
Cost of services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing costs
|
$
|
50,394
|
|
|
$
|
45,283
|
|
|
$
|
5,111
|
|
|
11
|
%
|
|
$
|
147,198
|
|
|
$
|
131,701
|
|
|
$
|
15,497
|
|
|
12
|
%
|
Service fees
|
$
|
1,889
|
|
|
$
|
1,495
|
|
|
$
|
394
|
|
|
26
|
%
|
|
$
|
5,493
|
|
|
$
|
4,111
|
|
|
$
|
1,382
|
|
|
34
|
%
|
Provision for credit losses
|
$
|
17,408
|
|
|
$
|
19,277
|
|
|
$
|
(1,869
|
)
|
|
(10
|
)%
|
|
$
|
41,396
|
|
|
$
|
46,999
|
|
|
$
|
(5,603
|
)
|
|
(12
|
)%
|
Operating interest
|
$
|
4,532
|
|
|
$
|
2,449
|
|
|
$
|
2,082
|
|
|
85
|
%
|
|
$
|
11,370
|
|
|
$
|
6,044
|
|
|
$
|
5,325
|
|
|
88
|
%
|
Depreciation and amortization
|
$
|
9,943
|
|
|
$
|
12,424
|
|
|
$
|
(2,482
|
)
|
|
(20
|
)%
|
|
$
|
29,749
|
|
|
$
|
36,436
|
|
|
$
|
(6,688
|
)
|
|
(18
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
$
|
18,004
|
|
|
$
|
22,299
|
|
|
$
|
(4,295
|
)
|
|
(19
|
)%
|
|
$
|
57,894
|
|
|
$
|
55,161
|
|
|
$
|
2,733
|
|
|
5
|
%
|
Sales and marketing
|
$
|
38,727
|
|
|
$
|
30,395
|
|
|
$
|
8,332
|
|
|
27
|
%
|
|
$
|
115,331
|
|
|
$
|
89,210
|
|
|
$
|
26,121
|
|
|
29
|
%
|
Depreciation and amortization
|
$
|
19,394
|
|
|
$
|
23,647
|
|
|
$
|
(4,252
|
)
|
|
(18
|
)%
|
|
$
|
60,497
|
|
|
$
|
70,087
|
|
|
$
|
(9,590
|
)
|
|
(14
|
)%
|
Impairment charge
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(12,212
|
)
|
|
(100
|
)%
|
|
$
|
—
|
|
|
$
|
12,212
|
|
|
$
|
(12,212
|
)
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
89,321
|
|
|
$
|
54,809
|
|
|
$
|
34,512
|
|
|
63
|
%
|
|
$
|
252,519
|
|
|
$
|
151,244
|
|
|
$
|
101,275
|
|
|
67
|
%
|
Cost of services
Processing costs
increased
$5.1 million
for the
third
quarter of
2018
and
$15.5 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, due primarily to volume-related increases, including incremental headcount and costs related to recent significant customer acquisitions.
Service fees increased
$0.4 million
for the
third
quarter of
2018
and
$1.4 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, due primarily to higher bank fees resulting from increased volumes.
Provision for credit losses
decreased
by
$1.9 million
for the
third
quarter of
2018
and
$5.6 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year. The
decrease
in credit loss was due to a decline in fraud losses, partly offset by increases in receivable balances due to higher average domestic fuel prices and volume growth.
We generally measure our credit loss performance by calculating fuel-related credit losses as a percentage of total fuel expenditures on payment processing transactions. This metric for credit losses was
14.2
basis points of fuel expenditures for the
third
quarter of
2018
, as compared to
23.5
basis points of fuel expenditures for the same period in the prior year. We generally use a roll-rate methodology to calculate the amount necessary for our ending receivable reserve balance. This methodology considers total receivable balances, recent charge-off experience, recoveries on previously charged-off accounts and the dollars that are delinquent to calculate the total reserve. In addition, management undertakes a detailed evaluation of the receivable balances to help further ensure overall reserve adequacy. The expense we recognized in the quarter is the amount necessary to bring the reserve to its required level based on accounts receivable aging and net charge-offs.
Operating interest
increased
$2.1 million
for the
third
quarter of
2018
and
$5.3 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, primarily due to higher interest rates paid on deposits and the impact of higher fuel prices.
Depreciation and amortization
decreased
by
$2.5 million
for the
third
quarter of
2018
and
$6.7 million
for the
nine months ended September 30, 2018
, compared to the same periods in the prior year, as the periods in 2017 were unfavorably impacted by accelerated amortization of our existing over-the-road payment processing technology as result of the EFS acquisition. This expense decrease relative to the prior year was partly offset by incremental depreciation on recent investments in internal-use software.
Other operating expenses
General and administrative expenses
decreased
$4.3 million
for the
third
quarter of
2018
, as compared to the same prior of the prior year, which was unfavorably impacted by an office closure restructuring to consolidate operations. General and administrative expenses
increased
$2.7 million
for the
nine months ended September 30, 2018
as compared to the same period in
the prior year primarily due to higher professional fees, partly offset by the absence of the aforementioned restructuring charges incurred during the nine months ended September 30, 2017.
Sales and marketing expenses
increased
$8.3 million
for the
third
quarter of
2018
and
$26.1 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, due primarily to a reclassification of payments to partners, which are included in sales and marketing expenses as a result of adopting the new revenue recognition standard. Prior to January 1, 2018, these payments were reflected as a reduction of revenue.
Depreciation and amortization
decreased
by
$4.3 million
for the
third
quarter of
2018
and
$9.6 million
for the
nine months ended September 30, 2018
as compared to the same period in the prior year, due primarily to lower relative amortization on certain acquired intangibles.
During the
nine months ended September 30, 2017
, we incurred a non-cash impairment charge due to a write-off related to in-sourcing certain technology functions. There were no impairment charges incurred during 2018.
Travel and Corporate Solutions
Revenues
The following table reflects comparative revenue and key operating statistics within Travel and Corporate Solutions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Increase (Decrease)
|
|
Nine Months Ended September 30,
|
|
Increase (Decrease)
|
(In thousands, except payment solutions purchase volume in millions)
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment processing revenue
|
$
|
54,345
|
|
|
$
|
44,177
|
|
|
$
|
10,168
|
|
|
23
|
%
|
|
$
|
150,411
|
|
|
$
|
119,328
|
|
|
$
|
31,083
|
|
|
26
|
%
|
Account servicing revenue
|
9,120
|
|
|
206
|
|
|
8,914
|
|
|
NM
|
|
|
27,584
|
|
|
528
|
|
|
27,056
|
|
|
NM
|
|
Finance fee revenue
|
670
|
|
|
87
|
|
|
583
|
|
|
670
|
%
|
|
1,157
|
|
|
469
|
|
|
688
|
|
|
147
|
%
|
Other revenue
|
18,675
|
|
|
16,556
|
|
|
2,119
|
|
|
13
|
%
|
|
46,201
|
|
|
43,414
|
|
|
2,787
|
|
|
6
|
%
|
Total revenues
|
$
|
82,810
|
|
|
$
|
61,026
|
|
|
$
|
21,784
|
|
|
36
|
%
|
|
$
|
225,353
|
|
|
$
|
163,739
|
|
|
$
|
61,614
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key operating statistics
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment processing revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment solutions purchase volume
|
$
|
9,621
|
|
|
$
|
8,663
|
|
|
$
|
958
|
|
|
11
|
%
|
|
$
|
26,492
|
|
|
$
|
22,939
|
|
|
$
|
3,553
|
|
|
15
|
%
|
(a)
The Company adopted the requirements of the new revenue recognition standard as of January 1, 2018, utilizing the modified retrospective method of transition. Impacted non-financial metrics have been updated prospectively.
NM - not meaningful
For the third quarter and the
nine months ended September 30, 2018
, the impact of foreign currency exchange rate fluctuations reduced revenue by
$0.8 million
and increased revenue by
$1.6 million
, respectively.
Payment processing revenue
increased
$10.2 million
for the
third
quarter of
2018
and
$31.1 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, due to strong performance in both our travel and corporate payment products. During the third quarter of 2018, we benefited from volume growth in the U.S., the Asia Pacific region and Brazil, while performance for the
nine months ended September 30, 2018
was attributed to volume increases in all geographies. The impact of the adoption of the new revenue recognition standard also contributed to revenue growth. Upon adoption of the new revenue recognition standard, we reclassified certain amounts paid to partners from a reduction of revenue to sales and marketing expense and fees paid to third-party payment processing networks from service fees to a reduction of revenue.
Account servicing revenue
increased
$8.9 million
for the
third
quarter of
2018
and
$27.1 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, due to the acquisition of AOC during October 2017.
Finance fee revenue was not material to Travel and Corporate Solutions’ operations for the three or nine months ended
September 30, 2018
or 2017.
Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time to pay, placing a customer on a payment plan or granting waivers of late fees. There were no material concessions granted to
customers during the three or nine months ended
September 30, 2018
. As of
September 30, 2017
, customer balances with such concessions totaled $8.5 million. For the
three and nine
months ended
September 30, 2017
, customer balances with such concessions resulted in approximately $0.4 million and $1.7 million in waived late fees, respectively.
Other revenue increased
$2.1 million
for the
third
quarter of
2018
and
$2.8 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, as volume related increases were partly offset by an unfavorable adoption impact of the new revenue recognition standard. As of January 1, 2018, payment of network fees are now reflected as a reduction of revenue resulting from the adoption of the new revenue recognition standard. Prior to January 1, 2018, these network fees were classified as a selling expense.
Operating Expenses
The following table compares line items within operating income for Travel and Corporate Solutions for the three and nine months ended
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Increase (Decrease)
|
|
Nine Months Ended September 30,
|
|
Increase (Decrease)
|
(In thousands)
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
Cost of services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing costs
|
$
|
10,999
|
|
|
$
|
4,595
|
|
|
$
|
6,405
|
|
|
139
|
%
|
|
$
|
33,967
|
|
|
$
|
14,949
|
|
|
$
|
19,019
|
|
|
127
|
%
|
Service fees
|
$
|
7,151
|
|
|
$
|
15,344
|
|
|
$
|
(8,193
|
)
|
|
(53
|
)%
|
|
$
|
21,102
|
|
|
$
|
45,433
|
|
|
$
|
(24,331
|
)
|
|
(54
|
)%
|
Provision for credit losses
|
$
|
3,862
|
|
|
$
|
(418
|
)
|
|
$
|
4,280
|
|
|
NM
|
|
|
$
|
5,687
|
|
|
$
|
(575
|
)
|
|
$
|
6,262
|
|
|
NM
|
|
Operating interest
|
$
|
4,061
|
|
|
$
|
2,377
|
|
|
$
|
1,684
|
|
|
71
|
%
|
|
$
|
10,043
|
|
|
$
|
6,016
|
|
|
$
|
4,027
|
|
|
67
|
%
|
Depreciation and amortization
|
$
|
2,807
|
|
|
$
|
1,288
|
|
|
$
|
1,519
|
|
|
118
|
%
|
|
$
|
12,034
|
|
|
$
|
3,626
|
|
|
$
|
8,409
|
|
|
232
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
$
|
7,150
|
|
|
$
|
4,617
|
|
|
$
|
2,533
|
|
|
55
|
%
|
|
$
|
19,985
|
|
|
$
|
12,257
|
|
|
$
|
7,728
|
|
|
63
|
%
|
Sales and marketing
|
$
|
10,478
|
|
|
$
|
5,719
|
|
|
$
|
4,759
|
|
|
83
|
%
|
|
$
|
36,076
|
|
|
$
|
15,691
|
|
|
$
|
20,385
|
|
|
130
|
%
|
Depreciation and amortization
|
$
|
3,903
|
|
|
$
|
2,573
|
|
|
$
|
1,330
|
|
|
52
|
%
|
|
$
|
10,818
|
|
|
$
|
7,814
|
|
|
$
|
3,004
|
|
|
38
|
%
|
Impairment charges
|
$
|
2,424
|
|
|
$
|
—
|
|
|
$
|
2,424
|
|
|
NM
|
|
|
$
|
2,424
|
|
|
$
|
3,963
|
|
|
$
|
(1,539
|
)
|
|
(39
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
29,975
|
|
|
$
|
24,932
|
|
|
$
|
5,043
|
|
|
20
|
%
|
|
$
|
73,217
|
|
|
$
|
54,566
|
|
|
$
|
18,651
|
|
|
34
|
%
|
NM - not meaningful
Cost of services
Processing costs
increased
$6.4 million
for the
third
quarter of
2018
and
$19.0 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, due primarily to the acquisition of AOC.
Service fees
decreased
$8.2 million
for the
third
quarter of
2018
and
$24.3 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, due primarily to cost savings as a result of the AOC acquisition and impacts from adoption of the new revenue recognition standard. These favorable impacts were partly offset by incremental expenses resulting from higher relative purchase volumes. Upon the adoption of the new revenue recognition standard, we reclassified network fees paid from service fees to a reduction of revenue.
Provision for credit losses increased
$4.3 million
for the
third
quarter of
2018
and
$6.3 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, due primarily to a discrete customer reserve taken during the third quarter of 2018.
Operating interest expense
increased
$1.7 million
for the
third
quarter of
2018
and
$4.0 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, due primarily to higher interest rates paid on deposits.
Depreciation and amortization
increased
$1.5 million
for the
third
quarter of
2018
and
$8.4 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, due primarily to assets recognized upon acquisition of AOC.
Other operating expenses
General and administrative expenses
increased
$2.5 million
for the
third
quarter of
2018
and
$7.7 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, due primarily to the acquisition of AOC.
Sales and marketing expenses
increased
$4.8 million
for the
third
quarter of
2018
and
$20.4 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, due primarily to a reclassification of payments to partners. These payments to partners are included in sales and marketing expenses as a result of adopting the new revenue recognition standard. Prior to January 1, 2018, these payments were reflected as a reduction of revenue.
Depreciation and amortization for the
third
quarter of
2018
increased
$1.3 million
for the
third
quarter of
2018
and
$3.0 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, due primarily to assets recognized upon the AOC acquisition.
During the third quarter of 2018, we recognized a non-cash impairment charge to write-off certain property and equipment. During the
nine months ended September 30, 2017
, we incurred a non-cash impairment charge due to a write-off related to in-sourcing certain technology functions.
Health and Employee Benefit Solutions
Revenues
The following table reflects comparative revenue and key operating statistics within Health and Employee Benefit Solutions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Increase (Decrease)
|
|
Nine Months Ended September 30,
|
|
Increase (Decrease)
|
(In thousands, except purchase volume in millions)
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment processing revenue
|
$
|
12,503
|
|
|
$
|
11,255
|
|
|
$
|
1,248
|
|
|
11
|
%
|
|
$
|
43,756
|
|
|
$
|
39,896
|
|
|
$
|
3,860
|
|
|
10
|
%
|
Account servicing revenue
|
26,818
|
|
|
26,258
|
|
|
560
|
|
|
2
|
%
|
|
80,545
|
|
|
75,772
|
|
|
4,773
|
|
|
6
|
%
|
Finance fee revenue
|
1,389
|
|
|
10,019
|
|
|
(8,630
|
)
|
|
(86
|
)%
|
|
13,365
|
|
|
22,113
|
|
|
(8,748
|
)
|
|
(40
|
)%
|
Other revenue
|
9,558
|
|
|
3,366
|
|
|
6,192
|
|
|
184
|
%
|
|
23,929
|
|
|
14,518
|
|
|
9,411
|
|
|
65
|
%
|
Total revenues
|
$
|
50,268
|
|
|
$
|
50,898
|
|
|
$
|
(630
|
)
|
|
(1
|
)%
|
|
$
|
161,595
|
|
|
$
|
152,299
|
|
|
$
|
9,296
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key operating statistics (U.S. only)
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment processing revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase volume
|
$
|
1,061,215
|
|
|
$
|
955,652
|
|
|
$
|
105,563
|
|
|
11
|
%
|
|
$
|
3,817,924
|
|
|
$
|
3,429,725
|
|
|
$
|
388,199
|
|
|
11
|
%
|
Account servicing revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of SaaS accounts
|
11,057
|
|
|
9,566
|
|
|
1,491
|
|
|
16
|
%
|
|
10,876
|
|
|
9,025
|
|
|
1,851
|
|
|
21
|
%
|
(a)
The Company adopted the requirements of the new revenue recognition standard as of January 1, 2018, utilizing the modified retrospective method of transition. Impacted non-financial metrics have been updated prospectively.
For the third quarter of 2018 and the
nine months ended September 30, 2018
, the impact of foreign currency exchange rate fluctuations reduced revenue by
$1.0 million
and
$1.9 million
, respectively.
Payment processing revenue
increased
$1.2 million
for the
third
quarter of
2018
and
$3.9 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, primarily due to an increase in purchase volume as a result of customer signings.
Account servicing revenue
increased
$0.6 million
for the
third
quarter of
2018
and
$4.8 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, primarily due to WEX Health customer signings and existing customer growth, which resulted in a higher number of participants using our SaaS healthcare technology platform, and higher revenue earned on health savings account assets, partly offset by an unfavorable impact from WEX Health customer mix and lower revenues in Brazil.
Finance fee revenue
decreased
$8.6 million
for the
third
quarter of
2018
and
$8.7 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, primarily due to the accounting impact of our WEX Latin America securitization arrangement, as discussed further in the other revenue discussion below.
Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time to pay, placing a customer on a payment plan or granting waivers of late fees. As of
September 30, 2018
and
2017
, there were no material concessions granted to customers.
Other revenue increased
$6.2 million
for the
third
quarter of
2018
and
$9.4 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year. Increased revenues for the third quarter of 2018 were primarily due to the gain on sale of WEX Latin America customer receivables under our recently amended securitization. Prior to the third quarter of 2018, the revenue associated with these receivables was included in finance fee revenue. See Part I
–
Item 1
–
Note 10, Off
–
Balance Sheet Arrangements for further information. During the third quarter of 2018 and
nine months ended September 30, 2018
, we also benefited from higher WEX Health ancillary fees.
Operating Expenses
The following table compares line items within operating income for Health and Employee Benefit Solutions for the three and nine months ended
September 30, 2018
and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Increase (Decrease)
|
|
Nine Months Ended September 30,
|
|
Increase (Decrease)
|
(In thousands)
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
Cost of services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing costs
|
$
|
18,189
|
|
|
$
|
19,240
|
|
|
$
|
(1,051
|
)
|
|
(5
|
)%
|
|
$
|
54,345
|
|
|
$
|
56,031
|
|
|
$
|
(1,686
|
)
|
|
(3
|
)%
|
Service fees
|
$
|
4,777
|
|
|
$
|
2,818
|
|
|
$
|
1,959
|
|
|
70
|
%
|
|
$
|
13,251
|
|
|
$
|
7,868
|
|
|
$
|
5,383
|
|
|
68
|
%
|
Provision for credit losses
|
$
|
164
|
|
|
$
|
755
|
|
|
$
|
(591
|
)
|
|
(78
|
)%
|
|
$
|
(154
|
)
|
|
$
|
1,503
|
|
|
$
|
(1,657
|
)
|
|
NM
|
|
Operating interest
|
$
|
1,676
|
|
|
$
|
2,711
|
|
|
$
|
(1,035
|
)
|
|
(38
|
)%
|
|
$
|
6,869
|
|
|
$
|
4,989
|
|
|
$
|
1,880
|
|
|
38
|
%
|
Depreciation and amortization
|
$
|
6,263
|
|
|
$
|
5,167
|
|
|
$
|
1,096
|
|
|
21
|
%
|
|
$
|
18,275
|
|
|
$
|
14,577
|
|
|
$
|
3,698
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
$
|
7,337
|
|
|
$
|
5,954
|
|
|
$
|
1,383
|
|
|
23
|
%
|
|
$
|
18,891
|
|
|
$
|
16,882
|
|
|
$
|
2,009
|
|
|
12
|
%
|
Sales and marketing
|
$
|
5,398
|
|
|
$
|
5,409
|
|
|
$
|
(11
|
)
|
|
—
|
%
|
|
$
|
17,389
|
|
|
$
|
16,710
|
|
|
$
|
679
|
|
|
4
|
%
|
Depreciation and amortization
|
$
|
5,348
|
|
|
$
|
5,705
|
|
|
$
|
(357
|
)
|
|
(6
|
)%
|
|
$
|
16,203
|
|
|
$
|
16,796
|
|
|
$
|
(593
|
)
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
1,116
|
|
|
$
|
3,139
|
|
|
$
|
(2,023
|
)
|
|
(64
|
)%
|
|
$
|
16,526
|
|
|
$
|
16,943
|
|
|
$
|
(417
|
)
|
|
(2
|
)%
|
NM - not meaningful
Cost of services
Processing costs decreased slightly for the
third
quarter of 2018 and for the
nine months ended September 30, 2018
as compared to the same periods in the prior year as the favorable impact of lower bank fees in WEX Latin America resulting from a shift in product mix was partly offset by higher WEX Health processing costs resulting from volume increases.
Service fees
increased
$2.0 million
for the
third
quarter of
2018
and
$5.4 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, due primarily to revenue growth on WEX Health payment processing and health savings account assets.
Provision for credit losses was not material to Health and Employee Benefit Solutions’ operations for both the three and nine months ended September 30, 2018 and 2017.
Operating interest
decreased
$1.0 million
for the
third
quarter of
2018
and increased
$1.9 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year. The increase in interest expense for the
nine months ended September 30, 2018
was associated with the ramp up of our WEX Latin America securitized debt agreement, which we entered into during the second quarter of 2017. During the third quarter of 2018, we amended this agreement, resulting in sale accounting treatment upon the transfer of WEX Latin America customer receivables. As such, our associated cost of funding is now embedded in the gain on sale of the receivables and is recorded within other revenue, resulting in decreased operating interest for the three months ended September 30, 2018.
Depreciation and amortization
increased
$1.1 million
for the
third
quarter of
2018
and
$3.7 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year, resulting from higher depreciation expense on capitalized internal-use software development costs.
Other operating expenses
General and administrative expenses increased
$1.4 million
for the
third
quarter of
2018
and
$2.0 million
for the
nine months ended September 30, 2018
due primarily to an increase in professional fees as compared to the same periods in the prior year.
Sales and marketing and depreciation and amortization for the
third
quarter of 2018 were generally consistent with the same period in the prior year.
Unallocated corporate expenses
Unallocated corporate expenses represent the portion of expenses relating to general corporate functions including acquisition expenses, certain finance, legal, information technology, human resources, administrative and executive expenses and other expenses not directly attributable to a reportable segment.
The following table compares line items within operating income for unallocated corporate expenses for the
three and nine
months ended
September 30, 2018
and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Increase (Decrease)
|
|
Nine Months Ended September 30,
|
|
Increase (Decrease)
|
(In thousands)
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
Other operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
$
|
19,309
|
|
|
$
|
18,668
|
|
|
$
|
641
|
|
|
3
|
%
|
|
$
|
58,951
|
|
|
$
|
49,489
|
|
|
$
|
9,462
|
|
|
19
|
%
|
Sales and marketing
|
$
|
6
|
|
|
$
|
62
|
|
|
$
|
(56
|
)
|
|
(90
|
)%
|
|
$
|
51
|
|
|
$
|
115
|
|
|
$
|
(64
|
)
|
|
(56
|
)%
|
Depreciation and amortization
|
$
|
409
|
|
|
$
|
425
|
|
|
$
|
(16
|
)
|
|
(4
|
)%
|
|
$
|
1,299
|
|
|
$
|
1,092
|
|
|
$
|
207
|
|
|
19
|
%
|
General and administrative expenses for the
third
quarter of
2018
were generally consistent with the general and administrative expenses for the same period in the prior year. General and administrative expenses increased
$9.5 million
for the
nine months ended September 30, 2018
as compared to the same period in the prior year, due primarily to higher personnel related costs, including incremental share based compensation and headcount, and increased professional fees, including those incurred as part of our recent acquisition and debt restructurings.
Other unallocated corporate expenses were not material to the Company’s operations for the periods presented.
Non-operating income and expense
The following table reflects comparative results for certain amounts excluded from operating income for the
three and nine
months ended
September 30, 2018
and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Increase (Decrease)
|
|
Nine Months Ended September 30,
|
|
Increase (Decrease)
|
(In thousands)
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
Financing interest expense
|
$
|
(25,718
|
)
|
|
$
|
(25,754
|
)
|
|
$
|
(36
|
)
|
|
—
|
%
|
|
$
|
(78,560
|
)
|
|
$
|
(81,449
|
)
|
|
$
|
(2,889
|
)
|
|
(4
|
)%
|
Net foreign currency (loss) gain
|
$
|
(1,094
|
)
|
|
$
|
14,611
|
|
|
$
|
(15,705
|
)
|
|
NM
|
|
|
$
|
(27,438
|
)
|
|
$
|
33,578
|
|
|
$
|
(61,016
|
)
|
|
NM
|
|
Net unrealized gain (loss) on financial instruments
|
$
|
2,157
|
|
|
$
|
(150
|
)
|
|
$
|
2,307
|
|
|
NM
|
|
|
$
|
18,371
|
|
|
$
|
(849
|
)
|
|
$
|
19,220
|
|
|
NM
|
|
Income taxes
|
$
|
18,751
|
|
|
$
|
18,570
|
|
|
$
|
181
|
|
|
1
|
%
|
|
$
|
48,278
|
|
|
$
|
43,760
|
|
|
$
|
4,518
|
|
|
10
|
%
|
Net income (loss) from non-controlling interest
|
$
|
(40
|
)
|
|
$
|
(111
|
)
|
|
$
|
71
|
|
|
(64
|
)%
|
|
$
|
803
|
|
|
$
|
(886
|
)
|
|
$
|
1,689
|
|
|
NM
|
|
NM - not meaningful
Financing interest expense for the
third
quarter of
2018
was relatively consistent with the financing interest expense in the same period in the prior year. Financing interest expense decreased
$2.9 million
for the nine months ended September 30, 2018 as compared to the same period in the prior year. This decrease was primarily due to lower effective interest rates, including the impact of $1.3 billion in interest rate swaps outstanding as of
September 30, 2018
, and a decrease in average borrowings under our 2016 Credit Agreement, partly offset by a loss on the extinguishment of debt as part of our January 2018 debt repricing.
Our foreign currency exchange exposure is primarily related to the remeasurement of our cash, receivable and payable balances, including intercompany transactions that are denominated in foreign currencies. The Company incurred net foreign currency losses of
$1.1 million
in the
third
quarter of 2018 and
$27.4 million
in the
nine months ended September 30, 2018
resulting
from transactions denominated in foreign currencies and intercompany transactions. During the third quarter of 2018 and the nine months ended September 30, 2018, the U.S. dollar strengthened relative to numerous major foreign currencies in which we transact, including the Euro, British pound, Australian dollar and Brazilian real, though the rate of the U.S. dollar strengthening slowed in the third quarter of 2018. During the
third
quarter and the
nine months ended September 30, 2017
, the Company benefited from the U.S. dollar weakening relative to the Euro, British pound and Australian dollar.
Net unrealized gains on financial instruments increased
$2.3 million
for the
third
quarter of
2018
and
$19.2 million
for the
nine months ended September 30, 2018
as compared to the same periods in the prior year. Late in the fourth quarter of 2017, the Company entered into two interest rate swap agreements with aggregate notional amounts of $500.0 million. The favorable impact of our swap agreements resulted from increases in the variable interest rates combined with a higher notional amount of interest rate swaps outstanding.
Our effective tax rate was
24.7 percent
and
24.8 percent
for the
third
quarter of 2018 and the
nine months ended September 30, 2018
as compared to
35.4 percent
and 35.5 percent in the same periods last year. The decline in our tax rate was primarily due to the 2017 Tax Act, which reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent effective January 1, 2018.
During the fourth quarter of 2017, the Company recorded a provisional amount of one-time income tax benefit of
$60.6 million
associated with the 2017 Tax Act. During the third quarter of 2018, the Company recorded an adjustment to the one-time income tax benefit attributable to the Company updating its estimate of foreign undistributed earnings, which was materially offset by an adjustment to certain deferred tax attributes as a result of further clarification provided by the IRS relative to IRC 162(m). The income tax benefit of $60.6 million may be impacted by future clarification and guidance, primarily related to state tax conformity to federal tax changes, however, we do not expect such changes to be material to our financial statements. As of
September 30, 2018
, we are still evaluating the effects of GILTI provisions as guidance and interpretations continue to emerge, however, we do not expect the impact to be material to our financial statements. We have not determined the accounting policy of either treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred or factoring such amounts into the Company’s measurement of its deferred taxes. However, the standard requires that we reflect the impact of the GILTI provisions as a period expense until the accounting policy is finalized in the fourth quarter. Therefore, we have included the provisional estimate of GILTI related to current-year operations in our estimated annual effective tax rate, and will update the impact and accounting policy as the analysis related to the GILTI provisions is completed in the fourth quarter.
Net income or loss from non-controlling interest relates to our 75 percent ownership stake in WEX Europe Services. Such amounts were not material to Company operations for both the third quarter and three and
nine months ended September 30, 2018
and 2017.
Non–GAAP Financial Measures That Supplement GAAP Measures
The Company’s non-GAAP adjusted net income excludes unrealized gains and losses on financial instruments, net foreign currency remeasurement gains and losses, acquisition-related intangible amortization, other acquisition and divestiture related items, stock-based compensation, restructuring and other costs, impairment charges, debt restructuring and debt issuance cost amortization, similar adjustments attributable to our non-controlling interest and certain tax related items.
Although adjusted net income is not calculated in accordance with GAAP, this non-GAAP measure is integral to the Company’s reporting and planning processes; the Company’s chief operating decision maker uses segment adjusted operating income to allocate resources among our operating segments. The Company considers this measure integral because it excludes the above-specified items that the Company’s management excludes in evaluating the Company’s performance. Specifically, in addition to evaluating the Company’s performance on a GAAP basis, management evaluates the Company’s performance on a basis that excludes the above items because:
|
|
•
|
Exclusion of the non-cash, mark-to-market adjustments on financial instruments, including interest rate swap agreements and investment securities, helps management identify and assess trends in the Company’s underlying business that might otherwise be obscured due to quarterly non-cash earnings fluctuations associated with these financial instruments. Additionally, the non-cash, mark-to-market adjustments on financial instruments are difficult to forecast accurately, making comparisons across historical and future quarters difficult to evaluate.
|
|
|
•
|
Net foreign currency gains and losses primarily result from the remeasurement to functional currency of cash, receivable and payable balances, certain intercompany notes denominated in foreign currencies and any gain or loss on foreign currency hedges relating to these items. The exclusion of these items helps management compare changes in operating results between periods that might otherwise be obscured due to currency fluctuations.
|
|
|
•
|
The Company considers certain acquisition-related costs, including certain financing costs, investment banking fees, warranty and indemnity insurance, certain integration-related expenses and amortization of acquired intangibles, as well as gains and losses from divestitures to be unpredictable, dependent on factors that may be outside of our control and unrelated to the continuing operations of the acquired or divested business or the Company. In prior periods, the Company has adjusted for goodwill impairments, acquisition-related asset impairments and gains and losses on divestitures. In addition, the size and complexity of an acquisition, which often drives the magnitude of acquisition-related costs, may not be indicative of such future costs. The Company believes that excluding acquisition-related costs and gains or losses of divestitures facilitates the comparison of our financial results to the Company’s historical operating results and to other companies in our industry.
|
|
|
•
|
Stock-based compensation is different from other forms of compensation, as it is a non-cash expense. For example, a cash salary generally has a fixed and unvarying cash cost. In contrast, the expense associated with an equity-based award is generally unrelated to the amount of cash ultimately received by the employee, and the cost to the Company is based on a stock-based compensation valuation methodology and underlying assumptions that may vary over time.
|
|
|
•
|
Restructuring and other costs are related to certain identified initiatives to further streamline the business, improve the Company’s efficiency, create synergies and to globalize the Company’s operations, all with an objective to improve scale and increase profitability going forward. This also includes other immaterial costs that the Company has incurred and are non-operational and non-recurring. We exclude these items when evaluating our continuing business performance as such items are not consistently occurring and do not reflect expected future operating expense, nor do they provide insight into the fundamentals of current or past operations of our business.
|
|
|
•
|
Impairment charges represent non-cash asset write-offs, which do not reflect recurring costs that would be relevant to the Company’s continuing operations. The Company believes that excluding these nonrecurring expenses facilitates the comparison of our financial results to the Company’s historical operating results and to other companies in its industry.
|
|
|
•
|
Debt restructuring and debt issuance cost amortization are unrelated to the continuing operations of the Company. Debt restructuring costs are not consistently occurring and do not reflect expected future operating expense, nor do they provide insight into the fundamentals of current or past operations of our business. In addition, since debt issuance cost amortization is dependent upon the financing method which can vary widely company to company, we believe that excluding these costs helps to facilitate comparison to historical results as well as to other companies within our industry.
|
|
|
•
|
The adjustments attributable to non-controlling interest have no significant impact on the ongoing operations of the business.
|
|
|
•
|
The tax related items are the difference between the Company’s GAAP tax provision and a pro forma tax provision based upon the Company’s adjusted net income before taxes as well as the impact from certain discrete tax items. The methodology utilized for calculating the Company’s adjusted net income tax provision is the same methodology utilized in calculating the Company’s GAAP tax provision.
|
For the same reasons, WEX believes that adjusted net income may also be useful to investors as one means of evaluating the Company’s performance. However, because adjusted net income is a non-GAAP measure, it should not be considered as a substitute for, or superior to, net income, operating income or cash flows from operating activities as determined in accordance with GAAP. In addition, adjusted net income as used by WEX may not be comparable to similarly titled measures employed by other companies.
The following table reconciles net income attributable to shareholders to adjusted net income attributable to shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In thousands)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income attributable to shareholders
|
$
|
57,322
|
|
|
$
|
33,971
|
|
|
$
|
145,253
|
|
|
$
|
80,462
|
|
Unrealized (gains) losses on financial instruments
|
(2,157
|
)
|
|
150
|
|
|
(18,371
|
)
|
|
849
|
|
Net foreign currency remeasurement losses (gains)
|
1,094
|
|
|
(14,611
|
)
|
|
27,438
|
|
|
(33,578
|
)
|
Acquisition-related intangible amortization
|
33,439
|
|
|
38,510
|
|
|
103,596
|
|
|
114,603
|
|
Other acquisition and divestiture related items
|
1,536
|
|
|
1,006
|
|
|
2,792
|
|
|
3,380
|
|
Stock-based compensation
|
9,799
|
|
|
8,483
|
|
|
25,659
|
|
|
22,354
|
|
Restructuring and other costs
|
1,973
|
|
|
6,024
|
|
|
8,274
|
|
|
10,169
|
|
Impairment charges
|
2,424
|
|
|
—
|
|
|
2,424
|
|
|
16,175
|
|
Debt restructuring and debt issuance cost amortization
|
2,216
|
|
|
4,287
|
|
|
11,515
|
|
|
8,450
|
|
ANI adjustments attributable to non-controlling interest
|
(351
|
)
|
|
(207
|
)
|
|
(889
|
)
|
|
(1,162
|
)
|
Tax related items
|
(11,936
|
)
|
|
(16,130
|
)
|
|
(42,819
|
)
|
|
(53,131
|
)
|
Adjusted net income attributable to shareholders
|
$
|
95,359
|
|
|
$
|
61,483
|
|
|
$
|
264,872
|
|
|
$
|
168,571
|
|
Liquidity and Capital Resources
We believe that our cash generating capability, financial condition and operations, together with our revolving credit facility, term loans and notes outstanding, as well as other available methods of financing (including deposits, participation loans, borrowed federal funds and securitization facilities), will be adequate to fund our cash needs for at least the next 12 months.
Our short-term cash requirements consist primarily of funding the working capital needs of our business, payments on maturities and withdrawals of brokered deposits and borrowed federal funds, required capital expenditures, repayments on our credit facility, interest payments on our credit facility and other operating expenses. WEX Bank can fund our short-term domestic cash requirements through the issuance of brokered deposits and borrowed federal funds. Any remaining cash needs are primarily funded through operations. Our long-term cash requirements consist primarily of amounts owed and corresponding interest payments on our 2016 Credit Agreement and Notes, amounts due to Wyndham Worldwide Corporation as part of our tax receivable agreement and various facilities lease agreements.
Earnings outside of the United States are accompanied by certain financial risks, such as changes in foreign currency exchange rates. Changes in foreign currency exchange rates may reduce the reported value of our foreign currency revenues, net of expenses, and cash flows. We cannot predict changes in currency exchange rates, the impact of exchange rate changes, nor the degree to which we will be able to manage the impact of currency exchange rate changes.
Undistributed earnings and profits of certain foreign subsidiaries of the Company amounted to an estimated
$61.8 million
and $58.7 million as of
September 30, 2018
and
December 31, 2017
, respectively. These earnings and profits are considered to be indefinitely reinvested. As discussed in Item 1 – Note
12
, Income Taxes, the United States enacted the 2017 Tax Act in December 2017, which impacted foreign undistributed earnings and profits, among other things. The 2017 Tax Act imposes a one-time transition tax on foreign undistributed earnings and profits, which is included in our 2017 U.S. Income Tax Return. The Company intends to offset the transition tax with net operating loss carryforwards and accordingly does not expect this tax to result in additional cash tax payable.
Upon distribution of these earnings and profits in the form of dividends or otherwise, the Company would be subject to withholding taxes payable to foreign countries, where applicable, and to certain state income taxes, but would have no further federal income tax liability. The Company’s primary tax jurisdictions are the United States, Australia and the United Kingdom
.
We fund a customer’s entire receivable as part of fleet and travel payment processing transactions, while the revenue generated by these transactions is only a small percentage of that amount. As a consequence, cash flows from operations are significantly impacted by changes in accounts receivable and accounts payable balances, which directly impact our capital resource requirements. See discussion of cash flows provided by (used for) operating and financing activities below for more information.
The table below summarizes our cash activities:
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|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
(In thousands)
|
2018
|
|
2017
|
Cash flows provided by (used for) operating activities
|
$
|
183,133
|
|
|
$
|
(44,546
|
)
|
Cash flows used for investing activities
|
$
|
(57,479
|
)
|
|
$
|
(56,005
|
)
|
Cash flows (used for) provided by financing activities
|
$
|
(80,958
|
)
|
|
$
|
177,109
|
|
Operating Activities
Cash provided by operating activities for the
nine
months ended
September 30, 2018
increased
$227.7 million
as compared to the same period in the prior year, resulting from higher relative net income adjusted for non-cash charges, an increase in accounts payable due to higher volumes and a return of collateral as a result of contract renegotiations. These factors were partly offset by an increase in accounts receivable due to higher fuel prices and volumes as compared to the same period last year.
Investing Activities
Cash used for investing activities for the
nine
months ended
September 30, 2018
was generally consistent with cash used for investing activities for the same period in the prior year. For the
nine
months ended
September 30, 2018
, cash used for investing activities consisted of
$53.4 million
of capital additions primarily related to the development of internal-use software as we expand globally and provide competitive products and services to our customers.
Financing Activities
Cash used for financing activities for the
nine
months ended
September 30, 2018
increased
$258.1 million
as compared to the same period in the prior year, primarily due to net repayments under our 2016 Credit Agreement, partly offset by
$178.0 million
of borrowings as a result of the debt repricings in January 2018 and August 2018.
Securitization Facilities
The Company is a party to three securitized debt agreements. Under two of these agreements, our subsidiaries sell trade accounts receivable to bankruptcy-remote subsidiaries consolidated by the Company. Under the third agreement, the Company sells certain unsecured salary advance receivables to an investment fund managed by an unrelated third-party financial institution at a discount relative to the face value of the transferred receivables. Amounts collected on the securitized receivables are restricted to pay the securitized debt and are not available for general corporate purposes. See Part I – Item 1 – Note
9
, Financing and Other Debt and Note 10, Off–Balance Sheet Arrangements, for more information regarding these facilities.
Deposits and Borrowed Federal Funds
WEX Bank issues certificates of deposit in various maturities ranging from
three months
to
five
years, with interest rates ranging from
1.30 percent
to
3.45 percent
and from 1.00 percent to 2.15 percent as of
September 30, 2018
and December 31, 2017, respectively. As of
September 30, 2018
and December 31, 2017, we had approximately
$917.7 million
and $937.7 million of certificates of deposit outstanding, respectively.
As of
September 30, 2018
, we had approximately
$238.4 million
of interest-bearing brokered money market deposits with a weighted average interest rate of
2.24 percent
, compared to
$285.9 million
of interest-bearing brokered money market deposits at
December 31, 2017
, with a weighted average interest rate of
1.49 percent
.
WEX Bank may issue brokered deposits, subject to FDIC rules governing minimum financial ratios, which include risk-based asset and capital requirements. As of
September 30, 2018
, all brokered deposits were in denominations of $250 thousand or less, corresponding to FDIC deposit insurance limits. Interest-bearing brokered money market funds may be withdrawn at any time. We believe that our brokered deposits are paying competitive yields and that there continues to be consumer demand for these instruments.
WEX Bank participates in the ICS service offered by Promontory Interfinancial Network, which allows WEX Bank to purchase brokered money market demand accounts and demand deposit accounts in an amount not to exceed
$125.0 million
as part of a one-way buy program. At
September 30, 2018
, there was no outstanding balance for ICS purchases.
We also carry non-interest bearing deposits that are required for certain customers as collateral for their credit accounts. We had
$108.8 million
and
$70.2 million
of these deposits on hand at
September 30, 2018
and
December 31, 2017
, respectively.
WEX Bank also borrows from lines of credit on a federal funds rate basis to supplement the financing of our accounts receivable. Our federal funds lines of credit were
$310.0 million
as of
September 30, 2018
. There were no outstanding borrowings as of both
September 30, 2018
and
December 31, 2017
.
2016 Credit Agreement
The 2016 Credit Agreement provides for secured tranche A and tranche B term loan facilities in original principal amounts equal to
$455.0 million
and
$1.3 billion
respectively, and a
$720.0 million
secured revolving credit facility, with a sublimit for letters of credit and swingline loans. The amounts due under the 2016 Credit Agreement mature in July 2023, subject to certain adjustments. Prior to maturity, amounts borrowed under the credit facility will be reduced by mandatory quarterly payments of
$5.4 million
and
$3.4 million
for tranche A and tranche B term loan facilities, respectively. On January 17, 2018, the Company repriced the secured tranche B term loans under the 2016 Credit Agreement, which reduced the applicable interest rate margin for the Company’s tranche B term loan facility by 50 basis points for both Eurocurrency Rate (as defined in the 2016 Credit Agreement) borrowings and base rate borrowings, and increased the outstanding amounts on these tranche B term loans from $1,182.0 million to $1,335.0 million. Following the January repricing, the applicable interest rate margin for the tranche B term loans was set at
2.25%
for Eurocurrency borrowings and
1.25%
for base rate borrowings. On August 24, 2018, the Company repriced the revolving credit loans and secured tranche A term loans under the 2016 Credit Agreement. The repricing reduced the applicable interest rate margin at current levels for the Company’s revolving credit loans by 25 basis points for both LIBOR borrowings and base rate borrowings, increased the amount available under the revolving credit facility from
$570.0 million
to
$720.0 million
and provided for an additional tranche A term loan in the amount of
$25 million
. Following the repricing, the applicable interest rate margin for the revolving credit loans and tranche A term loans was set at
2.00%
for LIBOR borrowings and
1.00%
for base rate borrowings.
Our credit agreements contain various financial covenants requiring us to maintain certain financial ratios. The August 2018 repricing modified certain financial covenants, including extending by 1 year (from December 31, 2018 to December 31, 2019) the date on which the consolidated leverage ratio test reduces from 5.00:1.00 to 4.50:1.00, extending by 2 years (from December 31, 2019 to December 31, 2021) the date on which the consolidated leverage ratio test reduces to 4.00:1.00, and adding an interim consolidated leverage ratio test of 4.25:1.00 for a one year period from December 31, 2020 through September 30, 2021. In addition to the financial covenants, the credit agreements contain various customary restrictive covenants including restrictions in certain situations on the payment of dividends. We were in compliance with all material covenants and restrictions at
September 30, 2018
. WEX Bank is not subject to certain of these restrictions.
As of
September 30, 2018
, we had no borrowings against our $720.0 million revolving credit facility. After considering outstanding letters of credit, our borrowing capacity under this revolving credit facility was
$666.3 million
as of
September 30, 2018
. The combined outstanding debt under our tranche A term loan facility and our tranche B term loan facility totaled
$1.8 billion
at
September 30, 2018
. As of
September 30, 2018
, amounts outstanding under the 2016 Credit Agreement bore a weighted average effective interest rate of
4.3 percent
.
See Part I – Item 1 – Note 9, Financing and Other Debt in the report and Part I – Item 1 – Note 13, Financing Debt, in the notes to the consolidated financial statements in our Annual Report on Form 10–K for the fiscal year ended December 31, 2017 for further information regarding the 2016 Credit Agreement.
WEX Latin America Debt
WEX Latin America had debt of approximately
$7.8 million
and
$9.7 million
as of
September 30, 2018
and
December 31, 2017
, respectively. This is composed of credit facilities held in Brazil and loan arrangements related to our accounts receivable. The average interest rate was
16.9 percent
and
21.2 percent
as of
September 30, 2018
and
December 31, 2017
, respectively. These borrowings are recorded in short-term debt, net on the Company’s unaudited condensed consolidated balance sheets for the periods presented.
Participation Debt
Historically, WEX Bank maintained three separate participation agreements with third-party banks to fund customer balances that exceeded WEX Bank’s lending limit to an individual customer. In June 2018, WEX Bank entered into a fourth participation agreement with a third-party bank to fund an additional customer’s balance. Associated unsecured borrowings carry a variable interest rate of 1 month to 3 month LIBOR plus a margin of 225 basis points. The balance of the debt was approximately
$141.0 million
and
$185.0 million
at
September 30, 2018
and
December 31, 2017
, respectively. The commitment will mature in amounts of
$75.4 million
and
$50.0 million
on December 31, 2018 and August 31, 2020, respectively, with the remaining
$15.6 million
maturing on demand.
WEX Europe Services Accounts Receivable Factoring
WEX Europe Services uses a substantially non-recourse factoring arrangement to sell receivables to a third-party financial institution to manage its working capital and cash flows. Available capacity is dependent on the level of our trade accounts receivable eligible to be sold and the financial institutions’ willingness to purchase such receivables. As such, this factoring arrangement can be reduced or eliminated at any time due to market conditions and changes in the credit worthiness of our customers, which would negatively impact our liquidity. See Part I – Item 1 – Note
10
, Off–Balance Sheet Arrangement, to the unaudited condensed consolidated financial statements of this Form 10–Q for further information.
WEX Bank Accounts Receivable Factoring
In August 2018, WEX Bank entered into a receivables purchase agreement with an unrelated third-party financial institution to sell certain of our trade receivables under non-recourse transactions. WEX Bank continues to service the receivables post-transfer with no participating interest. The Company obtained a true-sale opinion from an independent attorney, which states that the factoring agreement provides legal isolation upon WEX Bank bankruptcy or receivership under local law. As such, transfers under this arrangement are treated as a sale and are accounted for as a reduction in trade receivables because the agreements transfer effective control of the receivables to the buyer.
WEX Latin America Securitization of Receivables
During the second quarter of 2017, WEX Latin America entered into a securitized debt agreement to transfer certain unsecured receivables associated with our salary payment card product to an investment fund managed by an unrelated third-party financial institution. As of December 31, 2017 and through June 30, 2018, this securitization arrangement did not meet the derecognition conditions due to continuing involvement with the transferred assets and accordingly WEX Latin America reported the transferred receivables and securitized debt on our unaudited condensed consolidated balance sheets.
During the third quarter of 2018, the securitization agreements were amended, resulting in the Company giving up effective control of the transferred receivables to the buyer. Additionally, the Company received a true-sale opinion from an independent attorney stating that the amended agreements provide legal isolation upon WEX Latin America bankruptcy or receivership under local law. As such, transfers under this arrangement are treated as a sale and are accounted for as a reduction in trade receivables.
Other Liquidity Matters
At
September 30, 2018
, we had variable-rate borrowings of
$1.7 billion
under our 2016 Credit Agreement. We periodically review our projected borrowings under our 2016 Credit Agreement and the current interest rate environment in order to ascertain whether interest rate swaps should be used to reduce our exposure to interest rate volatility. We maintain five interest rate swap contracts that mature between December 2018 and December 2022. Collectively, these derivative contracts are intended to fix the future interest payments associated with
$1.3 billion
of our variable rate borrowings at between 0.896% and 2.212%. See Part I – Item 1 – Note
7
, Derivative Instruments, and Note
11
, Fair Value, for further information.
We currently have authorization from our board of directors to purchase up to $150 million of our common stock until September 2021, which is entirely unused as of
September 30, 2018
. The program is funded either through our future cash flows or through borrowings on our 2016 Credit Agreement. Share repurchases are made on the open market and may be commenced or suspended at any time. The Company’s management, based on its evaluation of market and economic conditions and other factors, determines the timing and number of shares repurchased.
The Company’s subsidiary, WEX Bank, is subject to various regulatory capital requirements administered by the FDIC and the Utah Department of Financial Institutions. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, WEX Bank must meet specific capital guidelines that involve quantitative measures of WEX Bank’s assets, liabilities and certain off-balance sheet items. WEX Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could limit our business activities and have a material adverse effect on our business, results of operations and financial condition.
As of
September 30, 2018
, WEX Bank met all the requirements to be deemed “well-capitalized” pursuant to FDIC regulation and for purposes of the Federal Deposit Insurance Act. See Part I – Item 1 – Note
17
, Supplementary Regulatory Capital Disclosure, for further information.
The Company has not declared any dividends on its common stock since it commenced trading on the NYSE on February 16, 2005. The timing and amount of future dividends, if any, will be (i) dependent upon the Company’s results of operations, financial condition, cash requirements and other relevant factors, (ii) subject to the discretion of the board of directors of the Company and (iii) payable only out of the Company’s surplus or current net profits in accordance with the General Corporation Law of the State of Delaware.
The Company has certain restrictions on the dividends it may pay under its revolving credit agreement, including the requirement to maintain pro forma compliance with a ratio of consolidated funded indebtedness to consolidated EBITDA of less than 2.50:1.00 for the most recent period of four fiscal quarters.
Off–Balance Sheet Arrangements
Although off-balance sheet arrangements are not recorded as liabilities under GAAP, such arrangements serve a variety of business purposes, and may potentially impact our liquidity, capital resources and results of operations. However, the Company is not dependent on them to maintain its liquidity and capital resources. The Company is not aware of any circumstances that are reasonably likely to cause the off-balance sheet arrangements to have a material adverse effect on liquidity and capital resources. As of
September 30, 2018
, we had posted letters of credit totaling approximately
$53.7 million
as collateral under the terms of our lease agreement for our corporate offices, other corporate matters and for payment processing activity at certain foreign subsidiaries.
Contractual Obligations
During October 2018, the Company entered into a definitive agreement to acquire Noventis, an electronic payments network focused on optimizing payment delivery for bills and invoices to commercial entities, for approximately
$310 million
. The transaction is expected to close in the first half of 2019 following customary regulatory approvals and customary closing conditions.
During October 2018, the Company entered into a definitive asset purchase agreement to acquire Chevron’s existing trade accounts receivable portfolio. As part of this agreement, we paid approximately
$200 million
, which includes a
$160 million
premium in excess of the receivables’ estimated carrying value.
On January 17, 2018, the Company repriced the secured tranche B term loans under the 2016 Credit Agreement, which reduced the applicable interest rate margin for the Company’s tranche B term loan facility by 50 basis points for both Eurocurrency Rate (as defined in the 2016 Credit Agreement) borrowings and base rate borrowings, and increased the outstanding amounts on these tranche B term loans from
$1.2 billion
to
$1.3 billion
.
On August 24, 2018, the Company repriced the revolving credit loans and secured tranche A term loans under the 2016 Credit Agreement. The repricing reduced the applicable interest rate margin at current levels for the Company’s revolving credit loans by 25 basis points for both LIBOR borrowings and base rate borrowings, increased the amount available under the revolving credit facility from
$570.0 million
to
$720.0 million
and provided for an additional tranche A term loan in the amount of
$25.0 million
. In addition, the repricing extended the maturity date for the revolving credit facility and tranche A term loan to July 1, 2023, modified the leverage ratios for determining the applicable interest rate on the tranche A term loans and revolving credit loans and modified certain financial covenants, including modifying the definition of specified acquisition to allow the Company to designate, one time, an acquisition involving the payment of consideration in excess of
$300 million
. All other contractual obligations are consistent with those disclosed in our Annual Report on Form 10–K for the year ended December 31, 2017.
Critical Accounting Policies and Estimates
As of January 1, 2018, we adopted the new revenue recognition standard using the modified retrospective approach.
There were three primary impacts on the Company of adopting Topic 606.
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Certain amounts paid to partners in our Fleet Solutions and Travel and Corporate Solutions segments have been determined to fall under the “cost to obtain a contract” guidance. As a result, these amounts, which were previously presented as a reduction of revenues, are now reflected within sales and marketing on our unaudited condensed consolidated statements of income. This change increased both reported revenues and expenses for the three and
nine months ended
September 30, 2018
by approximately
$13.8 million
and
$44.9 million
, respectively.
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•
|
Network fees paid to third party payment processing networks by all three of our segments, but primarily by our Travel and Corporate Solutions segment, are now presented as a reduction of revenues in our unaudited condensed consolidated statements of income. Prior to January 1, 2018, these amounts were included within service fees. This change reduced both reported revenues and expenses by approximately
$3.4 million
and
$13.5 million
, respectively, for the three and
nine months ended
September 30, 2018
.
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•
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Certain costs to obtain a contract, such as sales commissions, are to be capitalized and amortized over the life of the customer relationship, with a practical expedient available for contracts under one year in duration. The vast majority of the Company’s commissions will continue to be expensed as incurred.
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As of January 1, 2018, we recorded $0.6 million cumulative-effect adjustment, net of the associated tax effect, related to the deferral of capitalizable costs to obtain a contract within our Health and Employee Benefit Solutions segment. These commissions will be amortized to sales and marketing expense over a useful life which considers the contract term, our commission policy, renewal experience and the transfer of services to which the asset relates.
See Part I – Item 1 – Note 3, Revenue, to the unaudited condensed consolidated financial statements of this Form 10–Q for further information regarding the adoption of the new revenue standard.
Other than this adoption, there have been no material changes to the critical accounting policies and estimates discussed in our Annual Report on Form 10–K for the year ended
December 31, 2017
.
Recently Adopted Accounting Standards
See Part I – Item 1 – Note 2, Recent Accounting Pronouncements, to the unaudited condensed consolidated financial Statements of this Form 10–Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of September 30, 2018, we have no material changes to the market risk disclosures in our Annual Report on Form 10–K for the year ended
December 31, 2017
.