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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 _________________________________________
FORM 10-Q
  _________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-32426
  _________________________________________
 
WEX INC.
(Exact name of registrant as specified in its charter)
  _________________________________________
Delaware
 
01-0526993
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
97 Darling Avenue, South Portland, Maine
 
04106
(Address of principal executive offices)
 
(Zip Code)
(207) 773-8171
(Registrant’s telephone number, including area code) 
 _________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
  
Outstanding at October 23, 2014
Common Stock, $0.01 par value per share
  
38,768,316 shares



TABLE OF CONTENTS
 
 
Page
 
 
 
PART I-FINANCIAL INFORMATION
 
 
 
Item 1.
 3
 
 
 
Item 2.
 24
 
 
 
Item 3.
 36
 
 
 
Item 4.
 36
 
 
 
PART II-OTHER INFORMATION
 
 
 
Item 1.
 37
 
 
 
Item 1A.
 37
 
 
 
Item 2.
 37
 
 
 
Item 6.
 38
 
 
             SIGNATURE
 
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for statements that are forward-looking and are not statements of historical facts. This Quarterly Report includes forward-looking statements including, but not limited to, statements about management’s plan and goals and statements about the consummation of pending transactions. Any statements in this Quarterly Report that are not statements of historical facts are forward-looking statements. When used in this Quarterly Report, the words “may,” “could,” “anticipate,” “plan,” “continue,” “project,” “intend,” “estimate,” “believe,” “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. Forward-looking statements relate to our future plans, objectives, expectations and intentions and are not historical facts and accordingly involve known and unknown risks and uncertainties and other factors that may cause the actual results or performance to be materially different from future results or performance expressed or implied by these forward-looking statements. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report, in press releases and in oral statements made by our authorized officers: the effects of general economic conditions on fueling patterns as well as payments and transaction processing activity; the effects of the Company’s business expansion and acquisition efforts; the Company’s failure to successfully integrate the businesses it has acquired; the Company's failure to consummate a previously announced transaction, including the acquisition of ExxonMobil's European commercial fuel card program; the failure of corporate investments to result in anticipated strategic value; the impact and size of credit losses; the impact of changes to the Company's credit standards; breaches of the Company’s technology systems and any resulting negative impact on our reputation, liabilities, or loss of relationships with customers or merchants; fuel price volatility; the Company’s failure to maintain or renew key agreements; failure to expand the Company’s technological capabilities and service offerings as rapidly as the Company’s competitors; the actions of regulatory bodies, including banking and securities regulators, or possible changes in banking regulations impacting the Company’s industrial bank and the Company as the corporate parent; the impact of foreign currency exchange rates on the Company’s operations, revenue and income; changes in interest rates; the impact of the Company’s outstanding notes on its operations; financial loss if the Company determines it necessary to unwind its derivative instrument position prior to the expiration of a contract; the incurrence of impairment charges if our assessment of the fair value of certain of our reporting units changes; the uncertainties of litigation; as well as other risks and uncertainties identified in Item 1A of our Annual Report for the year ended December 31, 2013, filed on Form 10-K with the Securities and Exchange Commission on February 27, 2014. Our forward-looking statements do not reflect the potential future impact of any alliance, merger, acquisition, disposition or stock repurchases. The forward-looking statements speak only as of the date of the initial filing of this Quarterly Report and undue reliance should not be placed on these statements. We disclaim any obligation to update any forward-looking statements as a result of new information, future events or otherwise.

2


PART I
Item 1. Financial Statements.
WEX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited) 
 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
Cash and cash equivalents
$
576,706

 
$
361,486

Accounts receivable (less reserve for credit losses of $13,446 in 2014 and $10,396 in 2013)
2,033,974

 
1,712,061

Available-for-sale securities
18,740

 
15,963

Fuel price derivatives, at fair value
6,782

 

Property, equipment and capitalized software (net of accumulated depreciation of $165,784 in 2014 and $145,400 in 2013)
96,057

 
72,275

Deferred income taxes, net
3,776

 
88,965

Goodwill
1,095,233

 
819,892

Other intangible assets, net
471,860

 
206,744

Acquisition deposit
77,224

 

Other assets
199,210

 
154,892

Total assets
$
4,579,562

 
$
3,432,278

Liabilities and Stockholders’ Equity
 
 
 
Accounts payable
$
658,443

 
$
512,878

Accrued expenses
119,804

 
92,335

Income taxes payable
9,386

 
16,066

Deposits
1,468,734

 
1,088,930

Revolving line-of-credit facilities and term loan
683,825

 
285,000

Deferred income taxes, net
24,607

 
13,528

Notes outstanding
400,000

 
400,000

Other debt
54,662

 
7,278

Amounts due under tax receivable agreement
72,012

 
77,785

Fuel price derivatives, at fair value

 
7,358

Other liabilities
14,337

 
9,094

Total liabilities
3,505,810

 
2,510,252

Commitments and contingencies (Note 14)

 

Redeemable non-controlling interest
17,983

 
18,729

Stockholders’ Equity
 
 
 
Common stock $0.01 par value; 175,000 shares authorized; 42,995 shares issued in 2014 and 42,901 in 2013; 38,870 shares outstanding in 2014 and 38,987 in 2013
430

 
429

Additional paid-in capital
177,305

 
168,891

Non-controlling interest
19,271

 
519

Retained earnings
1,033,837

 
879,519

Accumulated other comprehensive income
(24,743
)
 
(15,495
)
Less treasury stock at cost; 4,218 shares in 2014 and 4,007 shares in 2013
(150,331
)
 
(130,566
)
Total stockholders’ equity
1,055,769

 
903,297

Total liabilities and stockholders’ equity
$
4,579,562

 
$
3,432,278

See notes to unaudited condensed consolidated financial statements.

3


WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME
(in thousands, except per share data)
(unaudited)
 
 
Three months ended
 September 30,
 
Nine months ended
 September 30,
 
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Fleet payment solutions
$
144,497

 
$
136,874

 
$
425,760

 
$
393,953

Other payment solutions
77,637

 
54,651

 
180,023

 
141,227

Total revenues
222,134

 
191,525

 
605,783

 
535,180

Expenses
 
 
 
 
 
 
 
Salary and other personnel
55,392

 
41,469

 
142,720

 
122,193

Service fees
34,024

 
29,352

 
88,160

 
79,765

Provision for credit losses
7,261

 
5,015

 
23,154

 
13,686

Technology leasing and support
8,006

 
6,799

 
22,184

 
18,712

Occupancy and equipment
5,362

 
3,822

 
13,489

 
11,818

Depreciation, amortization and impairment
19,600

 
14,160

 
49,794

 
43,268

Operating interest expense
1,860

 
976

 
4,747

 
3,205

Cost of hardware and equipment sold
1,830

 
1,055

 
5,033

 
3,266

Other
13,438

 
10,984

 
39,275

 
33,763

Gain on sale of subsidiary
(27,169
)
 

 
(27,169
)
 

Total operating expenses
119,604

 
113,632

 
361,387

 
329,676

Operating income
102,530

 
77,893

 
244,396

 
205,504

Financing interest expense
(9,840
)
 
(7,369
)
 
(24,472
)
 
(22,077
)
Net (loss) gain on foreign currency transactions
(7,560
)
 
2,968

 
(5,289
)
 
1,708

Net realized and unrealized gain (loss) on fuel price derivatives
14,773

 
(3,640
)
 
9,057

 
(2,781
)
(Increase) decrease in amount due under tax receivable agreement
(1,356
)
 
150

 
(1,356
)
 
150

Income before income taxes
98,547

 
70,002

 
222,336

 
182,504

Income taxes
24,697

 
26,224

 
69,557

 
68,097

Net income
73,850

 
43,778

 
152,779

 
114,407

Less: Net loss attributable to non-controlling interests
(593
)
 
(60
)
 
(1,539
)
 
(333
)
Net earnings attributable to WEX Inc.
$
74,443

 
$
43,838

 
$
154,318

 
$
114,740

Net earnings attributable to WEX Inc. per share:
 
 
 
 
 
 
 
Basic
$
1.92

 
$
1.12

 
$
3.97

 
$
2.95

Diluted
$
1.91

 
$
1.12

 
$
3.96

 
$
2.93

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
38,867

 
38,978

 
38,896

 
38,934

Diluted
38,961

 
39,081

 
39,004

 
39,102

See notes to unaudited condensed consolidated financial statements.

4


WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
 
Three months ended
 September 30,
 
Nine months ended
 September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
73,850

 
$
43,778

 
$
152,779

 
$
114,407

Changes in available-for-sale securities, net of tax effect of $(15) and $(43) for the three months ended September 30, 2014 and 2013, and $116 and $(289) for the nine months ended September 30, 2014 and 2013
(26
)
 
(73
)
 
200

 
(492
)
Foreign currency translation
(33,832
)
 
7,856

 
(11,170
)
 
(38,117
)
Comprehensive income
39,992


51,561

 
141,809

 
75,798

Less: comprehensive (loss) income attributable to non-controlling interests
(3,571
)
 
112

 
(3,261
)
 
(1,900
)
Comprehensive income attributable to WEX Inc.
$
43,563

 
$
51,449

 
$
145,070

 
$
77,698

See notes to unaudited condensed consolidated financial statements.

5


WEX INC.
CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount at par
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Retained
Earnings
 
Non-controlling interest in subsidiaries
 
Total
Stockholders’
Equity
Balance at December 31, 2012
38,908

 
$
426

 
$
162,470

 
$
37,379

 
$
(112,655
)
 
$
730,311

 
$

 
$
817,931

Stock issued upon exercise of stock options
70

 
1

 
1,671

 

 

 

 

 
1,672

Tax benefit from stock option and restricted stock units

 

 
6,509

 

 

 

 

 
6,509

Stock issued upon vesting of restricted and deferred stock units
241

 
2

 
(2
)
 

 

 

 

 

Stock-based compensation, net of share repurchases for tax withholdings

 

 
(4,033
)
 

 

 

 

 
(4,033
)
Purchase of shares of treasury stock

 

 

 

 
(17,911
)
 

 

 
(17,911
)
Changes in available-for-sale securities, net of tax effect of $(289)

 

 

 
(492
)
 

 

 

 
(492
)
Foreign currency translation

 

 

 
(36,550
)
 

 

 

 
(36,550
)
Net income

 

 

 

 

 
114,740

 

 
114,740

Balance at September 30, 2013
39,219


$
429


$
166,615


$
337


$
(130,566
)

$
845,051


$


$
881,866

Balance at December 31, 2013
38,987

 
$
429

 
$
168,891

 
$
(15,495
)
 
$
(130,566
)
 
$
879,519

 
$
519

 
$
903,297

Stock issued upon exercise of stock options
17

 

 
236

 

 

 

 

 
236

Tax benefit from stock option and restricted stock units

 

 
1,432

 

 

 

 

 
1,432

Stock issued upon vesting of restricted and deferred stock units
77

 
1

 
(1
)
 

 

 

 

 

Stock-based compensation, net of share repurchases for tax withholdings


 

 
6,747

 

 

 

 

 
6,747

Purchase of shares of treasury stock
(211
)
 

 

 

 
(19,765
)
 

 

 
(19,765
)
Changes in available-for-sale securities, net of tax effect of $116

 

 

 
200

 

 

 

 
200

Foreign currency translation

 

 

 
(9,448
)
 

 

 
(1,007
)
 
(10,455
)
Non-controlling interest investment

 

 

 

 

 

 
21,267

 
21,267

Net income (loss)

 

 

 

 

 
154,318

 
(1,508
)
 
152,810

Balance at September 30, 2014
38,870

 
$
430

 
$
177,305

 
$
(24,743
)
 
$
(150,331
)
 
$
1,033,837

 
$
19,271

 
$
1,055,769

See notes to unaudited condensed consolidated financial statements.

6


WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine months ended
 September 30,
 
2014
 
2013
Cash flows from operating activities
 
 
 
Net income
$
152,779

 
$
114,407

Adjustments to reconcile net income to net cash used for operating activities:
 
 
 
Fair value change of fuel price derivatives
(14,140
)
 
(1,234
)
Stock-based compensation
10,089

 
6,882

Depreciation, amortization and impairment
51,658

 
45,021

Gain on divestiture
(27,169
)
 

Deferred taxes
25,190

 
23,207

Provision for credit losses
23,154

 
13,686

Loss on disposal of property, equipment and capitalized software
1,138

 
637

Changes in operating assets and liabilities, net of effects of acquisition:
 
 
 
Accounts receivable
(389,339
)
 
(384,715
)
Other assets
(42,455
)
 
(39,289
)
Accounts payable
201,506

 
185,284

Accrued expenses
19,203

 
13,030

Income taxes
(6,757
)
 
5,463

Other liabilities
(1,724
)
 
(826
)
Amounts due under tax receivable agreement
(5,772
)
 
(6,841
)
Net cash used for operating activities
(2,639
)
 
(25,288
)
Cash flows from investing activities
 
 
 
Purchases of property, equipment and capitalized software
(39,403
)
 
(30,122
)
Purchases of available-for-sale securities
(2,740
)
 
(1,704
)
Maturities of available-for-sale securities
279

 
1,065

Acquisitions and investments, net of cash
(591,791
)
 

Proceeds from sale of subsidiary
46,890

 

Net cash used for investing activities
(586,765
)
 
(30,761
)
Cash flows from financing activities
 
 
 
Excess tax benefits from equity instrument share-based payment arrangements
1,432

 
6,509

Repurchase of share-based awards to satisfy tax withholdings
(3,342
)
 
(10,917
)
Proceeds from stock option exercises
235

 
1,671

Net change in deposits
379,812

 
267,859

Net change in borrowed federal funds

 
(48,400
)
Other debt
47,798

 
(3,003
)
Loan origination fee
(3,309
)
 
(12,023
)
Borrowings on notes outstanding

 
400,000

Net activity on 2011 revolving line-of-credit

 
(438,500
)
Net activity on 2014 revolving credit facility
190,700

 

Net activity on 2011 term loan

 
(182,500
)
Net activity on 2013 term loan
(14,375
)
 
288,750

Borrowings on 2014 term loan
222,500

 

Purchase of shares of treasury stock
(19,765
)
 
(17,911
)
Net cash provided by financing activities
801,686

 
251,535

Effect of exchange rate changes on cash and cash equivalents
2,938

 
(1,977
)
Net change in cash and cash equivalents
215,220

 
193,509

Cash and cash equivalents, beginning of period
361,486

 
197,662

Cash and cash equivalents, end of period
$
576,706

 
$
391,171

Supplemental cash flow information
 
 
 
Interest paid
$
31,757

 
$
20,291

Income taxes paid
$
49,504

 
$
33,013

Significant non-cash transactions
 
 
 
Increase in UNIK estimated earn out
$

 
$
198

See notes to unaudited condensed consolidated financial statements.

7


WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 
1.
Basis of Presentation
The acronyms and abbreviations identified below are used in the accompanying unaudited condensed consolidated financial statements and the notes thereto. The following is provided to aid the reader and provide a reference point when reviewing the unaudited condensed consolidated financial statements.
2011 Credit Agreement
 
Credit agreement entered into on May 23, 2011 among the Company, as borrower, WEX Card Holdings Australia Pty Ltd, a wholly-owned subsidiary of the Company, as specified designated borrower, Bank of America, N.A., as administrative agent and letter of credit issuer, and the other lenders party thereto
2013 Credit Agreement
 
Amended and restated credit agreement entered into on January 18, 2013 by and among the Company and certain of our subsidiaries, as borrowers, and WEX Card Holdings Australia Pty Ltd, as specified designated borrower, with a lending syndicate
2014 Amendment Agreement
 
Amendment and restatement agreement entered into on August 22, 2014, among the Company, the lenders party thereto, and Bank of America, N.A., as administrative agent
2014 Credit Agreement
 
Second amended and restated credit agreement entered into on August 22, 2014, by and among the Company and certain of our subsidiaries, as borrowers, and WEX Card Holding Australia
Adjusted Net Income or ANI
 
A non-GAAP metric that adjusts net earnings attributable to WEX Inc. for fair value changes of derivative instruments, the amortization of purchased intangibles, the expense associated with stock-based compensation, acquisition related expenses, the net impact of tax rate changes on the Company’s deferred tax asset and related changes in the tax-receivable agreement, deferred loan costs associated with the extinguishment of debt, certain non-cash asset impairment charges, gains on the extinguishment of a portion of the tax receivable agreement, gain or losses on divestitures and adjustments attributable to non-controlling interests, as well as the related tax impacts of the adjustments
ASU 2014-08
 
Accounting Standards Update No. 2014-08 Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
ASU 2014-09
 
Accounting Standards Update No. 2014-09 Revenue from Contracts with Customers (Topic 606)

ASU 2014-15
 
Accounting Standards Update No. 2014-15 Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern
Company
 
WEX Inc. and all entities included in the unaudited condensed consolidated financial statements
Esso Card
 
ExxonMobil’s European commercial fleet card portfolio
Evolution1
 
EB Holdings Corp. and its subsidiaries which includes Evolution1, Inc., acquired by the Company on July 16, 2014
FASB
 
Financial Accounting Standards Board
GAAP
 
Generally Accepted Accounting Principles in the United States
Indenture
 
The Notes were issued pursuant to an indenture dated as of January 30, 2013 among the Company, the guarantors listed therein, and The Bank of New York Mellon Trust Company, N.A., as trustee
NCI
 
Non-controlling interests
NOL
 
Net operating loss
Notes
 
$400 million notes with a 4.75% fixed rate, issued on January 30, 2013
NOW deposits
 
Negotiable order of withdrawal deposits
Pacific Pride
 
Pacific Pride Services, LLC, previously a wholly owned subsidiary, sold on July 29, 2014
SEC
 
Securities and Exchange Commission
UNIK
 
UNIK S.A., the Company's Brazilian 51 percent majority owned subsidiary
WEX
 
WEX Inc.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not

8


include all information and notes required by GAAP for complete financial statements. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K of WEX Inc. for the year ended December 31, 2013. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 27, 2014. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for any future quarter(s) or the year ending December 31, 2014.

Certain prior-year amounts have been reclassified to conform with the current year’s presentation. Specifically, UNIK debt previously included in Other liabilities was reclassified to Other debt on the condensed consolidated balance sheets.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and other liabilities approximate their respective fair values due to the short-term nature of such instruments. The carrying values of certificates of deposit, NOW deposits, interest-bearing money market deposits, borrowed federal funds and credit agreement borrowings approximate their respective fair values as the interest rates on these financial instruments are variable. All other financial instruments are reflected at fair value on the condensed consolidated balance sheets.

2.
New Accounting Standards

In April 2014, the FASB issued ASU 2014-08. Under the new guidance, only disposals representing a strategic shift in operations that have a major effect on the organization's operations and financial results, or a business activity classified as held for sale, should be presented as discontinued operations. Additionally, these amendments expanded the disclosure requirements for discontinued operations that will provide financial statement users with more information regarding the assets, liabilities, income and expenses of discontinued operations. This update is effective for interim and annual periods beginning after December 15, 2014. In addition, early adoption is permitted and the Company has elected to adopt this standard as of April 1, 2014. The adoption of this standard update affects presentation only and, as such, is not expected to have a material impact on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, which will supersede most existing revenue recognition guidance under U.S. GAAP. The new revenue recognition standard requires entities to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new standard is effective for interim and annual reporting periods beginning after December 15, 2016. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method.

In August 2014, the FASB issued ASU 2014-15 related to the disclosures regarding going concern. The new standard provides guidance regarding management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.


9

WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)

3.
Business Acquisitions

Esso Card Program
During the fourth quarter of 2013, the Company announced that it plans to acquire the assets of ExxonMobil’s European commercial fuel card program through a majority owned subsidiary, WEX Europe Services Limited. The anticipated Esso Card program transaction is expected to close late in the fourth quarter of 2014 or in the first quarter of 2015. During the third quarter of 2014, the Company made an advance payment to ExxonMobil of approximately $80,000 for a portion of the acquisition consideration, per the terms of the purchase agreement. Of this amount, 25 percent of the total was paid by the minority shareholder.
Acquisition of Evolution1
On July 16, 2014, the Company acquired all of the outstanding stock of Evolution1, a leading provider of cloud-based technology and payment solutions within the healthcare industry, for approximately $532,200 in cash. The transaction was financed through the Company’s cash on hand and existing credit facility. Evolution1 developed and operates an all-in-one, multi-tenant technology platform, card products, and mobile offering that supports a full range of healthcare account types. This includes consumer-directed payments for health savings accounts, health reimbursement arrangements, flexible spending accounts, voluntary employee beneficiary associations, and defined contribution and wellness programs. The Company acquired Evolution1 to advance the Company's capabilities in the healthcare market and enhance the Company's positioning and exposure to this growing market.
During the third quarter of 2014, the Company obtained preliminary information to assist in determining the fair values of certain tangible and intangible assets acquired and liabilities assumed in the Evolution1 acquisition. Based on such information, the Company recorded intangible assets and goodwill in accordance with the estimates described below. The Company is still reviewing the valuation of all assets and liabilities and has not finalized the purchase accounting.
The operations of Evolution1 contributed net revenues of approximately $16,540 and net losses of approximately $2,080 from July 16, 2014, through September 30, 2014, which includes finance costs. Evolution1 had previously recorded goodwill on its financial statements from prior acquisition, some of which is expected to be deductible for tax purposes. The Company has incurred $6,059 in acquisition costs. The results of operations for Evolution1 are presented in the Company's Other Payment Solutions segment.

The following is a summary of the preliminary allocation of the purchase price to the assets and liabilities acquired: 
Consideration paid (net of cash)
$
532,174

Less:
 
Accounts receivable
8,417

Accounts payable
(174
)
Deferred tax liabilities, net
(71,101
)
Other tangible assets and liabilities, net
(3,736
)
Acquired software(a)
70,000

Customer relationships(b)
211,000

Trademarks and trade name(c)
18,900

Recorded goodwill
$
298,868

(a) 
Weighted average life – 6.4 years.
(b) 
Weighted average life – 9.7 years.
(c) 
Weighted average life – 9.9 years.
The following represents unaudited pro forma operational results as if Evolution1 had been included in the Company’s unaudited consolidated statements of operations as of the beginning of the fiscal periods ended:

10

WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)

 
Three months ended September 30,
 
Nine months ended September 30,
  
2014
 
2013
 
2014
 
2013
Revenue
$
225,181

 
$
207,905

 
$
653,192

 
$
589,123

Net income attributable to WEX Inc.
$
69,889

 
$
37,309

 
$
141,206

 
$
98,303

Pro forma net income attributable to WEX Inc. per common share:
 
 
 
 
 
 
 
Net income per share – basic
$
1.80

 
$
0.96

 
$
3.63

 
$
2.52

Net income per share – diluted
$
1.79

 
$
0.95

 
$
3.62

 
$
2.51

The pro forma financial information assumes that the companies were combined as of January 1, 2013, and includes the business combination accounting impact from the acquisition, including amortization charges from acquired intangible assets, interest expense for debt incurred in the acquisition and net income tax effects. The pro forma results of operations do not include any cost savings or other synergies that may result from the acquisition or any estimated integration costs that have been or will be incurred by the Company. The pro forma information as presented above is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal year 2014 or fiscal year 2013.
Acquisition of FastCred
On October 15, 2013, UNIK acquired all of the stock of FastCred, a provider of fleet cards to the heavy truck or over-the-road segment of the Brazilian fleet market, for approximately $12,309, net of cash acquired. The Company purchased FastCred to expand its Fleet Payment Solutions segment. During the fourth quarter of 2013, the Company preliminarily allocated $4,282 of the cost of the acquisition to goodwill and $12,594 to other intangible assets, primarily customer relationships and acquired software. During the first quarter of 2014, the Company obtained additional information to assist in determining the fair values of certain tangible and intangible assets acquired and liabilities assumed as of the FastCred acquisition date. Based on such information, the Company retrospectively adjusted the fiscal year 2013 comparative information resulting in an increase in goodwill of $1,490, a decrease in intangible assets of $2,253, a decrease in property, equipment and capitalized software of $2, and a decrease in deferred income tax liabilities of $765. There were no changes to the previously reported consolidated statements of operations or statements of cash flows. The valuation of all assets and liabilities have been finalized. The total weighted average useful life of the intangible assets acquired from FastCred is four years for customer relationships and three years for acquired software. Goodwill recorded as a result of the FastCred acquisition is not currently deductible for income tax purposes. No pro forma information has been included in these financial statements as the operations of FastCred for the period that they were not part of the Company are not material to the Company’s revenues, net income or earnings per share.

4.
Sale of Subsidiary

On July 29, 2014, the Company sold its wholly owned subsidiary Pacific Pride for $48,230, subject to final working capital adjustments, which resulted in a pre-tax gain of $27,169. The transfer of the operations of Pacific Pride occurred on July 31, 2014. The Company decided to sell the operations of Pacific Pride as it did not align with the long-term strategy of the core fleet business. The operations of Pacific Pride are not material to the Company's annual revenue, net income or earnings per share. Simultaneously with the sale, the Company entered into a multi-year agreement with the buyer that will continue to allow WEX branded card acceptance at Pacific Pride locations. The Company does not view this divestiture as a strategic shift in its Fleet Payment Solution segment.


11

WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)

The following is a summary of the allocation of the assets and liabilities sold: 
Consideration received
$
48,230

Less:
 
Expenses associated with the sale
1,340

Accounts receivable
47,586

Accounts payable
(53,001
)
Other tangible assets and liabilities, net
828

Customer relationships
3,727

Trademarks and trade name
1,444

Goodwill
19,137

Gain on sale
$
27,169



5.
Reserves for Credit Losses
In general, the Company’s trade receivables provide for payment terms of 30 days or less. The Company does not extend revolving credit to its customers with respect to these receivables. The portfolio of receivables consists of a large group of smaller balance homogeneous amounts that are collectively evaluated for impairment. No customer made up more than six percent of the outstanding receivables at September 30, 2014.
As of September 30, 2014, approximately 96 percent of the outstanding balance of total trade accounts receivable was current and approximately 99 percent of the outstanding balance of total trade accounts receivable was less than 60 days past due. As of September 30, 2013, approximately 96 percent of the outstanding balance of total trade accounts receivable was current and approximately 99 percent of the outstanding balance was less than 60 days past due. The outstanding balance is made up of receivables from a wide range of industries.
The following table presents changes in reserves for credit losses related to accounts receivable:
 
Nine months ended September 30,
 
2014
 
2013
Balance, beginning of period
$
10,396

 
$
11,709

Provision for credit losses
23,154

 
13,686

Charge-offs
(25,776
)
 
(21,150
)
Recoveries of amounts previously charged-off
5,730

 
5,031

Currency translation
(58
)
 
(322
)
Balance, end of period
$
13,446

 
$
8,954

 

12

WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)



6.
Goodwill and Other Intangible Assets
Goodwill
The changes in goodwill during the first nine months of 2014 were as follows:
 
Fleet Payment Solutions Segment
 
Other
Payment
Solutions
Segment
 
Total
Gross goodwill, January 1, 2014
$
754,886

 
$
82,514

 
$
837,400

Impact of foreign currency translation
(3,276
)
 
(1,114
)
 
(4,390
)
Acquisition of Evolution1

 
298,868

 
298,868

Sale of subsidiary
(19,137
)
 

 
(19,137
)
Gross goodwill, September 30, 2014
732,473

 
380,268

 
1,112,741

Accumulated impairment, September 30, 2014
(1,337
)
 
(16,171
)
 
(17,508
)
Net goodwill, September 30, 2014
$
731,136

 
$
364,097

 
$
1,095,233

As described in Note 3, the Company adjusted the amount of goodwill and intangible assets as of December 31, 2013 in the accompanying condensed consolidated balance sheet to account for the measurement period adjustments to the FastCred purchase price allocation.
The Company had no impairments to goodwill during the nine months ended September 30, 2014.
Other Intangible Assets
The changes in other intangible assets during the first nine months of 2014 were as follows:
 
 
Net
Carrying
Amount,
January 1,
2014
 
Acquisition
 
Amortization
 
Disposals
 
Impact of
foreign
currency
translation
 
Net Carrying
Amount, September 30, 2014
Definite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
Acquired software
$
61,590

 
$
70,000

 
$
(6,982
)
 
$

 
$
(505
)
 
$
124,103

Customer relationships
127,403

 
211,000

 
(20,296
)
 
(3,727
)
 
(490
)
 
313,890

Patent
1,672

 

 
(253
)
 

 
(9
)
 
1,410

Trade names
8,835

 
18,900

 
(884
)
 
(1,444
)
 
(108
)
 
25,299

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
Trademarks and trade names
7,244

 

 

 

 
(86
)
 
7,158

Total
$
206,744

 
$
299,900

 
$
(28,415
)
 
$
(5,171
)
 
$
(1,198
)
 
$
471,860

The following table presents the estimated amortization expense related to the definite-lived intangible assets listed above for the remainder of 2014 and for each of the five succeeding fiscal years: 
Remaining 2014
$
12,220

2015
$
46,847

2016
$
45,172

2017
$
44,313

2018
$
41,330

2019
$
38,384


13

WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)

 Other intangible assets, net consist of the following:
 
September 30, 2014
 
December 31, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Definite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
Acquired software
$
152,596

 
$
(28,493
)
 
$
124,103

 
$
83,844

 
$
(22,254
)
 
$
61,590

Non-compete agreement

 

 

 
100

 
(100
)
 

Customer relationships
393,269

 
(79,379
)
 
313,890

 
197,424

 
(70,021
)
 
127,403

Patent
2,886

 
(1,476
)
 
1,410

 
2,935

 
(1,263
)
 
1,672

Trademarks and trade names
27,445

 
(2,146
)
 
25,299

 
10,112

 
(1,277
)
 
8,835

 
$
576,196

 
$
(111,494
)
 
464,702

 
$
294,415

 
$
(94,915
)
 
199,500

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
Trademarks and trade names
 
 
 
 
7,158

 
 
 
 
 
7,244

Total
 
 
 
 
$
471,860

 
 
 
 
 
$
206,744


7.
Earnings per Share
The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computations for the three and nine months ended September 30, 2014 and 2013:
 
Three months ended
 September 30,
 
Nine months ended
 September 30,
 
2014
 
2013
 
2014
 
2013
Net earnings attributable to WEX Inc. available for common stockholders – Basic and Diluted
$
74,443

 
$
43,838

 
$
154,318

 
$
114,740

Weighted average common shares outstanding – Basic
38,867

 
38,978

 
38,896

 
38,934

Unvested restricted stock units
74

 
74

 
85

 
125

Stock options
20

 
29

 
23

 
43

Weighted average common shares outstanding – Diluted
38,961

 
39,081

 
39,004

 
39,102

No shares were considered anti-dilutive during the periods reported.

14

WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)

8.
Derivative Instruments
The Company is exposed to certain risks relating to its ongoing business operations. Derivative instruments are utilized to manage the Company's commodity price risk. The Company enters into put and call option contracts related to the Company’s commodity price risk, which are based on the wholesale price of gasoline and the retail price of diesel fuel and settle on a monthly basis. These put and call option contracts, or fuel price derivative instruments, are designed to reduce the volatility of the Company’s cash flows associated with its fuel price-related earnings exposure in North America.
Beginning in April 2014, the Company initiated a partial foreign exchange hedging program. The Company uses currency forward contracts to offset the foreign currency impact of balance sheet translation. These derivatives have one month terms. The gains or losses on the currency forward contracts are reported in earnings within the same unaudited condensed consolidated statement of income line as the impact of the foreign currency translation, net gains or losses on foreign currency translations.
Accounting guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheet. The Company’s fuel price derivative instruments and foreign currency instruments do not qualify for hedge accounting treatment under the current accounting guidance, and therefore, no such hedging designation has been made.
Derivatives Not Designated as Hedging Instruments
For derivative instruments that are not designated as hedging instruments, the gain or loss on the derivative is recognized in current earnings. As of September 30, 2014, the Company had the following put and call option contracts, which are not designated as hedging contracts and settle on a monthly basis: 
 
Aggregate
Notional
Amount
(gallons) (a)
Fuel price derivative instruments – unleaded fuel
 
Option contracts settling October 2014 – March 2016
39,374

Fuel price derivative instruments – diesel
 
Option contracts settling October 2014 – March 2016
19,238

Total fuel price derivative instruments
58,612

(a) 
The settlement of the put and call option contracts is based upon the New York Mercantile Exchange’s New York Harbor Reformulated Gasoline Blendstock for Oxygenate Blending and the U.S. Department of Energy’s weekly retail on-highway diesel fuel price for the month.
The following table presents information on the location and amounts of derivative fair values in the condensed consolidated balance sheets:
 
 
Derivatives Classified as Assets
 
Derivatives Classified as Liabilities
 
 
September 30, 2014
 
December 31, 2013
 
September 30, 2014
 
December 31, 2013
Derivatives Not Designated as Hedging Instruments
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
Commodity contracts
 
Fuel price
derivatives,
at fair value
 
$
6,782

 
Fuel price
derivatives,
at fair value
 
$

 
Fuel price
derivatives,
at fair value
 
$

 
Fuel price
derivatives,
at fair value
 
$
7,358

The following table presents information on the location and amounts of derivative gains and losses in the condensed consolidated statements of income:

15

WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)

 
 
 
Amount of Gain or
(Loss) Recognized in
Income on  Derivative
Derivatives Not Designated as Hedging Instruments
Location of Gain or (Loss)
Recognized in
 
Three months ended September 30,
 
Nine months ended
 September 30,
Income on Derivative
 
2014
 
2013
 
2014
 
2013
Commodity contracts
Net realized and unrealized gain (loss) on fuel price derivatives
 
$
14,773

 
$
(3,640
)
 
$
9,057

 
$
(2,781
)
Foreign exchange contracts
Net realized gain (loss) on currency forward contracts
 
8,177

 
$

 
6,893

 
$

 

9.
Financing and Other Debt
2014 Credit Agreement Amendment
On August 22, 2014, the Company, entered into the agreements described below to modify certain terms of its existing bank borrowing agreements in order to permit the additional financings and investments to facilitate the consummation of the Esso Card transaction.
Amendment and Restatement Agreement
On August 22, 2014, the Company entered into the "2014 Amendment Agreement." Pursuant to the Amendment Agreement, certain lenders party to the “2013 Credit Agreement”, consented to the amendment and restatement of the 2013 Credit Agreement in the form of the “2014 Credit Agreement.”
The 2014 Amendment Agreement (i) provides for a new tranche of term loans under the 2014 Credit Agreement in an aggregate principal amount equal to $222,500 on the terms and conditions set forth in the 2014 Credit Agreement, (ii) modifies certain of the negative covenants as described below in the description of the 2014 Credit Agreement and (iii) provides for the addition of Wright Express International Holdings Limited as a designated borrower, subject to specified conditions precedent.
Second Amended and Restated Credit Agreement
On August 22, 2014, the Company entered into the 2014 Credit Agreement. The 2014 Credit Agreement provides for a term loan facility in an amount equal to $500,000 that matures on January 31, 2018, and a $700,000 secured revolving credit facility, with a $150,000 sublimit for letters of credit and a $20,000 sublimit for swingline loans, that terminates on January 31, 2018.
The 2014 Credit Agreement amends and restates the 2013 Credit Agreement. The 2014 Credit Agreement increases the outstanding amount of the term loans from $277,500 to $500,000, and does not change the amount of the $700,000 revolving loan. A portion of the indebtedness owing under the 2014 Credit Agreement is the same indebtedness as formerly evidenced by the 2013 Credit Agreement.
Proceeds from the 2014 Credit Agreement may be used for working capital purposes, acquisitions, payment of dividends and other restricted payments, refinancing of indebtedness, and other general corporate purposes.
Amounts outstanding under the 2014 Credit Agreement bear interest at a rate equal to, at the Company’s option, (a) the Eurocurrency Rate, as defined in the 2014 Credit Agreement, plus a margin of 1.25% to 2.75% based on the ratio of consolidated funded indebtedness of the Company and its subsidiaries to consolidated EBITDA or (b) the highest of (i) the Federal Funds Rate plus 0.50%, (ii) the prime rate announced by Bank of America N.A., and (iii) the Eurocurrency Rate plus 1.00%, in each case plus a margin of 0.25% to 1.75% based on the ratio of consolidated funded indebtedness of the Company and its subsidiaries to consolidated EBITDA. In addition, the Company has agreed to pay a quarterly commitment fee at a rate per annum ranging from 0.20% to 0.45% based on the ratio of consolidated funded indebtedness of the Company and its subsidiaries to consolidated EBITDA of the daily unused portion of the 2014 Credit Agreement.
The 2014 Credit Agreement contains customary representations and warranties, as well as affirmative and negative covenants. The 2014 Credit Agreement also requires that the Company maintain at the end of each fiscal quarter the following financial ratios: 

16

WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)

a consolidated EBIT to consolidated interest charges ratio of no less than 3.00 to 1.00, measured quarterly; and
a consolidated funded indebtedness (excluding the amount of consolidated funded indebtedness due to permitted securitization transactions) to consolidated EBITDA ratio of no more than 3.25 to 1.00, measured quarterly.
The Company may elect to increase the permissible ratio under the latter financial covenant to 3.75 to 1.00 (for four fiscal quarters) or to 4.25 to 1.00 (for two fiscal quarters) in connection with certain acquisitions.
2013 Credit Agreement
On January 18, 2013, the Company entered into the 2013 Credit Agreement. The 2013 Credit Agreement provides for a five-year amortizing $300,000 term loan facility, and a five-year $800,000 secured revolving credit facility with a $150,000 sub-limit for letters of credit. The 2013 Credit Agreement replaced the 2011 Credit Agreement and increased the outstanding amount of the term loan from $185,000 to $300,000 and increased the amount of the revolving loan from $700,000 to $800,000. On January 30, 2013, the revolving loan commitment under the 2013 Credit Agreement was reduced to $700,000. The reduction was required due to the issuance of the Notes described below.
$400 Million Note Offering
On January 30, 2013, the Company completed a $400,000 offering in aggregate principal amount of 4.75 percent senior notes due in 2023 at an issue price of 100.0 percent of the principal amount, plus accrued interest, from January 30, 2013, in a private placement for resale to “qualified institutional buyers” as defined in Rule 144A under the Securities Act, and in offshore transactions pursuant to Regulation S under the Securities Act. The Notes were issued pursuant to the Indenture dated as of January 30, 2013 among the Company, the guarantors listed therein, and The Bank of New York Mellon Trust Company, N.A., as trustee. The Notes will mature on February 1, 2023, and interest accrues at the rate of 4.750 percent per annum. Interest is payable semiannually in arrears on February 1 and August 1 of each year, commencing on August 1, 2013.
The Company used the net proceeds of this offering to repay the outstanding amount under the revolving portion of its 2013 Credit Agreement and to pay related fees and expenses and for general corporate purposes.
Other debt
UNIK debt
UNIK had approximately $9,662 of debt as of September 30, 2014, and $7,278 of debt as of December 31, 2013. UNIK's debt is comprised of various credit facilities held in Brazil, with various maturity dates. The weighted average annual interest rate was 14.5 percent as of September 30, 2014, and 15.8 percent as of December 31, 2013. This debt is classified in Other debt on the Company’s unaudited consolidated balance sheets for the periods presented. 
Participation debt
During the second quarter of 2014, WEX Bank entered into an agreement with a third party bank to fund a customer balance that exceeds the lending limit. This participation agreement allows WEX Bank to fund the portion of the customer balance that exceeds the lending limit. This borrowing carries a variable interest rate of 3-month LIBOR plus a margin of 2.25 percent.  The balance of the participation debt as of September 30, 2014, was $45,000, which is secured by a participation interest in the underlying customer receivable. The participation debt balance will fluctuate on a daily basis based on customer funding needs, and will range from $0 to $45,000. The participation debt agreement will mature on April 1, 2016. This debt is classified in Other debt on the Company’s unaudited consolidated balance sheets for the periods presented. 

10.
Fair Value
The Company holds mortgage-backed securities, fixed income and equity securities, derivatives (see Note 8, Derivative Instruments) and certain other financial instruments which are carried at fair value. The Company determines fair value based upon quoted prices when available or through the use of alternative approaches, such as model pricing, when market quotes are not readily accessible or available. In determining the fair value of the Company’s obligations, various factors are considered, including: closing exchange or over-the-counter market price quotations; time value and volatility factors underlying options and derivatives; price activity for equivalent instruments; and the Company’s own credit standing.
These valuation techniques may be based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

17

WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)

Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Instruments whose significant value drivers are unobservable.
The following table presents the Company’s assets that are measured at fair value and the related hierarchy levels as of September 30, 2014: 
 
 
 
Fair Value Measurements
at Reporting Date Using
 
September 30, 2014
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Mortgage-backed securities
$
811

 
$

 
$
811

 
$

Asset-backed securities
1,218

 

 
1,218

 

Municipal bonds
531

 

 
531

 

Equity securities
16,180

 
16,180

 

 

Total available-for-sale securities
$
18,740

 
$
16,180

 
$
2,560

 
$

Executive deferred compensation plan trust (a)
$
5,608

 
$
5,608

 
$

 
$

Fuel price derivatives – unleaded fuel (b)
$
4,496

 
$

 
$
4,496

 
$

Fuel price derivatives – diesel (b)
2,286

 

 

 
2,286

       Total fuel price derivatives
$
6,782


$


$
4,496


$
2,286

 
(a) 
The fair value of these instruments is recorded in Other assets.
(b) 
The balance sheet presentation combines unleaded fuel and diesel fuel positions.
The following table presents the Company’s assets and liabilities that are measured at fair value and the related hierarchy levels as of December 31, 2013:
 
 
 
Fair Value Measurements
at Reporting Date Using
 
December 31, 2013
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Mortgage-backed securities
$
839

 
$

 
$
839

 
$

Asset-backed securities
1,391

 

 
1,391

 

Municipal bonds
519

 

 
519

 

Equity securities
13,214

 
13,214

 

 

Total available-for-sale securities
$
15,963

 
$
13,214

 
$
2,749

 
$

Executive deferred compensation plan trust (a)
$
4,339

 
$
4,339

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
Fuel price derivatives – unleaded fuel (b)
$
5,216

 
$

 
$
5,216

 
$

Fuel price derivatives – diesel (b)
2,142

 

 

 
2,142

Total fuel price derivatives
$
7,358

 
$

 
$
5,216

 
$
2,142

(a) 
The fair value of these instruments is recorded in Other assets.
(b) 
The balance sheet presentation combines unleaded fuel and diesel fuel positions.


18

WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)

The following table presents a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended:
 
 
September 30, 2014
 
September 30, 2013
 
 
Fuel Price
Derivatives –
Diesel
 
Fuel Price
Derivatives –
Diesel
Beginning balance
 
$
(1,925
)
 
$
498

Total gains and (losses) – realized/unrealized
 
 
 
 
Included in earnings (a)
 
4,211

 
(1,015
)
Included in other comprehensive income
 

 

Purchases, issuances and settlements
 

 

Transfers (in)/out of Level 3
 

 

Ending balance
 
$
2,286

 
$
(517
)
 
(a) 
Gains and losses (realized and unrealized) associated with fuel price derivatives, included in earnings for the three months ended September 30, 2014 and 2013, are reported in net realized and unrealized losses on fuel price derivatives on the unaudited condensed consolidated statements of income.
The following table presents a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended:
 
 
September 30, 2014
 
September 30, 2013
 
 
Fuel Price
Derivatives –
Diesel
 
Contingent
Consideration
 
Fuel Price
Derivatives –
Diesel
Beginning balance
 
$
(2,142
)
 
$
(313
)
 
$
(107
)
Total (losses) and gains – realized/unrealized
 
 
 
 
 
 
Included in earnings (a)
 
4,428

 
(198
)
 
(410
)
Included in other comprehensive income
 

 

 

Purchases, issuances and settlements
 

 

 

Transfers (in)/out of Level 3
 

 
511

 

Ending balance
 
$
2,286

 
$

 
$
(517
)
(a) 
Gains and losses (realized and unrealized) associated with fuel price derivatives, included in earnings for the nine months ended September 30, 2014 and 2013, are reported in net realized and unrealized losses on fuel price derivatives on the unaudited condensed consolidated statements of income. Gains associated with contingent consideration, included in earnings for the nine months ended September 30, 2013, are reported in other expenses and loss of foreign currency transactions on the unaudited condensed consolidated statements of income.
$400 Million Notes outstanding
The Notes outstanding as of September 30, 2014, have a carrying value of $400,000 and fair value of $378,000. As of December 31, 2013, the carrying value of the $400,000 in Notes outstanding had a fair value of $365,000. The fair value is based on market rates for the issuance of our debt. The Company determined the fair value of its Notes outstanding are based on current quoted market prices.
Available-for-sale securities and executive deferred compensation plan trust
When available, the Company uses quoted market prices to determine the fair value of available-for-sale securities; such items are classified in Level 1 of the fair-value hierarchy. These securities primarily consist of exchange-traded equity securities.
For mortgage-backed and asset-backed debt securities and bonds, the Company generally uses quoted prices for recent trading activity of assets with similar characteristics to the debt security or bond being valued. The securities and bonds priced using such methods are generally classified as Level 2.
Fuel price derivatives

19

WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)

The majority of derivatives entered into by the Company are executed over-the-counter and are valued using internal valuation techniques, as no quoted market prices exist for such instruments. The valuation technique and inputs depend on the type of derivative and the nature of the underlying instrument. The principal technique used to value these instruments is a comparison of the spot price of the underlying instrument to its related futures curve adjusted for the Company’s assumptions of volatility and present value, where appropriate. The fair values of derivative contracts reflect the expected cash the Company will pay or receive upon settlement of the respective contracts.
The key inputs depend upon the type of derivative and the nature of the underlying instrument and include interest rate yield curves, the spot price of the underlying instruments, volatility, and correlation. The item is placed in either Level 2 or Level 3 depending on the observability of the significant inputs to the model. Correlation and inputs with longer tenures are generally less observable.
Fuel price derivatives – diesel. The assumptions used in the valuation of the diesel fuel price derivatives use both observable and unobservable inputs. There is a lack of price transparency with respect to forward prices for diesel fuel. Such unobservable inputs are significant to the diesel fuel derivative contract valuation methodology.
Quantitative Information About Level 3 Fair Value Measurements. The significant unobservable inputs used in the fair value measurement of the Company’s diesel fuel price derivative instruments designated as Level 3 as of September 30, 2014, are as follows:
 
Fair Value
 
Valuation
Technique
 
Unobservable Input
 
Range
$ per gallon
Fuel price derivatives – diesel
$
2,286

 
Option model
 
Future retail price of diesel fuel after September 30, 2014
 
$3.67 – 3.85
Sensitivity to Changes in Significant Unobservable Inputs. As presented in the table above, the significant unobservable inputs used in the fair value measurement of the Company’s diesel fuel price derivative instruments are the future retail price of diesel fuel from the fourth quarter of 2014 through the first quarter of 2016. Significant changes in these unobservable inputs in isolation would result in a significant change in the fair value measurement.
Contingent consideration
The Company had classified its liability for contingent consideration related to its acquisition of UNIK within Level 3 of the fair value hierarchy because the fair value is determined using significant unobservable inputs, which include the projected revenues of UNIK over a four month period. The fair value determination included assessing the probability of meeting certain milestones required to earn the contingent consideration.
On June 30, 2013, the Company finalized the contingent consideration amount based on current performance milestones and determined it to be approximately $511, which was paid on July 1, 2013.


11.
Accumulated Other Comprehensive Income
A reconciliation of accumulated other comprehensive income for the three month periods ended September 30, 2014 and 2013, is as follows:
 
2014
 
2013
 
Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
 
Foreign
Currency
Items
 
Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
 
Foreign
Currency
Items
Beginning balance
$
(207
)
 
$
6,344

 
$
(222
)
 
$
(7,052
)
Other comprehensive income (loss)
(26
)
 
(30,854
)
 
(73
)
 
7,684

Ending balance
$
(233
)
 
$
(24,510
)
 
$
(295
)
 
$
632


20

WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)

A reconciliation of accumulated other comprehensive income for the nine month periods ended September 30, 2014 and 2013, is as follows:
 
2014
 
2013
 
Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
 
Foreign
Currency
Items
 
Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
 
Foreign
Currency
Items
Beginning balance
$
(433
)
 
$
(15,062
)
 
$
197

 
$
37,182

Other comprehensive (loss) income
200

 
(9,448
)
 
(492
)
 
(36,550
)
Ending balance
$
(233
)
 
$
(24,510
)
 
$
(295
)
 
$
632

No amounts were reclassified from accumulated other comprehensive income in the periods presented.
The change in foreign currency items is primarily due to the foreign currency translation of non-cash assets such as goodwill and other intangible assets related to the Company's foreign subsidiaries.
The total tax effect on net accumulated unrealized losses, as of September 30, 2014, was $943, and the total tax effect on net accumulated unrealized losses, as of September 30, 2013, was $300.

12.
Non-controlling interests
On August 30, 2012, the Company acquired a 51 percent ownership interest in UNIK. Redeemable non-controlling interest was measured at fair value at the date of acquisition. The redeemable non-controlling interest is reported on the Company’s unaudited condensed consolidated balance sheets as “Redeemable non-controlling interest."
A reconciliation of redeemable non-controlling interest for the three and nine month periods ended September 30, 2014 and September 30, 2013, is as follows:
 
Three months ended
 September 30,
 
Nine months ended
 September 30,
 
2014
 
2013
 
2014
 
2013
Balance, beginning of period
$
19,732

 
$
19,650

 
$
18,729

 
$
21,662

Net income (loss) attributable to non-controlling interest
218

 
(60
)
 
(31
)
 
(333
)
Currency translation adjustment
(1,967
)
 
172

 
(715
)
 
(1,567
)
Ending balance
$
17,983

 
$
19,762

 
$
17,983

 
$
19,762


On November 8, 2013, the Company announced that it plans to acquire the assets of the Esso Card program through a majority owned subsidiary, WEX Europe Services Limited. The Company formed this entity during 2013 and has 75 percent ownership.

A reconciliation of non-controlling interest for the three and nine month periods ended September 30, 2014 is as follows:
 
Three months ended September 30, 2014
 
Nine months ended September 30, 2014
Balance, beginning of period
$
859

 
$
519

Non-controlling interest investment
20,234

 
21,267

Net loss attributable to non-controlling interest
(811
)
 
(1,508
)
Currency translation adjustment
(1,011
)
 
(1,007
)
Ending balance
$
19,271


$
19,271


13.
Income Taxes

21

WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)

Undistributed earnings of certain foreign subsidiaries of the Company amounted to $7,087 at September 30, 2014, and $4,665 at December 31, 2013. These earnings are considered to be indefinitely reinvested, and accordingly, no U.S. federal and state income taxes have been provided thereon. Upon distribution of these earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. The Company has determined that the amount of taxes attributable to these undistributed earnings is not practicably determinable.
During the third quarter of 2014, the Company completed a strategic tax review project which resulted in a change in estimate to reflect the tax impacts of the domestic production activities deduction and research and development credits in the Company's income tax provision. The Company has amended prior year tax returns as a result of this change in estimate which reduced the third quarter's tax expense by approximately $11,300. In addition, the current year to date tax provision was reduced by $1,700 as a result of the change in estimate which was also recorded in the third quarter.

14.
Commitments and Contingencies
Litigation
The Company is involved in pending litigation in the ordinary course of business. In the opinion of management, such litigation will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
 
15.
Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The operating segments are reviewed separately as each operating segment represents a strategic business unit that generally offers different products and serves different markets.
The Company’s chief operating decision maker evaluates the operating results of the Company’s reportable segments based upon revenues and “adjusted net income,” which is defined by the Company as net income adjusted for fair value changes of derivative instruments, the amortization of purchased intangibles, expense associated with stock-based compensation, acquisition related expenses, the net impact of tax rate changes on the Company’s deferred tax asset and related changes in the tax-receivable agreement, deferred loan costs associated with the extinguishment of debt, certain non-cash asset impairment charges, the gains on the extinguishment of a portion of the tax receivable agreement, gain or loss on divestitures and adjustments attributable to non-controlling interests.
The Company operates in two reportable segments, Fleet Payment Solutions and Other Payment Solutions. The Fleet Payment Solutions segment provides customers with payment and transaction processing services specifically designed for the needs of vehicle fleet customers. This segment also provides information management services to those fleet customers. The Other Payment Solutions segment provides customers with a payment processing solution for their corporate purchasing and transaction monitoring needs. Revenue in this segment is derived from the Company’s corporate purchase cards and virtual and prepaid card products. The corporate purchase card products are used by businesses to facilitate purchases of their products and to utilize the Company’s information management capabilities.
Net realized and unrealized losses on derivative instruments are allocated to the Fleet Payment Solutions segment in the computation of segment results for internal evaluation purposes. Total assets are not allocated to the segments.
The following table presents the Company’s reportable segment results on an adjusted pre-tax net income before NCI basis for the three months ended September 30, 2014 and 2013:

22

WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)

 
Total
Revenues
 
Operating
Interest
Expense
 
Depreciation
and
Amortization
 
Adjusted Pre-Tax Income before NCI
Three months ended September 30, 2014
 
 
 
 
 
 
 
Fleet payment solutions
$
144,497

 
$
1,033

 
$
6,412

 
$
48,728

Other payment solutions
77,637

 
827

 
1,390

 
29,699

Total
$
222,134

 
$
1,860

 
$
7,802

 
$
78,427

Three months ended September 30, 2013
 
 
 
 
 
 
 
Fleet payment solutions
$
136,874

 
$
427

 
$
5,767

 
$
59,117

Other payment solutions
54,651

 
549

 
342

 
23,355

Total
$
191,525

 
$
976

 
$
6,109

 
$
82,472

The following table presents the Company’s reportable segment results on an adjusted pre-tax net income before NCI basis for the nine months ended September 30, 2014 and 2013:
 
Total
 Revenues 
 
 Operating 
Interest
Expense
 
Depreciation
and
 Amortization 
 
Adjusted Pre-Tax Income before NCI
Nine months ended September 30, 2014
 
 
 
 
 
 
 
Fleet payment solutions
$
425,760

 
$
2,143

 
$
19,225

 
$
155,335

Other payment solutions
180,023

 
2,604

 
2,154

 
71,611

Total
$
605,783


$
4,747


$
21,379


$
226,946

Nine months ended September 30, 2013
 
 
 
 
 
 
 
Fleet payment solutions
$
393,953

 
$
1,392

 
$
17,358

 
$
164,832

Other payment solutions
141,227

 
1,813

 
1,346

 
48,080

Total
$
535,180


$
3,205


$
18,704


$
212,912

The following table reconciles adjusted pre-tax income before NCI to income before income taxes:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Adjusted pre-tax income before NCI
$
78,427

 
$
82,472

 
$
226,946

 
$
212,912

Unrealized gain (loss) on fuel price derivatives
16,213

 
(2,733
)
 
14,140

 
1,234

Amortization of acquired intangible assets
(11,798
)
 
(8,051
)
 
(28,415
)
 
(24,564
)
Stock-based compensation
(4,549
)
 
(2,494
)
 
(10,089
)
 
(6,882
)
Deferred loan costs associated with the extinguishment of debt

 

 

 
(1,004
)