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EX-31.1 - EXHIBIT 31.1 - WEX Inc.wex20150930ex311.htm

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, 2015
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 27, 2015
Common Stock, $0.01 par value per share
  
38,642,308 shares



TABLE OF CONTENTS
 
 
Page
 
 
 
PART I-FINANCIAL INFORMATION
 
 
 
Item 1.
 3
 
 
 
Item 2.
 27
 
 
 
Item 3.
 41
 
 
 
Item 4.
 41
 
 
 
PART II-OTHER INFORMATION
 
 
 
Item 1.
 43
 
 
 
Item 1A.
 43
 
 
 
Item 2.
 44
 
 
 
Item 6.
 45
 
 
             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. 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, payments, transaction processing activity and the commercial activity of fleets; the effects of the Company’s business expansion and acquisition efforts; the ability to consummate previously announced acquisitions; the Company’s failure to successfully integrate the businesses it has acquired; 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, or liabilities, or loss of relationships with customers or merchants; fuel price volatility and changes in fleet fuel efficiency; 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, 2014, filed on Form 10-K with the Securities and Exchange Commission on February 26, 2015. Our forward-looking statements and these factors 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,
2015
 
December 31,
2014
Assets
 
 
 
Cash and cash equivalents
$
533,626

 
$
284,763

Accounts receivable (less reserve for credit losses of $11,535 in 2015 and $13,919 in 2014)
1,791,681

 
1,865,538

Securitized accounts receivable, restricted
91,756

 

Income taxes receivable

 
6,859

Available-for-sale securities
18,738

 
18,940

Fuel price derivatives, at fair value
13,417

 
40,969

Property, equipment and capitalized software (net of accumulated depreciation of $184,159 in 2015 and $169,382 in 2014)
124,632

 
105,596

Deferred income taxes, net
9,675

 
5,764

Goodwill
1,068,455

 
1,116,902

Other intangible assets, net
443,027

 
497,297

Other assets
253,497

 
175,506

Total assets
$
4,348,504

 
$
4,118,134

Liabilities and Stockholders’ Equity
 
 
 
Accounts payable
$
518,892

 
$
425,956

Accrued expenses
184,927

 
137,358

Income taxes payable
8,911

 

Deposits
1,189,314

 
979,553

Securitized debt
78,303

 

Revolving line-of-credit facilities and term loan
709,219

 
901,564

Deferred income taxes, net
70,565

 
44,004

Notes outstanding
400,000

 
400,000

Other debt
50,340

 
52,975

Amounts due under tax receivable agreement
60,319

 
69,637

Other liabilities
10,793

 
12,776

Total liabilities
3,281,583

 
3,023,823

Commitments and contingencies (Note 14)

 

Redeemable non-controlling interest

 
16,590

Stockholders’ Equity
 
 
 
Common stock $0.01 par value; 175,000 shares authorized; 43,077 shares issued in 2015 and 43,021 in 2014; 38,745 shares outstanding in 2015 and 38,897 in 2014
431

 
430

Additional paid-in capital
172,788

 
179,077

Non-controlling interest
12,332

 
17,396

Retained earnings
1,162,733

 
1,081,730

Accumulated other comprehensive income
(109,021
)
 
(50,581
)
Less treasury stock at cost; 4,428 shares in 2015 and 4,218 shares in 2014
(172,342
)
 
(150,331
)
Total stockholders’ equity
1,066,921

 
1,077,721

Total liabilities and stockholders’ equity
$
4,348,504

 
$
4,118,134


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,
 
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
Fleet payment solutions
$
140,672

 
$
144,497

 
$
404,682

 
$
425,760

Other payment solutions
85,385

 
77,637

 
237,313

 
180,023

Total revenues
226,057

 
222,134

 
641,995

 
605,783

Expenses
 
 
 
 
 
 
 
Salary and other personnel
57,174

 
55,392

 
174,682

 
142,720

Restructuring
(45
)
 

 
8,514

 

Service fees
36,924

 
34,024

 
100,935

 
88,160

Provision for credit losses
6,635

 
7,261

 
14,532

 
23,154

Technology leasing and support
10,157

 
8,006

 
29,612

 
22,184

Occupancy and equipment
5,240

 
5,362

 
15,271

 
13,489

Depreciation, amortization and impairment
20,778

 
19,600

 
62,924

 
49,794

Operating interest expense
1,483

 
1,860

 
4,419

 
4,747

Cost of hardware and equipment sold
706

 
1,830

 
2,499

 
5,033

Other
19,260

 
13,438

 
50,919

 
39,275

Gain on divestiture

 
(27,169
)
 
(1,215
)
 
(27,169
)
Total operating expenses
158,312

 
119,604

 
463,092

 
361,387

Operating income
67,745

 
102,530

 
178,903

 
244,396

Financing interest expense
(11,330
)
 
(9,840
)
 
(35,334
)
 
(24,472
)
Net foreign currency gain (loss)
6,525

 
(7,560
)
 
(12
)
 
(5,289
)
Net realized and unrealized gain on fuel price derivative instruments
7,922

 
14,773

 
4,671

 
9,057

Non-cash adjustments related to tax receivable agreement
1,634

 
(1,356
)
 
1,634

 
(1,356
)
Income before income taxes
72,496

 
98,547

 
149,862

 
222,336

Income taxes
30,714

 
24,697

 
61,647

 
69,557

Net income
41,782

 
73,850

 
88,215

 
152,779

Less: Net gain (loss) attributable to non-controlling interests
203

 
(593
)
 
(2,201
)
 
(1,539
)
Net earnings attributable to WEX Inc.
41,579

 
74,443

 
90,416

 
154,318

Accretion of non-controlling interest
(9,413
)
 

 
(9,413
)
 

Net earnings attributable to shareholders
$
32,166

 
$
74,443

 
$
81,003

 
$
154,318

Net earnings attributable to shareholders per share:
 
 
 
 
 
 
 
Basic
$
0.83

 
$
1.92

 
$
2.09

 
$
3.97

Diluted
$
0.83

 
$
1.91

 
$
2.08

 
$
3.96

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
38,745

 
38,867

 
38,780

 
38,896

Diluted
38,808

 
38,961

 
38,852

 
39,004

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,
 
2015
 
2014
 
2015
 
2014
Net income
$
41,782

 
$
73,850

 
$
88,215

 
$
152,779

Changes in available-for-sale securities, net of tax effect of $59 and $(15) for the three months ended September 30, 2015 and 2014 and $29 and $116 for the nine months ended September 30, 2015 and 2014
99

 
(26
)
 
50

 
200

Foreign currency translation
(34,948
)
 
(33,832
)
 
(55,265
)
 
(11,170
)
Comprehensive income
6,933


39,992

 
33,000

 
141,809

Less: comprehensive loss attributable to non-controlling interests
(2,255
)
 
(3,571
)
 
(8,084
)
 
(3,261
)
Comprehensive income attributable to WEX Inc.
$
9,188

 
$
43,563

 
$
41,084

 
$
145,070

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, 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

Balance at December 31, 2014
38,897

 
$
430

 
$
179,077

 
$
(50,581
)
 
$
(150,331
)
 
$
1,081,730

 
$
17,396

 
$
1,077,721

Stock issued upon exercise of stock options
2

 

 
24

 

 

 

 

 
24

Tax from stock option and restricted stock units

 

 
(230
)
 

 

 

 

 
(230
)
Stock issued upon vesting of restricted and deferred stock units
56

 
1

 
(1
)
 

 

 

 

 

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


 

 
7,845

 

 

 

 

 
7,845

Purchase of shares of treasury stock
(210
)
 

 

 

 
(22,011
)
 

 

 
(22,011
)
Changes in available-for-sale securities, net of tax effect of ($29)

 

 

 
50

 

 

 

 
50

Foreign currency translation

 

 

 
(49,382
)
 

 

 
(1,673
)
 
(51,055
)
Adjustment of redeemable non-controlling interest

 

 
(13,927
)
 
(9,108
)
 

 
(9,413
)
 

 
(32,448
)
Net income (loss)

 

 

 

 

 
90,416

 
(3,391
)
 
87,025

Balance at September 30, 2015
38,745

 
$
431

 
$
172,788

 
$
(109,021
)
 
$
(172,342
)
 
$
1,162,733

 
$
12,332

 
$
1,066,921

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,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net income
$
88,215

 
$
152,779

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
 
Fair value change of fuel price derivatives
27,552

 
(14,140
)
Stock-based compensation
10,227

 
10,089

Depreciation, amortization and impairment
65,243

 
51,658

Gain on divestiture
(1,215
)
 
(27,169
)
Deferred taxes
24,057

 
25,190

Foreign currency remeasurement
17,074

 

Restructuring charge
8,514

 

Provision for credit losses
14,532

 
23,154

Loss on disposal of property, equipment and capitalized software
298

 
1,138

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(78,951
)
 
(389,339
)
Other assets
(82,133
)
 
(42,455
)
Accounts payable
107,884

 
201,506

Accrued expenses
40,539

 
19,203

Income taxes
17,288

 
(6,757
)
Other liabilities
(2,221
)
 
(1,724
)
Amounts due under tax receivable agreement
(9,318
)
 
(5,772
)
Net cash provided by (used for) operating activities
247,585

 
(2,639
)
Cash flows from investing activities
 
 
 
Purchases of property, equipment and capitalized software
(47,117
)
 
(39,403
)
Purchases of available-for-sale securities
(263
)
 
(2,740
)
Maturities of available-for-sale securities
544

 
279

Acquisitions and investments, net of cash

 
(591,791
)
Proceeds from divestitures
17,265

 
46,890

Net cash used for investing activities
(29,571
)
 
(586,765
)
Cash flows from financing activities
 
 
 
Excess tax benefits from equity instrument share-based payment arrangements
658

 
1,432

Repurchase of share-based awards to satisfy tax withholdings
(2,382
)
 
(3,342
)
Proceeds from stock option exercises
24

 
235

Net change in deposits
211,015

 
379,812

Other debt
155

 
47,798

Loan origination fee

 
(3,309
)
Net activity on 2014 revolving credit facility
(168,752
)
 
190,700

Net change in securitized debt
85,658

 

Payments on term loan
(20,625
)
 
(14,375
)
Borrowings on 2014 term loan

 
222,500

Purchase of redeemable non-controlling interest
(46,018
)
 

Purchase of shares of treasury stock
(22,011
)
 
(19,765
)
Net cash provided by financing activities
37,722

 
801,686

Effect of exchange rate changes on cash and cash equivalents
(6,873
)
 
2,938

Net change in cash and cash equivalents
248,863

 
215,220

Cash and cash equivalents, beginning of period
284,763

 
361,486

Cash and cash equivalents, end of period
$
533,626

 
$
576,706

Supplemental cash flow information
 
 
 
Interest paid
$
41,292

 
$
31,757

Income taxes paid
$
19,899

 
$
49,504

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. to exclude fair value changes of fuel-price related derivative instruments, the amortization of purchased intangibles, the impact of net foreign currency remeasurement gains and losses, 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, restructuring charges, gains on the extinguishment of a portion of the tax receivable agreement, regulatory reserves, gains or losses on divestitures and adjustments attributable to non-controlling interests, including adjustments to the redemption value of a non-controlling interest, as well as the related tax impacts of the adjustments

ASU 2014-09
 
Accounting Standards Update No. 2014-09 Revenue from Contracts with Customers (Topic 606)

ASU 2015-03
 
Accounting Standards Update No. 2015-03 Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
ASU 2015-04
 
Accounting Standards Update No. 2015-04 Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets
Company
 
WEX Inc. and all entities included in the unaudited condensed consolidated financial statements
European fleet business
 
Consists primarily of our European commercial fleet card portfolio acquired by the Company from ExxonMobil on December 1, 2014 ("Esso portfolio in Europe")
Evolution1
 
EB Holdings Corp. and its subsidiaries which includes Evolution1, Inc., acquired by the Company on July 16, 2014
FASB
 
Financial Accounting Standards Board
FDIC
 
Federal Deposit Insurance Corporation
GAAP
 
Generally Accepted Accounting Principles in the United States
Indenture
 
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
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
rapid! PayCard
 
rapid! PayCard, previously a line of business of the Company, sold on January 7, 2015
SaaS
 
Software-as-a-service
SEC
 
Securities and Exchange Commission
Securitization Subsidiary
 
Southern Cross WEX 2015-1 Trust, a bankruptcy-remote subsidiary consolidated by the Company
UNIK
 
UNIK S.A., the Company's Brazilian subsidiary
WEX
 
WEX Inc.

8

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

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 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, 2014. 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, 2014, filed with the SEC on February 26, 2015. 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, 2015 are not necessarily indicative of the results that may be expected for any future quarter(s) or the year ending December 31, 2015.
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, 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 unaudited condensed consolidated balance sheets.

2.
New Accounting Standards
In May 2014, the FASB issued ASU 2014-09 related to revenue recognition, 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 in exchange for those goods or services. The standard permits the use of either the retrospective or cumulative effect transition method. On July 9, 2015, the the Board voted to defer the effective date by one year to interim and annual reporting periods beginning after December 15, 2017, and permitted early adoption of the standard, but not for periods beginning on or before the original effective date of December 15, 2016. 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 April 2015, the FASB issued ASU 2015-03 related to the simplification of the presentation of debt issuance costs. The standard requires entities to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. The new standard is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. Entities would apply the new guidance retrospectively to all prior periods and provide the applicable disclosures for a change in accounting principal: (i) the nature of and reason for the change in accounting principle; (ii) the transition method; (iii) a description of the prior-period information that has been retrospectively adjusted; and, (iv) the effect of the change on the financial statement line item. The adoption of this standard affects presentation only and, as such, is not expected to have a material impact on the Company's consolidated financial statements.
In April 2015, the FASB issued ASU 2015-04 related to using a practical expedient for the measurement date of an employer’s defined benefit obligation and plan assets.The new standard gives an entity with a fiscal year-end that does not coincide with a calendar month-end the ability, as a practical expedient, to measure its defined benefit retirement obligations and related plan assets as of the month-end that is closest to its fiscal year-end. Additionally, the new standard provides guidance on accounting for (i) contributions to the plan and (ii) significant events that require a remeasurement (e.g., a plan amendment, settlement, or curtailment) that occur during the period between a month-end measurement date and the employer’s fiscal year-end. An entity should reflect the effects of those contributions or significant events in the measurement of the retirement benefit obligations and related plan assets. As a separate practical expedient, an entity may elect to measure the effects of a significant event as of the calendar month-end closest to the date of the significant event. The new standard is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted and the new standard should be applied prospectively. The Company does not believe that the adoption of ASU 2014-05 will have a material impact on its results of operations.
In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments.” This standard replaces the requirement that an acquirer in a business combination account for measurement period adjustments retrospectively with a requirement that an acquirer recognize adjustments to the provisional amounts that

9

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

are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer is required to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The pronouncement is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. The guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date of the guidance. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
3.
Business Acquisitions
Acquisition of remaining 49% of UNIK
On August 31, 2015, the Company acquired the remaining 49 percent ownership in UNIK for $46,018. See Note 12 Non-controlling interests for further information.
Esso portfolio in Europe
On December 1, 2014, the Company acquired certain assets of the Esso portfolio in Europe through a majority owned subsidiary, WEX Europe Services Limited. The Company formed this entity during 2013 and has 75 percent ownership. The Company paid $379,458 in cash, which includes an $80,000 advance payment made in the third quarter of 2014. The transaction was financed through the Company’s cash on hand and existing credit facility. Under the terms of the transaction, WEX purchased ExxonMobil’s commercial fleet fuel card program which includes operations, funding, pricing, sales and marketing in nine countries in Europe. As part of the transaction, both parties have agreed to enter into a long term supply agreement to serve the current and future Esso Card customers and to grow the business. The Company entered into this transaction in order to expand its presence in the European market and to broaden its international footprint, while laying the foundation for further expansion.
During the fourth 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 Esso portfolio in Europe transaction. During the first nine months of 2015, 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 acquisition date. Based on such information, the Company retrospectively adjusted the fiscal year 2014 comparative information resulting in an increase in goodwill of $537, a decrease in accounts receivable of $2, a decrease in the customer relationship intangible asset of $374, a decrease in the licensing agreements intangible asset of $374, and an increase in other tangible assets and liabilities, net, including consideration receivable of $213. The Company recorded intangible assets and goodwill as described below. The Company is still reviewing the valuation as well as performing procedures to verify the completeness and accuracy of the data used in the independent valuation of all assets and liabilities. The Company has not finalized the purchase accounting. Goodwill related to this transaction is expected to be deductible for income tax purposes. The results of operations for the Esso portfolio in Europe are presented in the Company's Fleet 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 acquired)
$
379,458

Less:
 
Accounts receivable
303,376

Other tangible assets and liabilities, net
(8,497
)
Licensing agreements(a)
36,605

Customer relationships(b)
7,346

Recorded goodwill
$
40,628

(a) 
Weighted average life – 4.6 years.
(b) 
Weighted average life – 7.2 years.

Supplemental pro forma financial information related to the Esso portfolio in Europe acquisition has not been provided as it would be impracticable to do so. Historical financial information regarding the acquired assets is not accessible and, thus, the amounts would require estimates to be significant and render the disclosure irrelevant.

10

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

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 $532,174 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 enhance the Company's capabilities and positioning in the growing healthcare 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. During the fourth quarter of 2014 and the first half of 2015, 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 acquisition date. Based on such information, the Company retrospectively adjusted the fiscal year 2014 comparative information resulting in an increase in goodwill of $379, an increase in other tangible assets and liabilities of $127, and an increase in deferred income tax liabilities of $252. 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. Evolution1 had previously recorded goodwill on its financial statements from a prior acquisition, some of which is expected to be deductible for tax purposes. The results of operations for Evolution1 are presented in the Company's Other Payment Solutions segment.

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

Less:
 
Accounts receivable
8,418

Accounts payable
(175
)
Deferred tax liabilities, net
(68,768
)
Other tangible assets and liabilities, net
(3,712
)
Acquired software and developed technology(a)
70,000

Customer relationships(b)
211,000

Trade name(c)
7,900

Trade name(d)
11,000

Recorded goodwill
$
296,511

(a) 
Weighted average life – 6.4 years.
(b) 
Weighted average life – 9.7 years.
(c) 
Weighted average life – 9.9 years.
(d) 
Indefinite-lived

The following represents unaudited pro forma operational results as if Evolution1 had been included in the Company’s unaudited condensed consolidated statements of operations as of the beginning of the fiscal periods ended:
 
Three Months Ended
 September 30, 2014
 
Nine months Ended
 September 30, 2014
Revenue
$
225,181

 
$
653,192

Net income attributable to WEX Inc.
$
69,889

 
$
141,206

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

 
$
3.63

Net income per share – diluted
$
1.79

 
$
3.62

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 acquisition related expenses, 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

11

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

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.
4.
Sale of Subsidiary and Assets
rapid! PayCard
On January 7, 2015, the Company sold the assets of its operations of rapid! PayCard for $20,000, which resulted in a pre-tax gain of approximately $1,215. The Company's primary focus in the U.S. continues to be in the fleet, travel, and healthcare industries. As such, the Company divested the operations of rapid! PayCard. The operations of rapid! PayCard were not material to the Company's annual revenue, net income or earnings per share. The Company does not view this divestiture as a strategic shift in its Other Payment Solution segment.
Pacific Pride
On July 29, 2014, the Company sold its wholly owned subsidiary Pacific Pride for $49,664, which resulted in a pre-tax gain of $27,490. 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 were 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.

The following is a summary of the allocation of the assets and liabilities sold: 
Consideration received
$
49,664

Less:
 
Expenses associated with the sale
1,340

Accounts receivable
48,699

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
$
27,490


5.
Reserves for Credit Losses
In general, the Company’s trade receivables provide for payment terms of 30 days or less. 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 ten percent of the outstanding receivables at September 30, 2015.
Receivables are generally written off when they are 150 days past due or upon declaration of bankruptcy by the customer. The reserve for credit losses is calculated by an analytic model that also takes into account other factors, such as the actual charge-offs for the preceding reporting periods, expected charge-offs and recoveries for the subsequent reporting periods, a review of accounts receivable balances which become past due, changes in customer payment patterns, known fraudulent activity in the portfolio, as well as leading economic and market indicators.
As of September 30, 2015, approximately 98 percent of the outstanding balance of total trade accounts receivable was less than 60 days past due. As of September 30, 2014, approximately 99 percent of the total trade accounts receivable outstanding balance was less than 60 days past due.


12

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

The following table presents changes in reserves for credit losses related to accounts receivable:
 
Nine months ended September 30,
 
2015
 
2014
Balance, beginning of period
$
13,919

 
$
10,396

Provision for credit losses
14,532

 
23,154

Charge-offs
(20,667
)
 
(25,776
)
Recoveries of amounts previously charged-off
3,965

 
5,730

Currency translation
(214
)
 
(58
)
Balance, end of period
$
11,535

 
$
13,446

 
6.
Goodwill and Other Intangible Assets
Goodwill
The changes in goodwill during the first nine months of 2015 were as follows:
 
Fleet Payment Solutions Segment
 
Other
Payment
Solutions
Segment
 
Total
Gross goodwill, January 1, 2015
$
759,986

 
$
374,424

 
$
1,134,410

Impact of foreign currency translation
(29,235
)
 
(6,679
)
 
(35,914
)
Disposal of certain assets
(147
)
 
(12,386
)
 
(12,533
)
Gross goodwill, September 30, 2015
730,604

 
355,359

 
1,085,963

Accumulated impairment, September 30, 2015
(1,337
)
 
(16,171
)
 
(17,508
)
Net goodwill, September 30, 2015
$
729,267

 
$
339,188

 
$
1,068,455

As described in Note 3, the Company adjusted the amount of goodwill as of December 31, 2014 in the accompanying unaudited condensed consolidated balance sheet to account for the measurement period adjustments to the Esso portfolio in Europe purchase price allocation.
The Company had no impairments to goodwill during the nine months ended September 30, 2015.
Management is currently evaluating its internal reporting structure and is in the process of determining the impact of the changes on the Company’s segment and goodwill reporting.

13

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

Other Intangible Assets
The changes in other intangible assets during the first nine months of 2015 were as follows:
 
Net
Carrying
Amount,
January 1,
2015
 
Amortization
 
Disposals
 
Impact of
foreign
currency
translation
 
Net Carrying
Amount, September 30, 2015
Definite-lived intangible assets
 
 
 
 
 
 
 
 
 
Acquired software and developed technology
$
119,509

 
$
(8,195
)
 
$

 
$
(4,289
)
 
$
107,025

Customer relationships
309,450

 
(23,506
)
 
(2,329
)
 
(6,977
)
 
276,638

Licensing agreements
35,341

 
(3,159
)
 
(164
)
 
(2,701
)
 
29,317

Patent
1,245

 
(67
)
 

 
(282
)
 
896

Trade names
15,373

 
(849
)
 
(723
)
 
(338
)
 
13,463

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
 
Trademarks and trade names
16,379

 

 

 
(691
)
 
15,688

Total
$
497,297

 
$
(35,776
)
 
$
(3,216
)
 
$
(15,278
)
 
$
443,027

The following table presents the estimated amortization expense related to the definite-lived intangible assets listed above for the remainder of 2015 and for each of the five succeeding fiscal years: 
Remaining 2015
$
11,910

2016
$
46,534

2017
$
46,348

2018
$
43,050

2019
$
39,901

2020
$
36,621

Other intangible assets, net consist of the following:
 
September 30, 2015
 
December 31, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Definite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
Acquired software and developed technology
$
144,857

 
$
(37,832
)
 
$
107,025

 
$
150,458

 
$
(30,949
)
 
$
119,509

Customer relationships
373,099

 
(96,461
)
 
276,638

 
393,942

 
(84,492
)
 
309,450

Licensing agreements
33,054

 
(3,737
)
 
29,317

 
35,726

 
(385
)
 
35,341

Patent
2,307

 
(1,411
)
 
896

 
2,697

 
(1,452
)
 
1,245

Trademarks and trade names
16,420

 
(2,957
)
 
13,463

 
17,786

 
(2,413
)
 
15,373

 
$
569,737

 
$
(142,398
)
 
427,339

 
$
600,609

 
$
(119,691
)
 
480,918

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
Trademarks and trade names
 
 
 
 
15,688

 
 
 
 
 
16,379

Total
 
 
 
 
$
443,027

 
 
 
 
 
$
497,297







14

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


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, 2015 and 2014:
 
Three months ended
 September 30,
 
Nine months ended
 September 30,
 
2015
 
2014
 
2015
 
2014
Net earnings attributable to WEX Inc. available for common stockholders – Basic and Diluted
$
32,166

 
$
74,443

 
$
81,003

 
$
154,318

Weighted average common shares outstanding – Basic
38,745

 
38,867

 
38,780

 
38,896

Unvested restricted stock units
46

 
74

 
55

 
85

Stock options
17

 
20

 
17

 
23

Weighted average common shares outstanding – Diluted
38,808

 
38,961

 
38,852

 
39,004

For the three and nine month periods ended September 30, 2015, certain potential outstanding stock options and restricted stock units were excluded from the computation of diluted earnings per share because the effect of including these options and restricted stock units would be anti-dilutive. No material amount of shares were considered anti-dilutive during the periods reported.
8.
Derivative Instruments
The Company is exposed to certain market 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.
During the fourth quarter of 2014, the Company suspended purchases under its fuel derivatives program due to unusually low prices in the commodities market. Management will continue to monitor the fuel price market and evaluate its alternatives as it relates to this hedging program. For the fourth quarter of 2015, the Company holds fuel price sensitive derivative instruments to hedge approximately 40 percent of our anticipated U.S. fuel-price related earnings exposure. For the first quarter of 2016, the amount hedged declines to 20 percent. At this time, there are no hedges beyond the first quarter of 2016.
Beginning in April 2014, the Company initiated a partial foreign currency exchange hedging program. The Company used currency forward contracts to offset the foreign currency impact of balance sheet translation. Prior to the first quarter of 2015, the Company managed foreign currency exchange exposure on an intra-quarter basis. Beginning in the first quarter of 2015, the Company held foreign currency exchange contracts that were outstanding over the quarter-end period, sought to minimize foreign cash balances, and expanded the scope of its hedging program to include additional currencies. During the third quarter of 2015, the Company terminated this foreign currency hedging program.
Beginning in September of 2015, the Company initiated a new limited foreign currency exchange hedging program, entering into short-term foreign currency swaps to convert the foreign currency exposures of certain foreign currency denominated intercompany loans and investments to U.S. dollars.
The realized and unrealized gains or losses on the currency forward contracts and swaps are reported in earnings within the same unaudited condensed consolidated statement of income line as the impact of the foreign currency translation, net foreign currency gain (loss).
Accounting guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the unaudited condensed consolidated balance sheet. The Company’s fuel price derivative instruments and foreign currency instruments do not qualify for hedge accounting treatment, and therefore, no such hedging designation has been made.

15

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

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, 2015, the Company had the following put and call option contracts related to the Company's commodity fuel price derivatives, 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 2015 – March 2016
7,769

Fuel price derivative instruments – diesel
 
Option contracts settling October 2015 – March 2016
3,848

Total fuel price derivative instruments
11,617

(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.
As of September 30, 2015, the Company had the following contracts related to its foreign currency swaps, which are not designated as hedging contracts and settle in U.S. dollars at various dates within 2 days: 
 
Aggregate
Notional
Amount

Australian dollar
A$
9,500

Euro
1,700

Pound sterling
£
17,000

The following table presents information on the location and amounts of derivative fair values in the unaudited condensed consolidated balance sheets:
 
 
Derivatives Classified as Assets
 
Derivatives Classified as Liabilities
 
 
September 30, 2015
 
December 31, 2014
 
September 30, 2015
 
December 31, 2014
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
 
$
13,417

 
Fuel price
derivatives,
at fair value
 
$
40,969

 
Fuel price
derivatives,
at fair value
 
$

 
Fuel price
derivatives,
at fair value
 
$

Foreign currency swaps
 
Accounts receivable
 
$
15

 
Accounts receivable
 
$

 
Accounts payable
 
$
115

 
Accounts payable
 
$

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

16

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
 
2015
 
2014
 
2015
 
2014
Commodity contracts
Net realized and unrealized gain on fuel price derivative instruments
 
$
7,922

 
$
14,773

 
$
4,671

 
$
9,057

Foreign currency forward exchanges
Net foreign currency gain (loss)
 
$

 
$
8,177

 
21,967

 
$
6,893

Foreign currency swaps
Net foreign currency gain (loss)
 
$
(100
)
 
$

 
$
(100
)
 
$

 

9.
Financing and Other Debt
2014 Credit Agreement
As of September 30, 2015, the Company has $243,594 of borrowings against its $700,000 revolving credit facility. The outstanding debt under the Company's amortizing term loan arrangement, which expires in January of 2018, totaled $465,625 at September 30, 2015 and $486,250 at December 31, 2014. As of September 30, 2015, amounts outstanding under the amortizing term loan bear interest at a rate of LIBOR plus 200 basis points. The revolving credit facility currently bears interest at a rate equal to, at our option, (a) LIBOR plus 200 basis points, (b) the prime rate plus 100 basis points for our domestic borrowings; and the Eurocurrency rate plus 200 basis points for our international borrowings.
Borrowed Federal Funds
In the second quarter of 2015, the Company increased its federal funds lines of credit by $135,000 to $260,000. As of September 30, 2015, the Company had $0 outstanding on its $260,000 federal funds lines of credit. As of December 31, 2014 the Company had no outstanding balance on its $125,000 of available credit on these lines.
UNIK debt
UNIK had approximately $5,340 of debt as of September 30, 2015, and $7,975 of debt as of December 31, 2014. UNIK's debt is comprised of various credit facilities held in Brazil, with various maturity dates. The weighted average annual interest rate was 14.1 percent as of September 30, 2015, and 13.9 percent as of December 31, 2014. This debt is classified in Other debt on the Company’s unaudited condensed 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 exceeded WEX Bank's lending limit to an individual customer. This borrowing carries a variable interest rate of 3-month LIBOR plus a margin of 2.25 percent.  The balance of the debt as of both September 30, 2015 and December 31, 2014, was $45,000. 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 condensed consolidated balance sheets for the periods presented. 
Securitization facility
On April 28, 2015, the Company entered into a one year securitized debt agreement with a bank. Under the terms of the agreement, each month, on a revolving basis, the Company sells certain of its Australian receivables to a bankruptcy-remote subsidiary consolidated by the Company ("Securitization Subsidiary"). The Securitization Subsidiary, in turn, uses the receivables as collateral to issue asset-backed commercial paper ("securitized debt") for approximately 85 percent of the securitized receivables. The amount collected on the securitized receivables is restricted to pay the securitized debt and is not available for general corporate purposes.
The Company pays a variable interest rate on the outstanding balance of the securitized debt, based on the Australian Bank Bill Rate plus an applicable margin. The interest rate as of September 30, 2015, was 2.91 percent. As of September 30, 2015, the Company had $78,303 of securitized debt.


17

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

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:
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, 2015: 
 
 
 
Fair Value Measurements
at Reporting Date Using
 
September 30, 2015
 
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
$
656

 
$

 
$
656

 
$

Asset-backed securities
892

 

 
892

 

Municipal bonds
423

 

 
423

 

Equity securities
16,767

 
16,767

 

 

Total available-for-sale securities
$
18,738

 
$
16,767

 
$
1,971

 
$

Executive deferred compensation plan trust (a)
$
5,446

 
$
5,446

 
$

 
$

Fuel price derivatives – unleaded fuel (b)
$
8,972

 
$

 
$
8,972

 
$

Fuel price derivatives – diesel (b)
4,445

 

 

 
4,445

       Total fuel price derivatives
$
13,417


$


$
8,972


$
4,445

Foreign currency swaps (c)
$
15

 
$

 
$
15

 
$

Liabilities:
 
 
 
 
 
 
 
Foreign currency swaps (d)
$
115

 

 
$
115

 

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

18

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

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, 2014:
 
 
 
Fair Value Measurements
at Reporting Date Using
 
December 31, 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
$
810

 
$

 
$
810

 
$

Asset-backed securities
1,165

 

 
1,165

 

Municipal bonds
554

 

 
554

 

Equity securities
16,411

 
16,411

 

 

Total available-for-sale securities
$
18,940

 
$
16,411

 
$
2,529

 
$

Executive deferred compensation plan trust (a)
$
5,927

 
$
5,927

 
$

 
$

Fuel price derivatives – unleaded fuel (b)
$
29,120

 
$

 
$
29,120

 
$

Fuel price derivatives – diesel (b)
11,849

 

 

 
11,849

Total fuel price derivatives
$
40,969

 
$

 
$
29,120

 
$
11,849

(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 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, 2015
 
September 30, 2014
 
 
Fuel Price
Derivatives –
Diesel
 
Fuel Price
Derivatives –
Diesel
Beginning balance
 
$
6,078

 
$
(1,925
)
Total gains and (losses) – realized/unrealized
 
 
 
 
Included in earnings (a)
 
(1,633
)
 
4,211

Included in other comprehensive income
 

 

Purchases, issuances and settlements
 

 

Transfers (in)/out of Level 3
 

 

Ending balance
 
$
4,445

 
$
2,286

 
(a)Gains and losses (realized and unrealized) associated with fuel price derivatives, included in earnings for the three months ended September 30, 2015 and 2014, are reported in net realized and unrealized gain on fuel price derivative instruments on the unaudited condensed consolidated statements of income.


19

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 nine months ended:
 
 
 
 
 
 
 
September 30, 2015
 
September 30, 2014
 
 
Fuel Price
Derivatives –
Diesel
 
Fuel Price
Derivatives –
Diesel
Beginning balance
 
$
11,848

 
$
(2,142
)
Total gains and (losses) – realized/unrealized
 
 
 
 
Included in earnings (a)
 
(7,403
)
 
4,428

Included in other comprehensive income
 

 

Purchases, issuances and settlements
 

 

Transfers (in)/out of Level 3
 

 

Ending balance
 
$
4,445

 
$
2,286

(a)Gains and losses (realized and unrealized) associated with fuel price derivatives, included in earnings for the nine months ended September 30, 2015 and 2014, are reported in net realized and unrealized gain on fuel price derivative instruments on the unaudited condensed consolidated statements of income.
$400 Million Notes outstanding
The Notes outstanding as of September 30, 2015, have a carrying value of $400,000 and fair value of $384,000. As of December 31, 2014, the carrying value of the $400,000 in Notes outstanding had a fair value of $388,000. 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 classified as Level 2 in the fair value hierarchy.
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. The obligations related to the deferred compensation plan trust are classified as Level 1 in the fair value hierarchy because the fair value is determined using quoted prices for identical instruments in active markets.
Foreign currency contracts
Derivatives include foreign currency forward and swap contracts. Our foreign currency forward and swap contracts are valued using an income approach (Level 2) based on the spot rate less the contract rate multiplied by the notional amount. We consider counterparty credit risk in the valuation of our derivatives. However, counterparty credit risk did not impact the valuation of our derivatives during 2015 and 2014.
Fuel price derivative instruments
The majority of fuel price derivative instruments 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.

20

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

Fuel price derivative instruments – diesel. The assumptions used in the valuation of the diesel fuel price derivative instruments 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, 2015, are as follows:
 
Fair Value
 
Valuation
Technique
 
Unobservable Input
 
Range
$ per gallon
Fuel price derivatives – diesel
$
4,445

 
Option model
 
Future retail price of diesel fuel after September 30, 2015
 
$3.72 – 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 third quarter of 2015 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.
11.
Accumulated Other Comprehensive Income
A reconciliation of accumulated other comprehensive income (loss) for the three month periods ended September 30, 2015 and 2014, is as follows:
 
2015
 
2014
 
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
$
(178
)
 
$
(67,344
)
 
$
(207
)
 
$
6,344

Other comprehensive income (loss)
99

 
(32,490
)
 
(26
)
 
(30,854
)
Purchase of redeemable non-controlling interest

 
(9,108
)
 

 

Ending balance
$
(79
)
 
$
(108,942
)
 
$
(233
)
 
$
(24,510
)
A reconciliation of accumulated other comprehensive income for the nine month periods ended September 30, 2015 and 2014, is as follows:
 
2015
 
2014
 
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
$
(129
)
 
$
(50,452
)
 
$
(433
)
 
$
(15,062
)
Other comprehensive (loss) income
50

 
(49,382
)
 
200

 
(9,448
)
Purchase of redeemable non-controlling interest

 
(9,108
)
 

 

Ending balance
$
(79
)
 
$
(108,942
)
 
$
(233
)
 
$
(24,510
)
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 accumulated unrealized losses, as of September 30, 2015, was $1,414, and the total tax effect on accumulated unrealized net gain, as of September 30, 2014, was $943.


21

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

12.
Non-controlling interests
On August 30, 2012, the Company acquired a 51 percent ownership interest in UNIK. The redeemable non-controlling interest was measured at fair value at the date of acquisition and was reported on the Company’s unaudited condensed consolidated balance sheets as “Redeemable non-controlling interest." On August 31, 2015, the Company acquired the remaining 49 percent ownership in UNIK for $46,018. Due to the put rights associated with the Company's original investment, the non-controlling interest was previously reported as a liability in other than permanent equity. The Company agreed to cancel this put option in conjunction with the acquisition. The value of the redeemable non-controlling interest was adjusted to the redemption value at date of purchase and the Company recorded the adjustment to retained earnings. This adjustment to retained earnings reduces the Earnings Per Share to shareholders. The Company recorded the amount paid in excess of the redemption value in additional paid-in capital and the impact related to foreign currency in accumulated other comprehensive income. The Company's overall purchase price was less than the fair value of UNIK.
A reconciliation of redeemable non-controlling interest for the three and nine month periods ended September 30, 2015 and September 30, 2014, is as follows:
 
Three months ended
 September 30,
 
Nine months ended
 September 30,
 
2015
 
2014
 
2015
 
2014
Balance, beginning of period
$
14,992

 
$
19,732

 
$
16,590

 
$
18,729

Net gain (loss) attributable to redeemable non-controlling interest
531

 
218

 
1,190

 
(31
)
Currency translation adjustment
(1,953
)
 
(1,967
)
 
(4,210
)
 
(715
)
Adjustment to redemption value
9,413

 

 
9,413

 

Excess purchase amount over redemption value
23,035

 

 
23,035

 

Purchase of non-controlling interest
(46,018
)
 

 
(46,018
)
 

Ending balance
$

 
$
17,983

 
$

 
$
17,983


On December 1, 2014, WEX acquired the assets of ExxonMobil's Esso portfolio in Europe through its 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, 2015 and September 30, 2014 is as follows:
 
Three months ended
 September 30,
 
Nine months ended
 September 30,
 
2015
 
2014
 
2015
 
2014
Balance, beginning of period
$
13,165

 
$
859

 
$
17,396

 
$
519

Non-controlling interest investment

 
20,234

 

 
21,267

Net loss attributable to non-controlling interest
(328
)
 
(811
)
 
(3,391
)
 
(1,508
)
Currency translation adjustment
(505
)
 
(1,011
)
 
(1,673
)
 
(1,007
)
Ending balance
$
12,332


$
19,271

 
$
12,332


$
19,271

13.
Income Taxes
Undistributed earnings of certain foreign subsidiaries of the Company amounted to $11,760 at September 30, 2015, and $7,733 at December 31, 2014. 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 2015, the Company incurred nondeductible expenses of approximately $3,000 and recorded discrete tax items primarily related to foreign dividends and tax return true-ups which resulted in an increase in the effective tax rate to 42.4 percent for the third quarter of 2015.

22

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

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. These items reduced the effective tax rate during the third quarter of 2014 to 25.1 percent.

14.
Commitments and Contingencies
Legal Matters

On September 24, 2015, the FDIC delivered to WEX Bank, a wholly owned subsidiary of WEX Inc. (the “Bank”), drafts of a Consent to Entry of an Order and a draft Consent Order to Cease and Desist alleging that the Bank violated Section 5 of the Federal Trade Commission Act. The alleged violation relates to the marketing and fee disclosure practices used in connection with negotiable order of withdrawal (“NOW”) account deposits associated with the Bank’s deposit program partner, Higher One. Higher One provides electronic financial disbursements and payment services to the higher education industry. Among these services, Higher One offers to facilitate opening a deposit account at participating banks for students receiving financial aid, with the Bank being one of those participating institutions. Upon a student’s opening of an account and receipt of funds in excess of their financial obligation to their education institution, the Bank holds the funds for the student but does not receive any of the fees at issue. Higher One services the accounts, pays related processing costs and receives all of the fees at issue. The proposed consent order, if agreed to by the Bank, would, among other things, require the Bank to pay restitution for certain fees collected by Higher One in connection with these NOW accounts and require the Bank to pay a civil money penalty (collectively, the “Proposed Order”). The Bank is reviewing its options at this time, which include (among others): contesting the allegations in the Proposed Order; disputing the FDIC’s authority to seek reimbursement or impose a civil money penalty; negotiating possible changes in the Proposed Order; or, consenting to entry of the Proposed Order without dispute.
 
The civil money penalty in the Proposed Order is $2,250. In response to the Proposed Order, the Bank recorded a liability, with a corresponding expense recorded in Other expense on the Condensed Consolidated Statement of Income, of this amount during the third quarter of 2015. However, the Bank may dispute the penalty and the amount could be reduced following the presentation of further evidence to the FDIC.

In addition to a civil money penalty, the Proposed Order would require the Bank to pay restitution of approximately $31,000 as a result of the alleged violations. The ultimate costs could be less than this amount if the Bank successfully contests the proposed restitution calculation or if the FDIC agrees to modify the amount of restitution. Additionally, the program agreement between the Bank and Higher One provides for indemnification by Higher One for certain costs and expenses incurred by the Bank. That indemnification obligation extends to any restitution the Bank may be ultimately required to pay but does not include the amount of any civil money penalty. Higher One’s ability to fulfill its indemnity obligations may be adversely affected by, among other developments, future regulatory changes or proceedings, its contractual indemnity obligations to other program participants, or other events affecting its business and financial condition. Moreover, Higher One has disclosed in its SEC filings that proposed rules from the Department of Education could alter, restrict or prohibit Higher One’s ability to offer and provide services in the current manner, and their business, financial condition and results of operations could be materially and adversely affected. This, in turn, could affect Higher One’s ability to fulfill any indemnification obligations it may have to the Bank. The estimated time that these rules would go into effect is July 1, 2016.
Because of the nature of the alleged violations and inherent difficulty in predicting the outcome of ongoing discussions and negotiations involving the FDIC, Higher One and other banks participating in this program, the Bank is unable to estimate a final resolution at this time. However, due to the receipt of the Proposed Order, the Company has recorded a liability for the proposed amount of financial restitution and a corresponding asset for the contractual indemnification of $31,000 (which amount does not include the civil money penalty mentioned above), respectively, during the third quarter of 2015.

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. 

23

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

15.
Restructuring
During the first nine months of 2015, the Company recorded initial restructuring costs of approximately $8,514 related to the Company's global review of operations. This global review identified certain initiatives to further streamline the business, improve the Company's efficiency, and to globalize the Company's operations, all with an objective to improve scale and increase profitability going forward. The costs related to this initiative are employee termination benefits. No payments were made during the first nine months of 2015. These costs are expected to be paid during the remainder of 2015 and 2016. The Company has determined that the amount of expense related to this program is probable and estimable and has recorded the impact on the unaudited condensed consolidated statements of income and in Accrued expenses on the unaudited condensed consolidated balance sheet.
The following table presents the Company’s restructuring liability for the three and nine months ended September 30, 2015:
 
Three months ended
 September 30,
Nine months ended
 September 30,
 
2015
 
2014
2015
 
2014
Beginning balance
$
8,822

 
$

$

 
$

Restructuring charges

 

8,559

 

Reserve release
(45
)
 

(45
)
 

Cash paid

 


 

Impact of foreign currency translation
(304
)
 

(41
)
 

Ending balance
$
8,473

 
$

$
8,473

 
$


16.
Segment Information
Operating segments are defined as component