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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 March 31, 2016
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 April 22, 2016
Common Stock, $0.01 par value per share
  
38,699,048 shares



TABLE OF CONTENTS
 
 
Page
 
 
 
PART I-FINANCIAL INFORMATION
 
 
 
Item 1.
 4
 
 
 
Item 2.
 26
 
 
 
Item 3.
 38
 
 
 
Item 4.
 38
 
 
 
PART II-OTHER INFORMATION
 
 
 
Item 1.
 40
 
 
 
Item 1A.
 40
 
 
 
Item 2.
 40
 
 
 
Item 6.
 41
 
 
             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 and in oral statements made by our authorized officers: the effects of general economic conditions on fueling patterns as well as payment and transaction processing activity; the impact of foreign currency exchange rates on the Company’s operations, revenue and income; changes in interest rates; the impact of fluctuations in fuel prices; the effects of the Company’s business expansion and acquisition efforts; the Company’s failure to successfully integrate the businesses it has acquired or plans to acquire; the Company's failure to successfully operate and expand ExxonMobil's European commercial fuel card program, or Esso Card; 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 relationships with customers or merchants; 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 or financial regulations impacting the Company’s industrial bank, the Company as the corporate parent or other subsidiaries or affiliates; the impact of the Company’s outstanding notes on its operations; the impact of increased leverage on the Company's operations, results or capacity generally, and as a result of potential acquisitions specifically; 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, 2015, filed on Form 10-K with the Securities and Exchange Commission on February 26, 2016. 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

2


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.


3


PART I
Item 1. Financial Statements.
WEX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited) 
 
March 31,
2016
 
December 31,
2015
Assets
 
 
 
Cash and cash equivalents
$
515,322

 
$
279,989

Accounts receivable (less reserve for credit losses of $12,151 in 2016 and $13,832 in 2015)
1,567,154

 
1,508,605

Securitized accounts receivable, restricted
86,278

 
87,724

Income taxes receivable
6,830

 

Available-for-sale securities
19,178

 
18,562

Fuel price derivatives, at fair value

 
5,007

Property, equipment and capitalized software (net of accumulated depreciation of $201,882 in 2016 and $192,140 in 2015)
146,511

 
138,585

Deferred income taxes, net
9,168

 
10,303

Goodwill
1,123,474

 
1,112,878

Other intangible assets, net
461,599

 
470,712

Other assets
208,263

 
215,544

Total assets
$
4,143,777

 
$
3,847,909

Liabilities and Stockholders’ Equity
 
 
 
Accounts payable
$
451,781

 
$
378,811

Accrued expenses
165,378

 
156,180

Income taxes payable

 
2,732

Deposits
1,041,695

 
870,518

Securitized debt
75,053

 
82,018

Revolving line-of-credit facilities and term loan, net
670,969

 
664,918

Deferred income taxes, net
94,463

 
83,912

Notes outstanding, net
394,983

 
394,800

Other debt
50,561

 
50,046

Amounts due under tax receivable agreement
57,537

 
57,537

Other liabilities
10,034

 
10,756

Total liabilities
3,012,454

 
2,752,228

Commitments and contingencies (Note 14)

 

Stockholders’ Equity
 
 
 
Common stock $0.01 par value; 175,000 shares authorized; 43,133 shares issued in 2016 and 43,079 in 2015; 38,801 shares outstanding in 2016 and 38,746 in 2015
431

 
431

Additional paid-in capital
176,455

 
174,972

Non-controlling interest
13,028

 
12,437

Retained earnings
1,206,720

 
1,183,634

Accumulated other comprehensive income
(92,969
)
 
(103,451
)
Less treasury stock at cost; 4,428 shares in 2016 and 4,428 shares in 2015
(172,342
)
 
(172,342
)
Total stockholders’ equity
1,131,323

 
1,095,681

Total liabilities and stockholders’ equity
$
4,143,777

 
$
3,847,909

See notes to unaudited condensed consolidated financial statements.

4


WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME
(in thousands, except per share data)
(unaudited)
 
 
Three months ended
 March 31,
 
2016
 
2015
Total revenues
205,928

 
202,285

Expenses
 
 
 
Salary and other personnel
63,410

 
58,417

Restructuring
1,589

 
8,559

Service fees
36,759

 
30,070

Provision for credit losses
3,917

 
3,914

Technology leasing and support
11,076

 
9,434

Occupancy and equipment
5,712

 
4,997

Depreciation and amortization
22,264

 
21,387

Operating interest expense
1,386

 
1,579

Cost of hardware and equipment sold
905

 
1,109

Other
17,783

 
15,794

Gain on divestiture

 
(1,215
)
Total operating expenses
164,801

 
154,045

Operating income
41,127

 
48,240

Financing interest expense
(21,558
)
 
(12,088
)
Net foreign currency gain (loss)
16,124

 
(4,376
)
Net realized and unrealized gain on fuel price derivative instruments
711

 
2,749

Income before income taxes
36,404

 
34,525

Income taxes
13,183

 
14,492

Net income
23,221

 
20,033

Less: Net gain (loss) attributable to non-controlling interests
135

 
(2,312
)
Net earnings attributable to WEX Inc.
$
23,086

 
$
22,345

 
 
 
 
Net earnings attributable to WEX Inc. per share:
 
 
 
Basic
$
0.60

 
$
0.58

Diluted
$
0.59

 
$
0.57

Weighted average common shares outstanding:
 
 
 
Basic
38,756

 
38,859

Diluted
38,850

 
38,952

See notes to unaudited condensed consolidated financial statements.

5


WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
 
Three months ended
 March 31,
 
2016
 
2015
Net income
$
23,221

 
$
20,033

Changes in available-for-sale securities, net of tax effect of $97 and $53 for the three months ended March 31, 2016 and 2015
164

 
91

Foreign currency translation
10,774

 
(29,066
)
Comprehensive income (loss)
34,159


(8,942
)
Less: comprehensive income (loss) attributable to non-controlling interests
591

 
(6,695
)
Comprehensive income (loss) attributable to WEX Inc.
$
33,568

 
$
(2,247
)
See notes to unaudited condensed consolidated financial statements.

6


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, 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
1

 

 
14

 

 

 

 

 
14

Tax expense from stock option and restricted stock units

 

 
(364
)
 

 

 

 

 
(364
)
Stock issued upon vesting of restricted and deferred stock units
45

 
1

 

 

 

 

 

 
1

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

 

 
863

 

 

 

 

 
863

Purchase of shares of treasury stock
(210
)
 

 

 

 
(22,011
)
 

 

 
(22,011
)
Changes in available-for-sale securities, net of tax effect of $53

 

 

 
91

 

 

 

 
91

Foreign currency translation

 

 

 
(24,683
)
 

 

 
(1,451
)
 
(26,134
)
Net income (loss)

 

 

 

 

 
22,345

 
(2,301
)
 
20,044

Balance at March 31, 2015
38,733


$
431


$
179,590


$
(75,173
)

$
(172,342
)

$
1,104,075


$
13,644


$
1,050,225

Balance at December 31, 2015
38,746

 
$
431

 
$
174,972

 
$
(103,451
)
 
$
(172,342
)
 
$
1,183,634

 
$
12,437

 
$
1,095,681

Stock issued upon exercise of stock options
1

 

 
5

 

 

 

 

 
5

Tax expense from stock option and restricted stock units

 

 
(578
)
 

 

 

 

 
(578
)
Stock issued upon vesting of restricted and deferred stock units
54

 

 

 

 

 

 

 

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

 

 
2,056

 

 

 

 

 
2,056

Changes in available-for-sale securities, net of tax effect of $97

 

 

 
164

 

 

 

 
164

Foreign currency translation

 

 

 
10,318

 

 

 
456

 
10,774

Net income

 

 

 

 

 
23,086

 
135

 
23,221

Balance at March 31, 2016
38,801

 
$
431

 
$
176,455

 
$
(92,969
)
 
$
(172,342
)
 
$
1,206,720

 
$
13,028

 
$
1,131,323

See notes to unaudited condensed consolidated financial statements.

7


WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three months ended
 March 31,
 
2016
 
2015
Cash flows from operating activities
 
 
 
Net income
$
23,221

 
$
20,033

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
 
Net unrealized (gain) loss
(11,440
)
 
25,113

Stock-based compensation
4,243

 
3,218

Depreciation, amortization and impairment
23,036

 
22,155

Gain on divestiture

 
(1,215
)
Deferred taxes
12,644

 
13,854

Restructuring charge
942

 
8,567

Provision for credit losses
3,917

 
3,914

Loss on disposal of property, equipment and capitalized software
3

 
145

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(49,711
)
 
17,826

Other assets
12,808

 
(25,512
)
Accounts payable
68,561

 
110,331

Accrued expenses
9,743

 
(23,921
)
Income taxes
(10,818
)
 
(1,558
)
Other liabilities
(734
)
 
(1,303
)
Net cash provided by operating activities
86,415

 
171,647

Cash flows from investing activities
 
 
 
Purchases of property, equipment and capitalized software
(20,494
)
 
(12,074
)
Purchases of available-for-sale securities
(489
)
 
(86
)
Maturities of available-for-sale securities
135

 
159

Proceeds from divestiture

 
16,708

Net cash (used for) provided by investing activities
(20,848
)
 
4,707

Cash flows from financing activities
 
 
 
Excess tax benefits from equity instrument share-based payment arrangements

 
(364
)
Repurchase of share-based awards to satisfy tax withholdings
(2,187
)
 
(2,355
)
Proceeds from stock option exercises
6

 
14

Net change in deposits
170,604

 
155,715

Other debt

 
(485
)
Net activity on 2014 revolving credit facility, net of debt issuance costs
15,056

 
(72,431
)
Net activity on term loan, net of debt issuance costs
(6,875
)
 
(6,875
)
Net change in securitized debt
(10,469
)
 

Purchase of shares of treasury stock

 
(22,011
)
Net cash provided by financing activities
166,135

 
51,208

Effect of exchange rate changes on cash and cash equivalents
3,631

 
(1,308
)
Net change in cash and cash equivalents
235,333

 
226,254

Cash and cash equivalents, beginning of period
279,989

 
284,763

Cash and cash equivalents, end of period
$
515,322

 
$
511,017

Supplemental cash flow information
 
 
 
Interest paid
$
16,068

 
$
17,698

Income taxes paid
$
11,505

 
$
2,745

See notes to unaudited condensed consolidated financial statements.

8


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 Pty Ltd., as designated borrower, and Bank of America, N.A., as administrative agent on behalf of consenting lenders.
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 and adjustments, 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, ticking fees, 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 2015-16
 
Accounting Standards Update No. 2015-16 Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
ASU 2016-01
 
Accounting Standards Update No. 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
ASU 2016-02
 
Accounting Standards Update No. 2016-02 Leases (Topic 842)
ASU 2016-08
 
Accounting Standards Update No. 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
ASU 2016-09
 
Accounting Standards Update No. 2016-09 Compensation-Stock Compensation (Topical 718): Improvements to Employee Share-Based Payment Accounting
Australian Securitization Subsidiary
 
Southern Cross WEX 2015-1 Trust, a bankruptcy-remote subsidiary consolidated by the Company
Average expenditure per payment processing transaction
 
Average total dollars of spend in a funded fuel transaction
Benaissance
 
Benaissance, a leading provider of integrated SaaS technologies and services for healthcare premium billing, payment and workflow management, acquired by the Company on November 18, 2015
Company
 
WEX Inc. and all entities included in the unaudited condensed consolidated financial statements
EFS
 
Electronic Funds Source LLC
Esso portfolio in Europe
 
European commercial fleet card portfolio acquired from ExxonMobil
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 interest

9

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

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
Over-the-road
 
Typically heavy trucks traveling long distances
Payment solutions purchase volume
 
Total amount paid by customers for transactions
Payment processing transactions
 
Funded payment transactions where the Company maintains the receivable for total purchase
PPG
 
Price per gallon of fuel
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
Ticking fees
 
A fee incurred by a borrower to compensate the lender to delay a financing arrangement and hold a commitment of funds for the borrower for a period of time.
Total fleet transactions
 
Total of transaction processing and payment processing transactions
Transaction processing transactions
 
Unfunded payment transactions where the Company is the processor and only has receivables for the processing fee
UNIK
 
UNIK S.A., the Company's Brazilian subsidiary
WEX
 
WEX Inc.
WEX Europe Services
 
Consists primarily of our European commercial fleet card portfolio acquired by the Company from ExxonMobil on December 1, 2014
WEX Health
 
Evolution1 and Benaissance combined, referred to as WEX Health
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, 2015. 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, 2015, filed with the SEC on February 26, 2016. 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 months ended March 31, 2016 are not necessarily indicative of the results that may be expected for any future quarter(s) or the year ending December 31, 2016.
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 ASU provides that debt issuance costs are analogous to debt discounts and reduce the proceeds of borrowing which increases the effective interest rate. Prior to the amendment, debt issuance costs were reported in the balance sheet as an asset. The amended guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, requires retrospective adoption, and represents a change in accounting principle. As a result of the adoption, the December 31, 2015 unaudited condensed consolidated balance sheet is restated as follows:
 
Previously Reported
 
Effect of Accounting Principle Adoption
 
Adjusted
Unaudited condensed consolidated balance sheet
 
 
 
 
 
Other assets
$
225,581

 
$
(10,037
)
 
$
215,544

Total assets
$
3,857,946

 
$
(10,037
)
 
$
3,847,909

Revolving line-of-credit facilities and term loan, net
$
669,755

 
$
(4,837
)
 
$
664,918

Notes outstanding, net
$
400,000

 
$
(5,200
)
 
$
394,800

Total liabilities
$
2,762,265

 
$
(10,037
)
 
$
2,752,228

Total liabilities and stockholders’ equity
$
3,857,946

 
$
(10,037
)
 
$
3,847,909

    

10

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

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 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. In March 2016, the FASB issued ASU 2016-08 and in April 2016, the FASB issued ASU 2016-10 to clarify the implementation guidance on the new revenue recognition standard. The effective dates for these standards are the same as the effective date for ASU 2014-09. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures and has not yet selected a transition method.
In September 2015, the FASB issued ASU 2015-16 related to 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 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 guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date of the guidance. The Company adopted this standard on January 1, 2016.
In January 2016, the FASB issued ASU 2016-01 related to accounting for equity investments. The pronouncement requires equity investments, except those accounted for under the equity method of accounting, or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. When transitioning, the standard requires leases to be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. Certain qualitative and quantitative disclosures are required. The standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. The Company is currently evaluating the impact the standard will have on the consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09 to simplify several aspects of accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, and classification in the statement of cash flows. The standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the impact the standard will have on the consolidated financial statements and related disclosures.
3.
Business Acquisitions
Benaissance
On November 18, 2015, the Company purchased the stock of Benaissance for approximately $80,677, subject to working capital adjustments. The transaction was financed through the Company’s cash on hand and existing credit facility. Benaissance provides financial management for health benefits administration by offering SaaS solutions for individual single point and

11

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

consolidated group premium billing. The Company acquired Benaissance to enhance the Company's positioning in the growing healthcare market.
During the fourth quarter of 2015, the Company obtained preliminary information to assist in determining the fair values of certain tangible and intangible assets acquired and liabilities assumed in the Benaissance acquisition. During the first quarter of 2016, the Company decreased certain tangible assets for $502 and increased Goodwill by $502. Based on such information, the Company recorded intangible assets and goodwill as described below. The Company is still reviewing certain state filings associated with the acquisition and has not finalized the purchase accounting. Goodwill is expected to be deductible for tax purposes.
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)
$
80,677

Less:
 
Accounts receivable
1,594

Other tangible assets and liabilities, net
314

Acquired software and developed technology(a)
10,300

Customer relationships(b)
27,700

Trade name(c)
1,500

Recorded goodwill
$
39,269

(a) 
Weighted average life – 5.0 years.
(b) 
Weighted average life – 7.6 years.
(c) 
Weighted average life – 8.1 years.
No pro forma information has been included in these financial statements as the operations of Benaissance for the period that they were not part of the Company are not material to the Company's revenues, net income and earnings per share.
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.

4.
Sale of Subsidiary and Assets
rapid! PayCard
On January 7, 2015, the Company sold the assets of its rapid! PayCard operations for $20,000, which resulted in a pre-tax book 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, which 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 operations.
5.
Reserves for Credit Losses
In general, the Company’s trade receivables provide for payment terms of 30 days or less. Receivables not paid within the terms of the customer agreement are generally subject to late fees based upon the outstanding customer receivable balance. Beginning in the first quarter of 2015, the Company began to extend revolving credit to certain customers with respect to small fleet receivables. These accounts are also subject to late fees and balances that are not paid in full are subject to interest charges based on the revolving balance. As of March 31, 2016, the Company has approximately $1,000 in receivables with revolving credit. The portfolio of receivables consists of a large group of homogeneous smaller balance amounts that are collectively evaluated for impairment. No customer made up more than nine percent of the outstanding receivables at March 31, 2016.
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.

12

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

As of March 31, 2016, approximately 90 percent of the outstanding balance of total trade accounts receivable was current and approximately 98 percent of the outstanding balance of total trade accounts receivable was less than 60 days past due. As of March 31, 2015, approximately 95 percent of the outstanding balance of total trade accounts receivable was current and approximately 98 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:
 
Three months ended March 31,
 
2016
 
2015
Balance, beginning of period
$
13,832

 
$
13,919

Provision for credit losses
3,917

 
3,914

Charge-offs
(7,036
)
 
(7,367
)
Recoveries of amounts previously charged-off
1,340

 
1,210

Currency translation
98

 
(163
)
Balance, end of period
$
12,151

 
$
11,513

6.
Goodwill and Other Intangible Assets
Goodwill
The changes in goodwill during the first three months of 2016 were as follows:
 
Fleet Solutions Segment
 
Travel and Corporate Solutions Segment
 
Health and Employee Benefit Solutions Segment
 
Total
Gross goodwill, January 1, 2016
$
736,240

 
$
43,825

 
$
350,321

 
$
1,130,386

Impact of foreign currency translation
9,207

 
(527
)
 
1,414

 
10,094

Acquisition adjustments

 

 
502

 
502

Gross goodwill, March 31, 2016
745,447

 
43,298

 
352,237

 
1,140,982

Accumulated impairment, March 31, 2016
(1,337
)
 
(16,171
)
 

 
(17,508
)
Net goodwill, March 31, 2016
$
744,110

 
$
27,127

 
$
352,237

 
$
1,123,474

As described in Note 3, the Company adjusted the amount of goodwill in the current period in the accompanying unaudited condensed consolidated balance sheet to account for the measurement period adjustments to goodwill associated with the Benaissance acquisition.
The Company had no impairments to goodwill during the three months ended March 31, 2016.

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 three months of 2016 were as follows:
 
 
Net
Carrying
Amount,
January 1,
2016
 
Amortization
 
Disposals
 
Impact of
foreign
currency
translation
 
Net Carrying
Amount, March 31, 2016
Definite-lived intangible assets
 
 
 
 
 
 
 
 
 
Acquired software and developed technology
$
114,012

 
$
(3,214
)
 
$

 
$
406

 
$
111,204

Customer relationships
297,904

 
(7,781
)
 

 
1,753

 
291,876

Licensing agreements
27,398

 
(1,276
)
 

 
1,114

 
27,236

Patent
878

 
(42
)
 

 
30

 
866

Trademarks and trade names
13,144

 
(333
)
 

 
14

 
12,825

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
 
Trademarks and trade names
17,376

 

 

 
216

 
17,592

Total
$
470,712

 
$
(12,646
)
 
$

 
$
3,533

 
$
461,599

The following table presents the estimated amortization expense related to the definite-lived intangible assets listed above for the remainder of 2016 and for each of the five succeeding fiscal years: 
Remaining 2016
$
38,138

2017
$
51,242

2018
$
47,276

2019
$
43,465

2020
$
39,972

2021
$
35,899

Other intangible assets, net consist of the following:
 
March 31, 2016
 
December 31, 2015
 
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
$
156,161

 
$
(44,957
)
 
$
111,204

 
$
155,182

 
$
(41,170
)
 
$
114,012

Customer relationships
407,783

 
(115,907
)
 
291,876

 
403,382

 
(105,478
)
 
297,904

Licensing agreements
33,217

 
(5,981
)
 
27,236

 
31,903

 
(4,505
)
 
27,398

Patent
2,536

 
(1,670
)
 
866

 
2,413

 
(1,535
)
 
878

Trademarks and trade names
16,437

 
(3,612
)
 
12,825

 
16,410

 
(3,266
)
 
13,144

 
$
616,134

 
$
(172,127
)
 
444,007

 
$
609,290

 
$
(155,954
)
 
453,336

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
Trademarks and trade names
 
 
 
 
17,592

 
 
 
 
 
17,376

Total
 
 
 
 
$
461,599

 
 
 
 
 
$
470,712






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 months ended March 31, 2016 and 2015:
 
Three months ended
 March 31,
 
2016
 
2015
Net earnings attributable to WEX Inc. available for common stockholders – Basic and Diluted
$
23,086

 
$
22,345

Weighted average common shares outstanding – Basic
38,756

 
38,859

Unvested restricted stock units
79

 
76

Stock options
15

 
17

Weighted average common shares outstanding – Diluted
38,850

 
38,952

For the three months ended March 31, 2016 and March 31, 2015, an immaterial number of 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.
8.
Derivative Instruments
The Company is exposed to certain market risks relating to its ongoing business operations. Derivative instruments were utilized in prior years to manage the Company's commodity price risk. The Company entered into put and call option contracts related to the Company’s commodity price risk, which were based on the wholesale price of gasoline and the retail price of diesel fuel and settled on a monthly basis. These put and call option contracts, or fuel price derivative instruments, were 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 alternatives as it relates to this hedging program. During the first quarter of 2016, the Company held fuel price sensitive derivative instruments to hedge approximately 20 percent of its anticipated U.S. fuel-price related earnings exposure based on assumptions at time of purchase and all these positions were settled as of March 31, 2016. After the first quarter of 2016, the Company is no longer hedged for changes in fuel prices.
In April 2014, the Company initiated a partial foreign currency exchange hedging program. In 2014 the Company managed foreign currency exchange exposure on an intra-quarter basis. During the third quarter of 2015, the Company decided to suspend the foreign currency exchange hedging program for all but a few short-term intercompany transactions. Because this was a partial foreign currency exchange hedging program, the Company had foreign currency exchange exposure which was not hedged while the program was in effect.
In September 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 the base currency.
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.
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.

15

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

As of March 31, 2016, the Company had the following contracts related to its foreign currency swaps, which are not designated as hedging contracts and settle in the base currency at various dates within two days of purchase: 
 
Aggregate
Notional
Amount

Australian dollar
A$
15,000

Norwegian Krone
NOK
40,000

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
 
 
March 31, 2016
 
December 31, 2015
 
March 31, 2016
 
December 31, 2015
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
 
$

 
Fuel price
derivatives,
at fair value
 
$
5,007

 
Fuel price
derivatives,
at fair value
 
$

 
Fuel price
derivatives,
at fair value
 
$

Foreign currency contracts
 
Accounts receivable
 
$

 
Accounts receivable
 
$

 
Accounts payable
 
$
10

 
Accounts payable
 
$
90

The following table presents information on the location and amounts of derivative gains and losses in the unaudited condensed consolidated statements of income:
 
 
 
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 March 31,
Income on Derivative
 
2016
 
2015
Commodity contracts
Net realized and unrealized gain on fuel price derivatives
 
$
711

 
$
2,749

Foreign currency contracts
Net foreign currency (loss) gain
 
$
(34
)
 
$
2,752

9.
Financing and Other Debt
In January 2016, the Company began to incur ticking fees for the debt financing commitment associated with the pending acquisition of EFS. As of March 31, 2016, the Company recorded $10,500 of ticking fees, which is included in financing interest expense. These ticking fees are calculated based on the financing commitment in the aggregate amount of $2,125,000 and will remain in place until the closing of the EFS acquisition or the expiration of the bank commitment, which is July 18, 2016. During the second quarter of 2016, the Company began to accrue approximately $6,500 of ticking fees on a monthly basis.
2014 Credit Agreement
As of March 31, 2016, the Company had $219,094, excluding loan origination fees, of borrowings against its $700,000 revolving credit facility. The outstanding debt under the amortizing term loan arrangement, which expires in January of 2018, totaled $451,875 at March 31, 2016 and $458,750 at December 31, 2015. As of March 31, 2016, 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

16

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

at a rate equal to, at the Company's option, (a) LIBOR plus 200 basis points, (b) the prime rate plus 100 basis points for domestic borrowings; and the Eurocurrency rate plus 200 basis points for international borrowings.
Borrowed Federal Funds
In the first quarter of 2016, the Company decreased its federal funds lines of credit by $11,500 to $246,000. As of March 31, 2016, the Company had $0 outstanding on its $246,000 federal funds lines of credit. As of December 31, 2015 the Company had no outstanding balance on its $257,500 of available credit on these lines.
UNIK debt
UNIK had approximately $5,561 of debt as of March 31, 2016, and $5,046 of debt as of December 31, 2015. UNIK's debt is comprised of various credit facilities held in Brazil, with various maturity dates. The weighted average annual interest rate was 13.5 percent as of March 31, 2016 and December 31, 2015. 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 customer balances 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 225 basis points.  The balance of the debt as of both March 31, 2016 and December 31, 2015, was $45,000, which, in each case, was secured by an 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 Company's participation debt agreement will mature on July 1, 2016. This debt is classified in Other debt on the Company’s unaudited condensed consolidated balance sheets for the periods presented. 
Australian securitization facility
On April 28, 2015, the Company entered into a one year securitized debt agreement with the Bank of Tokyo-Mitsubishi UFJ, Ltd. 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 ("Australian Securitization Subsidiary"). The Australian 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 was 2.93 percent as of March 31, 2016 and 2.91 percent as of December 31, 2015. The Company had $75,053 of securitized debt as of March 31, 2016 and $82,018 of securitized debt as of December 31, 2015.
Debt issuance costs
The following table presents the Company's net debt issuance costs related to its revolving line-of-credit facilities, term loan and notes outstanding:
 
March 31, 2016
 
December 31, 2015
Revolving line of credit facilities and term loan
$
4,248

 
$
4,837

Notes outstanding
$
5,017

 
$
5,200

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.

17

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

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 March 31, 2016: 
 
 
 
Fair Value Measurements
at Reporting Date Using
 
March 31, 2016
 
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
$
633

 
$

 
$
633

 
$

Asset-backed securities
778

 

 
778

 

Municipal bonds
778

 

 
778

 

Equity securities
16,989

 
16,989

 

 

Total available-for-sale securities
$
19,178

 
$
16,989

 
$
2,189

 
$

Executive deferred compensation plan trust (a)
$
5,905

 
$
5,905

 
$

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Foreign currency swaps (b)
$
10

 
$

 
$
10

 
$

 
(a) 
The fair value of these instruments is recorded in Other assets.
(b) 
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, 2015:
 
 
 
Fair Value Measurements
at Reporting Date Using
 
December 31, 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
$
650

 
$

 
$
650

 
$

Asset-backed securities
848

 

 
848

 

Municipal bonds
398

 

 
398

 

Equity securities
16,666

 
16,666

 

 

Total available-for-sale securities
$
18,562

 
$
16,666

 
$
1,896

 
$

Executive deferred compensation plan trust (a)
$
5,655

 
$
5,655

 
$

 
$

Fuel price derivatives – unleaded fuel (b)
$
3,083

 
$

 
$
3,083

 
$

Fuel price derivatives – diesel (b)
1,924

 

 

 
1,924

Total fuel price derivatives
$
5,007

 
$

 
$
3,083

 
$
1,924

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Foreign currency swaps (c)
$
90

 
$

 
$
90

 
$

(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 payable.

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:
 
 
March 31, 2016
 
March 31, 2015
 
 
Fuel Price
Derivatives –
Diesel
 
Fuel Price
Derivatives –
Diesel
Beginning balance
 
$
1,924

 
$
11,848

Total gains and (losses) – realized/unrealized
 
 
 
 
Included in earnings (a)
 
(1,924
)
 
(1,587
)
Included in other comprehensive income
 

 

Purchases, issuances and settlements
 

 

Transfers (in)/out of Level 3
 

 

Ending balance
 
$

 
$
10,261

 
(a)Gains and losses (realized and unrealized) associated with fuel price derivatives, included in earnings for the three months ended March 31, 2016 and 2015, are reported in net realized and unrealized losses on fuel price derivatives on the unaudited condensed consolidated statements of income.
 
 
 
 
 
$400 Million Notes outstanding
The Notes outstanding as of March 31, 2016 have a carrying value of $400,000, less loan origination fees of $5,017, and a fair value of $352,000. As of December 31, 2015 the carrying value of the $400,000 in Notes outstanding, less loan origination fees of $5,200, had a fair value of $366,000. The fair value is based on market rates for the issuance of the Company's debt. The Company determined the fair value of its Notes outstanding are classified as Level 2 in the fair value hierarchy.

19

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

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. The Company's 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 the Company's derivatives. However, counterparty credit risk did not impact the valuation of the Company's derivatives during 2016 and 2015.
Fuel price derivative instruments
The majority of fuel price derivative instruments entered into by the Company were 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 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. After the first quarter of 2016, the Company is no longer hedged for changes in fuel prices.
11.
Accumulated Other Comprehensive Loss
A reconciliation of accumulated other comprehensive income for the three month periods ended March 31, 2016 and 2015, is as follows:
 
2016
 
2015
 
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
$
(212
)
 
$
(103,239
)
 
$
(129
)
 
$
(50,452
)
Other comprehensive income (loss)
164

 
10,318

 
91

 
(24,683
)
Ending balance
$
(48
)
 
$
(92,921
)
 
$
(38
)
 
$
(75,135
)
 
 
 
 
 
 
 
 
No amounts were reclassified from accumulated other comprehensive income (loss) 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 March 31, 2016, was $3,821, and the total tax effect on accumulated unrealized losses, as of March 31, 2015, was $2,155.


20

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 put rights held by the non-controlling shareholders after the Company's original investment, the non-controlling interest was previously reported as a liability rather than permanent equity. The Company agreed to cancel this put option in conjunction with the acquisition of the remaining 49 percent ownership. 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 month period ended March 31, 2015, is as follows:
Balance, beginning of period
$
16,590

Net loss attributable to redeemable non-controlling interest
(11
)
Currency translation adjustment
(2,932
)
Ending balance
$
13,647


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.


21

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

A reconciliation of non-controlling interest for the three month periods ended March 31, 2016 and March 31, 2015 is as follows:
 
Three months ended
 March 31,
 
2016
 
2015
Balance, beginning of period
$
12,437

 
$
17,396

Net gain (loss) attributable to non-controlling interest
135

 
(2,301
)
Currency translation adjustment
456

 
(1,451
)
Ending balance
$
13,028


$
13,644

13.
Income Taxes
Undistributed earnings of certain foreign subsidiaries of the Company amounted to $15,963 at March 31, 2016, and $13,230 at December 31, 2015. 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.
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 unaudited condensed consolidated financial position, results of operations or cash flows.
Pending EFS Acquisition
See Note 17, Pending EFS Acquisition.
15.
Restructuring
During 2015, the Company recorded initial restructuring costs 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 remaining balance at March 31, 2016, is expected to be paid through 2016 and into 2017. 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 months ended March 31, 2016 and 2015:
 
Three Months Ended March 31,
 
2016
 
2015
Beginning balance
$
7,249

 
$

Restructuring charges
1,589

 
8,559

Cash paid
(647
)
 

Impact of foreign currency translation
315

 

Ending balance
$
8,506

 
$
8,559

16.
Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker is its Chief Executive Officer. The operating segments are aggregated into the three reportable segments described below.

22

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

The Company’s chief operating decision maker evaluates the operating results of the Company’s operating and reportable segments based upon revenues and adjusted pre-tax income before NCI which adjusts income before income taxes to exclude fair value changes of fuel price derivative instruments, net foreign currency remeasurement gains and losses, the amortization of acquired intangible assets, the expense associated with stock-based compensation, acquisition related expenses and adjustments, 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, restructuring charges, gain or losses on divestitures, regulatory reserves and adjustments attributable to non-controlling interests including adjustments to the redemption value of a non-controlling interest.
The Fleet Solutions segment provides customers with payment and transaction processing services specifically designed for the needs of commercial and government fleets. This segment also provides information management services to these fleet customers. The Travel and Corporate Solutions segment focuses on the complex payment environment of business-to-business payments, providing customers with payment processing solutions for their corporate payment and transaction monitoring needs. The Health and Employee Benefit Solutions segment provides healthcare payment products and SaaS consumer directed platforms, as well as payroll related benefits to customers in Brazil. Prior to the fourth quarter of 2015, the Company reported its results of operations in two business segments, Fleet Payment Solutions and Other Payment Solutions. During the fourth quarter of 2015, the Company revised its internal and external reporting and reports its results of operations in three reportable segments. The Company has recast the prior year's segment information to conform to the current year presentation.
Net realized and unrealized losses on derivative instruments are allocated to the Fleet Solutions segment in the computation of segment results for internal evaluation purposes. Total assets are not allocated to the segments.
Beginning in the second quarter of 2015, adjusted pre-tax income before NCI excludes net foreign currency gains and losses. For comparative purposes, adjusted pre-tax income before NCI attributable to WEX Inc. for the prior periods has been adjusted to reflect the exclusion of net foreign currency gains and losses and differs from the figure previously reported due to this adjustment.
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 March 31, 2016 and 2015:
 
Total
Revenues
 
Operating
Interest
Expense
 
Depreciation
and
Amortization
 
Adjusted Pre-Tax Income before NCI
Three months ended March 31, 2016
 
 
 
 
 
 
 
Fleet solutions
$
121,074

 
$
422

 
$
7,320

 
$
32,812

Travel and corporate solutions
45,142

 
552

 
356

 
19,991

Health and employee benefit solutions
39,712

 
412

 
1,942

 
6,261

Total
$
205,928

 
$
1,386

 
$
9,618

 
$
59,064

Three months ended March 31, 2015
 
 
 
 
 
 
 
Fleet solutions
$
128,490

 
$
740

 
$
7,458

 
$
45,284

Travel and corporate solutions
43,073

 

 
346

 
19,288

Health and employee benefit solutions
30,722

 
839

 
1,424

 
6,395

Total
$
202,285

 
$
1,579

 
$
9,228

 
$
70,967


23

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

The following table reconciles adjusted pre-tax income before NCI to income before income taxes:
 
Three months ended
 March 31,
 
2016
 
2015
Adjusted pre-tax income before NCI
$
59,064

 
$
70,967

Acquisition and divestiture related items
(27,945
)
 
(10,944
)
Stock-based compensation
(4,243
)
 
(3,218
)
Restructuring costs
(1,589
)
 
(8,559
)
Changes in unrealized fuel price derivatives
(5,007
)
 
(9,345
)
Net foreign currency remeasurement gain (loss)
16,124

 
(4,376
)
Income before income taxes
$
36,404


$
34,525

Although adjusted pre-tax income before NCI is not calculated in accordance with GAAP this measure is integral to the Company's reporting and planning processes. The Company considers this measure integral because it eliminates the non-cash volatility associated with the fuel price related derivative instruments, and excludes other specified items that the Company's management excludes in evaluating the Company's performance. Specifically, in addition to evaluating the Company's performance on a GAAP basis, management evaluates the Company's performance on a basis that excludes the above items because:
The Company considers certain acquisition-related costs, including certain financing costs, financing fees and ticking fees, investment banking fees, warranty and indemnity insurance, acquisition related expenses and amortization of acquired intangibles, as well as gains and losses from divestitures to be unpredictable, dependent on factors that may be outside of our control and unrelated to the continuing operations of the acquired or divested business or the Company. In prior periods not reflected above, the Company has adjusted for goodwill impairments, acquisition related assets impairments and adjustment to the tax receivable agreement. In addition, the size and complexity of an acquisition, which often drives the magnitude of acquisition-related costs, may not be indicative of such future costs. The Company believes that excluding acquisition-related costs and gains or losses of divestitures facilitates the comparison of our financial results to the Company's historical operating results and to other companies in our industry.
Stock-based compensation is different from other forms of compensation, as it is a non-cash expense. For example, a cash salary generally has a fixed and unvarying cash cost. In contrast, the expense associated with an equity-based award is generally unrelated to the amount of cash ultimately received by the employee, and the cost to us is based on a stock-based compensation valuation methodology and underlying assumptions that may vary over time.
Restructuring charges are related to employee termination benefits from certain identified initiatives to further streamline the business, improve the Company's efficiency, costs to create synergies, and to globalize the Company's operations, all with an objective to improve scale and increase profitability going forward. We exclude these items when evaluating our continuing business performance as such items are not consistently occurring and do not reflect expected future operating expense, nor provide meaningful insight into the fundamentals of current or past operations of our business.
Exclusion of the non-cash, mark-to-market adjustments on fuel-price related derivative instruments helps management identify and assess trends in the Company's underlying business that might otherwise be obscured due to quarterly non-cash earnings fluctuations associated with fuel-price-related derivative contracts.
The non-cash, mark-to-market adjustments on derivative instruments are difficult to forecast accurately, making comparisons across historical and future quarters difficult to evaluate.
Net foreign currency gains and losses primarily result from the remeasurement to functional currency of foreign currency cash, receivable and payable balances, certain intercompany notes and any gain or loss on foreign currency hedges relating to these items. The exclusion of these items helps management compare changes in operating results between periods that might otherwise be obscured due to currency fluctuations.
For the same reasons, WEX believes that adjusted pre-tax income before NCI may also be useful to investors as one means of evaluating the Company's performance. However, because adjusted pre-tax income before NCI is a non-GAAP measure, it should not be considered as a substitute for, or superior to, income before income taxes, net income, operating income or cash

24

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

flows from operating activities as determined in accordance with GAAP. In addition, adjusted pre-tax income before NCI as used by WEX may not be comparable to similarly titled measures employed by other companies.
17.
Pending EFS Acquisition
On October 18, 2015, the Company entered into a purchase agreement to acquire EFS, a provider of customized payment solutions for fleet and corporate customers with a focus on the large and mid-sized fleet segment.
Pursuant to the purchase agreement, and subject to the terms and conditions contained therein, at the closing of this acquisition, the Company will acquire all of the outstanding membership interests of WP Mustang Topco LLC, the indirect parent of EFS, and Warburg Pincus Private Equity XI (Lexington), LLC, an affiliated entity from investment funds affiliated with Warburg Pincus LLC for an aggregate purchase price comprised of $1,100,000 in cash and 4,012 shares of the Company’s common stock (representing approximately 9.4 percent of the Company’s outstanding common stock after giving effect to the issuance of the new shares) and subject to certain working capital and other adjustments, as described in the purchase agreement.
The parties’ obligations to consummate the acquisition are subject to customary closing conditions, including the expiration or termination of the applicable antitrust waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended.
Either party may terminate the purchase agreement if (i) the closing has not occurred on or prior to July 18, 2016, (ii) an order or law permanently prohibiting the acquisition has become final and non-appealable or (iii) the other party has breached its representations, warranties or covenants, subject to customary materiality qualifications and abilities to cure. In addition, the EFS sellers may also terminate the purchase agreement if, upon the satisfaction of the closing conditions and the expiration of a marketing period in connection with the Company’s debt financing, the Company fails to consummate the acquisition. Upon such a termination (and in certain other limited circumstances), if the EFS sellers so elect, the Company is required to pay the EFS sellers a cash termination fee of $45,000. In the event the purchase agreement is terminated in certain circumstances involving a failure to obtain required antitrust clearances the Company is required to pay the EFS sellers a cash termination fee of $70,000.
In connection with the planned acquisition of EFS, the Company has obtained financing commitments from Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, SunTrust Bank, SunTrust Robinson Humphrey, Inc. and MUFG Union Bank, N.A. and Citizens Bank, National Association, for senior secured credit facilities in the aggregate amount of $2,125,000, consisting of a $1,775,000 seven-year term loan facility and a $350,000 five-year revolving credit facility. The new senior secured credit facilities would replace our existing senior secured credit facilities under the 2014 Credit Agreement.
The Company has received a request for additional information (a “second request”) from the FTC in connection with the FTC's review of the proposed acquisition of EFS. The effect of the second request is to extend the waiting period imposed by the Hart-Scott-Rodino Antitrust Improvements Act until 30 days after both WEX and EFS have substantially complied with the request, unless that period is extended voluntarily by the parties or terminated sooner by the FTC. There can be no assurance that a challenge to the acquisition on antitrust grounds will not be made, or, if such a challenge is made, what the result might be.

25


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting estimates affect our financial statements. The discussion also provides information about the financial results of the two segments of our business to provide a better understanding of how those segments and their results affect our financial condition and results of operations as a whole. This discussion should be read in conjunction with our audited consolidated financial statements as of December 31, 2015, the notes accompanying those financial statements and management’s discussion and analysis as contained in our Annual Report on Form 10-K filed with the SEC on February 26, 2016 and in conjunction with the unaudited condensed consolidated financial statements and notes in Item 1 of Part I of this report.

Overview
WEX is a leading provider of corporate card payment solutions. We have expanded the scope of our business into a multi-channel provider of corporate payment solutions. We currently operate in three business segments: Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. Our business model enables us to provide exceptional payment security and control across a spectrum of payment sectors. The Fleet Solutions segment provides customers with fleet vehicle payment processing services specifically designed for the needs of commercial and government fleets. Fleet Solutions revenue is earned primarily from payment processing, account servicing and financing fees. Management estimates that WEX fleet cards are accepted at over 90 percent of fuel locations in each of the United States and Australia. The Travel and Corporate Solutions segment focuses on the complex payment environment of business-to-business payments, providing customers with payment processing solutions for their corporate payment and transaction monitoring needs. The Health and Employee Benefit Solutions segment provides healthcare payment products and SaaS consumer directed platforms, as well as payroll related benefits to customers in Brazil.
The Company’s U.S. operations include WEX, Fleet One, WEX Bank, and WEX Health. Our international operations include our wholly-owned subsidiaries WEX Fuel Cards Australia, WEX Prepaid Cards Australia, WEX New Zealand, UNIK, a Brazil based company, and WEX Europe, located in England, and our majority owned subsidiary WEX Europe Services, located in the United Kingdom.

Summary
Below are selected items from the first quarter of 2016:
Average number of vehicles serviced increased 3 percent from the first quarter of 2015 to approximately 9.5 million for the first quarter of 2016, primarily related to our European fleet business.
Total fuel transactions processed increased 1 percent from the first quarter of 2015 to 99.6 million for the first quarter of 2016. Total payment processing transactions in our Fleet Solutions segment increased 9 percent to 89.1 million for the first quarter of 2016 as compared to the same quarter in 2015. Transaction processing transactions decreased 35 percent to 10.5 million for the first quarter of 2016, as compared to the same quarter in 2015. The primary driver for the increase in payment processing transactions and decrease in transaction processing transactions was due to a large customer portfolio converting from an unfunded to a fully funded relationship in the beginning of 2016.
Average expenditure per payment processing transaction in our Fleet Solutions segment decreased 25 percent to $48.67 for the first quarter of 2016, from $65.23 for the same period in the prior year. The average U.S. fuel price per gallon during the first quarter of 2016 was $1.97, a 23 percent decrease over the same period in the prior year. The average Australian fuel price per gallon during the first quarter of 2016 was $3.10, a 17 percent decrease as compared to the same period in the prior year.
Credit loss expense in the Fleet Solutions segment was $4.0 million during the first quarter of 2016, as compared to $3.6 million during the first quarter of 2015. Spend volume decreased 19 percent in the first quarter of 2016, as compared to the same quarter last year and our credit losses were 9.3 basis points of fuel expenditures for the first quarter of 2016, as compared to 6.8 basis points of fuel expenditures for the same period last year.
Realized gains on our fuel price derivatives during the first quarter of 2016 were $5.7 million as compared to a realized gain of $12.1 million for the same period in the prior year.
Travel and Corporate solutions purchase volume grew by approximately $0.7 billion from the first quarter of 2015 to $4.9 billion for the first quarter of 2016, an increase of 18 percent, driven by organic growth in our travel product.

26


Our foreign currency exchange exposure is primarily related to the re-measurement of our cash, receivable and payable balances that are denominated in these foreign currencies. Movements in these exchange rates associated with our foreign held currencies resulted in a gain of $16.1 million for the first quarter of 2016, compared to a loss of $4.4 million for the first quarter of 2015.
Our effective tax rate was 36.2 percent for the first quarter of 2016 as compared to 42.0 percent for the first quarter of 2015. Discrete items in the first quarter of 2015 contributed to the higher effective tax rate, as compared to the first quarter of 2016. Future tax rates may fluctuate due to changes in the mix of earnings among different tax jurisdictions. Our tax rate may also fluctuate due to the impacts that rate and mix changes have on our net deferred tax assets. We anticipate that our future GAAP effective tax rate should be within the range of our historical rates.

27



Results of Operations
Fleet Solutions
The following table reflects comparative operating results and key operating statistics within our Fleet Solutions segment:
(in thousands, except per transaction and per gallon data)
Three months ended March 31,
 
Increase (decrease)
2016
 
2015
 
Amount
 
Percent
Revenues
 
 
 
 
 
 
 
Payment processing revenue
$
62,290

 
$
72,943

 
$
(10,653
)
 
(15
)%
Other
58,784

 
55,547

 
3,237

 
6
 %
Total revenues
121,074

 
128,490

 
(7,416
)
 
(6
)%
Total operating expenses
105,334

 
103,873

 
1,461

 
1
 %
Operating income
15,740


24,617

 
(8,877
)
 
(36
)%
Net foreign currency gain (loss)
12,528

 
(356
)
 
12,884

 
NM

Financing interest expense
(15,935
)
 
(9,237
)
 
(6,698
)
 
73
 %
Net realized and unrealized gains on derivative instruments
711

 
2,749

 
(2,038
)
 
(74
)%
Income before income taxes
$
13,044

 
$
17,773

 
$
(4,729
)
 
(27
)%
 
 
 
 
 
 
 
 
Key operating statistics
 
 
 
 
 
 
 
Payment processing revenue:
 
 
 
 
 
 
 
Payment processing transactions
89,097

 
81,934

 
7,163

 
9
 %
Average expenditure per payment processing transaction
$
48.67

 
$
65.23

 
$
(16.56
)
 
(25
)%
Average price per gallon of fuel
 
 
 
 
 
 
 
                     Domestic – ($/gal)
$
1.97

 
$
2.57

 
$
(0.60
)
 
(23
)%
                     Australia – ($/gal)
$
3.10

 
$
3.73

 
$
(0.63
)
 
(17
)%
Transaction processing revenue:
 
 
 
 
 
 
 
Transaction processing transactions
10,458

 
16,177

 
(5,719
)
 
(35
)%
Account servicing revenue:
 
 
 
 
 
 
 
Average number of vehicles serviced
9,518

 
9,272

 
246

 
3
 %
 NM - Not Meaningful  
Revenues
Payment processing revenue decreased $10.7 million for the first quarter of 2016 as compared to the first quarter of 2015. This decrease is primarily due to a 23% decrease in the average domestic price per gallon of fuel in 2016 as compared to 2015. This decrease was partially offset by an increase in payment processing volume related to a large customer portfolio converting from an unfunded to a fully funded relationship in the beginning of 2016.
Other revenue increased $3.2 million for the first quarter of 2016 as compared to the same period in the prior year. The increase in the first quarter is primarily due to additional price modernization initiatives in the small fleet market, beginning in the second half of 2015 and continuing during 2016.
The Company charges late fees, which is included in other revenue above. Receivables not paid within the terms of the customer agreement are generally subject to late fees based upon the outstanding customer receivable balance. Late fee revenue is earned when a customer’s receivable balance becomes delinquent. The late fee is calculated using a stated late fee rate based on the outstanding balance. The absolute amount of such outstanding balances can be attributed to (i) changes in fuel prices; (ii) customer specific transaction volume; and (iii) customer specific delinquencies. Late fee revenue can also be impacted by (i) changes in late fee rates and (ii) increases or decreases in the number of customers with overdue balances.

28


Operating Expenses
The following table compares selected expense line items within our Fleet Solutions segment for the three months ended:
 
 
 
 
 
Increase (decrease)
(in thousands)
March 31,
2016
 
March 31,
2015
 
Amount
 
Percent
Expense
 
 
 
 
 
 
 
Salary and other personnel
$
44,042

 
$
42,638

 
$
1,404

 
3
 %
Restructuring
$
1,589

 
$
8,559

 
$
(6,970
)
 
(81
)%
Service fees
$
17,124

 
$
12,199

 
$
4,925

 
40
 %
Provision for credit losses
$
4,041

 
$
3,642

 
$
399

 
11
 %
Technology leasing and support
$
6,564

 
$
5,621

 
$
943

 
17
 %
Depreciation and amortization
$
13,608

 
$
14,577

 
$
(969
)
 
(7
)%
Changes in operating expenses for the first quarter of 2016, as compared to the same period in the prior year, include the following:
Salary and other personnel expenses increased $1.4 million for the first quarter of 2016 as compared to the same period in the prior year. The increase is primarily due to annual changes in salary and variable compensation plans, offset by lower benefit costs and higher capitalized payroll.
In the first quarter of 2016, we recorded restructuring costs of approximately $1.6 million. During the first quarter of 2015, we recorded $8.6 million of restructuring costs. The costs related to these restructuring initiatives are employee termination benefits and are expected to be paid during the remainder of 2016 and 2017.
Service fees increased by $4.9 million for the first quarter of 2016 as compared to the same period in the prior year. Service fees increased compared to the prior year primarily due to merger and acquisition expenses associated with the pending acquisition of EFS.
Provision for credit losses increased by $0.4 million for the first quarter of 2016 as compared to the same period in the prior year. We generally measure our credit loss performance by calculating credit losses as a percentage of total fuel expenditures on the payment processing transactions. This metric for credit losses was 9.3 basis points of fuel expenditures for the first quarter of 2016, compared to 6.8 basis points of fuel expenditures for the same period last year. We generally use a roll rate methodology to calculate the amount necessary for our ending receivable reserve balance. This methodology considers total receivable balances, recent charge off experience, recoveries on previously charged off accounts, and the dollars that are delinquent to calculate the total reserve. In addition, management undertakes a detailed evaluation of the receivable balances to help further ensure overall reserve adequacy. The expense we recognized in the quarter is the amount necessary to bring the reserve to its required level based on accounts receivable aging and net charge offs.
Technology leasing and support expenses increased $0.9 million for the first quarter of 2016 as compared to the same period in the prior year. This increase is primarily due to additional software maintenance expense.
Depreciation and amortization expenses decreased $1.0 million for the first quarter of 2016 as compared to the same period in the prior year. This decrease is primarily related to lower amortization expense from our acquisition related intangibles.
Fuel price derivatives
We owned fuel price derivative instruments that we had purchased on a periodic basis to manage the impact of the volatility in domestic fuel prices on our cash flows. These fuel price derivative instruments did not qualify for hedge accounting. Accordingly, realized and unrealized gains and losses on our fuel price sensitive derivative instruments affected our net income.

29


Changes in fair value and settlements of these instruments and the changes in average fuel prices in relation to the underlying strike price of the instruments are shown in the following table:
 
Three months ended
 March 31,
(in thousands, except per gallon data)
2016
 
2015
Fuel price derivatives, at fair value, beginning of period
$
5,007

 
$
40,969

Net change in fair value
711

 
2,749

Cash payments on settlement
(5,718
)
 
(12,094
)
Fuel price derivatives, at fair value, end of period
$

 
$
31,624

Collar range:
 
 
 
Floor
$
3.28

 
$
3.34

Ceiling
$
3.34

 
$
3.40

Domestic average fuel price, beginning of period
$
2.09

 
$
2.56

Domestic average fuel price, end of period
$
2.09

 
$
2.55

During the fourth quarter of 2014 we suspended purchases under our fuel derivatives program due to unusually low prices in the commodities market. Management will continue to monitor the fuel price market and evaluate our alternatives as it relates to this hedging program. As of March 31, 2016, we are no longer hedged for changes in fuel prices.
Changes in fuel price derivatives for the three months ended March 31, 2016, as compared to the corresponding period a year ago, are attributable to the movements in fuel prices in the corresponding periods. Losses that are realized on these derivatives are offset by higher payment processing revenue we receive because such revenues are dependent, in part, on the current price of fuel. Conversely, realized gains are offset by lower payment processing revenue.
Foreign currency transactions
In the first quarter of 2015, we experienced fluctuations in exchange rates that resulted in a significant devaluation of major currencies to which our business is exposed, including the Australian dollar, the Euro and the British Pound Sterling. Our foreign currency exchange exposure is primarily related to the re-measurement of our cash, receivable and payable balances that are denominated in these foreign currencies.
Beginning in April 2014, we initiated a partial foreign currency exchange hedging program and expanded this program in the first quarter of 2015. The results of these hedges are recorded in Net foreign currency gain (loss). 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 the base currency.
The fluctuations in exchange rates, combined with the results of the foreign currency exchange hedging program, resulted in a gain of $12.5 million for the first quarter of 2016 as compared to a loss of $0.4 million for the first quarter of 2015. Management will continue to monitor foreign exchanges rates and the impact to the operations of the business.
Financing interest expense
Financing interest expense increased $6.7 million for the first quarter of 2016 as compared to the first quarter of the prior year. The increase is primarily due to the ticking fees incurred for the commitment of funds to finance the pending acquisition of EFS, offset by lower financing interest, as some of this debt was paid down over 2015. Financing interest expense is interest from our long te