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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
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

   awexlogo9302016.jpg
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) 

N/A
(Former name, former address and former fiscal year, if changed since last report)

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. ☒ 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). ☒ Yes   ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
  
Smaller reporting company
 
 
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
☐ Yes  ☒  No

Number of shares of common stock outstanding as of May 1, 2017 was 42,891,269.



TABLE OF CONTENTS




2


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; potential adverse changes to business or employee relationships, including those resulting from the completion of an acquisition; competitive responses to any acquisitions; uncertainty of the expected financial performance of the combined operations following completion of an acquisition; the ability to successfully integrate the Company's acquisitions, including Electronic Funds Source LLC's operations and employees; the ability to realize anticipated synergies and cost savings; unexpected costs, charges or expenses resulting from an acquisition; the Company's failure to successfully operate and expand ExxonMobil's European and Asian commercial fuel card programs; 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 or those of our third-party service providers 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 borrowing capacity generally, and as a result of acquisitions specifically; 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 on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 6, 2017. 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.

3


ACRONYMS AND ABBREVIATIONS
The acronyms and abbreviations identified below are used in this Quarterly Report, including the unaudited condensed consolidated financial statements and the notes thereto. The following is provided to aid the reader and provide a reference point when reviewing this Quarterly Report.
2014 Credit Agreement
Second amended and restated credit agreement entered into on August 22, 2014, by and among the Company and certain of its subsidiaries, as borrowers, WEX Card Holding Australia Pty Ltd., as designated borrower, and Bank of America, N.A., as administrative agent on behalf of consenting lenders
2016 Credit Agreement
Credit agreement entered into on July 1, 2016 by and among the Company and certain of its subsidiaries, as borrowers, WEX Card Holding Australia Pty Ltd., as designated borrower, and Bank of America, N.A., as administrative agent on behalf of the lenders
Adjusted net income or ANI
A non-GAAP measure that adjusts net earnings attributable to shareholders to exclude fair value changes of unrealized gains or losses on derivatives, the impact of net foreign currency remeasurement gains and losses, the expense associated with stock-based compensation, acquisition and divestiture related expenses and adjustments including the amortization of purchased intangibles, deferred loan costs amortization, restructuring and other costs, and adjustments attributable to 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 2016-09
Accounting Standards Update No. 2016-09 Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
ASU 2017-07
Accounting Standards Update No. 2017-07 Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
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
Company
WEX Inc. and all entities included in the unaudited condensed consolidated financial statements
EBITDA
A non-GAAP measure that adjusts income before income taxes to exclude interest, depreciation and amortization
EFS
Electronic Funds Source, LLC, a provider of customized corporate payment solutions for fleet and corporate customers with a focus on the large and mid-sized over-the-road fleets. On July 1, 2016, the Company acquired WP Mustang Topco LLC, the indirect parent of Electronic Funds Source, LLC and Warburg Pincus Private Equity XI (Lexington), LLC, an affiliated entity, from investment funds affiliated with Warburg Pincus LLC
Esso portfolio in Europe
European commercial fleet card portfolio acquired from ExxonMobil
European Securitization Subsidiary
Gorham Trade Finance B.V., a bankruptcy-remote subsidiary consolidated by the Company
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
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
Notes
$400 million notes with a 4.75% fixed rate, issued on January 30, 2013
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
SaaS
Software-as-a-service
SEC
Securities and Exchange Commission
Ticking fees
A fee incurred by a borrower to compensate the lender for maintaining a commitment of funds for the borrower for a period of time
Total fuel transactions
Total of transaction processing and payment processing transactions of our Fleet Solutions segment
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, which has been subsequently branded WEX Brazil
WEX
WEX Inc.
WEX Health
Evolution1 and Benaissance, collectively

4


PART I
Item 1. Financial Statements.
WEX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited) 
 
March 31,
2017
 
December 31,
2016
Assets
 
 
 
Cash and cash equivalents
$
203,995

 
$
190,930

Accounts receivable (less reserve for credit losses of $23,566 in 2017 and $20,092 in 2016)
2,246,815

 
2,054,701

Securitized accounts receivable, restricted
101,185

 
97,417

Income taxes receivable
9,792

 
10,765

Available-for-sale securities
23,413

 
23,525

Property, equipment and capitalized software (net of accumulated depreciation of $240,160 in 2017 and $228,336 in 2016)
171,254

 
167,278

Deferred income taxes, net
7,042

 
6,934

Goodwill
1,840,844

 
1,838,441

Other intangible assets, net
1,228,670

 
1,265,468

Other assets
342,752

 
341,638

Total assets
$
6,175,762

 
$
5,997,097

Liabilities and Stockholders’ Equity
 
 
 
Accounts payable
$
674,114

 
$
617,118

Accrued expenses
290,808

 
331,579

Deposits
1,040,675

 
1,118,823

Securitized debt
92,676

 
84,323

Revolving line of credit facilities and term loans, net
1,795,640

 
1,599,291

Deferred income taxes, net
163,465

 
152,906

Notes outstanding, net
395,718

 
395,534

Other debt
107,699

 
125,755

Amounts due under tax receivable agreement
47,302

 
47,302

Other liabilities
18,447

 
18,719

Total liabilities
4,626,544

 
4,491,350

Commitments and contingencies (Note 13)

 

Stockholders’ Equity
 
 
 
Common stock $0.01 par value; 175,000 shares authorized; 47,327 shares issued in 2017 and 47,173 in 2016; 42,899 shares outstanding in 2017 and 42,841 in 2016
473

 
472

Additional paid-in capital
545,135

 
547,627

Non-controlling interest
8,275

 
8,558

Retained earnings
1,273,935

 
1,244,271

Accumulated other comprehensive loss
(106,258
)
 
(122,839
)
Treasury stock at cost; 4,428 shares in 2017 and 2016
(172,342
)
 
(172,342
)
Total stockholders’ equity
1,549,218

 
1,505,747

Total liabilities and stockholders’ equity
$
6,175,762

 
$
5,997,097

See notes to unaudited condensed consolidated financial statements.

5


WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
 
 
Three Months Ended March 31,
 
2017
 
2016
Revenues
 
 
 
Payment processing revenue
$
136,378

 
$
111,057

Account servicing revenue
61,539

 
44,522

Finance fee revenue
43,372

 
23,506

Other revenue
50,068

 
26,843

Total revenues
291,357

 
205,928

Expenses
 
 
 
Salary and other personnel
83,585

 
63,410

Restructuring
484

 
1,589

Service fees
36,750

 
36,759

Provision for credit losses
12,231

 
3,917

Technology leasing and support
12,516

 
11,076

Occupancy and equipment
6,367

 
5,712

Depreciation and amortization
49,238

 
22,264

Operating interest expense
4,848

 
1,386

Cost of hardware and equipment sold
1,029

 
905

Other expenses
23,557

 
17,783

Total operating expenses
230,605

 
164,801

Operating income
60,752

 
41,127

Financing interest expense
(27,148
)
 
(21,558
)
Net foreign currency gain
8,442

 
16,124

Net unrealized gains on interest rate swap agreements
1,565

 

Net realized and unrealized gain on fuel price derivatives

 
711

Income before income taxes
43,611

 
36,404

Income taxes
14,535

 
13,183

Net income
29,076

 
23,221

Less: Net (loss) gain from non-controlling interest
(325
)
 
135

Net earnings attributable to shareholders
$
29,401

 
$
23,086

 
 
 
 
Net earnings attributable to WEX Inc. per share:
 
 
 
Basic
$
0.69

 
$
0.60

Diluted
$
0.68

 
$
0.59

Weighted average common shares outstanding:
 
 
 
Basic
42,871

 
38,756

Diluted
43,119

 
38,850

See notes to unaudited condensed consolidated financial statements.

6


WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
 
Three Months Ended March 31,
 
2017
 
2016
Net income
$
29,076

 
$
23,221

Changes in available-for-sale securities, net of tax expense of $1 and $97, respectively
3

 
164

Foreign currency translation
16,620

 
10,774

Comprehensive income
45,699


34,159

Less: Comprehensive (loss) income attributable to non-controlling interest
(283
)
 
591

Comprehensive income attributable to WEX Inc.
$
45,982

 
$
33,568

See notes to unaudited condensed consolidated financial statements.

7


WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional
Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Treasury Stock
 
Retained
Earnings
 
Non-Controlling Interest
 
Total Stockholders'
Equity
Balance at January 1, 2016
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 expense 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

Balance at January 1, 2017
42,841

 
$
472

 
$
547,627

 
$
(122,839
)
 
$
(172,342
)
 
$
1,244,271

 
$
8,558

 
$
1,505,747

Cumulative-effect adjustment1

 

 

 

 

 
263

 

 
263

Stock issued upon exercise of stock options
5

 

 
72

 

 

 

 

 
72

Stock issued upon vesting of restricted and deferred stock units
53

 
1

 
(1
)
 

 

 

 

 

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

 

 
(2,563
)
 

 

 

 

 
(2,563
)
Changes in available-for-sale securities, net of tax expense of $1

 

 

 
3

 

 

 

 
3

Foreign currency translation

 

 

 
16,578

 

 

 
42

 
16,620

Net income (loss)

 

 

 

 

 
29,401

 
(325
)
 
29,076

Balance at March 31, 2017
42,899

 
$
473

 
$
545,135

 
$
(106,258
)
 
$
(172,342
)
 
$
1,273,935

 
$
8,275

 
$
1,549,218

1Modified retrospective transition for ASU 2016-09 to recognize previously disallowed excess tax benefits that increased a net operating loss.
See notes to unaudited condensed consolidated financial statements.

8


WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities
 
 
 
Net income
$
29,076

 
$
23,221

Adjustments to reconcile net income to net cash (used for) provided by operating activities:
 
 
 
Net unrealized gain
(2,991
)
 
(11,437
)
Stock-based compensation
6,457

 
4,243

Depreciation and amortization
49,238

 
22,264

Debt issuance cost amortization
1,954

 
772

Provision for deferred taxes
10,517

 
12,644

Provision for credit losses
12,231

 
3,917

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(194,859
)
 
(49,711
)
Other assets
741

 
12,808

Accounts payable
60,650

 
68,561

Accrued expenses
(32,547
)
 
10,685

Income taxes
685

 
(10,818
)
Other liabilities
(331
)
 
(734
)
Net cash (used for) provided by operating activities
(59,179
)
 
86,415

Cash flows from investing activities
 
 
 
Purchases of property, equipment and capitalized software
(21,693
)
 
(20,494
)
Purchases of available-for-sale securities
(114
)
 
(489
)
Maturities of available-for-sale securities
229

 
135

Net cash used for investing activities
(21,578
)
 
(20,848
)
Cash flows from financing activities
 
 
 
Repurchase of share-based awards to satisfy tax withholdings
(9,020
)
 
(2,187
)
Proceeds from stock option exercises
72

 
6

Net change in deposits
(78,392
)
 
170,604

Net activity on other debt
(19,010
)
 

Net borrowings on revolving line of credit facility
202,580

 
15,056

Repayments on term loans
(8,688
)
 
(6,875
)
Net change in securitized debt
3,354

 
(10,469
)
Net cash provided by financing activities
90,896

 
166,135

Effect of exchange rate changes on cash and cash equivalents
2,926

 
3,631

Net change in cash and cash equivalents
13,065

 
235,333

Cash and cash equivalents, beginning of period
190,930

 
279,989

Cash and cash equivalents, end of period
$
203,995

 
$
515,322

See notes to unaudited condensed consolidated financial statements.


9


WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 
1.
Basis of Presentation
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 to 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, 2016. 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, 2016, filed with the SEC on March 6, 2017. 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, 2017 are not necessarily indicative of the results for any future periods or the year ending December 31, 2017.
The Company rounds amounts in the unaudited condensed consolidated financial statements to thousands and calculates all per-share data from underlying whole-dollar amounts. Thus, certain amounts may not recalculate based on reported numbers due to rounding.
The presentation of the accompanying unaudited condensed consolidated statements of income for the three months ended March 31, 2016 has been updated to disaggregate revenue into payment processing, account servicing, finance fee and other revenue in order to provide additional information regarding the Company’s significant revenue streams and to conform to the current year presentation. There was no change to total revenue, income from operations, net income or net income per share as a result of this updated presentation.
Effective January 1, 2017, the Company adopted ASU 2016-09, which simplifies 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. Prior to the adoption of this guidance, the Company recognized the net excess tax benefits of vested or settled awards in additional paid-in capital. This standard requires prospective recognition of all the tax effects related to share-based payments in the income statement. The impact of adoption was recorded as a $263 cumulative effect adjustment to Retained earnings. For the three months ended March 31, 2017, the Company recognized $1,600 of excess tax benefits within our income tax provision, which would have been recognized in additional paid-in-capital under previous guidance. See Note 12, Income Taxes, for the resulting impact on our effective tax rate. The Company has elected to prospectively classify these excess tax benefits as cash flows from operating activities for the three months ended March 31, 2017. The Company will continue to estimate the number of awards expected to vest, rather than electing to account for forfeitures as they occur. Adoption of this standard is not anticipated to impact the Company's minimum statutory tax withholding practices.
2.
New Accounting Standards
In March 2017, the FASB issued ASU 2017-07, which changes the presentation of net benefit pension costs by requiring the disaggregation of certain of its components. Under the guidance, companies are required to present the service cost component in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost will be presented in the income statement separately from the service cost component and outside the subtotal of operating income, if one is presented. Additionally, only the service cost component will be eligible for capitalization under the new guidance. The standard is effective for annual or interim periods beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements, interim or annual, have not been issued or made available for issuance. The Company does not believe this standard will have a material impact on the consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09 ("Topic 606"), which will supersede most existing revenue recognition guidance under 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. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

10

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

Topic 606 does not apply to rights or obligations associated with financial instruments (e.g. interest income), including the Company’s finance fee and interest income from banking relationships and cardholders. As such, approximately 14 percent of consolidated revenues for the period ended December 31, 2016 will not be impacted by Topic 606.
The Company’s revenue from discount and interchange, transaction processing and certain fees is within the scope of Topic 606. FASB and its Transition Resource Group have issued clarifications on various aspects of ASU 2014-09. Those clarifications, along with the guidance under Topic 606 support the conclusion that timing and measurement of revenue associated with the Company’s transaction processing services, including discount and interchange and other transaction processing fees, or approximately 48 percent of consolidated revenues for the period ended December 31, 2016, will remain substantially unchanged under the new standard.
The Company is in the process of assessing the remaining revenue streams that fall within the scope of this new standard. Included in this assessment is confirming principal vs. agent determinations, reviewing commission structure and applying the series guidance to the Company's revenue streams. Under the new guidance certain costs to obtain a contract, such as sales commissions are to be capitalized and amortized over the life of the contract, with a practical expedient available for contracts under one year in duration. Sales commissions that were expensed were approximately $5,400 for the period ended March 31, 2017.
On July 9, 2015, the FASB 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 January 1, 2017. The Company is not electing early adoption and as a result the standard will become effective on January 1, 2018. The guidance permits two methods of adoption: full retrospective approach, which requires an entity to restate each prior period that is reported in the financial statements and modified retrospective approach, which requires a cumulative adjustment to retained earnings as of the effective date, without restatement of prior period amounts. The Company currently anticipates adopting the standard using the modified retrospective method.
3.
Business Acquisition
EFS
On July 1, 2016, the Company acquired all of the outstanding membership interests of EFS, a provider of customized payment solutions for fleet and corporate customers with a focus on the large and mid-sized over-the-road fleets. The acquisition will enable the Company to expand its customer footprint and to utilize EFS' technology to better serve the needs of all fleet customers.
In consideration for the acquisition of EFS, the Company issued 4,012 shares of its common stock valued at approximately $355,000 based on the July 1, 2016 closing price of the Company's common stock on the New York Stock Exchange. This represented approximately 9.4 percent of the Company's outstanding common stock after giving effect to the issuance of the new shares in connection with this acquisition. The cash consideration for the transaction totaled approximately $1,182,000, and was funded with amounts received under the 2016 Credit Agreement described further in Note 7, Financing and Other Debt. The value of the total cash and stock consideration paid for the acquisition of EFS was approximately $1,444,000, net of $93,000 in cash acquired.
The Company records adjustments to the assets acquired and liabilities assumed throughout the measurement period, which may be up to one year from the acquisition date. The Company has obtained information to assist in determining the fair values of certain assets acquired and liabilities assumed throughout this period, resulting in the recording of other intangible assets and goodwill as described below. Goodwill is calculated as the consideration in excess of net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized, including synergies derived from the acquisition.
The tax structure of EFS consists of limited liability companies and corporations. The Company’s tax election will allow a step-up in tax basis related to its 49.5 percent direct ownership in the parent limited liability company. The remaining 50.5 percent ownership in the parent limited liability company is held by another limited liability company, taxed as a corporation, that is part of the EFS structure and will therefore receive carry over tax basis. The difference between book and tax basis resulting from receiving carry over tax basis has been reflected in the financial statements as an investment in partnership deferred tax liability. The Company is currently evaluating the tax basis and the allocation of book basis to the assets acquired and liabilities assumed in this business combination. In addition, the Company is still reviewing the valuation as well as performing procedures

11

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

to verify the completeness and accuracy of the data used in the independent valuation for intangible assets identified in the table below. Although not expected, the preliminary estimates could change significantly upon completion of this evaluation. The Company has not finalized the purchase accounting and estimates approximately $591,000 of the goodwill recognized in this business combination will be deductible for income tax purposes.
The following represents the components and preliminary allocation of the purchase price:
 
As Reported
December 31, 2016
 
Measurement Period Adjustments
 
As Reported
March 31, 2017
Total consideration, net of cash acquired
$
1,444,235

 
$

 
$
1,444,235

Less:
 
 
 
 
 
Accounts receivable
162,684

 

 
162,684

Property and equipment
2,387

 
1

 
2,388

Customer relationships (a)(b)
842,700

 
(1,300
)
 
841,400

Developed technologies (a)(c)
32,120

 

 
32,120

Trademarks and trade names (a)(d)
13,700

 

 
13,700

Deferred income tax assets
34,992

 

 
34,992

Accounts payable
(153,777
)
 
248

 
(153,529
)
Accrued expenses
(128,267
)
 
9,146

 
(119,121
)
Deferred income tax liabilities
(91,194
)
 

 
(91,194
)
Recorded goodwill (a)
$
728,890

 
$
(8,095
)
 
$
720,795

(a)Approximately $1,262,367 in goodwill and other intangible assets recorded from this business combination were preliminarily allocated to our Fleet Solutions segment; the remaining $345,648 was preliminarily allocated to our Travel and Corporate Solutions segment.
(b)Weighted average life – 8.1 years.
(c)Weighted average life – 2.0 years.
(d)Weighted average life – 7.7 years.
At March 31, 2017, estimated amortization expense related to the definite-lived intangible assets listed above for each of the next five fiscal years and thereafter is as follows:
Remaining 2017
$
64,032

2018
$
80,987

2019
$
74,548

2020
$
68,685

2021
$
60,654

2022
$
53,537

Thereafter
$
427,408

The pro forma financial information presented below includes the effects of the EFS acquisition as if it had been consummated on January 1, 2015. These pro forma results have been calculated after applying our accounting policies and adjusting results to reflect the intangible amortization and interest expense associated with the 2016 Credit Agreement used to fund the acquisition and related income tax results assuming they were applied and incurred since January 1, 2015. As a result, $4,765 in transaction costs which are directly attributable to the acquisition have been excluded from pro forma results for the three months ended March 31, 2016. The pro forma results of operations do not include any cost savings or other synergies that may result from the acquisition or any estimated integration costs that have been or will be incurred by the Company. Accordingly, the following pro forma information is not necessarily indicative of either the future results of operations or results that would have been achieved if the acquisition had taken place at the beginning of 2015. The operations of EFS contributed revenues of approximately $43,375 and net loss before taxes of approximately $11,203 to the Company's unaudited condensed consolidated income statement for the three months ended March 31, 2017.
    

12

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

The following represents unaudited pro forma operational results as if the acquisition had occurred January 1, 2015:
 
Three Months Ended March 31, 2016
Total revenues
$
240,297

Net earnings attributable to shareholders
$
18,333

Pro forma net income attributable to shareholders per common share:
 
Basic
$
0.43

Diluted
$
0.43

4.
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. The Company extends revolving credit to certain small fleet customers. 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. The Company had approximately $5,800 and $3,400 in receivables with revolving credit balances as of March 31, 2017 and December 31, 2016, respectively. The portfolio of receivables consists of a large group of homogeneous smaller balance amounts that are collectively evaluated for impairment.
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 past due accounts receivable balances, changes in customer payment patterns, known fraudulent activity in the portfolio, as well as leading economic and market indicators.
As of March 31, 2017, approximately 95 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, 2016, approximately 90 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. No one customer represented more than 10 percent of the outstanding receivables balance at March 31, 2017. One customer represented 11 percent of the outstanding receivables balance at December 31, 2016.
The following table presents changes in reserves for credit losses related to accounts receivable:
 
Three Months Ended March 31,
  
2017
 
2016
Balance, beginning of year
$
20,092

 
$
13,832

Provision for credit losses
12,231

 
3,917

Charges to other accounts
2,939

 

Charge-offs
(13,369
)
 
(7,036
)
Recoveries of amounts previously charged-off
928

 
1,340

Currency translation
745

 
98

Balance, end of period
$
23,566

 
$
12,151

5.
Earnings per Share
Basic earnings per share is computed by dividing net earnings attributable to shareholders by the weighted average number of shares of common stock and vested deferred stock units outstanding during the year. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options, the assumed issuance of unvested restricted stock units and deferred stock units, and unvested performance-based restricted stock units for which the performance condition has been met as of the date of determination using the treasury stock method unless the effect is anti-dilutive. The treasury stock method assumes that proceeds, including cash received from the exercise of employee stock options and the total unrecognized compensation expense for unvested share-based compensation

13

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

awards, would be used to purchase the Company's common stock at the average market price during the period. Prior to the January 2017 adoption of ASU 2016-09, the treasury stock method also included excess tax benefits in its proceeds calculation.
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, 2017 and 2016:
 
Three Months Ended March 31,
 
2017
 
2016
Net earnings attributable to shareholders
$
29,401

 
$
23,086

 
 
 
 
Weighted average common shares outstanding – Basic
42,871

 
38,756

Dilutive impact of share based compensation awards
248

 
94

Weighted average common shares outstanding – Diluted
43,119

 
38,850

For the three months ended March 31, 2017 and March 31, 2016, an immaterial number of outstanding share-based awards, for which the performance condition had been met as of the dates of determination if applicable, were excluded from the computation of diluted earnings per share because the effect of including these awards would be anti-dilutive.
6.
Derivative Instruments
The Company is exposed to certain market risks relating to its ongoing business operations. From time to time, the Company enters into derivative instrument arrangements to manage various risks including interest rate risk, foreign exchange risk, and commodity price risk. None of these derivative instruments qualify for hedge accounting treatment.
Interest Rate Swap Agreements
In November 2016, the Company entered into three forward-fixed interest rate swap agreements to manage the interest rate risk associated with our outstanding variable-interest rate borrowings. Under these swap agreements, the Company receives variable interest of 1-month LIBOR and pays fixed rates between 0.896% to 1.125%, reducing a portion of the variability of the future interest payments associated with $800,000 of the Company's borrowings.
The notional amounts, fixed and variable interest rates and maturities of the interest rate swap agreements are as follows:
 
Tranche A
Tranche B
Tranche C
Notional amount
$400,000
$150,000
$250,000
Amortization
5% annually
N/A
N/A
Maturity date
12/31/2020
12/31/2020
12/31/2018
Fixed interest rate
1.108%
1.125%
0.896%
See Note 9, Fair Value for more information regarding the valuation of our interest rate swaps.
Foreign Currency Exchange Program
The Company utilizes a 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. We will continue to monitor our foreign currency exposure for discrete items and may, from time to time, hedge certain foreign currency transactions.
    

14

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

The following table summarizes the contracts related to foreign currency swaps, which settle in the base currency at various dates within 5 days after quarter-end:
 
Aggregate Notional Amount
 
March 31,
 
2017
 
2016
Australian dollar
A$
18,000

 
A$
15,000

Norwegian Krone
NOK


 
NOK
40,000

The amount of gains and losses associated with these foreign currency swaps were not material for the quarters ending March 31, 2017 and 2016.
Fuel Derivatives Program
In prior years, the Company entered into put and call option contracts related to the Company’s commodity price risk. 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. 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 of these positions were settled as of March 31, 2016. The Company is no longer hedged for changes in fuel prices. Management will continue to monitor the fuel price market and evaluate its alternatives as it relates to this hedging program.
Consolidated Derivative Instruments
The following table presents information on the location and fair value of derivatives recorded in the unaudited condensed consolidated balance sheets:
 
 
Asset Derivatives
Derivatives Not Designated as Hedging Instruments
 
Balance Sheet Location
 
March 31, 2017
 
December 31, 2016
Interest rate swaps
 
Other assets
 
$
14,473

 
$
12,908

Given that the Company's commodity contracts and interest rate swap agreements are not designated as hedging instruments, changes in the fair value of these instruments, which represent unrealized gains and losses, are recognized in the consolidated statements of income. The following table presents information on the amounts of derivative gains and the locations in the unaudited condensed consolidated statements of income:
Derivatives Not Designated as Hedging Instruments
Location of Gain (Loss) on Derivatives Recognized in Income
Three Months Ended March 31,
2017
 
2016
Commodity contracts
Net realized and unrealized gain on fuel price derivatives
$

 
$
711

Interest rate swap agreements - unrealized portion
Net unrealized gains on interest rate swap agreements
$
1,565

 
$

Interest rate swap agreements - realized portion
Financing interest expense
$
(543
)
 
$

7.
Financing and Other Debt
2016 Credit Agreement
On July 1, 2016, the Company entered into the 2016 Credit Agreement, which replaced the 2014 Credit Agreement. The 2016 Credit Agreement provides for term loan facilities and a secured revolving credit facility, with a sublimit for letters of credit and swingline loans. Under this agreement, $925,000 matures on July 1, 2021 and $1,200,000 matures on July 1, 2023. Prior to maturity, amounts under the credit facility will be reduced by mandatory payments. Additional loans may be made available under the 2016 Credit Agreement upon request of the Company subject to specified terms and conditions, including receipt of lender commitments. Proceeds from the 2016 Credit Agreement may be used for working capital purposes, acquisitions, payment of dividends and other restricted payments, refinancing of indebtedness and other general corporate purposes.

15

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

As of March 31, 2017, the Company had $203,302 of borrowings, net of loan origination fees, against its $470,000 secured revolving credit facility, or approximately $267,000 of availability under the 2016 Credit Agreement, subject to the covenants as described below. The outstanding debt under the 2016 Credit Agreement amortizing term loans arrangement totaled $1,628,938 at March 31, 2017. As of March 31, 2017 and December 31, 2016, amounts outstanding under the 2016 Credit Agreement bore a weighted average effective interest rate of 4.4 percent and 4.2 percent, respectively.
As of both March 31, 2017 and December 31, 2016, the Company has posted approximately $13,350 in letters of credit as collateral for lease agreements and virtual card and fuel payment processing activity at our foreign subsidiaries.
Amounts outstanding under the 2016 Credit Agreement bear interest at a rate equal to, at the Company’s option, (a) the Eurocurrency Rate, as defined in the 2016 Credit Agreement, plus a margin of between 1.75% to 3.25% (2.75% at March 31, 2017) with respect to the tranche A term loan facility and the revolving credit facility and between 3.25% to 3.50% (3.50% at March 31, 2017) with respect to the tranche B term loan facility (with the Eurocurrency Rate subject to a 0.75% floor in the case of the tranche B term loan facility and a 0.0% floor in the case of the tranche A term loan and revolving credit facility), in each case, based on the ratio of consolidated funded indebtedness less up to $350,000 in permitted securitization transactions of the Company and its subsidiaries to consolidated EBITDA or (b) the highest of (i) the Federal Funds Rate plus 0.50%, (ii) the prime rate announced by Bank of America, and (iii) the Eurocurrency Rate plus 1.00%, in each case plus a margin of 0.75% to 2.25% (1.75% at March 31, 2017) with respect to the tranche A term loan facility and the revolving credit facility or 2.25% to 2.50% (2.50% at March 31, 2017) with respect to the tranche B term loan facility, in each case, based on the ratio of consolidated funded indebtedness less up to $350,000 in permitted securitization transactions of the Company and its subsidiaries to consolidated EBITDA. In November 2016, the Company entered into three interest rate swap agreements to manage the interest rate risk associated with our outstanding variable-interest rate borrowings under the 2016 Credit Agreement. See Note 6, Derivative Instruments, for further discussion.
In addition, the Company has agreed to pay a quarterly commitment fee at a rate per annum ranging from 0.30% to 0.50% (0.45% at March 31, 2017) based on the ratio of consolidated funded indebtedness less up to $350,000 in permitted securitization transactions of the Company and its subsidiaries to consolidated EBITDA of the daily unused portion of the 2016 Credit Agreement. The tranche B term loan facility was issued with an original issue discount of 1.00%.
Debt Covenants
As more fully described in our Annual Report on Form 10-K for the year ended December 31, 2016, the 2016 Credit Agreement and the Indenture contain covenants that limit the Company's and our subsidiaries' ability to (i) incur additional debt, (ii) pay dividends or make other distributions on, redeem or repurchase capital stock, or make investments or other restricted payments, (iii) enter into transactions with affiliates, (iv) dispose of assets or issue stock of restricted subsidiaries or regulated subsidiaries, (v) create liens on assets, or (vi) effect a consolidation or merger or sell all, or substantially all, of the Company’s assets. As of March 31, 2017, we were in compliance with all material covenants of our 2016 Credit Agreement and the Indenture.
$400 Million Notes Outstanding
On January 30, 2013, the Company completed a $400,000 offering in an aggregate principal amount of 4.750 percent senior notes due 2023. The Notes will mature on February 1, 2023, with interest of 4.750 percent payable semiannually. See Note 9, Fair Value, for additional information.
Borrowed Federal Funds
WEX Bank borrows from lines of credit on a federal funds rate basis to supplement the financing of its accounts receivable. Our federal funds lines of credit were $250,000 as of March 31, 2017 and December 31, 2016, with no outstanding balance as of March 31, 2017.
WEX Brazil Debt
WEX Brazil had debt of approximately $12,699 and $30,755 as of March 31, 2017 and December 31, 2016, respectively. This was comprised of credit facilities and loan arrangements related to its accounts receivable, with various maturity dates. The average interest rate was 24.1 percent and 19.7 percent as of March 31, 2017 and December 31, 2016, respectively. This debt is classified in Other debt on the Company’s unaudited condensed consolidated balance sheets for the periods presented. 



16

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

Participation Debt
WEX Bank maintains agreements with third-party banks to fund customer balances that exceed WEX Bank's lending limit to an individual customer. These borrowings carry a variable interest rate of 1 to 3-month LIBOR plus a margin of 225 basis points. The balance of the debt was $95,000 at each of March 31, 2017 and December 31, 2016, and was secured by an interest in the underlying customer receivables. The balance will fluctuate on a daily basis based on customer funding needs, and could range from $0 to $95,000. The balances will mature in amounts of $50,000 and $45,000 on August 18, 2017 and December 31, 2020, respectively. This debt is classified in Other debt on the Company’s unaudited condensed consolidated balance sheets. 
Australian Securitization Facility
The Company has entered into a one year securitized debt agreement with the Bank of Tokyo-Mitsubishi UFJ, Ltd expiring April 2017. Subsequent to March 31, 2017, this agreement was extended for an additional year. Under the terms of the agreement, each month, on a revolving basis, the Company sells certain of its Australian receivables to the Company's 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 2.68 percent and 2.65 percent as of March 31, 2017 and December 31, 2016, respectively. The Company had securitized debt under this facility of $86,327 and $78,592 as of March 31, 2017 and December 31, 2016, respectively.
European Securitization Facility
On April 7, 2016, the Company entered into a five year securitized debt agreement with the Bank of Tokyo-Mitsubishi UFJ, Ltd. Under the terms of the agreement, the Company sells certain of its receivables from selected European countries to its European Securitization Subsidiary. The European Securitization Subsidiary, in turn, uses the receivables as collateral to issue securitized debt. The amount collected on the securitized receivables is restricted to pay the securitized debt and is not available for general corporate purposes. The amounts of receivables to be securitized under this agreement will be determined by management on a monthly basis. The interest rate was 0.94 percent and 0.95 percent as of March 31, 2017 and December 31, 2016, respectively. The Company had $6,349 and $5,731 of securitized debt as of March 31, 2017 and December 31, 2016, respectively.
Debt Issuance Costs
The following table presents the Company's net debt issuance costs related to its revolving line of credit facilities, term loans and notes outstanding:
 
March 31, 2017
 
December 31, 2016
Revolving line of credit facilities and term loans
$
36,600

 
$
38,334

Notes outstanding
$
4,282

 
$
4,466

8.
Factoring
WEX Europe Services Accounts Receivable Factoring
During the first quarter of 2017, WEX Europe Services ("WES") entered into a factoring arrangement with an unrelated third-party financial institution (the "Purchasing Bank") to sell certain of its accounts receivable in order to accelerate the collection of the Company's cash and reduce internal costs, thereby improving liquidity. Under this arrangement, the Purchasing Bank establishes a credit limit for each customer account. The factored receivables are without recourse to the extent that the customer balances are maintained at or below the established credit limit. For customer receivable balances in excess of the Purchasing Bank's credit limit, the Company maintains the risk of default. The Purchasing Bank is deemed the purchaser of these receivables and is entitled to enforce payment of these amounts from the debtor. Additionally, there are no indications of the Company's continuing involvement in the factored receivables. As further substantiation for the treatment of these receivables, we obtained a true sale opinion from an independent attorney, which states that the factoring agreement creates a sale of receivables both below and above the established credit limits under local law.

17

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

This factoring arrangement is accounted for as a sale and accordingly the Company records the receivables sold as a reduction of accounts receivable and proceeds as cash from operating activities. The Company sold approximately $53,000 receivables during the three months ended March 31, 2017. Proceeds received are recorded net of applicable expenses, interest and commissions. This resulted in a loss on factoring of approximately $200 for the three months ended March 31, 2017, and was recorded in Other expenses in the unaudited condensed consolidated statement of income. As of March 31, 2017, the Company had associated factoring receivables of approximately $400, of which $200 were in excess of the established credit limit. There were no charge-backs on balances in excess of the credit limit during the three months ended March 31, 2017.
Brazil Accounts Receivable Factoring
During the first quarter of 2017, WEX Brazil entered into a factoring agreement to sell certain unsecured receivables, without recourse, to an unrelated third-party financial institution. Under the terms of the agreement, the Company retains no rights or interest and has no obligations with respect to the receivables. As such, the factoring under this arrangement is accounted for as a sale. The Company sold approximately $8,000 of receivables during the three months ended March 31, 2017, which resulted in a $400 loss on factoring, which was recorded in Other expenses in the unaudited condensed consolidated statement of income. The Company records receivables sold under this agreement as a reduction of accounts receivable and proceeds as cash from operating activities.
9.
Fair Value
The Company holds mortgage-backed securities, fixed income securities, derivatives (see Note 6, 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. Various factors are considered in determining the fair value of the Company’s obligations, 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.
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. We did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during either of three months ended March 31, 2017 or March 31, 2016.
    

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 that are measured at fair value and the related hierarchy levels:
 
Fair Value Hierarchy
March 31, 2017
 
December 31, 2016
Assets:
 
 
 
 
Municipal bonds
2
$
596

 
$
682

Asset-backed securities
2
514

 
648

Mortgage-backed securities
2
484

 
490

Fixed-income mutual fund
1
21,819

 
21,705

Total available-for-sale securities
 
$
23,413

 
$
23,525

Executive deferred compensation plan trust (a)
1
$
6,716

 
$
5,673

Interest rate swaps (a)
2
$
14,473

 
$
12,908

(a)The fair value of these instruments is recorded in Other assets.
Available-For-Sale Securities
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 an open-ended mutual fund which is invested in fixed-income securities and is held in order to satisfy the regulatory requirements of WEX Bank. For mortgage-backed and asset-backed debt securities and municipal 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.
Executive Deferred Compensation Plan Trust
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.
Interest Rate Swap Arrangements
The Company determines the fair value of its interest rate swaps based on the discounted cash flows of the difference between the projected fixed payments on the swap and the implied floating payments using the current LIBOR curve, which are Level 2 inputs in the fair value hierarchy.
$400 Million Notes Outstanding
Not considering unamortized loan origination fees, the Notes outstanding have a carrying value of $400,000 at each of March 31, 2017 and December 31, 2016, and a fair value of $394,000 and $390,000 as of March 31, 2017 and December 31, 2016, respectively. The fair value is based on market rates for the issuance of our debt. The Company determined the fair value of its Notes outstanding is classified as Level 2 in the fair value hierarchy.
Debt
The Company determines the fair value of the amount outstanding under its 2016 Credit Facility based on the market rates for the issuance of the Company's debt, which are Level 2 inputs in the fair value hierarchy. As of March 31, 2017, the 2016 Credit Facility has a carrying value of $1,832,240 and a fair value of $1,846,481. As of December 31, 2016, the carrying value of the Credit Facility approximated its carrying value.


19

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

10.
Accumulated Other Comprehensive Loss
A reconciliation of accumulated other comprehensive loss is as follows:
 
Three Months Ended March 31,
 
2017
 
2016
 
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
$
(463
)
 
$
(122,376
)
 
$
(212
)
 
$
(103,239
)
Other comprehensive income
3

 
16,578

 
164

 
10,318

Ending balance
$
(460
)
 
$
(105,798
)
 
$
(48
)
 
$
(92,921
)
The total tax effect on accumulated unrealized losses was $5,842 and $3,821 as of March 31, 2017 and March 31, 2016, respectively. 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. No amounts were reclassified from accumulated other comprehensive income (loss) in the periods presented.
11.
Non-Controlling Interest
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 is as follows:
 
Three Months Ended March 31,
 
2017
 
2016
Balance, beginning of year
$
8,558

 
$
12,437

Net (loss) gain attributable to non-controlling interest
(325
)
 
135

Currency translation adjustment
42

 
456

Balance, end of period
$
8,275


$
13,028

12.
Income Taxes
The Company's effective tax rate was 33.3 percent for the first quarter of 2017 as compared to 36.2 percent for the first quarter of 2016. As a result of the recent adoption of ASU 2016-09, the $1,600 tax effect of excess tax benefits related to share-based payments was recorded to the income statement in the first quarter of 2017, which contributed to the lower effective tax rate. See Note 1, Basis of Presentation for more information.
Undistributed earnings of certain foreign subsidiaries of the Company amounted to $29,722 and $25,824 at March 31, 2017 and December 31, 2016, respectively. 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.
13.
Commitments and Contingencies
Litigation
On August 11, 2016, the Company was sued in the Circuit Court of St. Charles County, Missouri, in a putative class action alleging the Company improperly sent unauthorized facsimile advertisements in violation of the Telephone Consumer Protection Act, 47 U.S.C. § 227 (the “TCPA”). The named plaintiff seeks to represent a nationwide class of recipients of unauthorized facsimile advertisements from the Company (collectively, the "Plaintiffs") and requests statutory damages for each facsimile advertisement.

20

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

The Plaintiffs further allege that the opt-out notice of the faxes did not meet the criteria set forth in the TCPA or its underlying regulations. The Company removed the case to the United States District Court for the Eastern District of Missouri on September 15, 2016. On October 14, 2016, the Company filed an answer denying liability and stating the facsimile advertisement at issue was sent by FleetOne, LLC, Company’s wholly-owned subsidiary.
The Company is currently conducting an internal review of this matter and intends to vigorously defend itself. The current estimate of a reasonably possible loss contingency is not material to the Company's unaudited condensed consolidated financial position, results of operations, cash flows or liquidity.
The Company is involved in other 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.
Commitments
Significant commitments and contingencies as of March 31, 2017 are consistent with those discussed in Note 18, Commitments and Contingencies to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2016.
14.
Restructuring

In the first quarter of 2015, the Company commenced a restructuring initiative (the "2015 Restructuring Initiative") as a result of its global review of operations. The global review of operations identified certain initiatives to further streamline the business, to 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 Company continued its efforts to improve its overall operational efficiency and began a second restructuring initiative (the "2016 Restructuring Initiative") during the second quarter of 2016. In connection with the EFS acquisition, the Company initiated a restructuring program in the third quarter of 2016 (the "Acquisition Integration Restructuring Initiative").

The restructuring expenses related to these initiatives primarily consist of employee costs and office closure costs directly associated with the respective program. The Company has determined the amount of expenses related to these initiatives is probable and reasonably estimable. As such, the Company has recorded the impact on the unaudited condensed consolidated statements of income and in Accrued expenses on the unaudited condensed consolidated balance sheets. Restructuring charges incurred to date under these initiatives were $18,357 as of March 31, 2017.

The balance under the 2015 Restructuring Initiative is expected to be paid through 2018. Amounts under the 2016 Restructuring Initiative and the Acquisition Integration Restructuring Initiative are expected to be paid through 2017. The Company expects to incur an additional $450 in restructuring costs related to the Acquisition Integration Restructuring Initiative. The Company does not expect to incur any additional restructuring costs related to the 2015 and 2016 Restructuring Initiatives.
The following table presents the Company's 2015 Restructuring Initiative liability:
 
Three Months Ended March 31,
 
2017
 
2016
Balance, beginning of year
$
5,231

 
$
7,249

Restructuring charges
310

 
1,589

Cash paid
(348
)
 
(647
)
Impact of foreign currency translation
38

 
315

Balance, end of period
$
5,231

 
$
8,506

    
    





21

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

The following table presents the Company’s 2016 Restructuring Initiative liability:
 
Three Months Ended March 31, 2017
Balance, beginning of year
$
3,662

Reserve release
(533
)
Impact of foreign currency translation
73

Balance, end of period
$
3,202

The following table presents the Company’s Acquisition Integration Restructuring Initiative liability:
 
Three Months Ended March 31, 2017
Balance, beginning of year
$
1,764

Restructuring charges
707

Cash paid
(590
)
Other
258

Balance, end of period
$
2,139

The following table presents the Company's total restructuring liability:
 
Three Months Ended March 31,
 
2017
 
2016
Balance, beginning of year
$
10,657

 
$
7,249

Restructuring charges
1,017

 
1,589

Reserve release
(533
)
 

Cash paid
(938
)
 
(647
)
Other
258

 

Impact of foreign currency translation
111

 
315

Balance, end of period
$
10,572

 
$
8,506

15.
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 ("CODM") in deciding how to allocate resources and assess performance. The Company’s CODM is its Chief Executive Officer. The operating segments are aggregated into the three reportable segments described below.
Fleet Solutions 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.
Travel and Corporate Solutions 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.
Health and Employee Benefit Solutions provides healthcare payment products and SaaS consumer directed platforms, as well as payroll related benefits to customers.
The Company’s CODM 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 unrealized gains and losses on derivatives, net foreign currency remeasurement gains and losses, acquisition and divestiture related items, stock-based compensation, restructuring and other costs and debt issuance cost amortization.
Although adjusted pre-tax income before NCI is not calculated in accordance with GAAP, this non-GAAP measure is integral to the Company's reporting and planning processes and the CODM uses it to allocate resources. The Company considers

22

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

this measure integral because it excludes specified items that the Company's management excludes in evaluating the Company's performance. Specifically, in addition to evaluating performance on a GAAP basis, management evaluates performance on a basis that excludes the above items because:
Exclusion of the non-cash, mark-to-market adjustments on derivative instruments, including fuel price related derivatives and interest rate swap agreements, helps management identify and assess trends in the Company's underlying business that might otherwise be obscured due to quarterly non-cash earnings fluctuations associated with these 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 cash, receivable and payable balances, certain intercompany notes denominated in foreign currencies and any gain or loss on foreign currency hedges relating to these items. The exclusion of these items helps management compare changes in operating results between periods that might otherwise be obscured due to currency fluctuations.
The Company considers certain acquisition-related costs, including certain financing costs, ticking fees, investment banking fees, warranty and indemnity insurance, certain integration related expenses and amortization of acquired intangibles, as well as gains and losses from divestitures to be unpredictable, dependent on factors that may be outside of our control and unrelated to the continuing operations of the acquired or divested business or the Company. In 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. In prior periods, the Company has adjusted for goodwill impairments and acquisition related asset impairments. No goodwill or acquisition related impairments were identified during the three months ended March 31, 2017 or 2016.
Stock-based compensation is different from other forms of compensation, as it is a non-cash expense. For example, a cash salary generally has a fixed and unvarying cash cost. In contrast, the expense associated with an equity-based award is generally unrelated to the amount of cash ultimately received by the employee, and the cost to the Company is based on a stock-based compensation valuation methodology and underlying assumptions that may vary over time.
Restructuring and other costs are related to employee termination benefits from certain identified initiatives to further streamline the business, improve the Company's efficiency, create synergies, and to globalize the Company's operations, all with an objective to improve scale and increase profitability going forward. 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 insight into the fundamentals of current or past operations of our business.
Debt issuance cost amortization is a non-cash item, which is unrelated to the continuing operations of the Company. Because debt issuance cost amortization is dependent upon the financing method which can vary widely company to company, we believe that excluding this cost helps to facilitate comparison to historical results as well as to other companies within our industry.
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, net income, operating income or cash 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.
The tables below present the Company’s reportable segment results on an adjusted pre-tax net income before NCI basis and the prior period has been updated to reflect the following:
Beginning in the third quarter of 2016, adjusted pre-tax income before NCI excluded debt issuance cost amortization. For comparative purposes, adjusted pre-tax income before NCI for the prior periods has been adjusted to reflect the exclusion of this item.
The segment information has also been updated to disaggregate revenue into payment processing, account servicing, finance fee and other revenue in order to provide additional information regarding the Company’s significant revenue streams. There was no change to total revenue or other financial information as a result of this updated presentation.        

23

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

The following tables present the Company’s reportable segment results on an adjusted pre-tax net income before NCI basis:
 
Fleet Payment Solutions
 
Travel and Corporate Solutions
 
Health and Employee Benefit Solutions
 
Total
Three Months Ended March 31, 2017
 
 
 
 
 
 
 
Payment processing revenue
$
86,262

 
$
34,875

 
$
15,241

 
$
136,378

Account servicing revenue
36,069

 
155

 
25,315

 
61,539

Finance fee revenue
36,429

 
223

 
6,720

 
43,372

Other revenue
32,063

 
12,460

 
5,545

 
50,068

Total revenues
$
190,823

 
$
47,713

 
$
52,821

 
$
291,357

 
 
 
 
 
 
 
 
Operating interest expense
$
1,324

 
$
1,566

 
$
1,958

 
$
4,848

Depreciation and amortization
$
36,068

 
$
3,038

 
$
10,132

 
$
49,238

Adjusted pre-tax income before NCI
$
51,232

 
$
22,408

 
$
10,236

 
$
83,876

 
 
 
 
 
 
 
 
Three Months Ended March 31, 2016
 
 
 
 
 
 
 
Payment processing revenue
$
62,290

 
$
34,626

 
$
14,141

 
$
111,057

Account servicing revenue
25,438

 
272

 
18,812

 
44,522

Finance fee revenue
21,938

 
75

 
1,493

 
23,506

Other revenue
11,408

 
10,169

 
5,266

 
26,843

Total revenues
$
121,074

 
$
45,142

 
$
39,712

 
$
205,928

 
 
 
 
 
 
 
 
Operating interest expense
$
422

 
$
552

 
$
412

 
$
1,386

Depreciation and amortization
$
13,608

 
$
616

 
$
8,040

 
$
22,264

Adjusted pre-tax income before NCI
$
33,111

 
$
20,148

 
$
6,577

 
$
59,836

Our segments earn interest income both from banking relationships and from cardholders. The majority of interest income
from cardholders is earned on our salary payment cards offered in Brazil.
The following table presents the Company's interest income by segment:
 
Three Months Ended March 31,
 
2017
 
2016
Fleet Solutions
$
1,124

 
$
884

Travel and Corporate Solutions
46

 
92

Health and Employee Benefit Solutions
6,859

 
1,495

Total interest income
$
8,029

 
$
2,471

The following table reconciles income before income taxes to adjusted pre-tax income before NCI:
 
Three Months Ended March 31,
 
2017
 
2016
Income before income taxes
$
43,611

 
$
36,404

Unrealized (gains) losses on derivative instruments
(1,565
)
 
5,007

Net foreign currency remeasurement gain
(8,442
)
 
(16,124
)
Acquisition and divestiture related items
40,114

 
27,945

Stock-based compensation
6,457

 
4,243

Restructuring and other costs
1,747

 
1,589

Debt issuance cost amortization
1,954

 
772

Adjusted pre-tax income before NCI
$
83,876

 
$
59,836


24

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

16.
Supplementary Regulatory Capital Disclosure
The Company's subsidiary, WEX Bank, is subject to various regulatory capital requirements administered by the FDIC and the Utah Department of Financial Institutions. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, WEX Bank must meet specific capital guidelines that involve quantitative measures of WEX Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. WEX Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require WEX Bank to maintain minimum amounts and ratios as defined in the regulations. As of December 31, 2016, the most recent FDIC exam report categorized WEX Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events subsequent to that examination report that management believes have changed WEX Bank’s capital rating.
WEX Bank’s actual and regulatory minimum capital amounts and ratios are presented in the following table:
 
Actual Amount
 
Ratio
 
Minimum for Capital Adequacy Purposes Amount
 
Ratio
 
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions Amount
 
Ratio
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Total Capital to risk-weighted assets
$
277,198

 
13.28
%
 
$
166,950

 
8.0
%
 
$
208,688

 
10.0
%
Tier 1 Capital to average assets
$
262,264

 
12.57
%
 
$
83,475

 
4.0
%
 
$
104,344

 
5.0
%
Common equity to risk-weighted assets
$
262,264

 
13.07
%
 
$
90,294

 
4.5
%
 
$
130,425

 
6.5
%
Tier 1 Capital to risk-weighted assets
$
262,264

 
13.07
%
 
$
120,392

 
6.0
%
 
$
106,523

 
8.0
%
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Total Capital to risk-weighted assets
$
228,402

 
12.59
%
 
$
145,182

 
8.0
%
 
$
181,477

 
10.0
%
Tier 1 Capital to average assets
$
214,847

 
11.10
%
 
$
77,413

 
4.0
%
 
$
96,767

 
5.0
%
Common equity to risk-weighted assets
$
214,847

 
11.84
%
 
$
81,665

 
4.5
%
 
$
117,961

 
6.5
%
Tier 1 Capital to risk-weighted assets
$
214,847

 
11.84
%
 
$
108,887

 
6.0
%
 
$
145,183

 
8.0
%

25


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide information that will assist the reader with understanding our financial statements, the changes in key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting estimates affect our financial statements. The discussion also provides information about the financial results of the three segments of our business to provide a better understanding of how those segments and their results affect our financial condition and results of operations as a whole. Our MD&A is presented in the following sections:
Overview
Summary
Results of Operations
Liquidity and Capital Resources
Critical Accounting Policies and Estimates
Recently Adopted Accounting Standards
This discussion should be read in conjunction with our audited consolidated financial statements as of December 31, 2016, the notes accompanying those financial statements and MD&A as contained in our Annual Report on Form 10-K filed with the SEC on March 6, 2017 and in conjunction with the unaudited condensed consolidated financial statements and notes in Part I – Item 1 of this report.
Overview
WEX Inc. is a leading provider of corporate payment solutions. We have expanded the scope of our business into a multi-channel provider of corporate payment solutions. We currently operate in three business segments: Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. Our business model enables us to provide exceptional payment security and control across a spectrum of payment sectors. The Fleet Solutions segment provides customers with fleet vehicle payment processing services specifically designed for the needs of commercial and government fleets. Fleet Solutions revenue is earned primarily from payment processing, account servicing and financing fees. Management estimates that WEX fleet cards are accepted at over 90 percent of fuel locations in each of the United States and Australia. The Travel and Corporate Solutions segment focuses on the complex payment environment of business-to-business payments, providing customers with payment processing solutions for their corporate payment and transaction monitoring needs. The Health and Employee Benefit Solutions segment provides healthcare payment products and SaaS platform consumer-directed healthcare payments, as well as payroll related benefits to customers in Brazil.
The Company’s U.S. operations include WEX Inc. and our wholly-owned subsidiaries WEX Bank, WEX FleetOne, EFS and WEX Health. Our international operations include our wholly-owned subsidiaries, WEX Fuel Cards Australia, WEX Prepaid Cards Australia, WEX New Zealand, WEX Asia, WEX Europe Limited, UNIK S.A., a Brazil-based company that we refer to as "WEX Brazil," and a majority equity position in WEX Europe Services Limited and its subsidiaries.
Summary
Below are selected items from the first quarter of 2017:
Average number of vehicles serviced increased 11 percent from the first quarter of 2016 to approximately 10.6 million for the first quarter of 2017, primarily related to the acquisition of EFS.
Total fuel transactions processed increased 24 percent from the first quarter of 2016 to 123.9 million for the first quarter of 2017. Total payment processing transactions in our Fleet Solutions segment increased 15 percent to 102.8 million for the first quarter of 2017 as compared to the same quarter in 2016. Transaction processing transactions increased 102 percent to 21.2 million for the first quarter of 2017, as compared to the same quarter in 2016. The increase in payment processing transactions resulted from organic revenue growth and the acquisition of EFS. The primary driver for the increase in transaction processing transactions was due to the acquisition of EFS.
Average expenditure per payment processing transaction in our Fleet Solutions segment increased 42 percent to $68.90 for the first quarter of 2017, from $48.67 for the same period in the prior year. The average U.S. fuel price per gallon during the first quarter of 2017 was $2.40, a 22 percent increase as compared to the same period in the prior year. The average Australian fuel price per gallon during the first quarter of 2017 was $3.76, a 21 percent increase as compared to the same period in the prior year. Additionally, the increase in average expenditure

26


per payment processing transaction was due to a 19 percent increase in the average gallons per payment processing transaction, resulting from the acquisition of EFS.
Credit loss expense in the Fleet Solutions segment was $12.6 million during the first quarter of 2017, as compared to $4.0 million during the first quarter of 2016. Spend volume increased 63 percent in the first quarter of 2017, as compared to the same quarter last year and our credit losses were 17.8 basis points of fuel expenditures for the first quarter of 2017, as compared to 9.3 basis points of fuel expenditures for the same period last year. The increase in credit loss was primarily related to higher incidences of fraud and a slight deterioration in accounts receivable.
Travel and Corporate Solutions purchase volume grew by approximately $1.7 billion from the first quarter of 2016 to $6.6 billion for the first quarter of 2017, an increase of 35 percent, driven by organic growth in our travel product and the EFS acquisition.
Health and Employee Benefits Solutions purchase volume grew to $1.3 billion for first quarter of 2017, as compared to $1.1 billion in the first quarter of 2016. This 23 percent increase was primarily related to new customer signings.
Our foreign currency exchange exposure is primarily related to the re-measurement of our cash, receivable and payable balances, including intercompany transactions, that are denominated in foreign currencies. Movements in the exchange rates associated with our foreign held currencies resulted in a gain of $8.4 million for the first quarter of 2017, compared to a gain of $16.1 million for the first quarter of 2016.
Our effective tax rate was 33.3 percent for the first quarter of 2017 as compared to 36.2 percent for the first quarter of 2016. The tax effect of excess tax benefits related to share-based payments recorded to the income statement in the first quarter of 2017 contributed to the lower effective tax rate. Future tax rates may fluctuate due to changes in the mix of earnings among different tax jurisdictions, as well as impacts that tax rate and earnings mix changes have on our net deferred tax assets. The recent adoption of ASU 2016-09 will result in increased income tax expense volatility, the nature of which will be dependent on the magnitude of our common stock price fluctuations. See Part I – Item 1 – Note 1, Basis of Presentation for further information.

27


Results of Operations
Prior year segment information below has been updated to disaggregate revenue into payment processing, account servicing, finance fee and other revenue in order to provide additional information regarding the Company’s significant revenue streams. There was no change to total revenue or other financial information as a result of this updated presentation.
Fleet Solutions
The following table reflects comparative operating results and key operating statistics within Fleet Solutions:
(in thousands, except per transaction and per gallon data)
Three Months Ended March 31,
 
Increase (Decrease)
2017
 
2016
 
Amount
 
Percent
Revenues
 
 
 
 
 
 
 
Payment processing revenue
$
86,262

 
$
62,290

 
$
23,972

 
38
 %
Account servicing revenue
36,069

 
25,438

 
10,631

 
42

Finance fee revenue
36,429

 
21,938

 
14,491

 
66

Other revenue
32,063

 
11,408

 
20,655

 
181

Total revenues
190,823

 
121,074

 
69,749

 
58

Total operating expenses
161,286

 
105,334

 
55,952

 
53

Operating income
29,537


15,740

 
13,797

 
88

Net foreign currency gain
1,342

 
12,528

 
(11,186
)
 
(89
)
Financing interest expense
(16,443
)
 
(15,935
)
 
(508
)
 
(3
)
Net unrealized gains on interest rate swap agreements
894

 

 
894

 
NM

Net realized and unrealized gains on derivative instruments

 
711

 
(711
)
 
(100
)
Income before income taxes
$
15,330

 
$
13,044

 
$
2,286

 
18
 %
 
 
 
 
 
 
 
 
Key operating statistics
 
 
 
 
 
 
 
Payment processing revenue:
 
 
 
 
 
 
 
Payment processing transactions
102,765

 
89,097

 
13,668

 
15
 %
Average expenditure per payment processing transaction
$
68.90

 
$
48.67

 
$
20.23

 
42
 %
Average price per gallon of fuel:
 
 
 
 
 
 
 
Domestic – ($/gal)
$
2.40

 
$
1.97

 
$
0.43

 
22
 %
Australia – ($/gal)
$
3.76

 
$
3.10

 
$
0.66

 
21
 %
Account servicing revenue:
 
 
 
 
 
 
 
Average number of vehicles serviced
10,571

 
9,518

 
1,053

 
11
 %
NM - Not Meaningful
Revenues
Payment processing revenue increased $24.0 million for the first quarter of 2017 as compared to the same period in the prior year, resulting from higher domestic average fuel prices and payment processing volumes. Increased volumes were due to organic growth and the acquisition of EFS. These favorable impacts were partly offset by a slight decrease in our interchange rate due to the acquisition of EFS.
Account servicing revenue increased by $10.6 million for the first quarter of 2017 as compared to the same period in the prior year, resulting from the EFS acquisition and increases in fees to certain customers as part of our price modernization efforts over the course of the prior year.
Other revenue increased by $20.7 million for the first quarter of 2017 as compared to the same period in the prior year, resulting primarily from EFS transaction processing revenue.
    

28


Finance fee revenue is comprised of the following components:
(in thousands)
Three Months Ended March 31,
 
Increase (Decrease)
 
2017
 
2016
 
Amount
 
Percent
Late fee revenue
$
29,463

 
$
17,588

 
$
11,875

 
68
 %
Factoring fee revenue
5,757

 
4,163

 
1,594

 
38

Cardholder interest income
76

 
159

 
(83
)
 
(52
)
Other finance fee revenue
1,133

 
28

 
1,105

 
NM

Finance fee revenue
$
36,429

 
$
21,938

 
$
14,491

 
66
 %
NM - Not Meaningful
Late fee revenue is primarily fees charged for receivables not paid within the terms of the customer agreement based upon the outstanding customer receivable balance. Late fee revenue is earned when a customer’s receivable balance becomes delinquent and is calculated using the greater of a minimum charge or a stated late fee rate multiplied by the outstanding balance that is subject to a late fee charge. Changes in the absolute amount of such outstanding balances can be attributed to (i) changes in fuel prices; (ii) customer specific transaction volume; and (iii) customer specific delinquencies. Late fee revenue can also be impacted by (i) changes in late fee rates and (ii) increases or decreases in the customer overdue balances. Late fee rates are determined and set based primarily on the risk associated with our customers, coupled with a strategic view of standard rates within our industry. Periodically, we assess the market rates associated within our industry to determine what late fee rates are appropriate. We consider factors such as the Company’s overall financial model and strategic plan, the cost to our business from customers failing to pay timely and the impact such late payments have on our financial results. These assessments are typically conducted at least annually but may occur more often depending on macro-economic factors.
Late fees increased $11.9 million for the first quarter of 2017 as compared to the same period in the prior year. The increase in late fees was comprised of $7.0 million due to rate increases and $4.9 million due to the change in overdue balances resulting primarily from higher domestic average fuel prices and increased payment processing volumes. During the first quarter of 2017, monthly late fee rates ranged from 0 to 6.99 percent with a minimum of $75, as compared to a monthly range of 0 to 2.99 percent with a minimum of $75 during the same period of the prior year. The weighted average rate was 4.5 percent and 3.5 percent for the first quarter of 2017 and 2016, respectively.
Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time to pay, placing a customer on a payment plan or granting waivers of late fees. As of March 31, 2017 and 2016, there were no material concessions granted to customers.
The primary source of factoring fee revenue is calculated as a negotiated percentage fee of the receivable balance that we purchase. A secondary source of factoring fee revenue is a flat rate service fee to our customers that request a non-contractual same day funding of the receivable balance. Factoring fee revenue increased $1.6 million for the first quarter of 2017 as compared to the same period in the prior year, due to higher relative receivable balances purchased resulting from increased customer demand for our services.
Operating Expenses
The following table compares selected expense line items within Fleet Solutions:
 
Three Months Ended March 31,
 
Increase (Decrease)
(in thousands)
2017
 
2016
 
Amount
 
Percent
Expenses
 
 
 
 
 
 
 
Salary and other personnel
$
60,038

 
$
44,042

 
$
15,996

 
36
 %
Restructuring
$
484

 
$
1,589

 
$
(1,105
)
 
(70
)%
Service fees
$
18,522

 
$
17,124

 
$
1,398

 
8
 %
Provision for credit losses
$
12,582

 
$
4,041

 
$
8,541

 
211
 %
Technology leasing and support
$
8,835

 
$
6,564

 
$
2,271

 
35
 %
Depreciation and amortization
$
36,068

 
$
13,608

 
$
22,460

 
165
 %
Operating interest expense
$
1,324

 
$
422

 
$
902

 
214
 %
Other expenses
$
18,048

 
$
13,071

 
$
4,977

 
38
 %

29


Salary and other personnel expenses increased $16.0 million for the first quarter of 2017 as compared to the same period in the prior year. The increase is primarily due to incremental headcount to support business growth, including resources assumed as part of the EFS acquisition and, to a lesser extent, increases in both variable compensation plans and benefit costs.
Restructuring costs for the first quarter of 2017 decreased $1.1 million as compared to the same period in the prior year, primarily due to the wind-down of prior year initiatives related to our Esso portfolio in Europe. Restructuring costs for the three months ended March 31, 2017 relate primarily to a restructuring program associated with our EFS acquisition and consists of employee costs and office closure costs, which are expected to be paid through 2017.
Service fees increased by $1.4 million for the first quarter of 2017 as compared to the same period in the prior year, resulting from incremental payment processing volumes, due in part to the acquisition of EFS.
Provision for credit losses increased by $8.5 million for the first quarter of 2017 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 17.8 basis points of fuel expenditures for the first quarter of 2017, compared to 9.3 basis points of fuel expenditures for the same period last year. The increase in credit loss was due to higher incidences of fraud and a slight deterioration in accounts receivable, the increase in average domestic fuel prices and the acquisition of EFS. We 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 $2.3 million for the first quarter of 2017 as compared to the same period in the prior year. This increase is primarily due to additional software maintenance expense, resulting from incremental technological investments in our business and the EFS acquisition.
Depreciation and amortization increased by $22.5 million for the first quarter of 2017 as compared to the same period in the prior year, primarily due to amortization of intangibles acquired in the EFS business combination. Refer to Part I – Item 1 – Note 3, Business Acquisition of this report for more information. Following the acquisition of EFS, the Company evaluated the estimated useful life of our existing over-the-road payment processing technology. As a result of this analysis, we accelerated amortization related to this technology during the third quarter of 2016, resulting in incremental amortization during the first quarter of 2017 as compared to the same period in the prior year. We will amortize the remaining $5.8 million of remaining net book value associated with this technology during the second quarter of 2017.
Operating interest expense increased $0.9 million for the first quarter of 2017 as compared to the same period in the prior year, due primarily to higher interest rates paid on recently issued certificates of deposit, which replaced previously held non-interest bearing deposits following the expiration of an agreement with a deposit partner during the fourth quarter of 2016. Additionally, higher fuel prices, EFS balances, and volume increases contributed to the increase in operating interest expense.
Other expenses increased by $5.0 million for the first quarter of 2017 as compared to the same period in the prior year, primarily due to the acquisition of EFS.
Fuel Price Derivatives
In the past, we owned fuel price derivative instruments that we 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. Our results for the first quarter of 2016 were favorably impacted by approximately $0.7 million in net realized and unrealized gains on these derivative instruments. Subsequent to the first quarter of 2016, we were no longer hedged for changes in fuel prices. Management will continue to monitor the fuel price market and evaluate our alternatives as it relates to hedging fuel price risk.
Foreign Currency Transactions
The fluctuations in exchange rates resulted in a gain of $1.3 million for the first quarter of 2017 compared to a gain of $12.5 million for the first quarter of 2016. In the first quarter of 2017, the U.S. dollar slightly weakened relative the Euro and Australian dollar, as compared to the first quarter of 2016 during which the U.S. dollar experienced a significantly more pronounced decline against each of those foreign currencies. The year-over-year decrease in foreign currency gains was also impacted by the absence of gains on intercompany loans recognized during the first quarter of 2016.

30


Our foreign currency exchange exposure is primarily related to the re-measurement of our cash, receivable and payable balances, including intercompany transactions, that are denominated in foreign currencies. Management will continue to monitor foreign exchanges rates and the impact to the operations of the business.
Financing Interest Expense
Financing interest expense increased $0.5 million for the first quarter of 2017 as compared to the same period in the prior year, primarily due to higher relative borrowings under our 2016 Credit Agreement and an increase in our effective interest rate on outstanding borrowings. These unfavorable impacts were almost entirely offset by the absence of $10.5 million dollars in ticking fees, which we incurred during the first quarter of 2016 associated with the commitment of funds to finance the acquisition of EFS.
Travel and Corporate Solutions
The following table reflects comparative operating results and key operating statistics within Travel and Corporate Solutions:
 
Three Months Ended March 31,
 
Increase (Decrease)
(in thousands, except payment solutions purchase volume in millions)
2017
 
2016
 
Amount
 
Percent
Revenues
 
 
 
 
 
 
 
Payment processing revenue
$
34,875

 
$
34,626

 
$
249

 
1
 %
Account servicing revenue
155

 
272

 
(117
)
 
(43
)
Finance fee revenue
223

 
75

 
148

 
197

Other revenue
12,460

 
10,169

 
2,291

 
23

Total revenues
47,713

 
45,142

 
2,571

 
6

Total operating expenses
26,353

 
25,416

 
937

 
4

Operating income
21,360

 
19,726

 
1,634

 
8

Financing interest expense
(1,653
)
 

 
(1,653
)
 
NM

Net foreign currency gain
7,197

 
3,240

 
3,957

 
122

Net unrealized gains on interest rate swap agreements
92

 

 
92

 
NM

Income before income taxes
$
26,996

 
$
22,966

 
$
4,030

 
18
 %
 
 
 
 
 
 
 
 
Key operating statistics
 
 
 
 
 
 
 
Payment processing revenue:
 
 
 
 
 
 
 
Payment solutions purchase volume
$
6,600

 
$
4,879

 
$
1,721

 
35
 %
NM - Not Meaningful
Revenues
Payment processing revenue increased $0.2 million for the first quarter of 2017 as compared to the same period in the prior year, primarily due to an organic increase in corporate charge card purchase volume from our WEX travel product and the acquisition of EFS. These favorable impacts were partly offset by a decrease in our net interchange rate primarily resulting from contract renegotiations with a large travel customer which went into effect in January 2017.
Other revenue increased $2.3 million for the first quarter of 2017 as compared to the same period in the prior year, primarily due to higher international settlement fees.
Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time to pay, placing a customer on a payment plan or granting waivers of late fees. As of and for the three months ended March 31, 2017, customer balances with such concessions totaled $14.2 million and resulted in approximately $0.6 million in waived late fees. There were no material concessions granted during the three months ended March 31, 2016.





31


Operating Expenses
The following table compares selected expense line items within Travel and Corporate Solutions:
 
Three Months Ended March 31,
 
Increase (Decrease)
(in thousands)
2017
 
2016
 
Amount
 
Percent
Expenses
 
 
 
 
 
 
 
Salary and other personnel
$
6,214

 
$
5,064

 
$
1,150

 
23
 %
Service fees
$
12,319

 
$
14,918

 
$
(2,599
)
 
(17
)%
Technology leasing and support & occupancy and equipment
$
2,765

 
$
3,563

 
$
(798
)
 
(22
)%
Depreciation and amortization
$
3,038

 
$
616