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EX-10.1 - EXHIBIT 10.1 - WEX Inc.exhibit101secondquarter10-q.htm



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 June 30, 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

   awexlogo9302016a01.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 August 1, 2017 was 42,904,381.



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 on March 6, 2017 and Item 1A. of Part II of the quarterly report on Form 10-Q filed on May 8, 2017, both filed with the Securities and Exchange Commission. 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, an impairment charge, debt issuance cost 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 2017-09
Accounting Standards Update No. 2017-09 Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
Australian Securitization Subsidiary
Southern Cross WEX 2015–1 Trust, a bankruptcy-remote subsidiary consolidated by the Company
Average expenditure per payment processing transaction
Average total dollars of spend in a funded fuel transaction
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
NYSE
New York Stock Exchange
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
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) 
 
June 30,
2017
 
December 31,
2016
Assets
 
 
 
Cash and cash equivalents
$
219,001

 
$
190,930

Accounts receivable (net of allowances of $26,758 in 2017 and $20,092 in 2016)
2,455,015

 
2,054,701

Securitized accounts receivable, restricted
121,964

 
97,417

Income taxes receivable
9,038

 
10,765

Available-for-sale securities
23,653

 
23,525

Property, equipment and capitalized software (net of accumulated depreciation of $251,074 in 2017 and $228,336 in 2016)
177,399

 
167,278

Deferred income taxes, net
8,146

 
6,934

Goodwill
1,808,192

 
1,838,441

Other intangible assets (net of accumulated amortization of $334,394 in 2017 and $254,142 in 2016)
1,192,093

 
1,265,468

Other assets
329,250

 
341,638

Total assets
$
6,343,751

 
$
5,997,097

Liabilities and Stockholders’ Equity
 
 
 
Accounts payable
$
727,587

 
$
617,118

Accrued expenses
330,835

 
331,579

Deposits
1,122,671

 
1,118,823

Securitized debt
104,525

 
84,323

Revolving line of credit facilities and term loans, net
1,740,201

 
1,599,291

Deferred income taxes, net
134,594

 
152,906

Notes outstanding, net
395,902

 
395,534

Other debt
149,063

 
125,755

Amounts due under tax receivable agreement
41,403

 
47,302

Other liabilities
17,329

 
18,719

Total liabilities
4,764,110

 
4,491,350

Commitments and contingencies (Note 11)

 

Stockholders’ Equity
 
 
 
Common stock $0.01 par value; 175,000 shares authorized; 47,343 shares issued in 2017 and 47,173 in 2016; 42,915 shares outstanding in 2017 and 42,841 in 2016
473

 
472

Additional paid-in capital
552,733

 
547,627

Non-controlling interest
8,324

 
8,558

Retained earnings
1,291,022

 
1,244,271

Accumulated other comprehensive loss
(100,569
)
 
(122,839
)
Treasury stock at cost; 4,428 shares in 2017 and 2016
(172,342
)
 
(172,342
)
Total stockholders’ equity
1,579,641

 
1,505,747

Total liabilities and stockholders’ equity
$
6,343,751

 
$
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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Payment processing revenue
$
141,354

 
$
126,080

 
$
277,732

 
$
237,136

Account servicing revenue
65,677

 
47,433

 
127,216

 
91,955

Finance fee revenue
42,085

 
32,704

 
85,457

 
56,210

Other revenue
54,768

 
27,719

 
104,836

 
54,563

Total revenues
303,884

 
233,936

 
595,241

 
439,864

Expenses
 
 
 
 
 
 
 
Salary and other personnel
85,811

 
66,662

 
169,396

 
130,072

Restructuring
1,676

 
3,506

 
2,160

 
5,095

Service fees
37,351

 
45,924

 
74,101

 
82,683

Provision for credit losses
16,082

 
6,443

 
28,313

 
10,360

Technology leasing and support
14,101

 
10,932

 
26,617

 
22,008

Occupancy and equipment
6,459

 
6,113

 
12,826

 
11,825

Depreciation and amortization
49,961

 
23,109

 
99,199

 
45,373

Operating interest expense
4,464

 
1,505

 
9,312

 
2,891

Cost of hardware and equipment sold
1,098

 
665

 
2,127

 
1,570

Impairment charge
16,175

 

 
16,175

 

Other expenses
23,125

 
17,442

 
46,682

 
35,225

Total operating expenses
256,303

 
182,301

 
486,908

 
347,102

Operating income
47,581

 
51,635

 
108,333

 
92,762

Financing interest expense
(28,547
)
 
(30,418
)
 
(55,695
)
 
(51,976
)
Net foreign currency gain (loss)
10,525

 
(4,823
)
 
18,967

 
11,301

Net unrealized loss on interest rate swap agreements
(2,264
)
 

 
(699
)
 

Net realized and unrealized gain on fuel price derivatives

 

 

 
711

Income before income taxes
27,295

 
16,394

 
70,906

 
52,798

Income taxes
10,655

 
4,482

 
25,190

 
17,665

Net income
16,640

 
11,912

 
45,716

 
35,133

Less: Net loss from non-controlling interest
(450
)
 
(655
)
 
(775
)
 
(520
)
Net earnings attributable to shareholders
$
17,090

 
$
12,567

 
$
46,491

 
$
35,653

 
 
 
 
 
 
 
 
Net earnings attributable to WEX Inc. per share:
 
 
 
 
 
 
 
Basic
$
0.40

 
$
0.32

 
$
1.08

 
$
0.92

Diluted
$
0.40

 
$
0.32

 
$
1.08

 
$
0.92

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
43,002

 
38,806

 
42,937

 
38,781

Diluted
43,060

 
38,857

 
43,090

 
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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
16,640

 
$
11,912

 
$
45,716

 
$
35,133

Changes in available-for-sale securities, net of tax expense of $60 and $63 for the three months ended June 30, 2017 and 2016 and $61 and $160 for the six months ended June 30, 2017 and 2016, respectively
106

 
107

 
109

 
271

Foreign currency translation
6,082

 
(11,479
)
 
22,702

 
(705
)
Comprehensive income
22,828


540

 
68,527

 
34,699

Less: Comprehensive gain (loss) attributable to non-controlling interest
49

 
(976
)
 
(234
)
 
(385
)
Comprehensive income attributable to WEX Inc.
$
22,779

 
$
1,516

 
$
68,761

 
$
35,084

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
7

 

 
93

 

 

 

 

 
93

Tax expense from stock option and restricted stock units

 

 
(692
)
 

 

 

 

 
(692
)
Stock issued upon vesting of restricted and deferred stock units
61

 

 

 

 

 

 

 

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

 

 
6,970

 

 

 

 

 
6,970

Changes in available-for-sale securities, net of tax expense of $160

 

 

 
271

 

 

 

 
271

Foreign currency translation

 

 

 
(840
)
 

 

 
135

 
(705
)
Net income (loss)

 

 

 

 

 
35,653

 
(520
)
 
35,133

Balance at June 30, 2016
38,814


$
431


$
181,343


$
(104,020
)
 
$
(172,342
)
 
$
1,219,287

 
$
12,052

 
$
1,136,751

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

 

 

 

 

 
260

 

 
260

Stock issued upon exercise of stock options
9

 

 
431

 

 

 

 

 
431

Stock issued upon vesting of restricted and deferred stock units
65

 
1

 
(1
)
 

 

 

 

 

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

 

 
4,676

 

 

 

 

 
4,676

Changes in available-for-sale securities, net of tax expense of $61

 

 

 
109

 

 

 

 
109

Foreign currency translation

 

 

 
22,161

 

 

 
541

 
22,702

Net income (loss)

 

 

 

 

 
46,491

 
(775
)
 
45,716

Balance at June 30, 2017
42,915

 
$
473

 
$
552,733

 
$
(100,569
)
 
$
(172,342
)
 
$
1,291,022

 
$
8,324

 
$
1,579,641

1Impact of modified retrospective transition as part of the Company's ASU 2016-09 adoption 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)
 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities
 
 
 
Net income
$
45,716

 
$
35,133

Adjustments to reconcile net income to net cash (used for) provided by operating activities:
 
 
 
Net unrealized loss (gain)
4,457

 
(14,745
)
Stock-based compensation
13,871

 
9,113

Depreciation and amortization
99,199

 
45,373

Debt issuance cost amortization
4,163

 
1,543

Provision for deferred taxes
14,924

 
15,251

Provision for credit losses
28,313

 
10,360

Impairment charge
16,175

 

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(423,854
)
 
(383,831
)
Other assets
(3,350
)
 
12,166

Accounts payable
111,251

 
166,850

Accrued expenses
3,322

 
64,026

Income taxes
1,458

 
(15,059
)
Other liabilities
(1,665
)
 
2,408

Amounts due under tax receivable agreement
(5,899
)
 
(5,364
)
Net cash used for operating activities
(91,919
)
 
(56,776
)
Cash flows from investing activities
 
 
 
Purchases of property, equipment and capitalized software
(37,480
)
 
(35,742
)
Purchases of available-for-sale securities
(230
)
 
(5,596
)
Maturities of available-for-sale securities
272

 
183

Net cash used for investing activities
(37,438
)
 
(41,155
)
Cash flows from financing activities
 
 
 
Repurchase of share-based awards to satisfy tax withholdings
(9,194
)
 
(2,143
)
Proceeds from stock option exercises
431

 
93

Net change in deposits
2,631

 
66,994

Net activity on other debt
22,980

 
10,845

Net borrowings on revolving line of credit facility
148,223

 
76,754

Repayments on term loans
(17,375
)
 
(13,750
)
Net change in securitized debt
13,662

 
(10,154
)
Net cash provided by financing activities
161,358

 
128,639

Effect of exchange rate changes on cash and cash equivalents
(3,930
)
 
7,150

Net change in cash and cash equivalents
28,071

 
37,858

Cash and cash equivalents, beginning of period
190,930

 
279,989

Cash and cash equivalents, end of period
$
219,001

 
$
317,847

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 and six months ended June 30, 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.
2.
New Accounting Standards
Adopted During the Six Months Ended June 30, 2017    
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 $260 cumulative effect adjustment to Retained earnings. For the six months ended June 30, 2017, the Company recognized approximately $1,600 of excess tax benefits within our income tax provision, which would have been recognized in additional paid-in-capital under previous guidance. For the three months ended June 30, 2017, the amount of excess tax benefits recognized was not material. The Company has elected to prospectively classify these excess tax benefits as cash flows from operating activities effective January 1, 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.
Not Yet Adopted
In May 2017, the FASB issued ASU 2017-09, which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. Under the new guidance, an entity will not apply modification accounting to a share-based payment award if there is no change to the award’s fair value, vesting conditions and classification as an equity or liability instrument. The guidance is effective prospectively for all companies for annual periods beginning on or after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact the standard will have 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.
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.

10

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

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 likely 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 $20,000 for the year ended December 31, 2016.
On July 9, 2015, the FASB voted to defer the effective date of ASU 2014-09 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 NYSE. 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 recorded adjustments to the assets acquired and liabilities assumed throughout the one year measurement period. The Company 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 estimates that approximately $557,000 of the goodwill recognized in this business combination will be deductible for income tax purposes.
    

    

11

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

The following represents the components and final allocation of the purchase price:
 
As Reported
December 31, 2016
 
Measurement Period Adjustments
 
As Reported
June 30, 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

 
6,352

 
41,344

Other assets

 
739

 
739

Accounts payable
(153,777
)
 
248

 
(153,529
)
Accrued expenses
(128,267
)
 
9,361

 
(118,906
)
Deferred income tax liabilities
(91,194
)
 
28,071

 
(63,123
)
Recorded goodwill (a)
$
728,890

 
$
(43,472
)
 
$
685,418

(a)Approximately $1,235,331 in goodwill and other intangible assets recorded from this business combination were allocated to our Fleet Solutions segment; the remaining $337,307 was 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 June 30, 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
$
42,688

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 the Company's 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, $1,829 and $6,594 in transaction costs, which are directly attributable to the acquisition, have been excluded from pro forma results for the three and six months ended June 30, 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 $45,246 and $88,621 and net loss before taxes of approximately $8,809 and $20,012 for the three and six months ended June 30, 2017, respectively, to the Company's unaudited condensed consolidated statement of income.
    

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 June 30, 2016
 
Six Months Ended June 30, 2016
Total revenues
$
270,987

 
$
511,284

Net earnings attributable to shareholders
$
2,279

 
$
20,612

Net income attributable to shareholders per share:
 
 
 
Basic
$
0.05

 
$
0.48

Diluted
$
0.05

 
$
0.48

4.
Reserves for Accounts Receivable
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 $8,400 and $3,400 in receivables with revolving credit balances as of June 30, 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 June 30, 2017, approximately 96 percent of the outstanding balance of total trade accounts receivable was current and approximately 97 percent of the outstanding balance of total trade accounts receivable was less than 60 days past due. As of June 30, 2016, approximately 92 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. One customer represented 11 percent of the outstanding receivables balance as of both June 30, 2017 and December 31, 2016.
The following table presents changes in reserves for accounts receivable:
 
Six Months Ended June 30,
  
2017
 
2016
Balance, beginning of year
$
20,092

 
$
13,832

Provision for credit losses
28,313

 
10,360

Charges to other accounts
7,779

 

Charge-offs
(33,050
)
 
(13,681
)
Recoveries of amounts previously charged-off
3,349

 
2,476

Currency translation
275

 
77

Balance, end of period
$
26,758

 
$
13,064

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:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net earnings attributable to shareholders
$
17,090

 
$
12,567

 
$
46,491

 
$
35,653

 
 
 
 
 
 
 
 
Weighted average common shares outstanding – Basic
43,002

 
38,806

 
42,937

 
38,781

Dilutive impact of share-based compensation awards
58

 
51

 
153

 
69

Weighted average common shares outstanding – Diluted
43,060

 
38,857

 
43,090

 
38,850

For the three and six months ended June 30, 2017 and June 30, 2016, an immaterial number of outstanding share-based awards 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 the Company's 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
December 31, 2020
December 31, 2020
December 31, 2018
Fixed interest rate
1.108%
1.125%
0.896%
See Note 9, Fair Value for more information regarding the valuation of the Company's 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. The Company will continue to monitor its 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
 
June 30,
 
2017
 
2016
Australian dollar
A$
15,000

 
A$

Norwegian Krone
NOK
28,000

 
NOK


The amount of gains and losses associated with these foreign currency swaps were not material for the three and six months ended June 30, 2017 and June 30, 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 asset derivatives recorded in the unaudited condensed consolidated balance sheets:
Derivatives Not Designated as Hedging Instruments
 
Balance Sheet Location
 
June 30, 2017
 
December 31, 2016
Interest rate swaps
 
Other assets
 
$
12,209

 
$
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 unaudited condensed consolidated statements of income. The following table presents information on the amounts of derivative gains and losses 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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Commodity contracts
 
Net realized and unrealized gain on fuel price derivatives
 
$

 
$

 
$

 
$
711

Interest rate swap agreements - unrealized portion
 
Net unrealized loss on interest rate swap agreements
 
$
(2,264
)
 
$

 
$
(699
)
 
$

Interest rate swap agreements - realized portion
 
Financing interest expense
 
$
(77
)
 
$

 
$
(620
)
 
$

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

15

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

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.
As of June 30, 2017, the Company had $154,805 of borrowings against its $470,000 secured revolving credit facility, or approximately $315,000 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 totaled $1,620,250 at June 30, 2017. As of June 30, 2017 and December 31, 2016, amounts outstanding under the 2016 Credit Agreement bore a weighted average effective interest rate of 4.8 percent and 4.2 percent, respectively.
As of both June 30, 2017 and December 31, 2016, the Company has posted approximately $13,000 in letters of credit as collateral for lease agreements and virtual card and fuel payment processing activity at its 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% (3.25% at June 30, 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 June 30, 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% (2.25% at June 30, 2017) with respect to the tranche A term loan facility and the revolving credit facility or 2.25% to 2.50% (2.50% at June 30, 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 its 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% (0.50% at June 30, 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%.
On July 3, 2017, the Company repriced the secured term loans under the 2016 Credit Agreement. See Note 16, Subsequent Event, for further discussion.
Debt Covenants
As more fully described in the Company's 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 its 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 June 30, 2017, the Company was in compliance with all material covenants of its 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 February 1, 2023, with interest 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. The Company's federal funds lines of credit were $250,000 as of June 30, 2017 and December 31, 2016, with no outstanding balance as of June 30, 2017.
WEX Brazil Debt
WEX Brazil had debt of approximately $14,063 and $30,755 as of June 30, 2017 and December 31, 2016, respectively. This was composed of credit facilities and loan arrangements related to its accounts receivable, with various maturity dates. The

16

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

average interest rate was 22.9 percent and 19.7 percent as of June 30, 2017 and December 31, 2016, respectively. This debt is recorded in Other debt on the Company’s unaudited condensed consolidated balance sheets for the periods presented. 
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 agreements were amended during the second quarter of 2017 to increase the funding capacity by $40,000 to $135,000. Associated 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 $135,000 and $95,000 at June 30, 2017 and December 31, 2016 respectively, and was secured by an interest in the underlying customer receivables. The balance will fluctuate on a daily basis based on customer funding needs. The balance will mature in amounts of $85,000 and $50,000 on May 30, 2018 and December 31, 2021, respectively. This debt is recorded in Other debt on the Company’s unaudited condensed consolidated balance sheets for the periods presented. 
Australian Securitization Facility
During the second quarter of 2017, the Company extended an existing securitized debt agreement with the Bank of Tokyo-Mitsubishi UFJ, Ltd through April 2018. 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 2.70 percent and 2.65 percent as of June 30, 2017 and December 31, 2016, respectively. The Company had $85,127 and $78,592 of securitized debt under this facility as of June 30, 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 0.35 percent and 0.95 percent as of June 30, 2017 and December 31, 2016, respectively. The Company had $19,398 and $5,731 of securitized debt under this facility as of June 30, 2017 and December 31, 2016, respectively.
Debt Issuance Costs
The following table presents the Company's net debt issuance costs:
 
June 30, 2017
 
December 31, 2016
Revolving line of credit facility and term loans
$
34,854

 
$
38,334

Notes outstanding
$
4,098

 
$
4,466

8.
Off-Balance Sheet Arrangements
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

17

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

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.
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 provided by operating activities. The Company sold approximately $171,000 and $224,000 of receivables under this arrangement during three and six months ended June 30, 2017, respectively. Proceeds received are recorded net of applicable expenses, interest and commissions. This resulted in a loss on factoring of $1,250 and $1,450 for the three and six months ended June 30, 2017, respectively, which was recorded in Other expenses in the unaudited condensed consolidated statement of income. As of June 30, 2017, the Company had associated factoring receivables of approximately $26,800, of which less than $100 were in excess of the established credit limit. There were no charge-backs on balances in excess of the credit limit during the three and six months ended June 30, 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 $8,300 of receivables during the three months ended June 30, 2017 and $16,300 receivables during the six months ended June 30, 2017. This resulted in a loss on factoring of $400 for the three months ended June 30, 2017 and a loss on factoring of $800 for the six months ended June 30, 2017, 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 provided by 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 the three or six months ended June 30, 2017 or June 30, 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
June 30, 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
22,059

 
21,705

Available-for-sale securities
 
$
23,653

 
$
23,525

Executive deferred compensation plan trust (a)
1
$
6,271

 
$
5,673

Interest rate swaps (a)
2
$
12,209

 
$
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 inputs are classified as 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 valued using Level 2 inputs.
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 Swaps
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 swaps and the implied floating payments using the current LIBOR curve, which are Level 2 inputs of 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 June 30, 2017 and December 31, 2016, and a fair value of $403,000 and $390,000 as of June 30, 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 both June 30, 2017 and December 31, 2016, the carrying value of the 2016 Credit Facility approximated its fair value.
10.
Income Taxes
The Company's effective tax rate was 39.0 percent for the second quarter of 2017 as compared to 27.3 percent for the second quarter of 2016. The increase in our effective tax rate was primarily due to adjustments relating to certain European tax returns in the second quarter of 2017 and the absence of several discrete tax benefits recorded during the second quarter of 2016.
The Company's effective tax rate was 35.5 percent for the first half of 2017 as compared to 33.5 percent for the first half of 2016. The increase in our effective tax rate was primarily due to adjustments relating to certain European tax returns in the first half of 2017 and the absence of several discrete tax benefits recorded during the first half of 2016. These unfavorable factors were partly offset by the $1,600 tax effect of excess tax benefits related to share-based payments recorded in the income statement in the first half of 2017. See Note 2, New Accounting Standards for more information.

19

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

Undistributed earnings of certain foreign subsidiaries of the Company amounted to $36,184 and $25,824 at June 30, 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.
11.
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. 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. On May 10, 2017, the parties agreed to a settlement in principle to resolve the class claims, contingent on court approval. The expected settlement amount 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 June 30, 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.
12.
Stock-Based Compensation
The fair value of restricted stock units, deferred stock units, performance-based restricted stock units, performance-based stock options and service-based stock options awarded during the three and six months ended June 30, 2017 totaled $17,186 and $45,341, respectively, as compared to $1,391 and $25,927 for the three and six months ended June 30, 2016.
Stock Options
Performance-Based Stock Options
In May 2017, the Company granted performance-based stock options with a contractual term of ten years to members of senior management. The options contain a market condition that begins operating on the third anniversary of the grant date, requiring the closing price of the Company's stock to meet or exceed certain price thresholds for twenty consecutive trading days (“Stock Price Hurdle”) in order for shares to vest. In addition, award recipients must be continually employed from the grant date until such date that the Stock Price Hurdle is satisfied in order for shares to vest. To the extent both the service condition and the Stock Price Hurdle are not met by the end of a defined measurement period, these performance-based stock options will be canceled.
The grant date fair value of these performance options was estimated on the date of the grant using a Monte-Carlo simulation model used to simulate a distribution of future stock price paths based on historical volatility levels.
    

20

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

The table below summarizes the assumptions used to calculate the fair value:
Exercise price
$
99.69

Expected stock price volatility
31.14
%
Risk-free interest rate
2.18
%
Weighted average fair value of performance options granted
$
28.69

The Company will expense these performance-based stock options on a graded basis over the derived service period of approximately three years regardless of whether the market condition is satisfied. Upon satisfaction of a Stock Price Hurdle, any unrecognized compensation expense for that specific tranche will be accelerated.
Service-Based Stock Options
On March 20, 2017, the Company approved the grant of stock options to certain officers and employees under the 2010 Equity Incentive Plan. Stock options granted generally become exercisable over three years (with approximately 33 percent of the total grant vesting each year on the anniversary of the grant date) and expire 10 years from the date of grant.
The fair value of each option award is estimated on the grant date using a Black-Scholes-Merton option-pricing model and the following assumptions:
 
March 20, 2017
Weighted average expected life (in years)
6.0

Weighted average exercise price
$
104.95

Weighted average volatility
30.67
%
Weighted average risk-free rate
2.13
%
Weighted average fair value
$
35.58

13.
Impairment and Restructuring Activities

Impairment

During the three months ended June 30, 2017, the Company executed a vendor contract amendment based on a strategic decision to in-source certain previously outsourced technology functions. As a result of this action, the Company determined that $16,175 of prepaid services had no future benefit and were therefore written off within the Fleet Solutions segment.

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 $21,050 as of June 30, 2017.

The balances under the 2015 Restructuring Initiative and the Acquisition Integration Restructuring Initiative are expected to be paid through 2018. Amounts under the 2016 Restructuring Initiative are expected to be paid through 2017. Based on current

21

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

plans, which are subject to change, the Company expects to incur an additional $450 in restructuring costs related to the 2015 Restructuring Initiative and $200 in restructuring costs related to the 2016 Restructuring Initiative.
The following table presents the Company's 2015 Restructuring Initiative liability:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Balance, beginning of period
$
5,231

 
$
8,506

 
$
5,231

 
$
7,249

Restructuring charges
1,223

 

 
1,533

 
1,589

Cash paid
(2,488
)
 
(1,478
)
 
(2,836
)
 
(2,125
)
Liability transfer to 2016 Restructuring Initiative
(1,158
)
 

 
(1,158
)
 

Impact of foreign currency translation
200

 
57

 
238

 
372

Balance, end of period
$
3,008

 
$
7,085

 
$
3,008

 
$
7,085

The following table presents the Company’s 2016 Restructuring Initiative liability:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Balance, beginning of period
$
3,202

 
$

 
$
3,662

 
$

Restructuring charges
219

 
3,506

 
219

 
3,506

Reserve release

 

 
(533
)
 

Cash paid
(487
)
 

 
(487
)
 

Liability transfer from 2015 Restructuring Initiative
1,158

 

 
1,158

 

Impact of foreign currency translation
250

 
(18
)
 
323

 
(18
)
Balance, end of period
$
4,342

 
$
3,488

 
$
4,342

 
$
3,488

The following table presents the Company’s Acquisition Integration Restructuring Initiative liability:
 
Three Months Ended
June 30, 2017
 
Six Months Ended
June 30, 2017
Balance, beginning of period
$
2,139

 
$
1,764

Restructuring charges
234

 
941

Cash paid
(889
)
 
(1,479
)
Other
(151
)
 
107

Balance, end of period
$
1,333

 
$
1,333

The following table presents the Company's total restructuring liability:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Balance, beginning of period
$
10,572

 
$
8,506

 
$
10,657

 
$
7,249

Restructuring charges
1,676

 
3,506

 
2,693

 
5,095

Reserve release

 

 
(533
)
 

Cash paid
(3,864
)
 
(1,478
)
 
(4,802
)
 
(2,125
)
Other
(151
)
 

 
107

 

Impact of foreign currency translation
450

 
39

 
561

 
354

Balance, end of period
$
8,683

 
$
10,573

 
$
8,683

 
$
10,573

14.
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

22

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

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 pre-tax adjusted income 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, including ticking fees incurred on the commitment of funds to finance the acquisition of EFS and acquisition-related intangible amortization, stock-based compensation and restructuring and other costs. In addition, for the second quarter of 2017, we have excluded an impairment charge related to the insourcing of certain technology functions from a third party.
Beginning in the third quarter of 2016, pre-tax adjusted income excluded debt issuance cost amortization. For comparative purposes, pre-tax adjusted income for the prior periods has been adjusted to reflect the exclusion of this item.    
The following tables present the Company’s reportable segment results on an pre-tax adjusted income basis:
 
Fleet Solutions
 
Travel and Corporate Solutions
 
Health and Employee Benefit Solutions
 
Total
Three Months Ended June 30, 2017
 
 
 
 
 
 
 
Payment processing revenue
$
87,678

 
$
40,276

 
$
13,400

 
$
141,354

Account servicing revenue
41,311

 
167

 
24,199

 
65,677

Finance fee revenue
36,552

 
159

 
5,374

 
42,085

Other revenue
34,763

 
14,398

 
5,607

 
54,768

Total revenues
$
200,304

 
$
55,000

 
$
48,580

 
$
303,884

 
 
 
 
 
 
 
 
Operating interest expense
$
2,071

 
$
2,073

 
$
320

 
$
4,464

Depreciation and amortization
$
36,370

 
$
3,222

 
$
10,369

 
$
49,961

Pre-tax adjusted income
$
54,596

 
$
25,501

 
$
5,486

 
$
85,583

 
 
 
 
 
 
 
 
Three Months Ended June 30, 2016
 
 
 
 
 
 
 
Payment processing revenue
$
70,711

 
$
43,194

 
$
12,175

 
$
126,080

Account servicing revenue
27,548

 
337

 
19,548

 
47,433

Finance fee revenue
30,674

 
145

 
1,885

 
32,704

Other revenue
15,027

 
9,660

 
3,032

 
27,719

Total revenues
$
143,960

 
$
53,336

 
$
36,640

 
$
233,936

 
 
 
 
 
 
 
 
Operating interest expense
$
379

 
$
611

 
$
515

 
$
1,505

Depreciation and amortization
$
14,147

 
$
761

 
$
8,201

 
$
23,109

Pre-tax adjusted income
$
38,267

 
$
23,200

 
$
5,631

 
$
67,098


23

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

 
Fleet Solutions
 
Travel and Corporate Solutions
 
Health and Employee Benefit Solutions
 
Total
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
Payment processing revenue
$
173,940

 
$
75,151

 
$
28,641

 
$
277,732

Account servicing revenue
77,380

 
322

 
49,514

 
127,216

Finance fee revenue
72,981

 
382

 
12,094

 
85,457

Other revenue
66,826

 
26,858

 
11,152

 
104,836

Total revenues
$
391,127

 
$
102,713

 
$
101,401

 
$
595,241

 
 
 
 
 
 
 
 
Operating interest expense
$
3,395

 
$
3,639

 
$
2,278

 
$
9,312

Depreciation and amortization
$
72,438

 
$
6,260

 
$
20,501

 
$
99,199

Pre-tax adjusted income
$
105,828

 
$
47,909

 
$
15,722

 
$
169,459

 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
Payment processing revenue
$
133,001

 
$
77,820

 
$
26,315

 
$
237,136

Account servicing revenue
52,986

 
610

 
38,359

 
91,955

Finance fee revenue
52,611

 
221

 
3,378

 
56,210

Other revenue
26,436

 
19,827

 
8,300

 
54,563

Total revenues
$
265,034

 
$
98,478

 
$
76,352

 
$
439,864

 
 
 
 
 
 
 
 
Operating interest expense
$
801

 
$
1,163

 
$
927

 
$
2,891

Depreciation and amortization
$
27,755

 
$
1,377

 
$
16,241

 
$
45,373

Pre-tax adjusted income
$
71,378

 
$
43,348

 
$
12,208

 
$
126,934

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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Fleet Solutions
$
696

 
$
701

 
$
1,820

 
$
1,586

Travel and Corporate Solutions
315

 
96

 
361

 
187

Health and Employee Benefit Solutions
5,495

 
1,888

 
12,354

 
3,382

Total interest income
$
6,506

 
$
2,685

 
$
14,535

 
$
5,155

The following table reconciles income before income taxes to pre-tax adjusted income:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Income before income taxes
$
27,295

 
$
16,394

 
$
70,906

 
$
52,798

Unrealized loss on derivative instruments
2,264

 

 
699

 
5,007

Net foreign currency remeasurement (gain) loss
(10,525
)
 
4,823

 
(18,967
)
 
(11,301
)
Acquisition-related ticking fees

 
19,511

 

 
30,045

Acquisition-related intangible amortization
38,114

 
12,565

 
76,093

 
25,211

Other acquisition and divestiture related items
239

 
2,179

 
2,374

 
6,944

Stock-based compensation
7,414

 
4,870

 
13,871

 
9,113

Restructuring and other costs
2,398

 
5,985

 
4,145

 
7,574

Impairment charge
16,175

 

 
16,175

 

Debt issuance cost amortization
2,209

 
771

 
4,163

 
1,543

Pre-tax adjusted income
$
85,583

 
$
67,098

 
$
169,459

 
$
126,934


24

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

15.
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
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Total Capital to risk-weighted assets
$
313,045

 
13.26
%
 
$
188,931

 
8.0
%
 
$
236,164

 
10.0
%
Tier 1 Capital to average assets
$
301,818

 
12.78
%
 
$
94,466

 
4.0
%
 
$
118,082

 
5.0
%
Common equity to risk-weighted assets
$
301,818

 
13.07
%
 
$
103,879

 
4.5
%
 
$
150,047

 
6.5
%
Tier 1 Capital to risk-weighted assets
$
301,818

 
13.07
%
 
$
138,505

 
6.0
%
 
$
184,673

 
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
%
16.
Subsequent Event
Effective July 3, 2017, the Company repriced the secured term loans under the 2016 Credit Agreement. The amendment reduces the applicable interest rate margin at current borrowing levels for both LIBOR borrowings and base rate borrowings by (i) 50 basis points for the Company's tranche A term loans and (ii) 75 basis points for the Company's tranche B term loans. The consolidated leverage ratio as defined in the credit facility (i.e. consolidated funded indebtedness to consolidated EBITDA), was also modified for purposes of calculating the interest rate margin for tranche A term loans and revolving loans and determining compliance with the financial covenant by allowing the Company to exclude up to $75 million of certain corporate cash balances for purposes of determining consolidated funded indebtedness. The applicable interest rate margin for the tranche A term loans will continue to be determined based on the Company's consolidated leverage ratio, with the interest rate margin initially set at 2.75% for LIBOR borrowings, and 1.75% for base rate borrowings. The applicable interest rate margin for the tranche B term loans will no longer be determined based on the Company's consolidated leverage ratio and will instead be set at 2.75% for LIBOR borrowings, and 1.75% for base rate borrowings.
As the debt repricings are not considered substantially different, the Company applied modification accounting. We believe the majority of the approximately $3,000 of fees paid as part of the repricing will be expensed immediately as financing interest during the third quarter of 2017. Any capitalizable fees will be amortized to financing interest expense over the remaining term of the debt. No gain or loss was recognized as a result of the exchange.

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 second quarter of 2017:
Average number of vehicles serviced increased 13 percent from the second quarter of 2016 to approximately 10.9 million for the second quarter of 2017, primarily related to the acquisition of EFS.
Total fuel transactions processed increased 24 percent from the second quarter of 2016 to 130.0 million for the second quarter of 2017. Total payment processing transactions in our Fleet Solutions segment increased 15 percent to 108.1 million for the second quarter of 2017 as compared to the same quarter in 2016. Transaction processing transactions increased 104 percent to 21.9 million for the second 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 the acquisition of EFS.
Average expenditure per payment processing transaction in our Fleet Solutions segment increased 23 percent to $68.43 for the second quarter of 2017, from $55.61 for the same period in the prior year, which was primarily driven by a 19 percent increase in the average gallons per payment processing transaction, resulting from the acquisition of EFS. The average U.S. fuel price per gallon during the second quarter of 2017 was $2.41, a 5 percent increase as compared to the same period in the prior year. The average Australian fuel price per gallon

26


during the second quarter of 2017 was $3.65, an 11 percent increase as compared to the same period in the prior year.
Credit loss expense in the Fleet Solutions segment was $15.1 million during the second quarter of 2017, as compared to $5.3 million during the second quarter of 2016. The increase in credit loss was primarily related to higher incidences of fraud as compared to the prior year. Spend volume increased 41 percent in the second