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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 September 30, 2018
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

   awexlogo9302016a04.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 every Interactive Data File required to be submitted 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 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
 
  
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 October 31, 2018 was 43,103,426.



TABLE OF CONTENTS




2


Unless otherwise indicated or required by the context, the terms “we,” “us,” “our,” “WEX,” or the “Company,” in this
Quarterly Report on Form 10–Q mean WEX Inc. and all of its subsidiaries that are consolidated under Generally Accepted Accounting Principles in the United States.
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 “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project” 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;
the ability to realize anticipated synergies and cost savings;
unexpected costs, charges or expenses resulting from an acquisition;
the Companys ability to successfully acquire, integrate, operate and expand 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 the Companys third-party service providers and any resulting negative impact on our reputation, liabilities or relationships with customers or merchants;
the Companys failure to maintain or renew key commercial agreements;
failure to expand the Company’s technological capabilities and service offerings as rapidly as the Company’s competitors;
failure to successfully implement the Company’s information technology strategies and capabilities in connection with its technology outsourcing and insourcing arrangements and any resulting cost associated with that failure;
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, 2017 filed with the Securities and Exchange Commission on March 1, 2018.
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.
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, as amended.
2017 Tax Act
2017 Tax Cuts and Jobs Act
Adjusted Net Income or ANI

A non-GAAP measure that adjusts net income attributable to shareholders to exclude unrealized gains and losses on financial instruments, net foreign currency remeasurement gains and losses, acquisition-related intangible amortization, other acquisition and divestiture related items, stock-based compensation, restructuring and other costs, impairment charges, debt restructuring and debt issuance cost amortization, adjustments attributed to our non-controlling interest and certain tax related items.
Segment adjusted operating income
A non-GAAP measure that adjusts operating income to exclude specified items that the Company’s management excludes in evaluating segment performance, including acquisition and divestiture related expenses and adjustments including the amortization of purchased intangibles, impairment charges, the expense associated with stock-based compensation, restructuring and other costs, debt restructuring costs and unallocated corporate expenses.
AOC
AOC Solutions and one of its affiliate companies, 3Delta Systems, Inc.
ASU 2014–09
Accounting Standards Update No. 2014–09 Revenue from Contracts with Customers (Topic 606)
ASU 2016–01
Accounting Standards Update No. 2016–01 Financial Instruments – Overall (Subtopic 825–10): Recognition and Measurement of Financial Assets and Financial Liabilities
ASU 2016–02
Accounting Standards Update No. 2016–02 Leases (Topic 842)
ASU 2016–09
Accounting Standards Update No. 2016–09 Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
ASU 2016–13
Accounting Standards Update No. 2016–13 Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
ASU 2016–18
Accounting Standards Update No. 2016–18 Statement of Cash Flows (Topic 230): Restricted Cash
ASU 2017–07
Accounting Standards Update 2017–07 Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
ASU 2018–15
Accounting Standards Update No. 2018–15 Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350–40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
Australian Securitization Subsidiary
Southern Cross WEX 2015–1 Trust, a bankruptcy-remote subsidiary consolidated by the Company
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
European Securitization Subsidiary
Gorham Trade Finance B.V., a bankruptcy-remote subsidiary consolidated by the Company
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
GAAP
Generally Accepted Accounting Principles in the United States
GILTI
Global Intangible Low Taxed Income
ICS
Insured Cash Sweep
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
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
Total fuel transactions
Total of transaction processing and payment processing transactions of our Fleet Solutions segment
WEX Latin America
UNIK S.A., the Company’s Brazilian subsidiary, which has been subsequently branded WEX Latin America
WEX
WEX Inc.
WEX Health
Evolution1 and Benaissance, collectively

4


PART I
Item 1. Financial Statements.
WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Payment processing revenue
$
182,871

 
$
145,702

 
$
530,063

 
$
423,434

Account servicing revenue
78,748

 
71,322

 
236,168

 
198,538

Finance fee revenue
53,703

 
50,879

 
154,958

 
136,336

Other revenue
67,368

 
56,099

 
187,206

 
160,935

Total revenues
382,690

 
324,002

 
1,108,395

 
919,243

Cost of services
 
 
 
 
 
 
 
Processing costs
79,580

 
69,119

 
235,508

 
202,682

Service fees
13,818

 
19,658

 
39,847

 
57,413

Provision for credit losses
21,435

 
19,614

 
46,930

 
47,927

Operating interest
10,268

 
7,537

 
28,281

 
17,049

Depreciation and amortization
19,013

 
18,879

 
60,058

 
54,639

Total cost of services
144,114

 
134,807

 
410,624

 
379,710

General and administrative
51,799

 
51,538

 
155,720

 
133,788

Sales and marketing
54,611

 
41,585

 
168,849

 
121,726

Depreciation and amortization
29,054

 
32,349

 
88,817

 
95,788

Impairment charges
2,424

 

 
2,424

 
16,175

Operating income
100,688

 
63,723

 
281,961

 
172,056

Financing interest expense
(25,718
)
 
(25,754
)
 
(78,560
)
 
(81,449
)
Net foreign currency (loss) gain
(1,094
)
 
14,611

 
(27,438
)
 
33,578

Net unrealized gain (loss) on financial instruments
2,157

 
(150
)
 
18,371

 
(849
)
Income before income taxes
76,033

 
52,430

 
194,334

 
123,336

Income taxes
18,751

 
18,570

 
48,278

 
43,760

Net income
57,282

 
33,860

 
146,056

 
79,576

Less: Net (loss) income from non-controlling interest
(40
)
 
(111
)
 
803

 
(886
)
Net income attributable to shareholders
$
57,322

 
$
33,971

 
$
145,253

 
$
80,462

 
 
 
 
 
 
 
 
Net income attributable to WEX Inc. per share:
 
 
 
 
 
 
 
Basic
$
1.33

 
$
0.79

 
$
3.37

 
$
1.87

Diluted
$
1.31

 
$
0.79

 
$
3.33

 
$
1.87

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
43,191

 
43,014

 
43,141

 
42,963

Diluted
43,615

 
43,101

 
43,558

 
43,092

See notes to unaudited condensed consolidated financial statements.

See Note 1, Basis of Presentation, for further details on our change in presentation to a functional income statement.


5


WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
57,282

 
$
33,860

 
$
146,056

 
$
79,576

Changes in investment securities, net of tax (benefit) expense of $(10) and $53 for the three and nine months ended September 30, 2017, respectively

 
(12
)
 

 
97

Foreign currency translation
(9,250
)
 
11,042

 
(32,728
)
 
33,744

Comprehensive income
48,032


44,890

 
113,328

 
113,417

Less: Comprehensive (loss) income attributable to non-controlling interest
(109
)
 
122

 
540

 
(112
)
Comprehensive income attributable to WEX Inc.
$
48,141

 
$
44,768

 
$
112,788

 
$
113,529

See notes to unaudited condensed consolidated financial statements.

6


WEX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited) 
 
September 30,
2018
 
December 31,
2017
Assets
 
 
 
Cash and cash equivalents
$
533,361

 
$
508,072

Restricted cash
22,696

 
18,866

Accounts receivable (net of allowances of $38,103 in 2018 and $30,207 in 2017)
3,124,204

 
2,517,980

Securitized accounts receivable, restricted
142,575

 
150,235

Prepaid expenses and other current assets
85,842

 
69,413

Total current assets
3,908,678

 
3,264,566

Property, equipment and capitalized software (net of accumulated depreciation of $312,921 in 2018
and $264,928 in 2017)
166,999

 
163,908

Goodwill
1,838,909

 
1,876,132

Other intangible assets (net of accumulated amortization of $480,950 in 2018 and $392,827 in 2017)
1,069,116

 
1,154,047

Investment securities
24,088

 
23,358

Deferred income taxes, net
8,610

 
7,752

Other assets
143,342

 
253,088

Total assets
$
7,159,742

 
$
6,742,851

Liabilities and Stockholders’ Equity
 
 
 
Accounts payable
$
1,160,661

 
$
811,362

Accrued expenses
308,021

 
315,346

Short-term deposits
878,071

 
986,989

Short-term debt, net
238,864

 
397,218

Other current liabilities
26,848

 
24,795

Total current liabilities
2,612,465

 
2,535,710

Long-term debt, net
2,140,875

 
2,027,752

Long-term deposits
386,770

 
306,865

Deferred income taxes, net
140,478

 
119,283

Other liabilities
29,897

 
32,683

Total liabilities
5,310,485

 
5,022,293

Commitments and contingencies (Note 13)
 
 

Stockholders’ Equity
 
 
 
Common Stock $0.01 par value; 175,000 shares authorized; 47,528 shares issued in 2018 and 47,352 in 2017;
43,100 shares outstanding in 2018 and 43,022 in 2017
475

 
473

Additional paid-in capital
584,047

 
569,319

Retained earnings
1,550,577

 
1,404,683

Accumulated other comprehensive loss
(123,260
)
 
(90,795
)
Treasury stock at cost; 4,428 shares in 2018 and 2017
(172,342
)
 
(172,342
)
Total WEX Inc. stockholders’ equity
1,839,497

 
1,711,338

Non-controlling interest
9,760

 
9,220

Total stockholders’ equity
1,849,257

 
1,720,558

Total liabilities and stockholders’ equity
$
7,159,742

 
$
6,742,851

See notes to unaudited condensed consolidated financial statements.

See Note 1, Basis of Presentation, for further details on our change in presentation to a classified balance sheet.

7


WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
 
Common Stock Issued
 
 Additional
Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Treasury Stock
 
 Retained
Earnings
 
 Non-Controlling Interest
 
Total Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2016
47,173

 
$
472

 
$
547,627

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

 
$
8,558

 
$
1,505,747

Cumulative-effect adjustment1

 

 

 

 

 
261

 

 
261

Balance at January 1, 2017
47,173

 
$
472

 
$
547,627

 
$
(122,839
)
 
$
(172,342
)
 
$
1,244,532

 
$
8,558

 
$
1,506,008

Stock issued
176

 
1

 
594

 

 

 

 

 
595

Share repurchases for tax withholdings

 

 
(9,420
)
 

 

 

 

 
(9,420
)
Stock-based compensation expense

 

 
22,354

 

 

 

 

 
22,354

Changes in investment securities, net of tax expense of $53

 

 

 
97

 

 

 

 
97

Foreign currency translation

 

 

 
32,970

 

 

 
774

 
33,744

Net income (loss)

 

 

 

 

 
80,462

 
(886
)
 
79,576

Balance at September 30, 2017
47,349


$
473


$
561,155


$
(89,772
)
 
$
(172,342
)
 
$
1,324,994

 
$
8,446

 
$
1,632,954

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
47,352

 
$
473

 
$
569,319

 
$
(90,795
)
 
$
(172,342
)
 
$
1,404,683

 
$
9,220

 
$
1,720,558

Cumulative-effect adjustment2

 

 

 

 

 
641

 

 
641

Balance at January 1, 2018
47,352

 
$
473

 
$
569,319

 
$
(90,795
)
 
$
(172,342
)
 
$
1,405,324

 
$
9,220

 
$
1,721,199

Stock issued
176

 
2

 
2,243

 

 

 

 

 
2,245

Share repurchases for tax withholdings

 

 
(12,172
)
 

 

 

 

 
(12,172
)
Stock-based compensation expense

 

 
24,657

 

 

 

 

 
24,657

Foreign currency translation

 

 

 
(32,465
)
 

 

 
(263
)
 
(32,728
)
Net income

 

 

 

 

 
145,253

 
803

 
146,056

Balance at September 30, 2018
47,528

 
$
475

 
$
584,047

 
$
(123,260
)
 
$
(172,342
)
 
$
1,550,577

 
$
9,760

 
$
1,849,257

1 Includes the impact of modified retrospective transition as part of the Company’s adoption of ASU 2016–09 to recognize previously disallowed excess tax benefits that increased a net operating loss.
2 Includes the impact of modified retrospective adoption of Topic 606.
See notes to unaudited condensed consolidated financial statements.

8


WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities
 
 
 
Net income
$
146,056

 
$
79,576

Adjustments to reconcile net income to net cash used for operating activities:
 
 
 
Net unrealized loss
3,871

 
6,411

Stock-based compensation
24,657

 
22,354

Depreciation and amortization
148,875

 
150,428

Debt restructuring and debt issuance cost amortization
7,717

 
5,935

Provision for deferred taxes
20,127

 
29,924

Provision for credit losses
46,930

 
47,927

Impairment charge
2,424

 
16,175

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable and securitized receivables
(685,441
)
 
(595,804
)
Prepaid expenses and other current and other long-term assets
111,489

 
(17,590
)
Accounts payable
371,421

 
228,284

Accrued expenses
(5,385
)
 
(7,740
)
Income taxes
4,530

 
(2,799
)
Other current and other long-term liabilities
(8,411
)
 
1,300

Amounts due under tax receivable agreement
(5,727
)
 
(8,927
)
Net cash provided by (used for) operating activities
183,133

 
(44,546
)
Cash flows from investing activities
 
 
 
Purchases of property, equipment and capitalized software
(53,416
)
 
(56,095
)
Purchase of equity investment
(2,617
)
 

Purchases of investment securities
(1,627
)
 
(355
)
Maturities of investment securities
181

 
445

Net cash used for investing activities
(57,479
)
 
(56,005
)
Cash flows from financing activities
 
 
 
Repurchase of share-based awards to satisfy tax withholdings
(12,172
)
 
(9,420
)
Proceeds from stock option exercises
2,245

 
595

Net change in deposits
(28,485
)
 
(29,052
)
Increase in borrowed federal funds

 
28,462

Net activity on other debt
(44,201
)
 
39,554

Borrowings on revolving credit facility
1,219,693

 
3,385,316

Repayments of revolving credit facility
(1,355,931
)
 
(3,241,719
)
Borrowings on term loans
178,000

 

Repayments on term loans
(26,971
)
 
(26,063
)
Debt issuance costs
(5,310
)
 
(438
)
Net change in securitized debt
(7,826
)
 
29,874

Net cash (used for) provided by financing activities
(80,958
)
 
177,109

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(15,577
)
 
(15,247
)
Net change in cash, cash equivalents and restricted cash
29,119

 
61,311

Cash, cash equivalents and restricted cash, beginning of period (a)
526,938

 
213,342

Cash, cash equivalents and restricted cash, end of period (a)
$
556,057

 
$
274,653

 
 
 
 
Supplemental disclosure of non-cash investing and financing activities
 
 
 
Capital expenditures incurred but not paid
$
5,608

 
$
7,553

(a) The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within our unaudited condensed consolidated balance sheets to amounts reported within our unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2018 and 2017:

9


 
Nine Months Ended September 30,
 
2018
 
2017
Cash and cash equivalents at beginning of period
$
508,072

 
$
190,930

Restricted cash at beginning of period
18,866

 
22,412

Cash, cash equivalents and restricted cash at beginning of period
$
526,938

 
$
213,342

 
 
 
 
Cash and cash equivalents at end of period
$
533,361

 
$
251,118

Restricted cash at end of period
22,696

 
23,535

Cash, cash equivalents and restricted cash at end of period
$
556,057

 
$
274,653

See notes to unaudited condensed consolidated financial statements.

10


WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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. Accordingly, they do not include all information and notes required by GAAP for complete financial statements. 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, 2017, filed with the SEC on March 1, 2018. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results for any future periods or the year ending December 31, 2018.
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 foot, crossfoot or recalculate based on reported numbers due to rounding.
Changes to Prior Year Financial Statement Presentation
Effective January 1, 2018, the Company modified the presentation of the balance sheets and statements of income and changed how it allocates certain costs to our segments. These changes enhance the information reported to the users of our financial statements.
The Company now classifies assets and liabilities as current and non-current within our unaudited condensed consolidated balance sheets as defined according to the normal twelve month operating cycle of our business. Prior period amounts have been recast to conform with this presentation. As a result of this change, total assets and total liabilities have increased by approximately $3.7 million compared to what was reported within our Annual Report on Form 10–K for the year ended December 31, 2017 due to a gross-up of interest rate swap arrangements to reflect their corresponding short and long-term portions. See Note 11, Fair Value, for more information on the fair value of our interest rate swap arrangements.
Additionally, the Company has modified the presentation of certain line items in its unaudited condensed consolidated statements of income. Under the new presentation, costs of services are segregated from other operating expenses. Operating expenses have been reclassified into functional categories in order to provide additional detail into the underlying drivers of changes in operating expenses and align presentation with industry practice. The revised presentation did not result in a change to previously reported revenues, operating income, income before income taxes or net income.
Effective with the change in financial statement presentation noted above, the Company now reports expenses in the categories noted below. No changes have been made to non-operating expenses.
Cost of Services
Processing costs - The Company’s processing costs consist of expenses related to processing transactions, servicing customers and merchants and cost of goods sold related to hardware and other product sales.
Service fees - The Company incurs costs from third-party networks utilized to deliver payment solutions. Additionally, other third-parties are utilized in performing services directly related to generating revenue. With the adoption of Topic 606 effective January 1, 2018, fees paid to third-party payment processing networks are no longer recorded as service fees and are now presented as a reduction of revenues.
Provision for credit losses - Changes in the reserve for credit loss are the result of changes in management’s estimate of the losses in the Company’s outstanding portfolio of receivables, including losses from fraud.
Operating interest - The Company incurs interest expense on the operating debt obtained to provide liquidity for its short-term receivables.
Depreciation and amortization - The Company has identified those tangible and intangible assets directly associated with providing a service that generates revenue and records the depreciation and amortization associated with those assets under this category. Such assets include processing platforms and related infrastructure, acquired developed technology intangible assets and other similar asset types.

11

WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Other Operating Expenses
General and administrative - General and administrative includes compensation and related expenses for executive, finance and accounting, other information technology, human resources, legal and other corporate functions. Also included are corporate facilities expenses, certain third-party professional service fees and other corporate expenses.
Sales and marketing - The Company’s sales and marketing expenses relate primarily to compensation, benefits, sales commissions and related expenses for sales, marketing and other related activities. With the adoption of Topic 606 effective January 1, 2018, certain payments to partners are now classified as sales and marketing expenses.
Depreciation and amortization - The depreciation and amortization associated with tangible and intangible assets that are not considered to be directly associated with providing a service that generates revenue are recorded as other operating expenses. Such assets include corporate facilities and information technology assets and acquired intangible assets other than those included in cost of services.

    

12

WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


2.
Recent Accounting Pronouncements
The following table provides a brief description of accounting pronouncements adopted during the nine months ended September 30, 2018 and recent accounting pronouncements that could have a material effect on our financial statements:
Standard
 
Description
 
Date/Method of Adoption
 
Effect on financial statements or other significant matters
Adopted During the Nine Months Ended September 30, 2018
ASU 2014–09
 
This standard supersedes 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.

 
The Company adopted this standard on January 1, 2018 using the modified retrospective approach to those contracts that were not completed as of January 1, 2018.

Adoption resulted in a cumulative adjustment to retained earnings as of the effective date, without restatement of prior period amounts.
 
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. There were three primary impacts to the Company resulting from the adoption of Topic 606, which are described below.

Certain amounts paid to partners in our Fleet Solutions and Travel and Corporate Solutions segments have been determined to fall under the “cost to obtain a contract” guidance. As a result, these amounts, which were previously presented as a reduction of revenues, are now reflected within sales and marketing on our unaudited condensed consolidated statements of income. This change increased both reported revenues and expenses for the three and nine months ended September 30, 2018 by approximately $13.8 million and $44.9 million, respectively.

Network fees paid by all three of our segments, but primarily by our Travel and Corporate Solutions segment, are now presented as a reduction of revenues in our unaudited condensed consolidated statements of income. Prior to January 1, 2018, these amounts were included within service fees. This change reduced both reported revenues and expenses by approximately $3.4 million and $13.5 million for the three and nine months ended September 30, 2018, respectively.

Certain costs to obtain a contract, such as sales commissions, are to be capitalized and amortized over the life of the customer relationship, with a practical expedient available for contracts under one year in duration. The vast majority of the Company’s commissions will continue to be expensed as incurred. This change resulted in an immaterial impact to operating income for the three and nine months ended September 30, 2018.

As of January 1, 2018, we recorded $0.6 million cumulative-effect adjustment, net of the associated tax effect, related to the deferral of capitalizable costs to obtain a contract within our Health and Employee Benefit Solutions segment. These commissions are amortized to sales and marketing expense over a useful life that considers the contract term, our commission policy, renewal experience and the transfer of services to which the asset relates.
 
 
 
 
 
 
 
ASU 2017–07
 
This standard 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 Company adopted ASU 2017–07 effective January 1, 2018.
 
The adoption did not have a material impact on our results of operations, cash flows or consolidated financial position.
 
 
 
 
 
 
 

13

WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


ASU 2016–18
 
This standard clarifies the classification and presentation of restricted cash in the statement of cash flows. Upon adoption, the statement of cash flows must explain the change during the period in the total of cash and cash equivalents and amounts described as restricted cash or cash equivalents.
 
The Company retrospectively adopted ASU 2016–18 effective January 1, 2018.
 
This retrospective adoption resulted in including restricted cash in cash, cash equivalents and restricted cash when reconciling the beginning of year and end of year amounts presented on the unaudited condensed consolidated statements of cash flows.

A reconciliation of cash, cash equivalents and restricted cash as reported within our unaudited condensed consolidated balance sheets is included within our unaudited condensed consolidated statements of cash flows.




 
 
 
 
 
 
 
ASU 2016–01
 
This standard requires equity investments, except those accounted for under the equity method of accounting, or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income.
 
The Company adopted ASU 2016–01 effective
January 1, 2018.
 
Changes in the fair value of investment securities are now reflected as non-operating income within our unaudited condensed consolidated statements of income. The adoption did not have a material impact on our results of operations, balance sheet or cash flows.
Not Yet Adopted as of September 30, 2018
ASU 2016–02
 
This standard increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Certain qualitative and quantitative disclosures are required.
 
The Company plans to adopt ASU 201602 effective January 1, 2019
 using the modified retrospective method provided under ASU 2018–11 Leases (Topic 842): Targeted Improvements.
 
The Company has established an ASU 2016–02 committee whose primary objectives include implementing a new software solution, reviewing and summarizing lease contracts, establishing completeness over the lease population, determining which practical expedients, if any, we will utilize to facilitate compliance and updating the Company’s accounting policies and procedures.

The Company expects to recognize right-of-use assets and corresponding lease liabilities on the Company’s consolidated balance sheet following the adoption of ASU 2016–02, but the Company is not able to quantify the impact of adoption at this time. The Company is also evaluating the impact the standard will have on its consolidated statement of operations, consolidated statement of cash flows and related disclosures


 
 
 
 
 
 
 
ASU 201613
 
This standard requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses will be based on historical experience, current conditions and reasonable and supportable forecasts that impact the collectability of the reported amount.
 
The standard is effective January 1, 2020.
 
The Company is evaluating the impact the standard will have on its consolidated financial statements and related disclosures.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
ASU 201815
 
This standard clarifies the accounting for capitalizing implementation costs in a cloud computing arrangement that is a service contract. The standard provides that implementation costs be treated using the same criteria used for internal-use software development costs, with amortization expense being recorded in the same income statement expense line as the hosted service costs and over the expected term of the hosting arrangement.
 
The standard is effective January 1, 2020.
 
The Company is evaluating the impact the standard will have on its consolidated financial statements and related disclosures.

14

WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


3.
Revenue
The Company adopted Topic 606 on January 1, 2018, utilizing the modified retrospective method. See Note 2, Recent Accounting Pronouncements, for further information regarding the adoption impact. Under the modified retrospective method, prior period comparable financial information continues to be presented under the guidance of Accounting Standards Codification (“ASC”) 605, Revenue Recognition. See the Company’s Annual Report on Form 10–K for the year ended December 31, 2017 for our accounting policies applied to revenue recognition prior to adoption of Topic 606.
The impact of adopting Topic 606 for the three and nine months ended September 30, 2018 was as follows:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
(In thousands)
Prior to Adoption
 
Impact of Topic 606
 
As Reported
 
Prior to Adoption
 
Impact of Topic 606
 
As Reported
Revenues
 
 
 
 
 
 
 
 
 
 
 
Payment processing revenue
$
174,170

 
$
8,701

 
$
182,871

 
$
501,674

 
$
28,389

 
$
530,063

Account servicing revenue
78,748

 

 
78,748

 
236,168

 

 
236,168

Finance fee revenue
53,703

 

 
53,703

 
154,958

 

 
154,958

Other revenue
65,682

 
1,686

 
67,368

 
183,997

 
3,209

 
187,206

Total revenues
372,303

 
10,387

 
382,690

 
1,076,797

 
31,598

 
1,108,395

Cost of services


 


 
 
 


 


 
 
Processing costs
79,580

 

 
79,580

 
235,508

 

 
235,508

Service fees
17,234

 
(3,416
)
 
13,818

 
53,310

 
(13,463
)
 
39,847

Provision for credit losses
21,435

 

 
21,435

 
46,930

 

 
46,930

Operating interest
10,268

 

 
10,268

 
28,281

 

 
28,281

Depreciation and amortization
19,013

 

 
19,013

 
60,058

 

 
60,058

Total cost of services
147,530

 
(3,416
)
 
144,114

 
424,087

 
(13,463
)
 
410,624

General and administrative
51,799

 

 
51,799

 
155,720

 

 
155,720

Sales and marketing
40,846

 
13,765

 
54,611

 
123,996

 
44,853

 
168,849

Depreciation and amortization
29,054

 

 
29,054

 
88,817

 

 
88,817

Impairment charge
2,424

 

 
2,424

 
2,424

 

 
2,424

Operating income
100,650

 
38

 
100,688

 
281,753

 
208

 
281,961

Financing interest expense
(25,718
)
 

 
(25,718
)
 
(78,560
)
 

 
(78,560
)
Net foreign currency loss
(1,094
)
 

 
(1,094
)
 
(27,438
)
 

 
(27,438
)
Net unrealized gain on financial instruments
2,157

 

 
2,157

 
18,371

 

 
18,371

Income before income taxes
75,995

 
38

 
76,033

 
194,126

 
208

 
194,334

Income taxes
18,741

 
10

 
18,751

 
48,222

 
56

 
48,278

Net income
57,254

 
28

 
57,282

 
145,904

 
152

 
146,056

Less: Net (loss) income from non-controlling interest
(40
)
 

 
(40
)
 
803

 

 
803

Net income attributable to shareholders
$
57,294

 
$
28

 
$
57,322

 
$
145,101

 
$
152

 
$
145,253

Topic 606 does not apply to rights or obligations associated with financial instruments, including the Company’s finance fee and interest income from banking relationships and cardholders, certain other fees associated with cardholder arrangements and commissions paid related to such agreements, which continue to be within the scope of ASC Topic 310, Receivables (“Topic 310”).
The vast majority of the Company’s Topic 606 revenue is derived from stand-ready obligations to provide payment processing, transaction processing and SaaS services and support. Revenue is recognized based on the value of services transferred to date using a time elapsed output method. For payment processing and transaction processing, services are considered to be transferred when a transaction is captured and the Company has validated that the transaction has no errors. Point-in-time revenue recognized during the three and nine months ended September 30, 2018 was not material.
We disaggregate our revenue from contracts with customers by service-type for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

15

WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


    
The following tables disaggregate our consolidated revenue for the three and nine months ended September 30, 2018:
 
Three Months Ended September 30, 2018
(In thousands)
Fleet Solutions
 
Travel and Corporate Solutions
 
Health and Employee Benefit Solutions
 
Total
Topic 606 revenues
 
 
 
 
 
 
 
Payment processing revenue
$
116,023

 
$
54,345

 
$
12,503

 
$
182,871

Account servicing revenue
6,920

 
9,120

 
26,818

 
42,858

Other revenue
11,721

 
1,063

 
6,359

 
19,143

Total Topic 606 revenues
$
134,664

 
$
64,528

 
$
45,680

 
$
244,872

 
 
 
 
 
 
 
 
Non-Topic 606 revenues
 
 
 
 
 
 
 
Account servicing revenue
$
35,890

 
$

 
$

 
$
35,890

Finance fee revenue
51,644

 
670

 
1,389

 
53,703

Other revenue
27,414

 
17,612

 
3,199

 
48,225

Total non-Topic 606 revenues
$
114,948

 
$
18,282

 
$
4,588

 
$
137,818

 
 
 
 
 
 
 
 
Total revenues
$
249,612

 
$
82,810

 
$
50,268

 
$
382,690

 
Nine Months Ended September 30, 2018
(In thousands)
Fleet Solutions
 
Travel and Corporate Solutions
 
Health and Employee Benefit Solutions
 
Total
Topic 606 revenues
 
 
 
 
 
 
 
Payment processing revenue
$
335,896

 
$
150,411

 
$
43,756

 
$
530,063

Account servicing revenue
20,770

 
27,584

 
80,545

 
128,899

Other revenue
39,288

 
3,386

 
19,775

 
62,449

Total Topic 606 revenues
$
395,954

 
$
181,381

 
$
144,076

 
$
721,411

 
 
 
 
 
 
 
 
Non-Topic 606 revenues
 
 
 
 
 
 
 
Account servicing revenue
$
107,269

 
$

 
$

 
$
107,269

Finance fee revenue
140,436

 
1,157

 
13,365

 
154,958

Other revenue
77,788

 
42,815

 
4,154

 
124,757

Total non-Topic 606 revenues
$
325,493

 
$
43,972

 
$
17,519

 
$
386,984

 
 
 
 
 
 
 
 
Total revenues
$
721,447

 
$
225,353

 
$
161,595

 
$
1,108,395

Payment Processing Revenue
Payment processing revenue consists primarily of interchange income. Interchange income is a fee paid by a merchant bank (“merchant”) to the card-issuing bank (generally the Company) in exchange for the Company facilitating and processing transactions with cardholders. Interchange fees are set by the card network. WEX processes transactions through both closed-loop and open-loop networks.
Our Fleet Solutions segment interchange income primarily relates to revenue earned on transactions processed through the Company’s proprietary closed-loop fuel networks. In closed-loop fuel network arrangements, written contracts are entered into between the Company and merchants, which determine the interchange fee charged on transactions. The Company extends short-term credit to the fleet cardholder and pays the merchant the purchase price for the cardholder’s transaction, less the interchange fees the Company retains. The Company collects the total purchase price from the fleet cardholder. In Europe, interchange income is specifically derived from the difference between the negotiated price of fuel from the supplier and the agreed upon price paid by fleet cardholders.

16

WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Interchange income in our Travel and Corporate Solutions and Health and Employee Benefit Solutions segments relates to revenue earned on transactions processed through open-loop networks. In open-loop network arrangements, there are several intermediaries involved between the merchant and the cardholder and written contracts between all parties involved in the process do not exist. Rather, the transaction is governed by the rates determined by the payment network at the point-of-sale. This framework dictates the interchange rate, the risk of loss, dispute procedures and timing of payment. For these transactions, there is an implied contract between the Company and the merchant. In our Travel and Corporate Solutions segment, the Company remits payment to the card network for the purchase price of the cardholder transaction, less the interchange fees the Company earns. The Company collects the total purchase price from the cardholder. In our Health and Employee Benefit Solutions segment, funding of transactions and collections from cardholders is performed by third-party sponsor banks, who remit a portion of the interchange fee to us.
The Company has determined that the merchant is the customer as it relates to interchange income regardless of the type of network through which transactions are processed. The Company’s primary performance obligation to merchants is a stand-ready commitment to provide payment and transaction processing services as the merchant requires, which is satisfied over time in daily increments. Since the timing and quantity of transactions to be processed by us is not determinable, the total consideration is determined to be variable consideration. The variable consideration for our payment and transaction processing service is usage-based and therefore specifically relates to our efforts to satisfy our obligation. The variability is satisfied each day the service is provided to the customer. We directly ascribe variable fees to the distinct day of service to which it relates, and we consider the services performed each day in order to ascribe the appropriate amount of total fees to that day. Therefore, we measure interchange income on a daily basis based on the services that are performed on that day.
In determining the amount of consideration received related to payment and transaction processing services provided, the Company assessed other intermediaries involved in the processing of transactions, including merchant acquirers, card networks, sponsor banks and third-party payment processors, and assessed whether the Company controls such services performed by other intermediaries according to principal-agent guidance in Topic 606. Based on this assessment, the Company determined that WEX does not control the services performed by merchant acquirers, card networks and sponsor banks as each of these parties is the primary obligor for their portion of payment and transaction processing services performed. Therefore, interchange income is recognized net of any fees owed to these intermediaries. The Company determined that services performed by third-party payment processors are controlled by WEX as the Company is responsible for directing how the third-party payment processor authorizes and processes transactions on the Company’s behalf. Therefore, such fees paid to third-party payment processors are recorded as service fees within cost of services.
Additionally, the Company enters into contracts with certain large customers or strategic cardholders that provide for fee rebates tied to performance milestones. The Company considered whether such fee rebates constitute consideration payable to a customer or other parties that purchase services from the customer per Topic 606. If so, such fee rebates, which are considered variable consideration, are recorded as a reduction in payment processing revenue in the same period that related interchange income is recognized. For the three and nine months ended September 30, 2018, such variable consideration totaled approximately $235.3 million and $656.5 million, respectively. Fee rebates made to certain other partners were determined to be costs to obtain a contract, and are recorded as sales and marketing expenses.
Account Servicing Revenue
In our Fleet Solutions segment, account servicing revenue is primarily comprised of monthly fees charged to cardholders based on the number of vehicles serviced. These fees are primarily in return for providing monthly vehicle data reports and are recognized on a monthly basis as the service is provided. This revenue is outside the scope of Topic 606. The Company also recognizes account servicing revenue related to reporting services on telematics hardware placements and permit sales to our OTR fleet customer base, both of which are within the scope of Topic 606.
In our Travel and Corporate Solutions segment, account servicing reflects revenues earned from our AOC acquisition, primarily consisting of licensing fees for use of our accounts receivable and accounts payable SaaS platforms.
In our Health and Employee Benefit Solutions segment, we also recognize account servicing fees for the per-participant per-month fee charged per consumer on our SaaS healthcare technology platform. Customers including health plans, third-party administrators, financial institutions and payroll companies typically enter into three to five year contracts, which contain significant termination penalties.

17

WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Our primary performance obligation in our Travel and Corporate Solutions and Health and Employee Benefit Solutions segments is a stand-ready commitment to provide SaaS services and support, which is satisfied over time in a series of daily increments. Revenue is recognized based on an output method using days elapsed to measure progress as the Company transfers control evenly over each monthly subscription period.
Finance Fee Revenue
The Company earns revenue on overdue accounts, which is recognized as revenue at the time the fees are assessed. The finance fee 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. On occasion, these fees are waived to maintain customer goodwill. The established reserve for such waived amounts is estimated and offset against the late fee revenue recognized. The Company engages in factoring, which is the purchase of accounts receivable from a third-party at a discount. The Company also recognized finance fee revenue earned on the Company’s foreign salary advance product. Effective in the third quarter of 2018, the Company revised the WEX Latin America securitized debt agreement, which now meets the derecognition criteria for the sale of salary advance product receivables. As a result, gains on the sale of these receivables are now recognized within “Other Revenue” below. See Note 10, Off–Balance Sheet Agreements for further information on our WEX Latin America securitization.
Other Revenue
Other revenue includes transaction processing revenue, professional and marketing services and the sales of telematics hardware, all of which is within scope of Topic 606. Revenue is recognized when control of the services or hardware is transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those services. In addition, international settlement fees and certain other cardholder fees (e.g. replacement card fees) and gains on sale of WEX Latin America receivables are included in other revenue. This revenue is outside the scope of Topic 606 and is recognized upon completion of the related service or the sale date of the receivables.
Contract Balances
The Company’s contract assets consist of upfront payments made to customers under long-term contracts and are recorded upon payment or when due. These payments reduce revenue recognition in future periods, as the resulting asset is amortized against revenue as the Company performs its obligations under these arrangements. The Company’s contract liabilities consist of customer payments received before the Company has satisfied the associated performance obligations and upfront payments due to the customer.
The following table provides information about these contract assets and liabilities from contracts with customers. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.
(In thousands)

 
 
 
 
 
 
Contract balance
 
Location on the unaudited condensed consolidated balance sheets
 
September 30, 2018
 
January 1, 2018
Receivables1
 
Accounts receivable, net
 
$
27,738

 
$
30,386

Contract assets
 
Prepaid expenses and other current assets
 
$
7,709

 
$
7,053

Contract assets
 
Other assets
 
$
47,646

 
$
49,068

Contract liabilities
 
Other current liabilities
 
$
23,723

 
$
26,592

1 The majority of the Company’s receivables, excluded from the table above, are either due from cardholders, who have not been deemed our customer as it relates to interchange income, or from revenues earned outside of the scope of ASC Topic 606.
Impairment losses recognized on our receivables and contract assets were immaterial for the three and nine months ended September 30, 2018. In the three and nine months ended September 30, 2018, we recognized revenue of $2.9 million and $8.2 million related to contract liabilities.

18

WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Remaining Performance Obligations
The Company’s unsatisfied, or partially unsatisfied performance obligations as of September 30, 2018 represent the remaining minimum monthly fees on a portion of contracts across the lines of business and contractually obligated professional services yet to be provided by the Company. It is not indicative of the Company’s future revenue, as it relates to an insignificant portion of the Company’s operations. As allowed by Topic 606, the Company has elected to exclude from this disclosure the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.
The following table includes revenue expected to be recognized in the future related to remaining performance obligations at the end of the reporting period.
(In thousands)
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
Minimum monthly fees1
$
17,265

 
$
57,108

 
$
35,176

 
$
19,648

 
$
9,803

 
$
2,226

 
$
141,226

Professional services2
3,401

 
9,796

 

 

 

 

 
13,197

Total remaining performance obligations
$
20,666

 
$
66,904

 
$
35,176

 
$
19,648

 
$
9,803

 
$
2,226

 
$
154,423

1 The transaction price allocated to the remaining performance obligations represents the minimum monthly fees on certain service contracts, which contain substantive termination penalties that require the counterparty to pay the Company for the aggregate remaining minimum monthly fees upon an early termination for convenience.
2 Includes software development projects and other services sold subsequent to the core offerings, to which the customer is contractually obligated.
4.
Business Acquisition
AOC
Effective October 18, 2017, the Company acquired certain assets and assumed certain liabilities of AOC, an industry leader in commercial payments technology. The acquisition of AOC, a longstanding technology provider for our virtual card product, will broaden our capabilities, increase our pool of employees with payments platform expertise and allow us to evolve with the needs of our customers and partners through the use of AOC’s payments processing technology platforms.
The Company purchased AOC for $129.8 million, which was funded with cash on hand and through borrowings under the 2016 Credit Agreement. The Company recorded adjustments to the assets acquired and liabilities assumed throughout the measurement period, which ended on September 30, 2018. The Company obtained information to assist in determining the fair values of certain assets acquired and liabilities assumed, resulting primarily in the recording of other intangible assets and goodwill. 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 goodwill and intangible assets recorded from this business combination were assigned to our Travel and Corporate Solutions segment. The Company assigned $21.6 million of the purchase price to an acquired processing platform that had not reached technological feasibility as of the date of acquisition. During the third quarter of 2018, the Company placed this asset into service. The goodwill recognized in this business combination will be deductible for income tax purposes.

19

WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


The following is a summary of the allocation of the purchase price to the assets and liabilities acquired:
(In thousands)
As Reported
December 31, 2017
 
Measurement Period Adjustments
 
Final
September 30, 2018
Total consideration
$
129,828

 
$

 
$
129,828

Less:
 
 
 
 

Cash
15,546

 

 
15,546

Accounts receivable
4,171

 
100

 
4,271

Property and equipment
2,530

 
(1,329
)
 
1,201

Customer relationships (a)
15,000

 
200

 
15,200

Developed technologies (b)
24,100

 

 
24,100

Trademarks and trade names (c)
1,460

 
10

 
1,470

In-process research and development

 
21,600

 
21,600

Other liabilities
(685
)
 
(772
)
 
(1,457
)
Recorded goodwill
$
67,706

 
$
(19,809
)
 
$
47,897

(a) Weighted average life – 9.0 years.
(b) Weighted average life – 3.4 years.
(c) Weighted average life – 4.3 years.
(a) (b) (c) The weighted average life of these amortized intangible assets is 5.5 years.
Since the acquisition date, the operations of AOC contributed net revenues of approximately $6.7 million and net loss before taxes of approximately $0.6 million during the year ended December 31, 2017. No pro forma information has been included in these financial statements as the operations of AOC for the period that they were not part of the Company are not material to the Company’s revenues, net income and earnings per share.
5.
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 agreement are generally subject to late fees based upon the outstanding receivable balance.
The Company extends revolving credit to certain small fleets. 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 $19.5 million and $12.2 million in receivables with revolving credit balances as of September 30, 2018 and December 31, 2017, respectively.
Concentration of Credit Risk
The receivables portfolio consists of a large group of homogeneous smaller balances across a wide range of industries, which are collectively evaluated for impairment. No one customer receivable balance represented 10 percent or more of the outstanding receivables balance at September 30, 2018 or December 31, 2017. The following table presents the outstanding balance of trade accounts receivable that are less than 30 and 60 days past due, in each case, as a percentage of total trade accounts receivable:
Delinquency Status
September 30, 2018
 
December 31, 2017
29 days or less past due
97
%
 
95
%
59 days or less past due
99
%
 
97
%
Reserves for Accounts Receivable
Receivables are generally written off when they are 150 days past due or upon declaration of bankruptcy of 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 payment patterns, known fraudulent activity in the portfolio, as well as leading economic and market indicators.

20

WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


The following table presents changes in the accounts receivable allowances:
 
Nine Months Ended September 30,
  (In thousands)
2018
 
2017
Balance, beginning of year
$
30,207

 
$
20,092

Provision for credit losses
46,930

 
47,927

Charges to other accounts1
14,408

 
12,221

Charge-offs
(58,532
)
 
(53,044
)
Recoveries of amounts previously charged-off
5,439

 
5,085

Currency translation
(349
)
 
431

Balance, end of period
$
38,103

 
$
32,712

1 The Company earns revenue by assessing monthly finance fees on accounts with overdue balances. These fees are recognized as revenue at the time the fees are assessed. The finance fee 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. On occasion, these fees are waived to maintain relationship goodwill. Charges to other accounts represents the offset against the late fee revenue recognized when the Company establishes a reserve for such waived amounts.
6.
Earnings per Share
Basic earnings per share is computed by dividing net income 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 awards 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 average unrecognized compensation expense for unvested share-based compensation awards, would be used to purchase the Company’s common stock at the average market price during the period.
The following table summarizes net income attributable to shareholders and reconciles basic and diluted shares outstanding used in the earnings per share computations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 (In thousands)
2018
 
2017
 
2018
 
2017
Net income attributable to shareholders
$
57,322

 
$
33,971

 
$
145,253

 
$
80,462

 
 
 
 
 
 
 
 
Weighted average common shares outstanding – Basic
43,191

 
43,014

 
43,141

 
42,963

Dilutive impact of share-based compensation awards
424

 
87

 
417

 
129

Weighted average common shares outstanding – Diluted
43,615

 
43,101

 
43,558

 
43,092

For the three and nine months ended September 30, 2018 and September 30, 2017, an immaterial number of outstanding share-based compensation awards were excluded from the computation of diluted earnings per share, as the effect of including these awards would be anti-dilutive.
7.
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.
Interest Rate Swap Agreements
During 2016 and 2017, we entered into five interest rate swap contracts. Collectively, these derivative contracts are intended to fix the future interest payments associated with $1.3 billion of our variable rate borrowings at between 0.896% and 2.212%. At September 30, 2018, we had variable-rate borrowings of $1.7 billion under our 2016 Credit Agreement.

21

WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


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
 
Tranche D
 
Tranche E
Notional amount at inception (in thousands)
$300,000
 
$200,000
 
$400,000
 
$150,000
 
$250,000
Amortization
N/A
 
N/A
 
5% annually
 
N/A
 
N/A
Maturity date
12/30/2022
 
12/30/2022
 
12/31/2020
 
12/31/2020
 
12/31/2018
Fixed interest rate
2.204%
 
2.212%
 
1.108%
 
1.125%
 
0.896%
The following table presents information on the location and amounts of interest rate swap gains and losses:
(In thousands)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Derivatives
Not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in Income Statement
 
2018
 
2017
 
2018
 
2017
Interest rate swap agreements –
unrealized portion
 
Net unrealized gain (loss) on financial instruments
 
$
2,340

 
$
(150
)
 
$
19,792

 
$
(849
)
Interest rate swap agreements –
realized portion
 
Financing interest income (expense)
 
$
1,866

 
$
377

 
$
3,542

 
$
(243
)
See Note 11, Fair Value, for more information regarding the valuation of the Company’s interest rate swaps.
8.
Deposits

WEX Bank has issued certificates of deposit with maturities ranging from three months to five years, with interest rates ranging from 1.30% to 3.45% as of September 30, 2018. As of December 31, 2017, certificates of deposit had maturities up to three years, with interest rates ranging from 1.00% to 2.15%. WEX Bank may issue brokered deposits, subject to FDIC rules governing minimum financial ratios, which include risk-based asset and capital requirements. As of September 30, 2018, all brokered deposits were in denominations of $250 thousand or less, corresponding to FDIC deposit insurance limits.
The Company requires deposits from certain customers as collateral for credit that has been extended. These deposits are generally non-interest bearing. Interest-bearing brokered money market deposits are issued in denominations of $250 thousand or less, and pay interest at variable rates based on LIBOR or the Federal Funds rate. Money market deposits may be withdrawn by the holder at any time, although notification may be required and the monthly number of transactions is limited. Interest-bearing brokered money market deposits and customer deposits are classified as short-term deposits on our unaudited condensed consolidated balance sheets.
The following table presents the composition of deposits:
  (In thousands)
September 30, 2018
 
December 31, 2017
Interest-bearing brokered money market deposits
$
238,382

 
$
285,899

Customer deposits
108,800

 
70,211

Certificates of deposit with maturities within 1 year (a)
530,889

 
630,879

Short-term deposits
878,071

 
986,989

Certificates of deposit with maturities greater than 1 year and less than 5 years (a)
386,770

 
306,865

Total deposits
$
1,264,841

 
$
1,293,854

 
 
 
 
Weighted average cost of funds on certificates of deposit outstanding
2.16
%
 
1.51
%
Weighted average cost of interest-bearing brokered money market deposits
2.24
%
 
1.49
%
(a) Certificates of deposit are classified as short-term or long-term within our unaudited condensed consolidated balance sheets based on maturity date.
Sources of Funds
WEX Bank participates in the ICS service offered by Promontory Interfinancial Network, which allows WEX Bank to purchase brokered money market demand accounts and demand deposit accounts in an amount not to exceed $125.0 million as

22

WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


part of a one-way buy program. At both September 30, 2018 and December 31, 2017, there was no outstanding balance for ICS purchases.
9.
Financing and Other Debt
The following table summarizes the Company’s total outstanding debt:
(In thousands)
September 30, 2018
 
December 31, 2017
Revolving line-of-credit facility under 2016 Credit Agreement (a)
$

 
$
136,535

Term loans under 2016 Credit Agreement (a)
1,753,904

 
1,602,875

Notes outstanding (a)
400,000

 
400,000

Securitized debt
111,556

 
126,901

Participation debt
140,965

 
184,990

WEX Latin America debt
7,808

 
9,747

Total gross debt
$
2,414,233

 
$
2,461,048

 
 
 
 
Current portion of gross debt
$
245,608

 
$
404,233

Less: Unamortized debt issuance costs
(6,744
)
 
(7,015
)
Short-term debt, net
$
238,864

 
$
397,218

 
 
 
 
Long-term gross debt
$
2,168,625

 
$
2,056,815

Less: Unamortized debt issuance costs
(27,750
)
 
(29,063
)
Long-term debt, net
$
2,140,875

 
$
2,027,752

 
 
 
 
Supplemental information under 2016 Credit Agreement:
 
 
 
Letters of credit (b)
$
53,718

 
$
27,500

Borrowing capacity (c)
$
666,282


$
405,965

(a) See Note 11, Fair Value, for more information regarding the Company’s 2016 Credit Agreement and notes outstanding.
(b) Collateral for lease agreements, virtual card and fuel payment processing activity at the Company’s foreign subsidiaries
(c) Contingent on maintaining compliance with the financial covenants as defined in the Company’s 2016 Credit Agreement
2016 Credit Agreement
The 2016 Credit Agreement provides for secured tranche A and tranche B term loan facilities in original principal amounts equal to $455.0 million and $1,335.0 million respectively, and a $720.0 million secured revolving credit facility, with a sublimit for letters of credit and swingline loans. Amounts due under the 2016 Credit Agreement mature in July 2023, subject to certain adjustments as more fully described below. Prior to maturity, amounts borrowed under the credit facility will be reduced by mandatory quarterly payments of $5.4 million and $3.4 million for tranche A and tranche B term loan facilities, respectively.
On January 17, 2018, the Company repriced the secured tranche B term loans under the 2016 Credit Agreement, which reduced the applicable interest rate margin for the Company’s tranche B term loan facility by 50 basis points for both Eurocurrency Rate (as defined in the 2016 Credit Agreement) borrowings and base rate borrowings, and increased the outstanding amounts on these tranche B term loans from $1,182.0 million to $1,335.0 million. In addition, the repricing amendment made certain other changes to the 2016 Credit Agreement including increasing the maximum consolidated leverage ratio for the period December 31, 2018 through September 30, 2019, and upon the occurrence of an acquisition meeting certain specified criteria, permitting to incurrence of unsecured indebtedness as long as the Company is in pro forma compliance with the financial covenants, resetting the six month soft recall period for a repricing of the tranche B term loans and resetting and amending the test for incremental loans. Following the repricing, the applicable interest rate margin for the tranche B term loans was set at 2.25% for Eurocurrency borrowings and 1.25% for base rate borrowings.
On August 24, 2018, the Company repriced the revolving credit loans and secured tranche A term loans under the 2016 Credit Agreement. The repricing reduced the applicable interest rate margin at current levels for the Company’s revolving credit loans by 25 basis points for both LIBOR borrowings and base rate borrowings, increased the amount available under the revolving credit facility from $570.0 million to $720.0 million and provided for an additional tranche A term loan in the amount of $25

23

WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


million. In addition, the repricing amendment extended the maturity date for the revolving credit facility and tranche A term loan to July 1, 2023, modified the leverage ratios for determining the applicable interest rate on the tranche A term loans and revolving credit loans and modified certain financial covenants, including extending by 1 year (from December 31, 2018 to December 31, 2019) the date on which the consolidated leverage ratio test reduces from 5.00:1.00 to 4.50:1.00, extending by 2 years (from December 31, 2019 to December 31, 2021) the date on which the consolidated leverage ratio test reduces to 4.00:1.00, and adding an interim consolidated leverage ratio test of 4.25:1.00 for a one year period from December 31, 2020 through September 30, 2021. In addition, the amendment modified the definition of specified acquisition to allow the Company to designate, one time, an acquisition involving the payment of consideration in excess of $300 million. Following the repricing, the applicable interest rate margin for the revolving credit loans and tranche A term loans was set at 2.00% for LIBOR borrowings and 1.00% for base rate borrowings.
As of September 30, 2018, amounts outstanding under the 2016 Credit Agreement bore interest at a rate equal to the Eurocurrency Rate plus a margin of 2.00% with respect to the revolving credit loans and tranche A term loans and at a rate equal to the Eurocurrency Rate plus a margin of 2.25% with respect to tranche B term loans (with the Eurocurrency Rate subject to a 0.00% floor). As of September 30, 2018 and December 31, 2017, amounts outstanding under the 2016 Credit Agreement bore a weighted average effective interest rate of 4.3 percent and 4.2 percent, respectively.
The Company accounted for the January repricing as both a debt extinguishment and debt modification by evaluating the refinancing on a creditor by creditor basis and the August 2018 repricing as a debt modification. During the first quarter of 2018, the Company recorded a loss on extinguishment of debt of $1.1 million related to the write-off of unamortized debt issuance costs. The Company incurred general and administrative expenses of $3.8 million related to third-party costs associated with the repricings. The loss on extinguishment and third-party costs are reflected as financing interest expense and service fees, respectively, within our unaudited condensed consolidated statements of income. In addition, the Company incurred and capitalized $6.1 million of new debt issuance costs related to the repricings.
The Company maintains 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 7, Derivative Instruments, 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, 2017, the 2016 Credit Agreement and the Indenture contain covenants that limit the ability of the Company and its subsidiaries, including its restricted subsidiaries and, in certain limited circumstances, WEX Bank and the Company’s other regulated subsidiaries, 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 September 30, 2018, the Company was in compliance with all material covenants of its 2016 Credit Agreement and the Indenture.
Notes Outstanding
As of both September 30, 2018 and December 31, 2017, the Company had $400.0 million of 4.75% fixed-rate senior notes outstanding, which will mature on February 1, 2023. Interest is payable semiannually in arrears on February 1 and August 1 of each year.
Australian Securitization Facility
The Company has renewed a one-year securitized debt agreement with the Bank of Tokyo-Mitsubishi UFJ, Ltd., which expires April 2019. 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 2.79% and 2.53% as of September 30, 2018 and December 31, 2017, respectively. The Company had $87.9 million and $90.0 million of securitized debt under this facility as of September 30, 2018 and December 31, 2017, respectively.

24

WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


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 0.91% and 1.11% as of September 30, 2018 and December 31, 2017, respectively. The Company had $23.7 million and $17.9 million of securitized debt under this facility as of September 30, 2018 and December 31, 2017, respectively.
Participation Debt
Historically, WEX Bank maintained three separate participation agreements with third-party banks to fund customer balances that exceeded WEX Bank’s lending limit to an individual customer. In June 2018, WEX Bank entered into a fourth participation agreement with a third-party bank to fund an additional customer’s balance. Associated unsecured borrowings carry a variable interest rate of 1 month to 3 month LIBOR plus a margin of 225 basis points. The balance of the debt was approximately $141.0 million and $185.0 million at September 30, 2018 and December 31, 2017, respectively. The outstanding commitment as of September 30, 2018 will mature in amounts of $75.4 million and $50.0 million on December 31, 2018 and August 31, 2020, respectively, with the remaining $15.6 million maturing on demand.
Borrowed Federal Funds
WEX Bank borrows from lines of credit on a federal funds rate basis to supplement the financing of its accounts receivable. There were no outstanding borrowings as of both September 30, 2018 and December 31, 2017. As of September 30, 2018, the Company’s federal funds available lines of credit was $310.0 million.
WEX Latin America Debt
WEX Latin America had debt of approximately $7.8 million and $9.7 million as of September 30, 2018 and December 31, 2017, respectively. This is comprised of credit facilities and loan arrangements related to our accounts receivable. The average interest rate was 16.87% and 21.20% as of September 30, 2018 and December 31, 2017, respectively. These borrowings are recorded in short-term debt, net on the Company’s unaudited condensed consolidated balance sheets for the periods presented.
10.
Off–Balance Sheet Arrangements
WEX Europe Services Accounts Receivable Factoring
During the first quarter of 2017, WEX Europe Services entered into a factoring arrangement with an unrelated third-party financial institution (the “Purchasing Bank.”) 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. Additionally, there are no indications of the Company’s continuing involvement in the factored receivables. The Company obtained a true-sale opinion from an independent attorney, which states that the factoring agreement provides legal isolation upon seller bankruptcy or receivership under local law and creates a sale of receivables for amounts transferred both below and above the established credit limits. As such, transfers under this arrangement are treated as sales and are accounted for as reductions in trade receivables because the agreements transfer effective control of the receivables to the Purchasing Bank. The Company records the proceeds as cash provided by operating activities.
The Company sold approximately $171.2 million and $532.1 million of receivables under this arrangement during the three and nine months ended September 30, 2018, respectively. Proceeds received are recorded net of applicable expenses, interest and commissions. The loss on factoring was $1.1 million and $3.5 million for the three and nine months ended September 30, 2018, respectively, and $1.2 million and $2.6 million for the three and nine months ended September 30, 2017, respectively, and was recorded within cost of services in the unaudited condensed consolidated statements of income. As of September 30, 2018 and December 31, 2017, the Company had associated factoring receivables of approximately $58.6 million and $61.8 million, respectively, of which approximately $0.6 million and $3.7 million, respectively, were in excess of the established credit limit.

25

WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Charge-backs on balances in excess of the credit limit during the three and nine months ended September 30, 2018 and during the three and nine months ended September 30, 2017 were insignificant.
WEX Bank Accounts Receivable Factoring
In August 2018, WEX Bank entered into a receivables purchase agreement with an unrelated third-party financial institution to sell certain of our trade receivables under non-recourse transactions. WEX Bank continues to service the receivables post-transfer with no participating interest. The Company obtained a true-sale opinion from an independent attorney, which states that the factoring agreement provides legal isolation upon WEX Bank bankruptcy or receivership under local law. As such, transfers under this arrangement are treated as a sale and are accounted for as a reduction in trade receivables because the agreements transfer effective control of the receivables to the buyer.
The Company sold approximately $1,309.2 million of receivables under this arrangement during both the three and nine months ended September 30, 2018. Proceeds from the sale, which are reported net of a negotiated discount rate, are recorded in operating activities within the Company’s unaudited condensed consolidated statement of cash flows. The loss on factoring was $0.4 million for both the three and nine months ended September 30, 2018 and was recorded within cost of services in the unaudited condensed consolidated statements of income.
WEX Latin America Securitization of Receivables
During the second quarter of 2017, WEX Latin America entered into a securitized debt agreement to transfer certain unsecured receivables associated with our salary payment card product to an investment fund managed by an unrelated third-party financial institution. WEX Latin America holds a non-controlling equity interest in the investment fund. As of December 31, 2017 and through June 30, 2018, this securitization arrangement did not meet the derecognition conditions due to continuing involvement with the transferred assets and accordingly WEX Latin America reported the transferred receivables and securitized debt on our unaudited condensed consolidated balance sheets. The Company had $30.1 million and $19.0 million of securitized debt under this facility as of June 30, 2018 and December 31, 2017, respectively. During the six months ended June 30, 2018, the Company recognized approximately $4.4 million of operating interest under this financing arrangement.
During the third quarter of 2018, the securitization agreements were amended, resulting in the Company giving up effective control of the transferred receivables to the buyer. Additionally, the Company received a true-sale opinion from an independent attorney stating that the amended agreements provide legal isolation upon WEX Latin America bankruptcy or receivership under local law. As such, transfers under this arrangement are treated as a sale and are accounted for as a reduction in trade receivables. As the securitization is now accounted for as an off-balance sheet arrangement, the Company derecognized $31.4 million of transferred receivables and $30.1 million of securitized debt during the third quarter of 2018, with an immaterial impact to the unaudited condensed consolidated statement of income for the three months ended September 30, 2018.
During the third quarter of 2018, the Company recognized a $3.2 million gain on sale of receivables, consisting of the difference between the sales price and the carrying value of the receivables, which is recorded within other revenue in our unaudited condensed consolidated income statement. Cash proceeds from the transfer of these receivables is reflected as an operating activity within our unaudited condensed consolidated statement of cash flows.
11.
Fair Value
The Company holds mortgage-backed securities, fixed-income securities, derivatives (see Note 7, Derivative Instruments) and certain other financial instruments that 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.

26

WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


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 and nine months ended September 30, 2018 or September 30, 2017.
The following table presents the Company’s assets and liabilities that are measured at fair value and the related hierarchy levels:
 (In thousands)
Fair Value Hierarchy
September 30, 2018
 
December 31, 2017
Assets
 
 
 
 
Municipal bonds
2
$
400

 
$
534

Asset-backed securities
2
319

 
345

Mortgage-backed securities
2
275

 
305

Fixed-income mutual fund
1
23,094

 
22,174

Investment securities (a)
 
$
24,088

 
$
23,358

Executive deferred compensation plan trust (b)
1
$
6,971

 
$
6,798

Interest rate swaps (c)
2
$
34,014

 
$
19,595

Liabilities
 
 
 
 
Interest rate swaps (d)
2
$

 
$