97 darling avenue | south portland, maine | 04106 (207) 773.8171
the intersection of payments, data, and technology
newsroom @wexinc.com | www.wexinc.com
2017
WEX INC.
ANNUAL
REPORT
about WEX
WEX is a leading global provider of corporate payment solutions. Since our founding in 1983, we
have expanded our scope to become a diversified corporate payment solutions provider supporting
customers around the world. At WEX, our focus is to simplify the complexities of payments systems
through innovative technology, user-friendly tools and industry-leading customer service.
Our proprietary technology allows us to harness massive amounts of data and deliver insights that help
customers make better business decisions. Our expertise within our Fleet, Travel and Corporate, and
Health and Employee Benefit verticals is complemented by our ability to deliver solutions tailored to
meet specific customer needs.
Through our products and services, we provide security, control and intelligence for the payment
transactions of more than 11.4 million fleet vehicles, more than $30 billion of Travel and Corporate
Solutions spend, and more than 25 million healthcare consumers.
WEX currently operates its business in three segments: Fleet Solutions, Travel and Corporate Solutions,
and Health and Employee Benefit Solutions. WEX and its subsidiaries employ more than 3,300 associates
across our network of locations in the United States, Australia, New Zealand, Brazil, the United Kingdom,
Italy, France, Germany, Norway and Singapore. The company has been publicly traded since 2005, and is
listed on the New York Stock Exchange under the ticker symbol “WEX.”
1
2
dear fellow shareholders
2017 was a milestone year for our company. Our
commitment to providing customers around the
world with best-in-class, innovative products has
solidified our position as a leading global payment
technology provider.
I am encouraged by the
achievements we made last year. But, I am even more
proud of our team for delivering exceptional value
to the global marketplace.
At the beginning of the year, we established our
strategic pillars that serve as the foundation of our
path forward: building upon our best-in-class growth
engine, leading through superior technology, driving
scale through exceptional execution and leveraging
our culture to attract and retain the best employees.
Our successful execution of all of these pillars allowed
us to deliver strong results in 2017, underscored by
record annual revenue. We rolled out an array of new
products, achieved our full synergy targets for EFS
well ahead of schedule and received the Great Place
to Work® certification on our first submission.
Our record revenue performance was underpinned
by significant new contract signings and renewals
throughout the year. The sophistication of our
products, combined with our commitment to
enhancing our offerings, allowed us to win business
with marquee names across all three of our business
segments including: Verizon, Chevron, Autozone,
Amadeus (Brazil), Bank of America, Conduit, and
Infinisource. This not only speaks to how our products
resonate in the marketplace, but it also provides us
with a solid foundation for continued momentum
and growth in 2018.
Our success has been, and will continue to be, driven
by our people and our technology. This year, we
released the WEX Crossroads product, which is a
one-card closed-loop solution. This unique offering
leverages a combination of WEX and EFS technologies.
We also acquired certain net assets of AOC Solutions,
a key technology provider for our virtual card
product, which expands our product capabilities
while reducing costs. Additionally, our focus on
customer personalization and data intelligence led
to the addition of roughly 350 features to our Health
platform, driving mobile app usage up over 100%
during the year.
Among many successes last year, we initiated a plan
to become certified as a Great Place to Work®, and
achieved certification. Our employees take pride in
their work, which creates an environment that fosters
growth and creativity. I believe that our culture is a
differentiator both in attracting and developing
talent as well as in winning and retaining business.
remain
forward, we will
Looking
focused on
executing against our strategic objectives. WEX is
more diverse than ever before with a growing base
of long-term customers that provides a strong base
of recurring revenue. In addition, we’ve won and
expanded valuable partnerships while maintaining
the industry’s lowest attrition rates, which will serve
as the foundation for sustainable long-term growth.
We’re encouraged by the contributions of all three of
our business segments to our growth engine this year,
as well as the momentum we bring into 2018.
I would like to thank our employees for their hard
work and dedication, and our shareholders for their
continued investment in and support of WEX. I
look forward to our continued prosperity in 2018
and beyond.
President and Chief Executive Officer • March 21st, 2018
3
FINANCIAL HIGHLIGHTS
TOTAL REVENUE
($ in Millions)
1,251
1,018
818
855
717
TOTAL PURCHASE VOLUME
($ in Billions)
65.0
50.6
44.1
44.5
38.1
1 3
1 4
1 5
1 6
1 7
1 3 1 4 1 5 1 6 1 7
KEY FINANCIAL HIGHLIGHTS & RECONCILIATIONS
($ in thousands)
2017
2016
2015
Revenue
$
1,250,548
$
1,018,460
$
854,637
Reconciliation of Adjusted Net Income (”ANI”) to Net Earnings Attributable to Shareholders
Net earnings attributable to shareholders
$
160,266 $
60,637
$
101,904
Unrealized (gains) losses on derivative instruments
Net foreign currency remeasurement (gain) loss
Acquisition-related ticking fees
Acquisition-related intangible amortization
Other acquisition and divestiture related items
Gain on divestitures
Stock-based compensation
Restructuring and other costs
Impairment charges and asset write-offs
Vendor settlement
Debt restructuring and issuance cost amortization
Non-cash adjustments related to tax receivable agreement
Regulatory reserve
ANI adjustments attributable to non-controlling interests
Tax related items
(1,314)
(29,919)
–
153,810
5,000
(20,958)
30,487
11,129
44,171
–
10,519
(15,259)
–
(1,563)
(113,327)
(7,901)
7,665
30,045
97,829
20,879
–
19,742
13,995
–
15,500
12,673
563
–
(2,583)
(79,834)
35,962
5,689
–
47,792
4,137
(1,215)
12,420
9,010
–
–
3,097
(2,145)
1,750
4,996
(32,286)
Adjusted net income attributable to shareholders
$
233,042 $
189,210
$
191,111
The Company’s non-GAAP adjusted net income excludes unrealized gains and losses on derivatives, net foreign currency remeasurement gains and losses, acquisition-related ticking fees, acquisition-related intangible amortization,
other acquisition and divestiture related items, stock-based compensation, restructuring and other costs, gain on divestiture, a one-time vendor settlement, debt restructuring and debt issuance cost amortization, non-cash adjustments
related to tax receivable agreement, reserves for regulatory penalties, adjustments attributed to our non-controlling interest and certain tax related items. In addition, for the year ended December 31, 2017, we have excluded certain
impairment charges and asset write-offs as described below.
Although adjusted net income is not calculated in accordance with GAAP, this non-GAAP measure is integral to the Company’s reporting and planning processes and the chief operating decision maker of the Company uses adjusted
operating income to allocate resources among our operating segments. The Company considers this measure integral because it excludes the above-specified items that the Company’s management excludes in evaluating the
Company’s performance. Specifically, in addition to evaluating the Company’s performance on a GAAP basis, management evaluates the Company’s performance on a basis that excludes the above items because:
• Exclusion of the non-cash, mark-to-market adjustments on derivative instruments, including fuel-price related derivatives and interest rate swap agreements, helps management identify and assess trends in the Company’s underlying
business that might otherwise be obscured due to quarterly non-cash earnings fluctuations associated with these derivative contracts. The non-cash, mark-to-market adjustments on derivative instruments are difficult to forecast
accurately, making comparisons across historical and future quarters difficult to evaluate.
• Net foreign currency gains and losses primarily result from the remeasurement to functional currency of cash, receivable and payable balances, certain intercompany notes denominated in foreign currencies and any gain or loss on
foreign currency hedges relating to these items. The exclusion of these items helps management compare changes in operating results between periods that might otherwise be obscured due to currency fluctuations.
• The Company considers certain acquisition-related costs, including certain financing costs, ticking fees, investment banking fees, warranty and indemnity insurance, certain integration related expenses and amortization of acquired
intangibles, as well as gains and losses from divestitures to be unpredictable, dependent on factors that may be outside of our control and unrelated to the continuing operations of the acquired or divested business or the Company.
In addition, the size and complexity of an acquisition, which often drives the magnitude of acquisition-related costs, may not be indicative of such future costs. The Company believes that excluding acquisition-related costs and gains
or losses of divestitures facilitates the comparison of our financial results to the Company’s historical operating results and to other companies in our industry.
• Stock-based compensation is different from other forms of compensation, as it is a non-cash expense. For example, a cash salary generally has a fixed and unvarying cash cost. In contrast, the expense associated with an equity-based
award is generally unrelated to the amount of cash ultimately received by the employee, and the cost to the Company is based on a stock-based compensation valuation methodology and underlying assumptions that may vary over time.
• Restructuring and other costs include employee termination benefits from certain identified initiatives to further streamline the business, improve the Company’s efficiency, create synergies and to globalize the Company’s operations,
all with an objective to improve scale and increase profitability going forward. We exclude these items when evaluating our continuing business performance as such items are not consistently occurring and do not reflect expected
future operating expense, nor provide insight into the fundamentals of current or past operations of our business.
• Impairment charges and asset write-offs represent non-cash asset write-offs related to the following:
Impairment of certain prepaid services following a strategic decision to in-source certain technology functions.
Impairments of certain payment processing software following the acquisition of AOC and as part of our ongoing platform consolidation strategy, designed to ensure we continue to deliver superior technology to our customers.
• These charges do not reflect recurring costs that are relevant to our continuing operations. The Company believes that excluding these nonrecurring expenses facilitates the comparison of our financial results to the Company’s
historical operating results and to other companies in our industry.
• Vendor settlement represents a payment in exchange for the release of potential claims related to insourcing certain technology, and does not reflect recurring costs that would be relevant to the continuing operations of the
Company. The Company believes that excluding this nonrecurring expense facilitates the comparison of our financial results to the Company’s historical operating results and to other companies in our industry.
• Debt restructuring and debt issuance cost amortization are non-cash items that are unrelated to the continuing operations of the Company. Debt restructuring costs are not consistently occurring and do not reflect expected future
operating expense, nor provide insight into the fundamentals of current or past operations of our business. In addition, since debt issuance cost amortization is dependent upon the financing method which can vary widely company
to company, we believe that excluding these costs helps to facilitate comparison to historical results as well as to other companies within our industry.
• The adjustments attributable to non-controlling interests, including adjustments to the redemption value of a non-controlling interest, and the non-cash adjustments related to our tax receivable agreement have no significant impact
on the ongoing operations of the business.
• Regulatory reserves reflect charges related to the impact of a regulatory action which resulted in WEX paying a penalty in 2016. We have excluded this item when evaluating our continuing business performance as it is not consistently
recurring and does not reflect an expected future operating expense, nor provide insight into the fundamentals of the current or past operations of our business.
• The tax related items are the difference between the Company’s U.S. GAAP tax provision and a pro forma tax provision based upon the Company’s adjusted net income before taxes as well as the impact from certain discrete tax items.
The methodology utilized for calculating the Company’s adjusted net income tax provision is the same methodology utilized in calculating the Company’s U.S. GAAP tax provision.
4
For the same reasons, WEX believes that adjusted net income may also be useful to investors as one means of evaluating the Company’s performance. However, because adjusted net income is a non-GAAP measure, it should not be
considered as a substitute for, or superior to, net income, operating income or cash flows from operating activities as determined in accordance with GAAP. In addition, adjusted net income as used by WEX may not be comparable to
similarly titled measures employed by other companies.
PERFORMANCE GRAPH
The following graph assumes $100 invested December 31, 2012 and compares (a) the percentage
change in the Company’s cumulative total stockholder return on the common stock (as
measured by dividing (i) the sum of (A) the cumulative amount of dividends, assuming dividend
reinvestment, during the periods presented, and (B) the difference between the Company’s share
price at the end and the beginning of the periods presented by (ii) the share price at the beginning
of the periods presented) with (b) (i) the Russell 2000 Index and (ii) the S&P Data Processing &
Outsourced Services Index.
TOTAL RETURN PERFORMANCE
)
$
(
E
U
L
A
V
X
E
D
N
I
350
300
250
200
150
100
50
12/31/12
12/31/13
12/31/14
12/31/15 12/31/16
12/31/17
WEX INC.
RUSSELL 2000
S&P DATA PROCESSING AND OUTSOURCED SERVICES
PERIOD ENDING DECEMBER 31
$
100.00
$
100.00
$
100.00
131.39
138.82
153.43
131.25
117.29
148.07
145.62
139.19
168.85
174.03
194.40
207.89
187.38
193.58
295.83
5
WEX leadership team
DAVID COOPER
Chief Technology Officer
MELISSA D. SMITH
President and Chief Executive Officer
HILARY A. RAPKIN
Chief Legal Officer
Cautionary Note Regarding Forward-Looking Statements
This annual report contains forward-looking statements, including statements regarding: financial guidance; assumptions underlying
the Company’s financial guidance; and, management’s expectations for future growth opportunities, scalability and market expansion.
Any statements that are not statements of historical facts may be deemed to be forward-looking statements. When used in this annual
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. These forward-
looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including: 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 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
6
WEX leadership team
JAY DEARBORN
President, Corporate Payments
KENNETH W. JANOSICK
Chief Portfolio Risk and
Operations Officer
NICOLA S. MORRIS
Chief Corporate Development
Officer
SCOTT PHILLIPS
President, Global Fleet
HILARY A. RAPKIN
Chief Legal Officer
ROBERTO SIMON
Chief Financial Officer
MELANIE TINTO
Chief Human Resources
Officer
JEFF YOUNG
President, Health
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; 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 for the year ended December 31, 2017, filed on Form 10-K with the Securities and Exchange Commission on March 1, 2018.
The Company’s forward-looking statements 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 this annual report and undue reliance should not
be placed on these statements. The Company disclaims any obligation to update any forward-looking statements as a result of new
information, future events or otherwise.
77
Table of Contents
(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to .
Commission file number 001-32426
WEX INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
97 Darling Avenue
South Portland, Maine
(Address of principal executive offices)
01-0526993
(I.R.S. Employer
Identification No.)
04106
(Zip Code)
(207) 773-8171
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Yes
No
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
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
No
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K.
Table of Contents
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
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
Non-accelerated filer
(Do not check if a smaller reporting company)
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 Act).
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant (assuming for the purpose of this
calculation, but without conceding, that all directors, officers and any 10 percent or greater stockholders are affiliates of the registrant) as of June 30, 2017, the
last business day of the registrant’s most recently completed second fiscal quarter, was $4,405,939,486 (based on the closing price of the registrant’s common
stock on that date as reported on the New York Stock Exchange).
There were 43,031,993 shares of the registrant’s common stock outstanding as of February 26, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s Proxy Statement for the 2018 Annual Meeting of Stockholders are incorporated by reference in Part III. With the exception of
the sections of the 2018 Proxy Statement specifically incorporated herein by reference, the 2018 Proxy Statement is not deemed to be filed as part of the 10-K.
Yes
No
Table of Contents
TABLE OF CONTENTS
Forward-Looking Statements
ACRONYMS AND ABBREVIATIONS
Part I
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
Item 5.
Part II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
Part IV
1
2
3
18
32
32
32
32
33
34
35
62
63
113
113
116
116
116
116
116
116
117
117
117
Table of Contents
Unless otherwise indicated or required by the context, the terms “we,” “us,” “our,” “WEX,” or the “Company,” in this
Annual Report on Form 10-K 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 Annual Report includes forward-looking statements including, but not limited to,
statements about management’s plan and goals, and the “Strategy” section of this Annual Report in Item 1. Any statements in this
Annual Report that are not statements of historical facts are forward-looking statements. When used in this Annual 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 Annual 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 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;
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 this Annual Report and in connection with such forward-looking
statements.
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
Annual 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.
•
•
•
•
•
•
•
•
•
1
Table of Contents
ACRONYMS AND ABBREVIATIONS
The acronyms and abbreviations identified below are used in this Annual Report including the accompanying consolidated
financial statements and the notes thereto. The following is provided to aid the reader and provide a reference point when reviewing
the Annual Report:
2013 Credit Agreement
2014 Credit Agreement
2016 Credit Agreement
Adjusted Net Income or ANI
Adjusted Operating Income
AOC
ASU 2014-09
ASU 2016-01
ASU 2016-02
ASU 2016-09
ASU 2016-13
ASU 2016-18
ASU 2017-09
Australian Securitization
Subsidiary
Average expenditure per
payment processing
transaction
Benaissance
Company
EBITDA
EFS
Amended and restated credit agreement entered into on January 18, 2013 by and among the Company and
certain of our subsidiaries, as borrowers, and WEX Card Holdings Australia Pty Ltd, as specified designated
borrower, with a lending syndicate
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.
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
A non-GAAP measure that adjusts net earnings attributable to shareholders to exclude unrealized gains
and losses on derivatives, net foreign currency remeasurement gains and losses, acquisition-related ticking
fees, acquisition-related intangible amortization, other acquisition and divestiture related items, stock-
based compensation, restructuring and other costs, impairment charges and asset write-offs, gain on
divestiture, a one-time vendor settlement, debt restructuring and debt issuance cost amortization, non-cash
adjustments related to tax receivable agreement, reserves for regulatory penalties, adjustments attributed
to our non-controlling interest and certain tax related items.
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, the expense associated with
stock-based compensation, restructuring and other costs, impairment charges and asset write-offs, gain on
divestiture, a one-time vendor settlement, debt restructuring costs and reserves for regulatory penalties.
AOC Solutions and one of its affiliate companies, 3Delta Systems, Inc. The Company acquired certain
assets and assumed certain liabilities of AOC Solutions and its affiliate in 2017.
Accounting Standards Update No. 2014-09 Revenue from Contracts with Customers (Topic 606)
Accounting Standards Update No. 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities
Accounting Standards Update No. 2016-02 Leases (Topic 842)
Accounting Standards Update No. 2016-09 Compensation-Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting
Accounting Standards Update No. 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments
Accounting Standards Update No. 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash
Accounting Standards Update No. 2017-09 Compensation—Stock Compensation (Topic 718): Scope of
Modification Accounting
Southern Cross WEX 2015-1 Trust, a bankruptcy-remote subsidiary consolidated by the Company
Average total dollars of spend in a funded fuel transaction
Benaissance, a provider of integrated SaaS technologies and services for healthcare premium billing,
payment and workflow management, acquired by the Company on November 18, 2015.
WEX Inc. and all entities included in the consolidated financial statements
A non-GAAP measure that adjusts income before income taxes to exclude interest, depreciation and
amortization
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 Fleet business
European commercial fleet card portfolio acquired from ExxonMobil
European Securitization
Subsidiary
Evolution1
Gorham Trade Finance B.V., a bankruptcy-remote subsidiary consolidated by the Company
EB Holdings Corp. and its subsidiaries which includes Evolution1, Inc., acquired by the Company on July
16, 2014
Evolution1 Plan
Evolution1 401(k) Plan sponsored by Evolution1 Inc.
FASB
Financial Accounting Standards Board
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FDIC
GAAP
Indenture
NCI
NOL
NYSE
Notes
Federal Deposit Insurance Corporation
Generally Accepted Accounting Principles in the United States
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
Non-controlling interest
Net operating loss
New York Stock Exchange
$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
Payment processing
transactions
PPG
Total amount paid by customers for transactions
Funded payment transactions where the Company maintains the receivable for total purchase
Price per gallon of fuel
rapid! PayCard
rapid! PayCard, previously a line of business of the Company, sold on January 7, 2015
SaaS
SEC
Ticking fees
Software-as-a-service
Securities and Exchange Commission
A fee incurred by a borrower to compensate the lender for maintaining a commitment of funds for the
prospective borrower for a period of time
Total fleet transactions
Total of transaction processing and payment processing transactions of our Fleet Solutions segment
Transaction processing
transactions
Unfunded payment transactions where the Company is the processor and only has receivables for the
processing fee
UNIK
WEX
UNIK S.A., the Company's Brazilian subsidiary, which has been subsequently branded WEX Latin America
WEX Inc.
WEX Europe Services
Consists primarily of our European Fleet business acquired by the Company from ExxonMobil on
December 1, 2014
WEX Health
Evolution1 and Benaissance, collectively
ITEM 1. BUSINESS
Our Company
PART I
WEX Inc. is a leading provider of corporate payment solutions. WEX Inc. began operations in 1983 as a Maine corporation
and was acquired in February 1996 by an entity that subsequently merged with HFS Incorporated to form Cendant Corporation
in December 1997. In June 1999, our predecessor, Wright Express, was sold to Avis Group Holdings, Inc., which was acquired
by Cendant Corporation in March 2001. In anticipation of our initial public offering, the Company’s operations were transferred
to a Delaware LLC, which was converted into a Delaware corporation in 2005 in conjunction with our initial public offering on
February 16, 2005 (NYSE:WEX). Over the past 30 years, we have expanded the scope of our business from a fleet payment
provider 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 products and services enable us to provide exceptional payment security and control across a wide spectrum
of payment sectors.
Fleet Solutions provides customers with fleet vehicle payment processing services specifically designed for the needs of
commercial and government fleets. During the year ended December 31, 2017, Fleet Solutions revenue represented approximately
66 percent of our total revenue. As of December 31, 2017, the segment services over 11.4 million vehicles. Management estimates
that WEX fleet cards are accepted at over 90 percent of fuel locations in each of the United States and Australia. With the acquisition
of our European Fleet business in December 2014, WEX fleet cards are accepted at all ExxonMobil stations throughout Europe.
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. Travel and
Corporate Solutions revenue, which represented approximately 18 percent of our total revenue during the year ended December 31,
2017, is generated primarily in the online travel market. The Travel and Corporate Solutions segment also includes payment
solutions for payables and travel expenses. The segment has operations in North America, Europe, South America and Asia-Pacific.
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Health and Employee Benefit Solutions represented approximately 16 percent of our total revenue during the year ended
December 31, 2017. During 2015, our wholly-owned subsidiary Evolution1 acquired Benaissance, a provider of integrated SaaS
technologies and services for the Consolidated Omnibus Budget Reconciliation Act (“COBRA”) and healthcare premium billing,
payment and workflow management, to complement our healthcare financial technology platform products and services. During
2016, we collectively rebranded Evolution1 and Benaissance as WEX Health. The Health and Employee Benefit Solutions segment
also includes payroll related benefits offered 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 operations, WEX Fuel Cards Australia, WEX Prepaid
Cards Australia, WEX Canada, WEX New Zealand, WEX Asia, WEX Europe Limited, UNIK S.A., a Brazil-based company that
we refer to as "WEX Latin America," and a controlling interest in WEX Europe Services Limited and its subsidiaries.
WEX Bank, a Utah industrial bank incorporated in 1998, is a FDIC insured depository institution. The functions performed
at WEX Bank contribute to the U.S. and Canadian operations of Fleet Solutions and the operations of Travel and Corporate Solutions
by providing a funding mechanism, among other services. With our ownership of WEX Bank, we have access to low-cost sources
of capital. WEX Bank raises capital primarily through the issuance of brokered deposit accounts and provides the financing and
makes credit decisions that enable the Fleet Solutions and Travel and Corporate Solutions segments to extend credit to customers.
WEX Bank approves customer applications, maintains appropriate credit lines for each customer, is the account issuer, and is the
counterparty for the customer relationships for most of our programs in the U.S. Operations such as sales, marketing, merchant
relations, customer service, software development and IT are performed as a service within our organization but outside of WEX
Bank. WEX Bank’s primary regulators are the Utah Department of Financial Institutions (“Utah DFI”) and the FDIC. The activities
performed by WEX Bank are integrated into the operations of our Fleet Solutions and Travel and Corporate Solutions segments.
Developments
Prior to our initial public offering in 2005, the Company’s growth had primarily been organic. Our growth in the past
several years has been supplemented by acquisitions. Our acquisitions over the last few years include:
• Effective October 18, 2017, we acquired certain assets and assumed certain liabilities of AOC, a provider of commercial
payments technology. This acquisition will broaden our capabilities, increase our pool of employees with payments
platform experience and allow us to evolve with the needs of our customers and partners through the use of AOC’s
payments processing technology platforms.
• On July 1, 2016, we acquired 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, in order to expand our customer footprint and utilize EFS's technology
to better serve the needs of our fleet customers.
• On November 18, 2015, our wholly-owned subsidiary Evolution1 acquired Benaissance, a provider of integrated SaaS
technologies and services for COBRA and healthcare premium billing, payment and workflow management, to
complement our healthcare payments products and services.
• On August 31, 2015, we acquired the remaining 49 percent ownership in UNIK S.A., a majority-owned subsidiary prior
to this transaction.
• On December 1, 2014, our majority owned subsidiary, WEX Europe Services Limited, acquired the assets of ExxonMobil's
European commercial fuel card program, which includes operations, funding, pricing, sales and marketing in nine countries
in Europe.
• On July 16, 2014, we acquired Evolution1, a provider of financial technology platform solutions within the healthcare
industry.
• On October 15, 2013, our majority-owned subsidiary WEX Latin America acquired FastCred, a provider of fleet cards
to the heavy truck or over-the-road segment of the fleet market in Brazil.
During the year ended December 31, 2017, the Company sold $8.9 million in net assets of its Telapoint business for
proceeds of $29.9 million, which resulted in a pre-tax book gain of $21.0 million. The divestiture was not material to the Company's
annual revenue, net income or earnings per share. The Company does not view this divestiture as a strategic shift in its operations.
On January 7, 2015, we sold the operations of rapid! PayCard for $20.0 million, which resulted in a pre-tax book gain of
$1.2 million. Our primary focus in the U.S. continues to be in the fleet, travel, and healthcare industries. As such, we divested the
operations of rapid! PayCard, which were not material to our annual revenue, net income or earnings per share.
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On July 29, 2014, we sold our Pacific Pride subsidiary for $49.7 million, which resulted in a pre-tax book gain of $27.5
million. The Company decided to sell the operations of Pacific Pride as it did not align with the long-term strategy of the core fleet
business. The Company entered into a multi-year agreement with the buyer that will continue to allow WEX branded card acceptance
at Pacific Pride locations.
Competitive Strengths
We believe the following strengths distinguish us from our competitors:
• Our proprietary closed-loop fuel networks in the U.S. and Australia are among the largest in each country. We describe
our fleet payment processing networks as “closed-loop” because we have a direct contractual relationship with both the
merchant and the fleet, and only WEX transactions can be processed on these networks. We have built networks that
management estimates to provide coverage to over 90 percent of fuel locations in the U.S. and Australia, as well as wide
acceptance in Europe and Brazil. This provides our customers with the convenience of broad acceptance.
• Our proprietary closed-loop fuel networks provide us with access to a higher level of fleet-specific information and control
as compared to what is typically available on an open-loop network. This provides high-level purchase controls at the
point of sale, including the flexibility of allowing fleets to restrict purchases and receive automated alerts. Additionally,
we have the ability to refine the information reporting provided to our fleet customers and customers of our strategic
relationships.
• We offer a differentiated set of products and services, including security and purchase controls, to allow our customers
and the customers of our strategic relationships to better manage their vehicle fleets. We provide customized analysis and
reporting on the efficiency of fleet vehicles and the purchasing behavior of fleet vehicle drivers. We make this data
available to fleet customers through both traditional reporting services and sophisticated web-based data analysis tools.
• Our long-standing strategic relationships, multi-year contracts and high contract renewal rates have contributed to the
stability and recurring nature of our revenue base. We believe that we offer a compelling value to our customers relative
to our competitors given the breadth and quality of our products and services and our deep understanding of our customers’
operational needs. We have a large installed customer base, with more than 11.4 million vehicles serviced as of
December 31, 2017 and co-branded strategic relationships with five of the largest U.S. fleet management providers and
with dozens of oil companies that use our private label solutions. Our wide site acceptance, together with our private-
label portfolios and value-added product and service offerings, drive high customer satisfaction levels, with a U.S. fleet
retention rate in excess of 97 percent (based on the 2017 rate of voluntary customer attrition).
• Our capabilities in the over-the-road segment of the market enhance our ability to serve fleet customers who operate both
heavy duty trucks and cars or light duty vehicles in the U.S. and Canada as well as to blend the small fleet and private
label businesses for greater scale. The July 2016 acquisition of EFS expanded our customer footprint within the over-
the-road market segment.
• Our purchase of ExxonMobil's commercial fuel card program, which uses a closed-loop network in Europe, combined
with the long term supply agreement to serve the current and future European Fleet business, provides us with a strong
foundation in the large European fleet market.
• Our travel and corporate payment products offer corporate customers enhanced security and control for complex payment
needs, while the addition of the EFS Corporate Payment Solutions set of products expands our presence into the electronic
accounts payable segment of the market. Our strategic relationships include four of the largest online travel agencies in
the world. We continue to expand our online travel payment solution capabilities and geographies, which currently include
North America, Europe, South America and Asia-Pacific. As of December 31, 2017, we settle transactions in 21 different
currencies.
• The demand for our payment processing, account servicing and transaction processing services combined with significant
operating scale has historically driven strong revenue growth and earnings potential. We have an extensive history of
organic revenue growth driven by our various marketing channels, our extensive network of fuel and service providers,
and our growth in transaction volume. Further, we have completed a number of strategic acquisitions to expand our
product and service offerings, which have contributed to our revenue growth and diversification of our products and
services.
• WEX Health has become a leading provider of cloud-based healthcare payments technology, through the acquisition of
Evolution1 in 2014 and Benaissance in 2015. Our large partner network expands our opportunities in the growing
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healthcare financial technology platform market. WEX Health benefits from both high retention rates and revenue
predictability as a result of its SaaS business model.
• We have an enterprise-wide risk management program that helps us identify and manage inherent risks related to our
liquidity, extension of credit and interest rates. Our ownership of WEX Bank provides us with access to low cost sources
of capital, which provide liquidity to fund our short-term card receivables. We have maintained a long record of low credit
losses due to the short-term, non-revolving credit issued to our customer base. Our credit risk management program is
enhanced by our proprietary scoring models, managing credit lines and early suspension policy. Interest rate risk is
managed through diversified funding sources at WEX Bank including interest bearing money market deposits and
certificates of deposit with varying maturities. Some of our merchant contracts include some ability to raise rates if interest
rates rise.
• We have an experienced and committed management team that has substantial industry knowledge and a proven track
record of financial success. The team has been successful in driving strong growth with consistent operating performance.
We believe that our management team positions us well to continue successfully implementing our growth strategy and
capturing operating efficiencies.
Strategy
Our Company’s path forward will be shaped by the following three strategic priorities:
• Drive continued growth. We continue to see significant organic growth opportunities across each of our Fleet
Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions segments. We seek to
capture this growth opportunity through our product excellence, marketing capabilities, sales force productivity,
and revenue management practices. Our acquisition strategy will complement our organic growth by both
enhancing scale and adding differentiation to our current offerings.
• Lead through superior technology. We have built and differentiate ourselves in the marketplace on a distinctive
set of technologies in our Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit
Solutions segments. As our markets continue to evolve, our ability to quickly and cost effectively innovate and
deliver superior technological solutions continue to set us apart from our peers.
•
Set standard for operational excellence. We stand apart in our segments by reliably delivering the best solutions
to our partners and customers. We are continually optimizing our cost structure and capturing new revenue
synergies across our lines of business. Gains in operational efficiency simplify our business, making us more
nimble to capture market opportunities as they arise.
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Overview
FLEET SOLUTIONS SEGMENT
The Fleet Solutions segment provides customers with fleet vehicle payment processing services specifically designed for
the needs of commercial and government fleets. We are a leading provider of fleet vehicle payment processing services with over
11.4 million vehicles at year end using our fleet payment solutions to purchase fuel and maintenance services. Our competitive
advantages in the fleet market include brand strength and product offerings, commitment to customer satisfaction and a financing
model with attractive credit terms. Our fleet products are based upon proprietary technology with closed-loop networks in the
U.S., Australia and Europe and wide site acceptance domestically and abroad.
As part of our value proposition, we deliver security through individualized driver identification and real-time transaction
updates, purchase controls and sophisticated reporting tools. We collect a broad array of information at the point of sale, including
the amount of the expenditure, the identity of the driver and vehicle, the odometer reading, the identity of the fuel or vehicle
maintenance provider and the items purchased. We use this information to provide customers with analytical tools to help them
effectively manage their vehicle fleets and control costs. We deliver value to our customers by providing customized offerings for
accepting merchants, processing payments and providing information management products and services to fleets.
Our proprietary closed-loop networks allow us to provide our customers with highly detailed, fleet-specific information
and customized controls that are not typically available on open-loop networks, such as limiting purchases to fuel only and restricting
the time of day and day of the week when fuel is purchased. Our network also enables us to avoid dependence on third-party
processors. In addition, our relationships with both fleets and merchants enable us to provide security and controls and provide
customizable reporting.
The following illustrates our proprietary closed-loop network:
Payment processing transactions represent a majority of the revenue stream in the Fleet Solutions segment. In a payment
processing transaction, we extend short-term credit to the fleet customer and pay the purchase price for the fleet customer’s
transaction, less the payment processing fees we retain, to the merchant. Revenue from our WEX Europe Services operations is
primarily generated by transactions where our revenue is derived from the difference between the negotiated price of the fuel from
the supplier and the price charged to the fleet customer. We collect the total purchase price from the fleet customer, normally within
30 days from the billing date.
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The following illustration depicts our business process for a typical WEX direct network domestic fuel payment processing
transaction:
With the acquisition of EFS, we have diversified our market position in the over-the-road fleet segment. We offer
customizable over-the-road fleet payment solutions that address comprehensive business needs including:
• Real-time interactive interfaces delivering data integrity through a seamless user interface
• Alternative payment and money transfer options
• Comprehensive settlement solutions
• Real-time reports and analytics for compliance and cost-optimization
•
Fuel reconciliation and mobile optimization tools
Products and Services
Payment processing fees are based on a percentage of the aggregate dollar amount of the customer’s purchase, a fixed
amount per transaction or a combination of both. Additionally, payment processing revenue related to our WEX Europe Services
operations is specifically derived from the difference between our negotiated price of the fuel from the supplier and the agreed
upon price paid by the fleets. In 2017, we processed approximately 430 million payment processing transactions, compared to 386
million payment processing transactions in 2016. Additionally, we receive revenue from account servicing fees, factoring
receivables and finance fees.
We offer the following services:
• Customer service, account activation and account retention: We offer customer service, account activation and
account retention services to fleets and fleet management companies and the fuel and vehicle maintenance
providers on our network. Our services include promoting the adoption and use of our products and programs
and account retention programs on behalf of our customers and partners.
• Authorization and billing inquiries and account maintenance: We handle authorization and billing questions,
account changes and other issues for fleets through our dedicated customer contact centers, which are available
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24 hours a day, seven days a week. Fleet customers also have self-service options available to them through our
websites.
• Premium fleet services: We assign designated account managers to businesses and government agencies with
large fleets. These representatives have in-depth knowledge of both our programs and the operations and
objectives of the fleets they service.
• Credit and collections services: We have developed proprietary account approval, credit management and fraud
detection programs. Our underwriting model produces a proprietary score, which we use to predict the likelihood
of an account becoming delinquent within 12 months of activation. We also use a credit maintenance model to
manage ongoing accounts, which helps us to predict the likelihood of account delinquency over an ongoing 18-
month time horizon. We have developed a collections scoring model that we use to rank and prioritize past due
accounts for collection activities. We also employ fraud specialists who monitor accounts, alert customers and
provide case management expertise to minimize losses and reduce program abuse.
• Merchant services: Our representatives work with fuel and vehicle maintenance providers to enroll these
providers in our network, test all network and terminal software and hardware, and to provide training on our
sale, transaction authorization and settlement processes.
• ClearView analytics platform: We provide customers with access to a web-based data analytics platform that
offers insights to fleet managers, including integrating and analyzing business fleet fuel purchases to uncover
fraud, manage product type controls and identify cost saving opportunities.
•
SmartHub mobile app: This mobile application gives business managers access to their account information
anytime and anywhere, including the ability to view and make bill payments, access transaction details and
control the status of driver fuel cards. As a result, this offering helps customers improve efficiencies, reduce late
fees, gain valuable insights and control unauthorized driver spending.
Information Management
We provide standard and customized information to customers through monthly vehicle analysis reports, custom reports
and our websites. We also alert customers of unusual transactions or transactions that fall outside of pre-established parameters.
Customers can access their account information through our website including account history and recent transactions, and
download the related details. In addition, fleet managers can elect to be notified by email when limits are exceeded in specified
purchase categories, including limits on transactions within a time range and gallons per day.
Marketing Channels
We market our fleet products and services both directly and indirectly to commercial and government vehicle fleet
customers with small, medium and large fleets, and over-the-road, long haul fleets. Our product suite includes payment processing
and transaction processing services, WEX branded fleet cards in North America and Motorpass/Motorcharge-branded fleet cards
in Australia. As of December 31, 2017, our direct line of business serviced 4.0 million vehicles. As of the same period, our over-
the-road line of business serviced 1.0 million vehicles, marketed under the EFS, EFS Transportation Services, T-Chek and Fleet
One brands.
We also market our products and services indirectly through co-branded and private label relationships. With a co-branded
relationship product, we market our products and services for, and in collaboration with, both fuel providers and fleet management
companies using their brand names and our logo on a co-branded fleet card. These companies seek to offer our payment processing
and information management services as a component of their total offering to their fleet customers. As of December 31, 2017,
our co-branded marketing channel serviced 2.1 million vehicles.
Our private label programs market our products and services for, and in collaboration with, fuel retailers, using only their
brand names. The fuel retailers with which we have formed strategic relationships offer our payment processing and information
management products and services to their fleet customers in order to establish and enhance customer loyalty. These fleets use
these products and services to purchase fuel at locations of the fuel retailer with whom we have the private label relationship. As
of December 31, 2017, our private label marketing channel serviced 4.3 million vehicles.
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Overview
TRAVEL AND CORPORATE SOLUTIONS SEGMENT
Our Travel and Corporate Solutions segment is comprised of our virtual and prepaid products with which we provide
innovative corporate purchasing and payment capabilities that can be integrated with our customers’ internal systems to streamline
their corporate payments, accounts payable and reconciliation processes.
Products and Services
The Travel and Corporate Solutions segment allows businesses to centralize purchasing, simplify complex supply chain
processes and eliminate the paper check writing associated with traditional purchase order programs. Our product suite includes
virtual, credit, debit and prepaid products.
Our virtual card is used for transactions where no card is presented, including, for example, transactions conducted over
the telephone, by mail, by fax or on the Internet. Our virtual card also can be used for transactions that require pre-authorization,
such as hotel reservations. Under our virtual card programs, each transaction is assigned a unique account number with a customized
credit limit and expiration date. These controls are in place to limit fraud and unauthorized spending. The unique account number
limits purchase amounts and tracks, settles and reconciles purchases more easily, creating efficiencies and cost savings for our
customers. The virtual card products offer both credit and debit options.
Our electronic accounts payable solution utilizes virtual card payments that are both broadly accepted and highly secure.
This product reduces manual processing costs and facilitates comprehensive payment terms management to maximize margin
improvement, efficiency and control.
Our corporate travel and expenses card offers broad global acceptance, reduced risk of fraud and enhanced travel data,
and is designed for organizations whose employees travel on business. We make trips easier to plan, more productive, and less
expensive through enhanced spending controls for both the company and its travelers.
Our prepaid and gift card products are offered through WEX Prepaid Card Australia and WEX Europe Limited to
companies throughout Australia and Europe. These products provide secure payment and financial management solutions with
single card options, access to open or closed loop redemption, load limits and variable expirations.
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The following illustration depicts our business process for a typical travel virtual card product transaction:
1 Guest books a hotel through a travel website owned by an online travel company
2 Online travel company reserves room at hotel through reservation system using a WEX virtual card number to reserve the room.
3 Upon checkout, hotel authorizes payment using the WEX virtual card number. The WEX virtual card restricts charge to predetermined
cost of room, incidental expenses are paid for by guest.
4 Online travel company pays WEX. WEX earns fee by retaining percentage of the online travel company reimbursement payment.
Marketing Channels
We market our Travel and Corporate Solutions segment products and services both directly and indirectly to new and
existing customers. Our products are marketed to commercial and government organizations and we use existing open-loop
networks.
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Overview
HEALTH AND EMPLOYEE BENEFIT SOLUTIONS SEGMENT
Our Health and Employee Benefit Solutions segment is comprised of our healthcare payment products and SaaS platforms
with which we provide simplified payment capabilities in a complex healthcare market as well as employee benefit products in
Brazil.
Products and Services
With our healthcare payment products, we provide consumer-directed payments in the complex healthcare market. We
partner with health plans, third-party administrators, financial institutions, payroll companies and software providers to provide a
software as a service product to support employers' healthcare benefits programs and to administer COBRA, flexible spending,
health saving and reimbursement accounts, and other healthcare related employee and dependent benefits.
We currently have relationships with approximately 300,000 employers, reaching 25 million consumers. Revenue is
generated primarily from SaaS based monthly fees to partners and interchange fees from spending on customer debit cards issued
under flexible spending, health savings and reimbursement accounts. Cards are branded with either Visa or MasterCard and operate
on a restricted open loop network.
Our benefit products are offered through our wholly-owned subsidiary, WEX Latin America. Employees using our benefit
products have access to salary advances payable in up to 24 monthly installments which are secured by future salary earnings.
These advances are funded primarily through securitization of the corresponding receivables.
Health and Employee Benefit Solutions segment revenues are generated primarily from platform usage subscription fees
and interchange fees from spending on the WEX Health payment cards.
Marketing Channels
We market our Health and Employee Benefit Solutions products and services to consumers through an extensive partner
network, which includes health plans, third party administrators, financial institutions, payroll providers and software providers.
Our employee benefit products are marketed to consumers through employers in Brazil.
Employees
OTHER ITEMS
As of December 31, 2017, WEX Inc. and its subsidiaries had more than 3,300 employees, of which approximately 2,500
were located in the United States. None of our U.S.-based employees are subject to a collective bargaining agreement. In Europe,
certain employees are members of trade unions or works councils. In Brazil, certain employees are members of unions. The
Company believes that its relations with its employees, unions and work councils are generally satisfactory. This belief was
reinforced by the Company being certified as a "Great Place to Work" in 2017 by Great Place to Work®.
Competition
We have a strong competitive position in each of our segments. Our product features and extensive account management
services are key factors behind our position in the fleet industry. We face competition in all of our segments. Our competitors vie
with us for prospective direct fleet customers as well as for companies with which to form strategic relationships. We compete
with companies that perform payment and transaction processing or similar services. Financial institutions that issue Visa,
MasterCard and American Express credit and charge cards currently compete against us primarily in the Fleet Solutions and Travel
and Corporate Solutions segments. We also compete with other healthcare payment service providers.
The most significant competitive factors include the breadth of features offered, functionality, servicing capability and
price. For more information regarding risks related to competition, see the information in Item 1A, under the heading “Our industry
continues to become increasingly competitive, which makes it more challenging for us to maintain profit margins at historical
levels.”
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Technology
We believe that investment in technology is a crucial step in maintaining and enhancing our competitive position in the
marketplace. Our data center network and infrastructure is supported by secure data centers with redundant locations. We have
data centers in various locations in the United States including South Portland, Maine and Aurora, Colorado. We also have data
centers and infrastructure located in various locations throughout Europe, Australia, New Zealand and Brazil.
Our fleet fuel-based closed-loop proprietary platforms capture detailed information from the fuel and maintenance
locations within our network. Operating a proprietary network not only enhances our value proposition, it also enables us to limit
dependence on third-party processors and to respond rapidly to changing customer needs with system upgrades, while maintaining
a more secure environment than an open-loop network typically allows. Our virtual card open-loop network uses internally
developed software and third-party processors. Our infrastructure has been designed around industry-standard architectures to
reduce downtime in the event of outages or catastrophic occurrences. At WEX Health, we maintain an integrated multi-account
payment platform, including a mobile application. In Australia, New Zealand, Brazil and the United Kingdom, we use standalone
platforms to support operations.
Our secure networks are designed to isolate our databases from unauthorized access. We use security protocols among
all applications, and our employees access critical components on a need-to-know basis. As of December 31, 2017, we have not
experienced any material incidents in network, application or data security. We are continually improving our technology to enhance
customer relationships and to increase efficiency and security. We also review technologies and services provided by others in
order to maintain the high level of service expected by our customers and continue to invest in our infrastructure.
For information regarding technology related risks, see the information in Item 1A under the headings “Our business is
regularly subject to cyberattacks and attempted security and privacy breaches and we may not be able to adequately protect our
information systems, including the data we collect about our customers, which could subject us to liability and damage our
reputation”, “Our failure to effectively implement new technology could jeopardize our position as a leader in our industry,” “We
are dependent on technology systems and electronic communications networks managed by third parties, which could result in
our inability to prevent service disruptions” and “If the technologies we use in operating our business and interacting with our
customers fail, are unavailable, or do not operate to expectations, or we fail to successfully implement technology strategies and
capabilities in connection with our outsourcing arrangements, our business and results of operation could be adversely impacted.”
Seasonality
Our businesses are affected by seasonal variations. For example, fuel prices are typically higher during the summer and
online travel sales are typically higher during the third quarter. In addition, we experience seasonality in our Health and Employee
Benefits Solutions segment, as consumer spend is correlated with insurance deductibles, typically resulting in higher spend in the
early part of the year until employees meet their deductibles.
Intellectual Property
We rely on a combination of patent, copyright, trade secret and trademark laws, confidentiality procedures, contractual
provisions and other similar measures to protect the proprietary information and technology used in our business. We generally
enter into confidentiality, professional services and/or license agreements with our consultants and corporate partners and control
access to and distribution of our technology, documentation and other proprietary information. Despite the efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise obtain the use of our products or technology that we
consider proprietary and third parties may attempt to develop similar technology independently. We pursue registration and
protection of our trademarks in the U.S. and other countries in which we operate or plan to operate. We market our products and
services using the WEX, Fleet One, EFS and the WEX Health Cloud brand names in the U.S., the Motorpass and Motorcharge
brand names in Australia and the WEX Latin America brand name in Brazil.
Regulation - United States
The Company and its affiliates are subject to certain state and federal laws and regulations, which govern insured depository
institutions and their affiliates as well as our operations in the healthcare market. WEX Bank is subject to supervision and
examination by both the Utah DFI and the FDIC. The Company and its affiliates are subject to certain limitations on transactions
with affiliates set forth in the Federal Reserve Act (“FRA”). The Company is subject to anti-tying provisions in the Bank Holding
Company Act. State and Federal laws and regulations limit the loans WEX Bank may make to one borrower and the types of
investments WEX Bank may make.
Below is a description of the material elements of the laws, regulations, policies and other regulatory matters affecting
the operations of WEX in the United States.
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Exemption from Certain Requirements of the Bank Holding Company Act
As an industrial bank organized under the laws of Utah that does not accept demand deposits that may be withdrawn by
check or similar means, WEX Bank meets the criteria for exemption from the definition of “bank” under the Bank Holding Company
Act. As a result, the Company is generally, except as stated above, not subject to the Bank Holding Company Act.
Restrictions on Intercompany Borrowings and Transactions
Sections 23A and 23B of the FRA and the implementing regulations limit the extent to which the Company can borrow
or otherwise obtain credit from or engage in other “covered transactions” with WEX Bank. “Covered transactions” include loans
or extensions of credit, purchases of or investments in securities, purchases of assets, including assets subject to an agreement to
repurchase, acceptance of securities as collateral for a loan or extension of credit, or the issuance of a guarantee, acceptance, or
letter of credit. Although the applicable rules do not serve as an outright ban on engaging in “covered transactions,” they do limit
the amount of covered transactions WEX Bank may have with any one affiliate and with all affiliates in the aggregate. The applicable
rules also require that the Company engage in such transactions with WEX Bank only on terms and under circumstances that are
substantially the same, or at least as favorable to WEX Bank, as those prevailing at the time for comparable transactions with
nonaffiliated companies. Furthermore, with certain exceptions, each loan or extension of credit by WEX Bank to the Company or
its other affiliates must be secured by collateral with a market value ranging from 100 percent to 130 percent of the amount of the
loan or extension of credit, depending on the type of collateral.
The Consumer Financial Protection Bureau
The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) to regulate the offering of consumer
financial products or services under the federal consumer financial laws. In addition, the CFPB was granted general authority to
prevent covered persons or service providers from committing or engaging in unfair, deceptive or abusive acts or practices under
federal law in connection with any transaction with a consumer for a consumer financial product or service. The CFPB has broad
rulemaking authority for a wide range of consumer protection laws. The legislation also gives the state attorneys general the ability
to enforce applicable federal consumer protection laws.
In addition, the Durbin Amendment to the Dodd-Frank Act provided that interchange fees that a card issuer or payment
network receives or charges for debit transactions will now be regulated by the Federal Reserve and must be “reasonable and
proportional” to the cost incurred by the card issuer in authorizing, clearing and settling the transaction. Payment network fees
may not be used directly or indirectly to compensate card issuers in circumvention of the interchange transaction fee restrictions.
In July 2011, the Federal Reserve published the final rules governing debit interchange fees. Effective in October 2011, with certain
exemptions, debit interchange rates were capped at $0.21 per transaction with an additional component of five basis points of the
transaction’s value to reflect a portion of the issuer’s fraud losses plus, for qualifying issuing financial institutions, an additional
$0.01 per transaction in debit interchange for fraud prevention costs.
Brokered Deposits
Under FDIC regulations, depending upon their capital classification, banks may be restricted in their ability to accept
brokered deposits. “Well capitalized” banks are permitted to accept brokered deposits, but banks that are not “well capitalized”
are not permitted to accept such deposits. The FDIC may, on a case-by-case basis, permit banks that are “adequately capitalized”
to accept brokered deposits if the FDIC determines that acceptance of such deposits would not constitute an unsafe or unsound
banking practice.
Other Financial Regulatory Requirements
WEX Bank must monitor and report unusual or suspicious account activity, as well as transactions involving amounts in
excess of prescribed limits, as required by the Bank Secrecy Act and Internal Revenue Service regulations. The USA PATRIOT
Act of 2001 substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing significant new
compliance and due diligence obligations, identifying new crimes and penalties and expanding the extra-territorial jurisdiction of
the United States. The United States Treasury Department has proposed and, in some cases, issued a number of implementing
regulations which impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect,
prevent and report money laundering and terrorist financing and to verify the identity of their customers. Certain of those regulations
impose specific due diligence requirements on financial institutions that maintain correspondent or private banking relationships
with non-U.S. financial institutions or persons. Failure of a financial institution to maintain and implement adequate programs to
combat money laundering and terrorist financing could have serious legal and reputational consequences for the institution.
The U.S. federal government has imposed economic sanctions that affect transactions with designated foreign countries,
nationals and others. These sanctions, which are administered by the United States Treasury’s Office of Foreign Assets Control
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(“OFAC”), take many different forms but generally include one or more of the following elements: (i) restrictions on trade with
or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned
country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing
investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially
designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction
(including property in the possession or control of U.S. persons). Blocked assets (for example, property and bank deposits) cannot
be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions
could have serious legal and reputational consequences.
Under the Financial Services Modernization Act of 1999, also referred to as the “Gramm-Leach-Bliley Act" (or “GLBA”),
the Company and WEX Bank are required to maintain a comprehensive written information security program that includes
administrative, technical and physical safeguards relating to customer information. However, this requirement does not generally
apply to information about companies or about individuals who obtain financial products or services for business, commercial, or
agricultural purposes. The GLBA also requires the Company and WEX Bank to provide initial and annual privacy notices to
customers that describe in general terms their information sharing practices. If the Company and WEX Bank intend to share
nonpublic personal information about customers with affiliates and/or nonaffiliated third parties, they must provide customers
with a notice and a reasonable period of time for each consumer to “opt out” of any such disclosure. In addition to U.S. federal
privacy laws, states also have adopted statutes, regulations and other measures governing the collection and distribution of nonpublic
personal information about customers. In some cases these state measures are preempted by federal law, but if not, the Company
and WEX Bank must monitor and comply with such laws in the conduct of its business.
Escheat Laws
We are subject to unclaimed or abandoned property state laws in the United States and in certain foreign countries that
require us to transfer to certain government authorities the unclaimed property of others that we hold when that property has been
unclaimed for a certain period of time. Moreover, we are subject to audit by state and foreign regulatory authorities with regard
to our escheatment practices.
Restrictions on Dividends
WEX Bank is subject to various regulatory requirements relating to the payment of dividends, including requirements to
maintain capital above regulatory minimums. A banking regulator may determine that the payment of dividends would be
inappropriate and could prohibit payment. Further, WEX Bank may not pay a dividend if it is undercapitalized or would become
undercapitalized as a result of paying the dividend. Utah law permits WEX Bank to pay dividends out of the net profits of the
industrial bank after providing for all expenses, losses, interest, and taxes accrued or due, but if WEX Bank’s surplus account is
less than 100 percent of its capital stock, WEX Bank must transfer up to 10 percent of its net profits to the surplus account prior
to the payment of any dividends.
Company Obligations to WEX Bank
Any non-deposit obligation of WEX Bank to the Company is subordinate, in right of payment, to deposits and other
indebtedness of WEX Bank. In the event of the Company’s bankruptcy, any commitment by the Company to a federal bank
regulatory agency to maintain the capital of WEX Bank will be assumed by the bankruptcy trustee and entitled to priority of
payment.
Restrictions on Ownership of WEX Inc. Common Stock
WEX Bank, and therefore the Company, is subject to bank regulations that impose requirements on entities that might
control WEX Bank through control of the Company. These requirements are discussed in Item 1A under the heading “If any entity
controls 10 percent or more of our common stock and such entity has caused a violation of applicable banking laws by its failure
to obtain any required approvals prior to acquiring that common stock, we have the power to, and may be required to, restrict such
entity’s ability to vote shares held by it.”
Healthcare Regulation
The federal and state governments in the U.S. continue to enact and consider many broad-based legislative and regulatory
proposals that could materially impact various aspects of our health-related business. The plans that our partners administer
feature consumer accounts that pay for out-of-pocket expenses incurred by employees and qualified dependents. These accounts
include Consumer-Directed Health ("CDH") accounts such as Health Savings Accounts, Flexible Spending Accounts, and Health
Reimbursement Arrangements (commonly referred to as HSAs, FSAs and HRAs, respectively), as well as wellness incentives,
commuter benefits, and other account-based arrangements. Most of these accounts are tax-advantaged under the appropriate law.
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Employers are continuing to use CDH approaches to manage the rate of increase in healthcare expenditures and to enable
employees to make decisions about the use of their healthcare savings. CDH programs provide consumers with visibility of and
control over payment for healthcare expenses.
The products that WEX Health's software and payment solutions support are subject to various state and federal laws,
including the Affordable Care Act, and regulations promulgated by the Internal Revenue Service, the Department of Health and
Human Services, the Department of Labor, and the Consumer Financial Protection Bureau. As such, changes in the status of tax-
advantaged CDH accounts could affect the attractiveness of these products.
In addition to tax-related regulation, the Patient Protection and Affordable Care Act and the Health Care and Education
Reconciliation Act (collectively referred to as “Health Care Reform”) mandated broad changes affecting insured and self-insured
health benefit plans that impact our current business model, including our relationship with current and future customers, producers
and health care providers, products, services, processes and technology. Health Care Reform left many details to be established
through regulations. While federal agencies have published proposed and final regulations with respect to most provisions, some
issues remain uncertain. The 2017 Tax Cuts and Jobs Act repealed certain provisions of Health Care Reform, including reducing
to zero the tax penalty for going without Health Care Reform-compliant healthcare coverage. The current U.S. Administration and
Congress have signaled their intent to significantly modify or completely repeal Health Care Reform and the associated
implementing regulations. It is unclear what, if any, additional measures may be taken in this regard. Accordingly, there may be
an extended period of uncertainty and unpredictability in the U.S. health care market, which may materially affect the availability
and cost of health coverage, the viability of health care providers and health benefit plans, the proportion of persons in the U.S.
who have health insurance; the distribution between privately funded and government funded health insurance; and the future
demand for, and profitability of, the offerings of our health-related business under our current business model.
In connection with the processing of data, we frequently undertake or are subject to specific compliance obligations under
privacy and data security-related laws, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA, the
Gramm-Leach-Bliley Act, and similar state and federal laws governing the collection, use, protection and disclosure of nonpublic
personally identifiable information, including individually identifiable health information.
HIPAA and its implementing regulations, as amended by the Health Information Technology for Economic and Clinical
Health Act, or the HITECH Act, impose requirements relating to the privacy, security and transmission of individually identifiable
health information. Among other things, HIPAA, as amended by the HITECH Act, and its implementing regulations, subjects us
to regulations and contractual obligations that impose privacy and security standards and breach notification and reporting
requirements.
In addition to tax, federal data privacy, security laws and regulations, we are subject to state laws governing confidentiality
and security of personally identifiable information and additional state-imposed breach notification and reporting requirements.
Regulation - Foreign
The conduct of our businesses and the use of our products and services outside the U.S., are subject to various foreign
laws and regulations administered by government entities and agencies in the countries and territories where we operate. Below
is a summary of material applicable laws and regulations in the jurisdictions around the world in which we do business.
Asia-Pacific
Australia
The Company’s Australian operations are subject to laws and regulations of the Commonwealth of Australia governing
banking and payment systems, financial services, credit products and money laundering. Because none of WEX Australia, WEX
Fuel Cards Australia or WEX Prepaid Cards Australia holds an Australian Financial Services License or credit license or is an
authorized deposit-taking institution, they operate within a framework of regulatory relief and exemptions afforded them on the
basis that they satisfy the requisite conditions. The Australian operations are also subject to the Privacy Act (1988) and the
Australian Privacy Principles.
Asia, including Singapore
The Company's operations in Asia are subject to the operation of the laws and regulation of the countries in which we
operate, including laws with regards to banking and payment systems, financial services, money laundering and data protection.
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Europe
The Company’s European operations are subject to laws and regulations of the European Union and the countries in
which we operate including, among others, those governing payment services, data protection, including General Data Protection
Regulation (commonly referred to as "GDPR"), and information security, consumer credit and anti-money laundering.
Brazil
The Company’s Brazilian operations are subject to laws and regulations of the Brazilian government, in particular the
Central Bank of Brazil. Brazil’s labor systems are governed by the Consolidation of Brazilian Labor Laws. Brazil is a signatory
of the World Trade Organization’s Trade-Related Aspects of Intellectual Property Rights agreement. This agreement establishes
a minimum protection standard to property rights and requires signatory countries to review and adapt national laws that meet that
standard.
Segments and Geographic Information
For an analysis of financial information about our segments as well as our geographic areas, see Item 8 - Note 23, Segment
Information of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
For a description of the risks related to our foreign operations, see the information in Item 1A, Risk Factors under the
heading “We are exposed to risks associated with operations outside of the United States, which could harm both our U.S. and
international operations.”
Available Information
The Company’s principal executive offices are located at 97 Darling Avenue, South Portland, ME 04106. Our telephone
number is (207) 773-8171, and our Internet address is www.wexinc.com. The Company’s annual, quarterly and current reports,
proxy statements and certain other information filed with the SEC, as well as amendments thereto, may be obtained free of charge
from our website. These documents are posted to our website as soon as reasonably practicable after we have filed or furnished
these documents with the SEC. These documents are also available at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC at www.sec.gov. The Company’s Audit Committee Charter, Compensation
Committee Charter, Finance Committee Charter, Corporate Governance Committee Charter, Corporate Governance Guidelines
and Code of Business Conduct and Ethics are available without charge through the “Corporate Governance” portion of the Investor
Relations page of the Company’s website. Copies will also be provided, free of charge, to any stockholder upon written request
to Investor Relations at the address above or by telephone at (866) 230-1633.
The Company’s Internet site and the information contained on it are not incorporated into this Form 10-K and should not
be considered part of this report.
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ITEM 1A. RISK FACTORS
The risks and uncertainties described below are not the only risks and uncertainties that we face. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
If any of those risks actually occurs, our business, financial condition, results of operations and cash flows could suffer. The
risks and uncertainties discussed below also include forward-looking statements and our actual results may differ materially
from those discussed in these forward-looking statements.
Risks Relating to Our Company
A significant portion of our revenues are related to the dollar amount of fuel purchased by our customers, and, as a
result, volatility in fuel prices could have an adverse effect on our revenues.
Our customers in our Fleet Solutions segment primarily purchase fuel. Accordingly, a significant part of our
revenue is dependent on fuel prices, which are prone to volatility. As of December 31, 2017, management estimates that
approximately 21 percent of our total revenues result from fees paid to us by fuel providers based on a negotiated
percentage of the purchase price of fuel purchased by our customers. We estimate that during 2017, each one cent decline in
average domestic fuel prices below average actual prices would result in approximately a $1.2 million decline in 2017
revenue. Therefore, extended declines in the price of fuel would have a material adverse effect on our total revenues. In the
fourth quarter of 2014, we suspended our fuel price hedging program and as of the second quarter of 2016, we no longer had
any remaining fuel hedging derivatives outstanding. As a result, we are exposed to the full impact of fuel price declines and
our net income is exposed to fuel price volatility unless and until a fuel price hedging program is reinstated. If fuel prices
decline, the lack of a hedge will negatively impact our revenue and income.
Fuel prices are dependent on many factors, all of which are beyond our control. These factors include, among
others:
•
•
•
•
•
•
•
supply and demand for oil and gas, and expectations regarding supply and demand;
speculative trading;
actions by major oil exporting nations;
level of U.S. oil production;
advances in oil production technologies;
political conditions in other oil-producing, gas-producing or supply-route countries, including revolution,
insurgency, terrorism or war;
refinery capacity;
• weather;
•
•
•
•
•
•
the prices of foreign exports and the availability of alternate fuel sources;
value of the U.S. dollar versus other major currencies;
actions by members of Organization of Petroleum Exporting Countries and other major oil-producing
nations;
implementation of fuel efficiency standards and the adoption by fleet customers of vehicles with greater
fuel efficiency or alternative fuel sources;
general worldwide economic conditions; and
governmental regulations, taxes and tariffs.
Another component of our revenue stream is the late fees that our customers pay on past due balances. As a result,
a decrease in the price of fuel leads to a decline in the amount of late fees we earn from customers who fail to pay us timely.
A portion of our revenue in Europe is derived from the difference between the negotiated price of the fuel from the
supplier and the price charged to the fleet customer. As a result, a contraction in these differences would reduce
revenues and could adversely affect our operating results.
Revenue from our European Fleet business is derived from transactions where our revenue is tied to the difference
between the negotiated price of the fuel from the supplier and the price charged to the fleet customer. The merchant’s cost of
fuel is dependent on several factors including, among others, the factors described above affecting fuel prices. We
experience fuel-price related revenue contraction when the merchant’s cost of fuel increases at a faster rate than the fuel
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price we charge to our fleet customers, or the fuel-price we charge to our fleet customers decreases at a faster rate than the
merchant’s cost of fuel. Accordingly, we generate less revenue, which could adversely affect our operating results.
Changes in interchange fees could decrease our revenue.
A portion of our revenue is generated by network processing fees charged to merchants, known as interchange fees,
associated with transactions processed using our cards. Interchange fee amounts associated with cards are affected by a number
of factors, including regulatory limits and fee changes. In addition, interchange fees are the subject of intense legal and regulatory
scrutiny and competitive pressures in the electronic payments industry. For example, the Durbin Amendment to the Dodd-
Frank Act, which serves to limit interchange fees may restrict or otherwise impact the way we do business or limit our ability
to charge certain fees to customers. The Consumer Financial Protection Bureau, or the CFPB, is also engaged in rulemaking
and regulation of the payments industry, in particular with respect to prepaid cards. On January 25, 2018, the CFPB issued a
final rule amending several aspects of its prepaid accounts rule adopted in October 2016 and delayed the overall effective date
for such prepaid accounts rule to April 1, 2019. The extensive nature of these regulations and the implementation dates for this
additional rulemaking may result in additional compliance obligations and expense for our business and our customers. These
factors could result in lower interchange fees generally in the future. Temporary or permanent decreases in the interchange
fees associated with our card transactions, could adversely affect our business and operating results.
If we fail to adequately assess and monitor credit risks posed by our customers, we could experience an increase in
credit loss.
We are subject to credit risk posed by our customers, many of which are small-to mid-sized businesses. Because we
often fund a customer's entire receivable while our revenue is generated from only a small percentage of that amount, our
risk of loss is amplified by the customer's failure to pay. We use various formulas and models to screen potential customers
and establish appropriate credit limits, but these formulas and models cannot eliminate all potential credit risks and may not
prevent us from approving applications that are fraudulently completed. Moreover, businesses that are good credit risks at
the time of application may deteriorate over time and we may fail to detect such changes. In addition, changes to our
policies on the types and profiles of businesses to which we extend credit could also have an adverse impact on our credit
losses. In times of economic slowdown, the number of our customers who default on payments owed to us tends to increase.
If we fail to adequately manage our credit risks, our provision for credit losses on the income statement could be
significantly higher.
We may incur substantial losses due to fraudulent use of our payment cards, payment systems or vouchers.
Under certain circumstances, we may bear the risk of substantial losses due to fraudulent use of our payment cards
or payment systems. We are also subject to risk from fraudulent acts of employees or contractors. Although we maintain
insurance for certain types of losses, the coverage may be insufficient or limited and may not fully protect against those
losses. Additionally, criminals use sophisticated illegal activities to target us, including "skimming", counterfeit cards and
accounts, and identity theft. A single, significant incident or a series of incidents of fraud or theft could lead to, among other
things, some or all of the following:
•
•
•
•
•
•
•
•
increased overall level of fraud;
direct financial losses as a result of fraudulent activity;
reputational harm;
decreased desirability of our services;
greater regulation;
increased compliance costs;
imposition of regulatory sanctions; or
significant monetary fines.
All of the above could have a material adverse effect on our operations, business success, financial condition and
results of operations. Our bad debt expense, inclusive of fraud losses, was $61.1 million in 2017 compared to $33.3 million
in 2016.
Fluctuations in foreign currency exchange rates could affect our financial results.
We earn revenues, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S.
dollar. Such currencies include, but are not limited to, the Australian dollar, the Canadian dollar, the Euro, British Pound
sterling, New Zealand dollar and Brazilian Real. Because our consolidated financial statements are presented in U.S. dollars,
we must translate revenues, income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in
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effect during or at the end of each reporting period. Realized and unrealized gains and losses on foreign currency
transactions as well as the re-measurement of our cash, receivable and payable balances that are denominated in foreign
currencies, are recorded directly in the consolidated statements of income. In addition, gains and losses associated with the
Company's foreign currency exchange derivatives are recorded on the consolidated statements of income.
Therefore, increases or decreases in the value of the U.S. dollar against other major currencies that we use to
conduct our business will affect our revenues, operating income and the value of balance sheet items denominated in those
currencies. Fluctuations in foreign currency exchange rates, particularly fluctuations in the U.S. dollar against other
currencies, may materially affect our financial results.
Our exposure to counterparty risk could create an adverse effect on our financial condition.
We engage in a number of transactions where counterparty risk is a relevant factor, including transactions with
customers, derivatives counterparties and those businesses we work with to provide services, among others. These risks are
dependent upon market conditions and also the real and perceived viability of the counterparty. The failure or perceived
weakness of any of our counterparties has the potential to expose us to risk of loss in certain situations. Certain contracts
and arrangements that we enter into with counterparties may provide us with indemnification clauses to protect us from
financial loss. If the counterparty fails to, or is unable to fulfill these indemnification clauses, we may incur losses as well as
harm to our reputation.
We have substantial indebtedness, which may materially and adversely affect our financial flexibility and our ability
to meet our debt service obligations.
Our 2016 Credit Agreement, as amended on January 17, 2018, provides for a tranche A term loan facility in an
amount equal to $455 million that matures on July 1, 2021 (of which $421 million remained outstanding at the time of the
amendment), a tranche B term loan facility in an amount equal to $1,335 million that matures on July 1, 2023 and a $570
million secured revolving credit facility, with a $250 million sublimit for letters of credit and a $20 million sublimit for
swingline loans, that terminates on July 1, 2021. Prior to maturity, amounts under the credit facility will be reduced by
mandatory amortization payments and may be reduced by the mandatory prepayment of our tranche B term loan facility out
of a certain portion of our excess cash or by optional prepayments. In addition to the 2016 Credit Agreement, our
indebtedness consists of our 4.750 percent senior notes in the principal amount of $400 million due 2023 (the “Notes”),
deposits issued by WEX Bank and other liabilities outstanding. Our indebtedness could, among other things:
• require us to dedicate a substantial portion of our cash flow to repaying our indebtedness, thus reducing the amount
of funds available for other general corporate purposes;
• limit our ability to borrow additional funds necessary for working capital, capital expenditures or other general
corporate purposes;
• increase our vulnerability to adverse general economic or industry conditions; and
• limit our flexibility in planning for, or reacting to changes in, our business.
There can be no assurance that we will be able to meet our indebtedness obligations, including any of our
obligations under the Notes. In addition, we may need to incur substantial additional indebtedness in the future to fund our
operations or certain strategic objectives. However, we may not be able to obtain the additional financing necessary for
these purposes.
In addition, under the 2016 Credit Agreement, unless otherwise agreed by the requisite lenders under the revolving
credit facility, we are required to remain in compliance with a consolidated EBITDA to consolidated interest charge ratio,
measured quarterly, of no less than 3.25 to 1.00; and a consolidated funded indebtedness (excluding up to $350 million of
consolidated funded indebtedness due to permitted securitization transactions and excluding the amount of consolidated
funded indebtedness constituting the non-recourse portion of permitted factoring transactions) to consolidated EBITDA
ratio,measured quarterly, of no more than 5.00 to 1.00, which ratio shall step down to 4.50 to 1.00 at December 31, 2018
and 4.00 to 1.00 at December 31, 2019. In addition, in the event of an acquisition meeting certain specified criteria, the
consolidated leverage ratio shall be permanently increased by 0.50:1.00. The 2016 Credit Agreement also contains various
affirmative and negative covenants that, subject to certain customary exceptions, restrict our ability to, among other things,
create liens over our property, incur additional indebtedness, enter into sale and lease-back transactions, make loans,
advances or other investments, make non-ordinary course asset sales, declare or pay dividends or make other distributions
with respect to equity interests, change the nature of our business, enter into certain agreements which restrict our ability to
pay dividends or other distributions or create liens on our property, transact business with affiliates and/or merge or
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consolidate with any other person. Our ability to comply with these provisions may be affected by events beyond our
control. Failure to comply with the financial covenants or any other non-financial or restrictive covenant in our 2016 Credit
Agreement could create a default. Upon a default, our lenders could accelerate the indebtedness under the facilities (except
only the requisite lenders under the revolving credit facility and the tranche A term loan facility may accelerate the revolving
credit facility due to a breach of the financial covenants), foreclose against their collateral or seek other remedies, which
could trigger a default under the Notes and would jeopardize our ability to continue our current operations.
Despite our substantial indebtedness, we may still be able to incur more debt, intensifying the risks described above.
Subject to restrictions in our 2016 Credit Agreement and the Notes, we may incur additional indebtedness, which
could increase the risks associated with our already substantial indebtedness. Subject to certain limitations, including
compliance with the covenants in our 2016 Credit Agreement, we have the ability to borrow additional funds under our
2016 Credit Agreement.
This indebtedness could have the effect, among other things, of reducing our flexibility to respond to changing
business and economic conditions and increasing interest expense.
Moreover, we may be required to raise substantial additional financing to fund working capital, capital
expenditures, acquisitions or other general corporate requirements. Our ability to arrange additional financing or refinancing
will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and
other factors beyond our control. There can be no assurance that we will be able to obtain additional financing or
refinancing on terms acceptable to us or at all.
Volatility in the financial markets may negatively impact our ability to access credit and the terms at which we would
access such credit.
Adverse conditions in the credit market may limit our ability to access credit at a time when we would like or need
to do so. Our senior secured revolving credit facility under the 2016 Credit Agreement expires in July 2021 when the
outstanding balance of the revolving credit facility and the tranche A term loan will be due, and in 2023 the tranche B term
loan and the Notes will be due. Any limitation on the availability of funds or credit facilities could have an impact on our
ability to refinance the maturing debt or react to changing economic and business conditions which could adversely impact
us.
Volatility in the financial markets may negatively impact WEX Bank’s ability to attract and retain deposits.
Adverse conditions in the credit market may limit WEX Bank’s ability to attract deposits at a time when it would
like or need to do so. A significant credit ratings downgrade, material capital market disruptions, significant withdrawals by
depositors at WEX Bank, or adverse changes to its industrial bank charter could impact our ability to maintain adequate
liquidity and impact our ability to provide competitive offerings to our customers. Any limitation of availability of deposits
could have an impact on our ability to finance our U.S. accounts receivable which would adversely impact us.
Our industrial bank subsidiary is subject to funding risks associated with its reliance on brokered deposits.
Under applicable regulations, if WEX Bank were no longer “well capitalized,” it would not be able to accept
brokered deposits without the approval of the FDIC. WEX Bank’s inability to accept brokered deposits, or a loss of a
significant amount of its brokered deposits, could adversely affect our liquidity. Additionally, such circumstances could
require it to raise deposit rates in an attempt to attract new deposits, or to obtain funds through other sources at higher rates,
which would adversely affect our results of operations.
To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on
many factors beyond our control.
Our ability to make payments on and to refinance our indebtedness, and to fund capital expenditures, acquisitions
and research and development efforts will depend on our ability to generate cash. This, to a certain extent, is subject to
economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
We have substantial indebtedness, and may incur additional indebtedness, which could lead to increased interest
expense and could increases the amount of cash flows required to fund interest expense associated with our indebtedness. In
addition, certain obligations under the 2016 Credit Agreement bear interest at variable interest rates. We currently maintain
five forward-fixed interest rate swap agreements which are intended to fix the future interest payments associated with
$1,300 million of our variable-rate borrowings; however, those swap agreements expire at various points prior to the
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expiration of the 2016 Credit Agreement. In addition, interest rate increases still could result in larger debt service
requirements. Such an increase in our debt service obligations would adversely affect our cash flows.
We cannot assure you that our business will generate sufficient cash flows from operations, that anticipated cost
savings and operating improvements will be realized on schedule or at all, that future borrowings will be available to us
under our 2016 Credit Agreement or any subsequent credit agreement, or that we can obtain alternative financing proceeds
in an amount sufficient to enable us to pay our indebtedness, including the Notes, or to fund our other liquidity needs. We
may need to refinance all or a portion of our indebtedness, including the Notes, at or before maturity. We cannot assure you
that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.
The debt service obligations under our 2016 Credit Agreement could also reduce funds available for working
capital, capital expenditures, acquisitions and other general corporate purposes and may create competitive disadvantages
relative to other companies with lower debt levels. The 2016 Credit Agreement was used in part to finance the acquisition of
EFS. If we do not achieve the expected benefits and cost savings from the acquisition, or if the financial performance of the
combined company does not meet current expectations, then our ability to service our indebtedness may be adversely
impacted.
In an environment of increasing interest rates, interest expense on the variable rate portion of our borrowings would
increase and we may not be able to replace our maturing debt with new debt that carries the same interest rates. We
may be adversely affected by significant changes in the brokered deposit market.
Our industrial bank subsidiary, WEX Bank, uses collectively brokered deposits, including certificates of deposit
and interest-bearing money-market deposits, to finance payments to major oil companies. Certificates of deposit carry fixed
interest rates from issuance to maturity, which vary and are relatively short term in duration. The interest-bearing money
market deposits carry variable rates. Upon maturity, the deposits will likely be replaced by issuing new deposits to the extent
that they are needed. In a rising interest rate environment, WEX Bank would not be able to replace maturing deposits with
deposits that carry the same or lower interest rates. Therefore, rising interest rates would result in reduced net income to the
extent that certificates of deposit and money market deposits mature and are replaced. At December 31, 2017, WEX Bank
had outstanding $630.9 million in certificates of deposit maturing within one year, $306.9 million in certificates of deposit
maturing between one and three years, and $285.9 million in interest-bearing money market deposits, for an aggregate
exposure of $1,223.7 million in brokered deposits at WEX Bank.
Additionally, under our 2016 Credit Agreement and Notes, we had $2,139.4 million of fixed and variable interest
rate indebtedness outstanding at December 31, 2017, consisting of $400.0 million of borrowings under our bond facility at a
fixed rate of 4.750 percent and $1,300 million of borrowings under our 2016 Credit Agreement that bore interest at floating
rates, subject to the partial hedging arrangement described above. An increase in interest rates would increase the cost of
borrowing under our 2016 Credit Agreement.
Our 2016 Credit Agreement uses LIBOR as a reference rate for our term loans and revolving credit facility, such
that the interest due pursuant to a such loans may be calculated using LIBOR (subject to a stated minimum value). On July
27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase
out LIBOR by the end of 2021. It is unclear if at that time LIBOR will cease to exist or if new methods of calculating
LIBOR will be established such that it continues to exist after 2021. The future of LIBOR at this time is uncertain. If the
method for calculation of LIBOR changes, if LIBOR is no longer available or if lenders have increased costs due to changes
in LIBOR, we may suffer from potential increases in interest rates on our floating debt rate. Further, we may need to
renegotiate our 2016 Credit Agreement and the loans that utilize LIBOR as a factor in determining the interest rate to
replace LIBOR with the new standard that is established.
The Dodd-Frank Act may have a significant impact on our business, results of operation and financial condition.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank
Act, was enacted into law. The Dodd-Frank Act, among other things, when fully implemented, will result in substantial
changes in the regulation of derivatives and capital market activities. The impact of the Dodd-Frank Act is difficult to assess
because many provisions are being phased in over time and because the current Presidential administration has indicated it
may make or propose changes to provisions of the Dodd-Frank Act. In particular, the Dodd-Frank Act establishes federal
oversight and regulation of the over-the-counter derivatives market and entities that participate in that market. The rules, if
enacted in their proposed form, may require us to change to any fuel price, currency and interest rate hedging practices we
may then use to comply with new regulatory requirements. Potential changes include clearing and execution methodology
of our derivatives transactions. The Dodd-Frank Act also requires many counterparties to derivatives instruments to spin off
some of their derivatives activities to a separate entity. These new entities may not be as creditworthy as the current
counterparty. Presently, we cannot assess the capital or margin requirements which might apply to our over-the-counter
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transactions. Once implemented, these changes could result in increased transaction costs. In summary, the Dodd-Frank Act
and any new regulations could increase the cost of derivative contracts or modify the way in which we conduct those
transactions. Additionally, we are required to pay to the lenders under the 2016 Credit Agreement, any increased costs
associated with the Dodd-Frank Act and other changes in laws, rules or regulations, subject to the terms of the 2016 Credit
Agreement.
The Dodd-Frank Act also created the CFPB, to regulate the offering of consumer financial products or services
under the federal consumer financial laws. The CFPB assumed rulemaking authority under the existing federal consumer
financial protection laws, and enforces those laws against and examines certain non-depository institutions and insured
depository institutions with total assets greater than $10 billion and their affiliates. In addition, the CFPB was granted
general authority to prevent covered persons or service providers from committing or engaging in unfair, deceptive or
abusive acts or practices under federal law in connection with any transaction with a consumer for a consumer financial
product or service, or the offering of a consumer financial product or service. The CFPB also has broad rulemaking
authority for a wide range of consumer protection laws. It is unclear what changes will be promulgated by the CFPB and
what effect, if any, such changes would have on our business and operations.
As required under the Dodd-Frank Act, the Government Accountability Office issued its study on the implications
of any elimination of the exemption to the definition of “bank” for industrial banks under the Bank Holding Company Act.
The study did not make a recommendation regarding the elimination of this exemption. However, if this exemption were
eliminated without any grandfathering or accommodations for existing institutions, we could be required to become a bank
holding company which could require us to either cease certain activities or divest WEX Bank.
The current U.S. Administration and Congress have signaled their intent to significantly or completely repeal the
Dodd-Frank Act and the associated implementing regulations, and it is unclear what, if any, measures may be implemented
to replace it. Accordingly, there may be an extended period of uncertainty and unpredictability regarding the provisions of
federal law and regulations that affect our business and operations.
The Dodd-Frank Act and any related legislation or regulations, or any repeal or replacement of such legislation or
regulations, may have a material impact on our business, results of operations and financial condition. The full impact of the
Dodd-Frank Act will not be known until all of the regulations implementing the statute are adopted and implemented.
However, compliance with these new laws and regulations may require us to make changes to our business, and, there is a
significant possibility that the Dodd-Frank Act will, at a minimum, result in increased regulatory burden and compliance
costs. We may be required to invest significant management time and resources to address the various provisions of the
Dodd-Frank Act and the numerous regulations that are required to be issued under it, or to address the changed business
environment resulting from a repeal of all or part of the Dodd Frank Act and any related legislation or regulation.
Decreased demand for fuel and other vehicle products and services could harm our business and results of
operations.
Demand for fuel and other vehicle products and services may be reduced by factors that are beyond our control,
such as the implementation of fuel efficiency standards and the development by vehicle manufacturers and adoption by our
fleet customers of vehicles with greater fuel efficiency or alternative fuel sources. To the extent that our customers require
less fuel, that decline in purchase volume could reduce our revenues, limiting our profitability and preventing us from taking
on other initiatives.
Our business is dependent on several key strategic relationships, the loss of which could adversely affect our results
of operations.
Revenue we received from services we provided to our top five customers and strategic relationships accounted for
approximately 10 percent of our total revenues in 2017. Accordingly, we are dependent on maintaining our strategic
relationships and our results of operations would be lower in the event that any of these relationships ceases to exist.
Likewise, we have agreements with the major oil companies, fuel retailers and truck stop merchants whose locations accept
our payment processing services. The termination of any of these agreements would reduce the number of locations where
our payment processing services are accepted; therefore, we could lose our competitive advantage and our operating results
could be adversely affected. While we regularly monitor these relationships, there can be no guarantee that we will be able
to maintain them in the future.
We may never realize the anticipated benefits of acquisitions we have completed or may undertake.
We have acquired and may attempt to acquire businesses, technologies, services, products or licenses in
technologies that we believe are a strategic fit with our business. The process of integrating and operating any acquired
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business, technology, service or product may result in unforeseen redundancies, operating difficulties, and expenditures and
may divert significant management attention from our ongoing business operations. As a result, we may incur a variety of
costs in connection with acquisitions and may never realize the anticipated benefits.
We are exposed to risks associated with operations outside of the United States, which could harm both our U.S. and
international operations.
We conduct operations in North America, South America, Asia Pacific and Europe. As part of our business strategy
and growth plan, we plan to further expand internationally. Expansion of our international operations could impose
substantial burdens on our resources, divert management’s attention from U.S. operations and otherwise harm our business.
In addition, there are many barriers to competing successfully in the international market, including:
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•
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•
•
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fluctuation in foreign currencies;
changes in the relations between the United States and foreign countries;
actions of foreign or United States governmental authorities affecting trade and foreign investment;
increased infrastructure costs including complex legal, tax, accounting and information technology laws and
treaties;
interpretation and application of local laws and regulations including, among others, those impacting anti-money
laundering, bribery, financial transaction reporting and positive balance or prepaid cards;
enforceability of intellectual property and contract rights;
potentially adverse tax consequences due to, but not limited to, the repatriation of cash and negative consequences
from changes in or interpretations of tax laws
competitive pressure on products and services from companies based outside the U.S. that can leverage lower costs
of operations;
the United Kingdom's decision in a June 23, 2016 referendum to leave the European Union (EU) (commonly
referred to as “Brexit”); and
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local labor conditions and regulations.
We cannot assure you that our investments outside the United States will produce desired levels of revenue or
costs, or that one or more of the factors listed above will not harm our business.
New laws, regulations and enforcement activities could negatively impact our business and the markets we presently
operate in or could limit our expansion opportunities.
Our operations are subject to substantial regulation both domestically and internationally. There are often new
regulatory efforts which could result in significant constraints and may impact our operations. These existing and emerging
regulations can make the expansion of our business very difficult and negatively impact our revenue. Among the regulations
that impact us or could impact us are those governing: interchange rates; interest rate and fee restrictions; credit access and
disclosure requirements; collection and pricing requirements; compliance obligations; data security and data breach
requirements; identity theft avoidance programs; health care mandates; and anti-money laundering compliance programs.
We also often must obtain permission to conduct business in new locations from government regulators. Changes to these
regulations, including expansion of consumer-oriented regulation to business-to-business transactions, could negatively
impact our operations, financial condition and results of operations and could further increase our compliance costs and
limit our ability to expand to new markets.
We also conduct business with other highly regulated businesses such as banks, payment card issuers, and health
insurance providers. These industries are subject to significant potential reforms that could negatively affect these
businesses, their ability to maintain or expand their products and services, and the costs associated with doing so. These
developments could also negatively impact our business.
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Laws or regulations developed in one jurisdiction or for one product could result in new laws or regulations in other
jurisdictions or for other products.
Regulators often monitor other approaches to the governance of the payment industry. As a result, a law or
regulation enacted in one jurisdiction could result in similar developments in another. In addition, law and regulation
involving one product could influence the extension of regulations to other product offerings.
The expansion of certain regulations could negatively impact our business in other geographies or for other
products. Rules and regulations concerning interchange and business operations regulations, for example, may differ from
country to country which adds complexity and expense to our operations.
These varying and increasingly complex regulations could limit our ability to globalize our products and could
significantly and adversely affect our business, financial condition and results of operations.
Regulations and industry standards intended to protect or limit access to personal information could adversely affect
our ability to effectively provide our services.
Governmental bodies in the United States and abroad have adopted, or are considering the adoption of, laws and
regulations restricting the transfer of, and requiring safeguarding of, non-public personal information. For example, in the
United States, all financial institutions must undertake certain steps to ensure the privacy and security of consumer financial
information. In Europe, the adoption of General Data Protection Regulation (commonly referred to as GDPR) also requires
additional privacy protections. In connection with providing services to our clients, we are required by regulations and
arrangements with payment networks and certain clients to provide assurances regarding the confidentiality and security of
non-public consumer information. These arrangements require periodic audits by independent companies regarding our
compliance with industry standards such as payment card industry, or PCI, standards and also allow for similar audits
regarding best practices established by regulatory guidelines. The compliance standards relate to our infrastructure and
operational procedures designed to safeguard the confidentiality and security of non-public consumer personal information
received from our customers. Our ability to maintain compliance with these standards and satisfy these audits will affect our
ability to attract and maintain business in the future. If we fail to comply with these regulations, we could be exposed to
suits for breach of contract or to governmental proceedings. In addition, our client relationships and reputation could be
harmed, and we could be inhibited in our ability to obtain new clients. If more restrictive privacy laws or rules are adopted
by authorities in the future on the federal or state level, our compliance costs may increase, our opportunities for growth
may be curtailed by our compliance capabilities or reputational harm and our potential liability for security breaches may
increase, all of which could have a material adverse effect on our business, financial condition and results of operations.
Changes in our tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax
liabilities could affect our future results.
We are subject to taxes in the U.S. and numerous foreign jurisdictions. Our future effective tax rates could be
affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred
tax assets and liabilities, or changes in tax laws or their interpretation. Any of these changes could have a material adverse
effect on our profitability. We are also subject to the examination of our income tax returns by the Internal Revenue Service
and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to
determine the adequacy of our provision for taxes. There can be no assurance that the outcomes from these examinations
will not materially adversely affect our financial condition and operating results.
On December 22, 2017, President Trump signed into law new legislation that significantly revised the Internal
Revenue Code of 1986, as amended. The newly enacted federal income tax law, among other things, contains significant
changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of
21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses),
limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating
loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such net
operating losses may be carried forward indefinitely), one time taxation of offshore earnings at reduced rates regardless of
whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions),
immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying
or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the
overall impact of the new federal tax law is uncertain and our business and financial condition could be adversely
affected. In addition, it is uncertain how various states will respond to the newly enacted federal tax law. The impact of this
tax reform on holders of our common stock is also uncertain and could be adverse. We urge our stockholders to consult with
their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our
common stock.
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The healthcare industry changes often and technology-enabled services used by consumers are relatively new and
unproven.
The market for technology-enabled services for healthcare consumers changes rapidly and new products and
services are consistently being introduced. Opportunities to gain market share are challenging due to the significant
resources of our existing and potential competitors. It is uncertain whether or how fast this market will continue to grow. In
order to remain competitive, we are continually involved in a number of projects to develop new services or compete with
these new market entrants, including the development of mobile versions of our proprietary technology platform. These
projects carry risks, such as cost overruns, delays in delivery, performance problems and lack of acceptance by our
customers.
Based on our experience, consumers are still learning about health savings accounts, which are often referred to as
HSAs, and other similar tax-advantaged healthcare savings arrangements. The willingness of consumers to increase their
use of technology platforms to manage their healthcare saving and spending tax advantaged benefits will impact our
operating results.
We may incur impairment charges on goodwill or other intangible assets.
We account for goodwill in accordance with Financial Accounting Standards Board, which is often referred to as
FASB, Accounting Standard Codification Topic 350, Intangibles—Goodwill and Other. Our reporting units and related
indefinite-lived intangible assets are tested annually during the fourth fiscal quarter of each year in order to determine
whether their carrying value exceeds their fair value. In addition, they are tested on an interim basis if an event occurs or
circumstances change between annual tests that would more likely than not reduce their fair value below carrying value. If
we determine the fair value of the goodwill or other indefinite-lived intangible assets is less than their carrying value as a
result of the tests, an impairment loss is recognized. Any such write-down would adversely affect our results of operations.
Our goodwill resides in multiple reporting units. The profitability of individual reporting units may suffer
periodically from downturns in customer demand and other factors, the high level of competition existing within our
industry, and the level of overall economic activity. Individual reporting units may be relatively more impacted by these
factors than the Company as a whole. As a result, demand for the services of one or more of the reporting units could
decline which could adversely affect our operations and cash flow, and could result in an impairment of goodwill or
intangible assets. As a result of our annual impairment analyses during the fourth quarter of fiscal 2017, we did not identify
any impairment of goodwill and other indefinite-lived intangible assets. For all reporting units, we use a discounted cash
flow model of the projected earnings of reporting units to determine the amount of goodwill impairment. While we currently
believe that the fair value of all of our intangibles substantially exceeds carrying value and that those intangibles so
classified will contribute indefinitely to the cash flows of the Company, materially different assumptions regarding future
performance of our reporting units or the weighted-average cost of capital used in the valuations could result in impairment
losses and/or additional amortization expense.
If our industrial bank subsidiary fails to meet certain criteria, we may become subject to regulation under the Bank
Holding Company Act, which could force us to divest WEX Bank or cease all of our non-banking activities and thus
could have an adverse effect on our revenue and business or could create a default under our 2016 Credit Agreement.
WEX Bank meets the criteria for exemption of an industrial bank from the definition of “bank” under the Bank
Holding Company Act. WEX Bank’s failure to qualify for this exemption would cause us to become subject to regulation
under the Bank Holding Company Act. This would require us to divest WEX Bank or become a Bank Holding Company
and to possibly cease certain non-banking activities which may be impermissible for a Bank Holding Company, and could
create a default under our 2016 Credit Agreement. Failure to qualify for this exemption could thus have an adverse effect on
our revenue and business.
The loss or suspension of the charter for our Utah industrial bank or changes in regulatory requirements could be
disruptive to operations and increase costs.
The regulatory status of WEX Bank enables it to issue certificates of deposit, accept money market deposits and
borrow on a federal funds rate basis from other banks. These funds are used to support our operations. WEX Bank operates
under a uniform set of state lending laws, and its operations are subject to extensive state and federal regulation. WEX
Bank, a Utah industrial bank incorporated in 1998, is an FDIC-insured depository institution. The bank’s primary regulators
are the Utah DFI and the FDIC. Continued licensing and federal deposit insurance are subject to ongoing satisfaction of
compliance and safety and soundness requirements. If WEX Bank were to lose its bank charter, we would either outsource
our credit support activities or perform these activities ourselves, which would subject us to the credit laws of each
individual state in which we conduct business. Furthermore, we could not be a MasterCard issuer and would have to work
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with another financial institution to issue the product or sell the portfolio. Any such change would be disruptive to our
operations and could result in significant incremental costs. In addition, changes in the bank regulatory environment,
including the implementation of new or varying measures or interpretations by the State of Utah or the federal government,
may significantly affect or restrict the manner in which we conduct business in the future or could create a default under our
2016 Credit Agreement.
We are subject to extensive supervision and regulation that could restrict our activities and impose financial
requirements or limitations on the conduct of our business and limit our ability to generate income.
We are subject to extensive federal and state regulation and supervision, including that of the FDIC, the CFPB, and
the Utah DFI. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and
the banking system as a whole, not shareholders or noteholders. These regulations affect our payment operations, capital
structure, investment practices, dividend policy and growth, among other things. Failure to comply with laws, regulations or
policies could result in sanctions by regulatory agencies, damages, civil money penalties or reputational damage, which
could have a material adverse effect on our business, financial condition and results of operations. While we have policies
and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. The
U.S. Congress and federal regulatory agencies frequently revise banking and securities laws, regulations and policies. We
cannot predict whether or in what form any other proposed regulations or statutes will be adopted or the extent to which our
business may be affected by any new regulation or statute. Such changes could subject our business to additional costs, limit
the types of financial services and products we may offer and increase the ability of non-banks to offer competing financial
services and products, among other things.
Our industrial bank subsidiary is subject to regulatory capital requirements that may require us to make capital
contributions to this subsidiary, and that may restrict the ability of the subsidiary to make cash available to us.
WEX Bank must maintain minimum amounts of regulatory capital. If WEX Bank does not meet these capital
requirements, its regulators have broad discretion to institute a number of corrective actions that could have a direct material
effect on our financial condition. WEX Bank, as an institution insured by the FDIC, must maintain certain capital ratios,
paid-in capital minimums and adequate allowances for loan losses. Under the Dodd-Frank Act, we are also required to serve
as a source of financial strength for WEX Bank. If WEX Bank were to fail to meet any of the capital requirements to which
it is subject, or if required under Dodd-Frank’s source of strength requirements, we may be forced to provide WEX Bank
with additional capital, which could impair our ability to service our indebtedness or may not be permitted under the terms
of our 2016 Credit Agreement or Notes. To pay any dividend, WEX Bank must maintain adequate capital above regulatory
guidelines. Accordingly, WEX Bank may be unable to make any of its cash or other assets available to us, including to
service our indebtedness.
We are subject to limitations on transactions with our industrial bank subsidiary, which may limit our ability to
engage in transactions with and obtain credit from our industrial bank.
Sections 23A and 23B of the FRA and the implementing regulations limit the extent to which we can borrow or
otherwise obtain credit from or engage in other “covered transactions” with WEX Bank. “Covered transactions” include
loans or extensions of credit, purchases of or investments in securities, purchases of assets, including assets subject to an
agreement to repurchase, acceptance of securities as collateral for a loan or extension of credit, or the issuance of a
guarantee, acceptance, or letter of credit. Although the applicable rules do not serve as an outright ban on engaging in
“covered transactions,” they do limit the amount of covered transactions WEX Bank may have with any one affiliate and
with all affiliates in the aggregate. The applicable rules also require that we engage in such transactions with WEX Bank
only on terms and under circumstances that are substantially the same, or at least as favorable to WEX Bank, as those
prevailing at the time for comparable transactions with nonaffiliated companies. Furthermore, with certain exceptions, each
loan or extension of credit by WEX Bank to the Company or its other affiliates must be secured by collateral with a market
value ranging from 100 percent to 130 percent of the amount of the loan or extension of credit, depending on the type of
collateral. Accordingly, WEX Bank may be unable to provide credit or engage in transactions with us, including transactions
intended to help us service our indebtedness.
If the technologies we use in operating our business and interacting with our customers fail, are unavailable, or do
not operate to expectations, or we fail to successfully implement technology strategies and capabilities in connection
with our outsourcing arrangements, our business and results of operation could be adversely impacted.
We utilize a combination of proprietary and third-party technologies to operate our business and interact with our
customers, partners and suppliers, among others. This includes technology that we have developed, have contracted with
others to develop, have outsourced to a single provider to operate or have obtained through third-parties by way of service
agreements. To the extent that our proprietary technology or a third-party providers’ technology does not work as agreed to
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or as expected, or if we experience outages or unavailability resulting from their operations and the services they provide to
us, our ability to efficiently and effectively deliver services could be adversely impacted and our business and results of
operations could be adversely affected. Similarly, any failure by our customers or partners to access the technology that we
develop internally could have an adverse effect on our business, results of operations and financial condition. Although we
make substantial investments in technology, there is no guarantee that it will function as intended once it is placed into
operation. Lastly, given our reliance on technology, we regularly assess our technology plans, including both platforms and
technology infrastructure. To the extent that we conclude that certain technologies should be retired, that existing platforms
should be consolidated, or that we should change our technology strategies, we may be required to impair or accelerate
depreciation on certain assets. Any of these potential changes or failures in our technology strategies may also divert
management’s attention and have a material adverse effect on our business and results of operations.
Our business is regularly subject to cyberattacks and attempted security and privacy breaches and we may not be
able to adequately protect our information systems, including the data we collect about our customers, which could
subject us to liability and damage our reputation.
We collect and store data about our customers and their fleets, including bank account information and spending
data. Our customers expect us to keep this information in our confidence. In certain instances, the information we collect
includes social security numbers. As a result of applicable laws, we are required to take commercially reasonable measures
to prevent and mitigate the impact of cyber-attack, as well as the unauthorized access, acquisition, release and use of
“personally identifiable information," such as social security numbers. While social security numbers constitute a very small
part of the data we keep, in the event of a security breach we would be required to determine the types of information
compromised and determine corrective actions and next steps under applicable laws, which would require us to expend
capital and other resources to address the security breach and protect against future breaches. An increasing number of
organizations, including large on-line and off-line merchants and businesses, large Internet companies, financial institutions,
and government institutions, have disclosed breaches of their information security systems, some of which have involved
sophisticated and highly targeted attacks, including on portions of their websites or infrastructure. Like those companies,
we too, are subject to regular and repeated attempts to breach our information security protections.
As outsourcing, specialization of functions, third-party digital services and technology innovation within the
payments industry increase (including with respect to mobile technologies, tokenization, big data and cloud storage
solutions), more third parties are involved in processing card transactions and there is a risk the confidentiality, integrity,
privacy and/or security of data held by, or accessible to, third parties, including merchants that accept our cards, payment
processors and our business partners, may be compromised, which could lead to unauthorized transactions on our cards and
costs associated with responding to such an incident. In addition, high profile data breaches could change consumer
behaviors, impact our ability to access data to make product offers and credit decisions and result in legislation and
additional regulatory requirements.
The techniques used in attempts to obtain unauthorized, improper or illegal access to our systems, our data or our
customers' data, to degrade service, or to sabotage our systems are constantly evolving, are difficult to detect quickly, and
may not be recognized until after a successful penetration of our information security systems. Unauthorized parties attempt
to gain access to our systems or facilities through various means, including, among others, targeting our systems or facilities
or our third-party vendors or customers, or attempting to fraudulently induce our employees, partners, customers or others
into disclosing user names, passwords, payment card information, or other sensitive information, which may in turn be used
to access our information technology systems. Certain efforts may be state-sponsored and supported by significant financial
and technological resources, making them even more difficult to detect. Like many companies, we are a target for such
breaches and attacks. Although we have developed systems and processes that are designed to protect our data and customer
data and to prevent data loss and other security breaches, and will continue to expend significant additional resources to
bolster these protections, these security measures cannot provide absolute security. Our information technology and
infrastructure may be vulnerable to successful cyberattacks or security breaches, and third parties may be able to access our
customers’ personal or proprietary information and data that are stored on or accessible through those systems.
Our security measures may also be breached due to employee error, malfeasance, system errors or vulnerabilities,
or other irregularities. Any actual or perceived breach of our security could interrupt our operations; result in our systems or
services being unavailable; result in improper disclosure of data; materially harm our reputation and brand; result in
significant legal and financial exposure; lead to loss of customer confidence in, or decreased use of, our products and
services; and, adversely affect our business and results of operations. Any breaches of network or data security at our
partners, some of whom maintain information about our customers, or breaches of our customers' systems could have
similar effects. In addition, our customers could have vulnerabilities on their own computer systems that are entirely
unrelated to our systems, but could mistakenly attribute their own vulnerabilities to us. While we take commercially
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appropriate steps to safeguard data used by and contained on the systems of our partners, customers and vendors, we cannot
control all access to those systems and they are therefore subject to potential cyberattacks and fraud.
Furthermore, as we have increased the number of platforms as well as the size of our networks and information
systems, our reliance on these technologies have become increasingly important to our operating activities. The potential
negative impact that a platform, network or information system shutdown may have on our operating activities has
increased. Shutdowns may be caused by cyberattacks and unexpected catastrophic events such as natural disasters or other
unforeseen events, such as software or hardware defects or cyber-attacks by groups or individuals.
Under the Financial Services Modernization Act of 1999, also referred to as the “Gramm-Leach-Bliley Act" or
GLBA, and some state laws, we and WEX Bank are required to maintain a comprehensive written information security
program that includes administrative, technical and physical safeguards relating to consumer information. This requirement
generally does not extend to information about companies or about individuals who obtain financial products or services for
business, commercial, or agricultural purposes.
The GLBA also requires us and WEX Bank to provide initial and annual privacy notices to customers that describe
in general terms our information sharing practices. If we or WEX Bank intend to share nonpublic personal information
about consumers with affiliates and/or nonaffiliated third parties, we and WEX Bank must provide customers with a notice
and a reasonable period of time for each customer to “opt out” of any such disclosure. In addition to U.S. federal privacy
laws with which we must comply, states also have adopted statutes, regulations and other measures governing the collection
and distribution of nonpublic personal information about customers. In some cases these state measures are preempted by
federal law, but if not, we and WEX Bank must monitor and seek to comply with individual state privacy laws in the
conduct of our businesses.
When we handle individually identifiable health information, regulations issued under Health Insurance Portability
and Accountability Act of 1996, or HIPAA, and the Health Information Technology for Economic and Clinical Health Act,
or HITECH, our contracts with our customers, and supplemental state laws require us to implement privacy and data
security measures and to comply with breach notification requirements. We may be subject to contractual damages and civil
or criminal penalties if we are found to violate these privacy, security and breach notification requirements.
Our efforts to comply with existing and future health and financial data laws and regulations, both in the U.S. and
abroad, is costly and time-consuming. Incidents involving our handling of this protected and sensitive information may
consume significant financial and managerial resources and may damage our reputation, which may discourage customers
from using, renewing, or expanding their use of our services.
Any security breach, inadvertent transmission of information about our customers, failure to comply with
applicable breach notification and reporting requirements, or any violation of international, federal or state privacy laws
could expose us to liability in excess of any applicable insurance policies, litigation, regulatory scrutiny, and/or cause
damage to our reputation. We may also be required to expend significant resources to implement additional data protection
measures or to modify the features and functionality of our system offerings in a way that is less attractive to customers.
Our failure to effectively implement new technology could jeopardize our position as a leader in our industry.
As a provider of information management and payment processing services, we must constantly adapt and respond
to the technological advances offered by our competitors and the informational requirements of our customers, including
those related to the Internet, in order to maintain and improve upon our competitive position. We may not be able to expand
our technological capabilities and service offerings as rapidly as our competitors, which could jeopardize our position as a
leader in our industry.
We are dependent on technology systems and electronic communications networks managed by third parties, which
could result in our inability to prevent service disruptions.
Our ability to process and authorize transactions electronically depends on our ability to electronically
communicate with our fuel and vehicle maintenance providers through point-of-sale devices and electronic networks that
are owned and operated by third parties. The electronic communications networks upon which we depend are often subject
to disruptions of various magnitudes and durations. Any severe disruption of one or more of these networks could impair
our ability to authorize transactions or collect information about such transactions, which, in turn, could harm our reputation
for dependable service and adversely affect our results of operations. In addition, our ability to collect enhanced data
relating to our customers’ purchases may be limited by the use of older point-of-sale devices by fuel and vehicle
maintenance providers. To the extent that fuel and vehicle maintenance providers within our network are slow to adopt
advanced point-of-sale devices, we may not be able to offer the latest services and capabilities that our customers demand.
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Our industry continues to become increasingly competitive, which makes it more challenging for us to maintain
profit margins at historical levels.
We face and expect to continue to face competition in each category of the overall industry from several companies
that seek to offer competing capabilities and services. Historically, we have been able to provide customers with a wide
spectrum of services and capabilities and, therefore, we have not considered price to be the exclusive or even the primary
basis on which we compete. As our competitors have continued to develop their service offerings, it has become
increasingly more challenging for us to compete solely on the basis of superior capabilities or service. In some areas of our
business we have been forced to respond to competitive pressures by reducing our fees. We have seen erosion of our
historical profit margins as we encourage existing strategic relationships to sign long-term contracts. If these trends continue
and if competition intensifies, our profitability may be adversely impacted.
While we have traditionally offered our services to all categories of the fleet industry, some of our competitors
have successfully garnered significant share in particular categories of the overall industry. To the extent that our
competitors are regarded as leaders in specific categories, they may have an advantage over us as we attempt to further
penetrate these categories.
We also face increased competition in our efforts to enter into new strategic relationships and renew existing
strategic relationships on similar terms.
Compliance with anti-money laundering laws and regulations creates additional compliance costs and reputational
risk.
We must monitor and report unusual or suspicious account activity, as well as transactions involving amounts in
excess of prescribed limits, as required by the Bank Secrecy Act and Internal Revenue Service regulations and other
regulations. The USA PATRIOT Act of 2001 imposes significant anti-money laundering compliance and due diligence
obligations on financial institutions, including WEX Bank. Financial regulators have issued various implementing
regulations and have made enforcement a top priority. Failure to maintain and implement adequate programs to combat
money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could result in the
imposition of fines or penalties and other serious legal and reputational consequences which may impact our financial
results.
Our increased presence in foreign jurisdictions increases the possibility of foreign law violations or violation of the
U.S. Foreign Corrupt Practices Act (“FCPA”), the United Kingdom Bribery Act of 2010 (“UKBA”) and the Brazilian
Anti-Corruption Law ("ACL").
We are subject to the FCPA, the ACL and the UKBA, as we own subsidiaries organized under UK and Brazilian
law, which serve as a holding companies for other subsidiaries. While the FCPA generally prohibits U.S. companies and
their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business,
the UKBA is broader in its reach and prohibits bribery in purely commercial contexts. Any violation of the FCPA, the
UKBA or similar laws and regulations, including the ACL, could result in significant expenses, divert management
attention, and otherwise have a negative impact on us. Any determination that we have violated the FCPA, UKBA, ACL or
laws of any other jurisdiction could subject us to, among other things, penalties and legal expenses that could harm our
reputation and have a material adverse effect on our financial condition and results of operation. The possibility of
violations of the FCPA, UKBA, ACL or similar laws or regulations may increase as we expand globally and into countries
with recognized corruption problems.
The failure to maintain effective systems of internal control over financial reporting and disclosure controls and
procedures could result in the inability to accurately report our financial results or prevent material misstatement
due to fraud, which could cause current and potential shareholders to lose confidence in our financial reporting,
adversely affect the trading price of our securities, harm our operating results or trigger a default under the 2016
Credit Agreement.
Effective internal control over financial reporting and disclosure controls and procedures are necessary for us to
provide reliable financial reports and effectively prevent fraud and operate successfully as a public company. Our financial
reporting and disclosure controls and procedures are reliant, in part, on information we receive from third parties that supply
information to us regarding transactions that we process. The failure to develop or maintain effective internal control over
financial reporting and disclosure controls and procedures could harm our reputation or operating results, or cause us to fail
to meet our reporting obligations, or trigger a default under the 2016 Credit Agreement. As we expand our business
operations domestically and internationally, we will need to maintain effective internal control over financial reporting and
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disclosure controls and procedures. If we are unable to do so, our external auditors could issue a qualified opinion on the
effectiveness of our internal control over financial reporting.
Ineffective internal control over financial reporting and disclosure controls and procedures could cause investors to
lose confidence in our reported financial information, which could have a negative effect on the trading price of our
securities or affect our ability to access the capital markets and could result in regulatory proceedings against us by, among
others, the SEC. In addition, a material weakness in internal control over financial reporting may lead to deficiencies in the
preparation of financial statements, which in turn could lead to litigation claims against us. The defense of any such claims
may cause the diversion of management’s attention and resources, and we may be required to pay damages if any such
claims or proceedings are not resolved in our favor. Any litigation, even if resolved in our favor, could cause us to incur
significant legal and other expenses. Such events could also affect our ability to raise capital to fund future business
initiatives.
Our ability to attract and retain qualified employees is critical to our success and the failure to do so may materially
adversely affect our performance.
We believe our employees, including our executive management team, are our most important resource and, in our
industry and geographic area, competition for qualified personnel is intense. If we were unable to retain and attract qualified
employees, our performance could be materially adversely affected.
Risks Relating to Our Common Stock
If any entity controls 10 percent or more of our common stock and such entity has caused a violation of applicable
banking laws by its failure to obtain any required approvals prior to acquiring that common stock, we have the
power to, and may be required to, restrict such entity’s ability to vote shares held by it.
As owners of a Utah industrial bank, we are subject to Utah banking regulations that require any entity that
controls 10 percent or more of our common stock to obtain the prior approval of Utah banking authorities. Federal law also
prohibits a person or group of persons from acquiring “control” of us unless the FDIC has been notified and has not
objected to the transaction. Under the FDIC’s regulations, the acquisition of 10 percent or more of a class of our voting
stock would generally create a rebuttable presumption of control. In addition, our certificate of incorporation requires that if
any stockholder fails to provide us with satisfactory evidence that any required approvals have been obtained, we may, or
will if required by state or federal regulators, restrict such stockholder’s ability to vote such shares with respect to any
matter subject to a vote of our stockholders.
As a result of these regulatory requirements, certain existing and potential stockholders may choose not to invest or
invest more in our stock. This could limit the number of potential investors and impact our ability to attract further funds.
Provisions in our charter documents, Delaware law and applicable banking law may delay or prevent our acquisition
by a third party.
Our certificate of incorporation and by-laws contain several provisions that may make it more difficult for a third
party to acquire control of us without the approval of our board of directors. These provisions include, among other things, a
classified board of directors, the elimination of stockholder action by written consent, advance notice for raising business or
making nominations at meetings of stockholders and “blank check” preferred stock. Blank check preferred stock enables our
board of directors, without stockholder approval, to designate and issue additional series of preferred stock with such special
dividend, liquidation, conversion, voting or other rights, including the right to issue convertible securities with no
limitations on conversion, and rights to dividends and proceeds in a liquidation that are senior to the common stock, as our
board of directors may determine. These provisions may make it more difficult or expensive for a third party to acquire a
majority of our outstanding voting common stock. We also are subject to certain provisions of Delaware law, which could
delay, deter or prevent us from entering into an acquisition, including Section 203 of the Delaware General Corporation
Law, which prohibits a Delaware corporation from engaging in a business combination with an interested stockholder unless
specific conditions are met. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy
contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for
their common stock.
In addition, because we own a Utah industrial bank, any purchaser of our common stock who would own
10 percent or more of our common stock after such purchase would be required to obtain the consent of Utah banking
authorities and the federal banking authorities prior to consummating any such acquisition. These regulatory requirements
may preclude or delay the purchase of a relatively large ownership stake by potential investors.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
All of our facilities are leased. The following table presents the details of our principal leased properties as of December 31,
2017:
Property location
Square footage
Purpose of leased property
Segment
South Portland, Maine
178,300 Corporate headquarters, operations center and warehouse All
Midvale, Utah
12,400 Bank operations
Fleet Solutions, Travel and Corporate Solutions
Melbourne, Australia
21,500 Australia fuel and prepaid card operations
Fleet Solutions, Travel and Corporate Solutions
São Paulo, Brazil
19,200 Brazil fuel, virtual and paycard operations
All
Crewe, England
14,700 European fuel operations
Fleet Solutions
Fargo, North Dakota
40,000 WEX Health operations
Health and Employee Benefit Solutions
Nashville, Tennessee
42,500 EFS Operations
Fleet Solutions, Travel and Corporate Solutions
Additional financial information about our leased facilities appears in Item 8 – Note 18, Commitments and Contingencies
of our consolidated financial statements.
ITEM 3. LEGAL PROCEEDINGS
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 sought to represent a nationwide class of recipients of
unauthorized facsimile advertisements from the Company (collectively, the "Plaintiffs") and requested statutory damages for
each facsimile advertisement. The Plaintiffs further alleged 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, the Company’s wholly-owned subsidiary. On May 10, 2017,
the parties agreed to a settlement in principle to resolve the class claims, which was preliminarily approved by the court on
October 6, 2017. The court entered its final judgment approving the settlement agreement on January 19, 2018. The settlement
amount is not material to the Company's financial position, results of operations, cash flows or liquidity.
In addition, from time to time, we are subject to legal proceedings and claims in the ordinary course of business. As of
the date of this filing, the current estimate of a reasonably possible loss contingency from all legal proceedings is not material to
the Company's consolidated financial position, results of operations, cash flows or liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The principal market for the Company’s common stock is the New York Stock Exchange (“NYSE”) and our ticker symbol
is WEX. The following table sets forth, for the indicated calendar periods, the reported intraday high and low sales prices of the
common stock on the NYSE Composite Tape:
2017
First quarter
Second quarter
Third quarter
Fourth quarter
2016
First quarter
Second quarter
Third quarter
Fourth quarter
High
Low
$
$
$
$
$
$
$
$
122.91
109.16
115.82
142.26
88.04
96.84
108.86
117.14
$
$
$
$
$
$
$
$
99.79
97.26
101.14
111.53
54.42
78.95
86.27
99.17
As of February 26, 2018, the closing price of our common stock was $153.64 per share, there were 43,031,993 shares of
our common stock outstanding and there were 13 holders of record of our common stock. The actual number of stockholders is
greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street
name by brokers or nominees.
Dividends
The Company has not declared any dividends on its common stock since it commenced trading on the NYSE on February 16,
2005. The timing and amount of future dividends, if any, will be (i) dependent upon the Company’s results of operations, financial
condition, cash requirements and other relevant factors, (ii) subject to the discretion of the Board of Directors of the Company
and (iii) payable only out of the Company’s surplus or current net profits in accordance with the General Corporation Law of the
State of Delaware.
The Company has certain restrictions on the dividends it may pay under its revolving credit agreement, including pro
forma compliance with a ratio of consolidated funded indebtedness to consolidated EBITDA of 2.50:1.00 for the most recent
period of four fiscal quarters.
Share Repurchases
On September 23, 2013, we announced a share repurchase program authorizing the purchase of up to $150 million of our
common stock from time to time which expired on September 30, 2017. On September 20, 2017, our board of directors approved
a new share repurchase program authorizing the purchase of up to $150 million of our common stock expiring on September 2021.
Share repurchases are to be made on the open market and can be commenced or suspended at any time.
We did not purchase any shares of our common stock during the year ended December 31, 2017. The approximate dollar
value of shares that were available to be purchased under our share repurchase program was $150 million as of December 31,
2017.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our summary historical financial information for the periods ended and as of the dates
indicated. You should read the following historical financial information along with Item 7 and the consolidated financial statements
and related notes thereto contained in this Form 10-K. The financial information included in the table below is derived from audited
financial statements:
(in thousands, except per share data)
Income statement information, for the year ended
Total revenues
Total operating expenses
Financing interest expense
Net realized and unrealized gains (losses) on fuel price derivatives
Net earnings attributable to shareholders
Basic earnings per share
Diluted earnings per share
Weighted average basic shares of common stock outstanding
Weighted average diluted shares of common stock outstanding
Balance sheet information, at end of period
Total assets
Liabilities and stockholders’ equity
Total liabilities
Redeemable non-controlling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
2017
2016
2015
2014
2013
December 31,
$
$
$
$
$
$
$
$
$
1,250,548
1,011,278
$
$
107,067
$
— $
$
160,266
3.73
3.72
42,977
43,105
6,739,175
5,018,617
—
$
$
$
$
1,018,460
823,332
113,418
711
60,637
1.49
1.48
40,809
40,914
5,997,097
4,491,350
—
$
$
$
$
$
$
$
$
$
854,637
625,844
46,189
5,848
101,904
2.63
2.62
38,771
38,843
3,847,909
2,752,228
—
$
$
$
$
$
$
$
$
$
817,647
511,409
36,042
46,212
202,211
5.20
5.18
38,890
39,000
4,105,379
3,011,068
16,590
$
$
$
$
$
$
$
$
$
1,720,558
1,505,747
1,095,681
1,077,721
717,463
440,724
29,419
(9,851)
149,208
3.83
3.82
38,946
39,103
3,419,753
2,497,727
18,729
903,297
$
6,739,175
$
5,997,097
$
3,847,909
$
4,105,379
$
3,419,753
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion below focuses on the factors affecting our consolidated results of operations for the years ended December
31, 2017, 2016 and 2015 and financial condition at December 31, 2017 and 2016 and, where appropriate, factors that may affect
our future financial performance, unless stated otherwise. This discussion should be read in conjunction with the consolidated
financial statements, notes to the consolidated financial statements and selected consolidated financial data. Our MD&A is presented
in the following sections:
•
•
2017 Highlights and Year in Review
Segments
• Results of Operations
• Liquidity and Capital Resources
• Critical Accounting Policies and Estimates
• Recently Adopted Accounting Standards
2017 Highlights and Year in Review
WEX is a leading provider of corporate payment solutions. Our opportunities for growth extend well beyond the fleet
fuel market, in particular to the online travel and healthcare payments markets. Building on a leading market position in our core
fleet business, we continue to expand our company.
Our strategic approach to entering new markets is focused on three steps:
•
Identify complicated markets facing complex payment challenges and inefficiencies,
• Develop products and services that address these unmet market needs, and,
• Operate with systemic efficiency through scale and cost management.
We have a proven model in the fleet space where we have developed a leading market position and a strong margin profile.
We have done the same in the online travel industry where we have become a leader in global virtual payments and continue to
grow the business and create scale on a global basis. Through the acquisitions of Evolution1 and Benaissance, WEX Health has
continued to expand into the consumer directed healthcare payments market.
The following events and accomplishments occurred during 2017:
• Contributions from all three of our segments resulted in the Company surpassing $1.2 billion in annual revenues
in 2017, 23% growth relative to the prior year.
• Effective October 18, the Company acquired certain assets and assumed certain liabilities of AOC, a longstanding
technology provider for our virtual card product. This acquisition will broaden the Company's capabilities,
increase our pool of employees with payments platform expertise and allow the Company to evolve with the
needs of its customers and partners through the use of AOC’s payments processing technology platforms.
The Company purchased AOC for $130 million, which was funded with cash on hand and through the Company's
2016 Credit Agreement.
• Effective October 30, the Company added $100 million of capacity to its revolving line of credit to provide
additional liquidity and flexibility.
• Effective July 3, the Company repriced the secured term loans under the 2016 Credit Agreement, which reduced
the applicable interest rate margin at current borrowing levels for both LIBOR borrowings and base rate
borrowings for the Company's tranche A term loans and tranche B term loans, 50 basis points and 75 basis points,
respectively. Based on amounts outstanding under these term loans at December 31, the repricing is expected
to provide an annualized savings of approximately $11 million in interest expense, approximately half of which
was realized in 2017.
• On December 20, the Company entered into two additional forward-fixed interest rate swap agreements to
manage the interest rate risk associated with $500 million of outstanding variable-interest rate borrowings.
Commencing December 2017, the Company will receive variable interest of 1-month LIBOR under these swaps
and will pay a weighted average annualized fixed rate of 2.21% over the five year term. With the commencement
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of these interest rate swaps, we have reduced the variability of the future interest payments associated with $1.7
billion of our borrowings, including our fixed rate notes outstanding.
Our Company's management believes the following metrics were important to our overall performance in 2017:
• Average number of vehicles serviced increased 9 percent from 2016 to approximately 10.9 million for 2017,
primarily related to growth in our worldwide customer base. As of December 31, 2017, vehicles serviced totaled
11.4 million.
• Total fleet transactions processed increased 14 percent from 2016 to 516.8 million in 2017. Payment processing
transactions increased 11 percent from 2016 to 429.7 million in 2017, and transaction processing transactions
increased 27 percent from 2016 to 87.1 million in 2017. The increase in payment processing transactions resulted
from a large customer portfolio converting from a transaction processing relationship to a payment processing
relationship late in 2016, the acquisition of EFS and organic growth. The primary driver for the increase in
transaction processing transactions was due to the acquisition of EFS, partially offset by the portfolio conversion
mentioned above.
• Average expenditure per payment processing transaction in our Fleet Solutions segment increased 19 percent
to $70.49 for 2017, from $59.19 in 2016. The average U.S. fuel price per gallon during 2017 was $2.50, a 13
percent increase as compared to the same period in the prior year.
• Credit loss expense in the Fleet Solutions segment was $59.3 million during 2017, as compared to $27.3 million
during 2016, resulting primarily from higher incidences of magnetic stripe card skimming fraud during 2017.
Spend volume increased 33 percent in 2017 as compared to 2016. Our credit losses were 17.2 basis points of
fuel expenditures for 2017, as compared to 11.1 basis points of fuel expenditures for 2016.
• Our Travel and Corporate Solutions purchase volume grew to $30.3 billion in 2017, a 27 percent increase from
2016. This increase is primarily driven by worldwide organic growth, most notably in the U.S. and Europe. This
favorable impact was offset by changes in the net interchange rate for this segment, which decreased 29% in
2017 as compared to 2016 due to contract renegotiations with one of our large partners.
• Our foreign currency exchange exposure is primarily related to the re-measurement of our cash, receivable and
payable balances that are denominated in foreign currencies. Movements in the exchange rates associated with
our foreign held currencies resulted in a gain of $29.9 million in 2017, as compared to a loss of $7.7 million in
2016.
• Our effective tax rate was 10.9 percent for 2017 as compared to 34.0 percent for 2016. The decline in our tax
rate is primarily due the reduction of our net deferred tax liabilities resulting from the change in federal corporate
income tax rate to 21 percent from 35 percent effective January 1, 2018 as part of the 2017 Tax Cuts and Jobs
Act (the "2017 Tax Act"), partly offset by the increase in valuation allowance. Our federal income tax expense
for periods beginning in 2018 will be based on the new rate. Future tax rates may fluctuate due to changes in
the mix of earnings among different tax jurisdictions, as well as impacts that tax rate and earnings mix changes
have on our net deferred tax assets.
•
Financing interest expense decreased $6.4 million in 2017, as compared to 2016. The decrease resulted from
the absence of certain ticking fees incurred in 2016, partly offset by higher relative average borrowings and
effective interest rates.
Segments
WEX operates in three reportable segments: Fleet Solutions, Travel and Corporate Solutions, and Health and Employee
Benefit Solutions. The Fleet Solutions segment provides payment, transaction processing and information management services
specifically designed for the needs of commercial and government fleets. The Travel and Corporate Solutions segment focuses on
the complex payment environment of business-to-business payments, providing customers with payment processing solutions for
their corporate payment and transaction monitoring needs. The Health and Employee Benefit Solutions segment provides a SaaS
platform for consumer directed healthcare payments, as well as payroll related benefits to customers in Brazil.
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Results of Operations
The Company does not allocate foreign currency gains and losses, financing interest expense, unrealized and realized
gains and losses on derivative instruments and non-cash adjustments related to our tax receivable agreement to our operating
segments as management believes these items are unpredictable and can obscure underlying trends.
YEAR ENDED DECEMBER 31, 2017, AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2016
The following table reflects comparative operating results and key operating statistics within our Fleet Solutions segment:
FLEET SOLUTIONS SEGMENT
(in thousands, except per transaction and per gallon data)
2017
2016
Increase
(decrease)
Revenues
Payment processing revenue
Account servicing revenue
Finance fee revenue
Other revenue
Total revenues
Total operating expenses
Operating income
Key operating statistics (a) (b)
Payment processing revenue:
Payment processing transactions
Payment processing fuel spend
Average price per gallon of fuel - Domestic – ($USD/gal)
Net payment processing rate
(a)
As of July 1, 2016, these key operating statistics include our EFS acquisition.
$
360,158
$
297,900
165,083
159,336
138,389
822,966
679,337
127,106
124,725
92,330
642,061
545,451
$
143,629
$
96,610
429,716
385,861
$ 30,288,539
$ 22,838,237
$
2.50
$
1.19%
2.21
1.30%
21 %
30 %
28 %
50 %
28 %
25 %
49 %
11 %
33 %
13 %
(8)%
(b)
Key operating statistics have been modified to provide added insight into segment revenue trends. Metrics for the years ended December 31, 2016 and 2015
have also been conformed to the current year presentation.
Revenues
Payment processing revenue increased $62.3 million for 2017, as compared to 2016, due primarily to the impact of a
13% increase in the annual average domestic price per gallon of fuel and higher payment processing volumes. Higher volumes
resulted from organic growth, the acquisition of EFS and a large customer portfolio converting from a transaction processing
relationship to a payment processing relationship in the beginning of 2016. These favorable factors were partly offset by a decrease
in our interchange rate as result of the large portfolio conversion mentioned above.
Account servicing revenue increased $38.0 million for 2017, as compared to 2016, resulting from worldwide price
modernization efforts over the course of the prior year and the EFS acquisition.
Other revenues increased $46.1 million in 2017, as compared to 2016, resulting primarily from higher transaction
processing revenue due to the acquisition of EFS and additional pricing modernization efforts.
Finance fee revenue is comprised of the following components:
(in thousands)
Late fee revenue
Factoring fee revenue
Cardholder interest income
Other finance fee revenue
Total finance fee revenue
2017
2016
$
125,763
$
102,497
29,018
535
4,020
19,689
544
1,995
$
159,336
$
124,725
Increase
(decrease)
23 %
47 %
(2)%
102 %
28 %
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Late fee revenue is primarily fees charged for receivables not paid within the terms of the customer agreement based
upon the outstanding customer receivable balance. Late fee revenue is earned when a customer’s receivable balance becomes
delinquent and is calculated using the greater of a minimum charge or a stated late fee rate multiplied by the outstanding balance
that is subject to a late fee charge. Changes in the absolute amount of such outstanding balances can be attributed to changes in
(i) fuel prices; (ii) customer specific transaction volume; and (iii) customer specific delinquencies. Late fee revenue can also be
impacted by changes in (i) late fee rates and (ii) increases or decreases in customer overdue balances. Late fee rates are determined
and set based primarily on the risk associated with our customers, coupled with a strategic view of standard rates within our
industry. Periodically, we assess the market rates associated within our industry to determine appropriate late fee rates. We consider
factors such as the Company’s overall financial model and strategic plan, the cost to our business from customers failing to pay
timely and the impact such late payments have on our financial results. These assessments are typically conducted at least annually
but may occur more often depending on macro-economic factors.
Late fee revenue increased $23.3 million in 2017, as compared to 2016, due to the change in overdue balances. For the
majority of 2016, late fee ranges and minimum charges were 0 to 6.99 percent monthly and $75, respectively. For the majority
of 2017, late fee ranges were 0 to 7.99 percent monthly, with minimum charges of $75. The weighted average late fee rate, net of
related charge-offs was 4.4% and 4.3% for 2017 and 2016, respectively.
Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time
to pay, placing a customer on a payment plan or granting waivers of late fees. There were no material concessions to customers
experiencing financial difficulties during both the years ended December 31, 2017 and 2016. Though not material, the Company
granted certain concessions to domestic customers impacted by hurricanes and forest fires during 2017.
The primary source of factoring fee revenue is calculated as a negotiated percentage fee of the receivable balance that
we purchase. A secondary source of factoring fee revenue is a flat rate service fee to our customers that request a non-contractual
same day funding of the receivable balance. Factoring fee revenue increased $9.3 million in 2017, as compared to 2016. The
increase in factoring fee revenue is due to organic growth and customer demand for our services.
Expenses
The following table compares selected expense line items within our Fleet Solutions segment:
(in thousands)
Expense
Salary and other personnel
Restructuring
Service fees
Provision for credit losses
Technology leasing and support
Depreciation and amortization
Operating interest
Impairment charges
Gain on divestiture
All other operating expenses1
2017
2016
Increase
(decrease)
$
259,047
$
201,817
6,203
68,766
59,251
36,388
143,300
8,611
22,144
(20,958)
7,486
95,555
27,264
28,763
100,860
3,476
—
—
$
96,585
$
80,230
28 %
(17)%
(28)%
117 %
27 %
42 %
148 %
NM
NM
20 %
1 Includes all expenses located in our consolidated statements of income which are not separately described above.
NM - Not Meaningful
Salary and other personnel expenses increased $57.2 million for 2017, as compared to 2016, due primarily to resources
assumed as part of the EFS acquisition, as well as personnel to support the in-sourcing of technology functions from a third party
provider and business growth. Additionally, we recognized higher expenses associated with variable compensation plans based
on performance.
We incurred restructuring costs of approximately $6.2 million and $7.5 million for 2017 and 2016, respectively.
Restructuring costs decreased due to the wind-down of prior year restructuring initiatives related to our European Fleet business,
partly offset by employee costs and office closure costs associated with our EFS acquisition, which are expected to be paid through
2018.
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Service fees decreased $26.8 million during 2017, as compared to 2016, primarily due to one-time expenses associated
with the acquisition of EFS as well as costs to outsource certain back office technology incurred during 2016, partly offset by an
increase in professional fees.
Provision for credit losses increased $32.0 million for 2017, as compared to 2016, resulting from higher incidences of
magnetic stripe card skimming fraud during 2017. Additionally, credit losses were impacted by higher relative fuel spend and the
acquisition of EFS. During 2017, the Company took a number of steps to combat fraud losses, including establishing portfolio
limits on the number of transactions and amount of fuel purchases. Additionally, we implemented new real-time technology during
the fourth quarter of 2017, designed to increase fraud detection speed. As a result of these actions, monthly fraud losses trended
downwards in the second half of 2017, most significantly in the fourth quarter. We anticipate that fraud incidents will continue to
trend down slightly in terms of size and frequency in 2018.
We generally measure our credit loss performance by calculating credit losses as a percentage of total fuel expenditures
on the payment processing transactions. This metric for credit losses was 17.2 basis points of fuel expenditures for 2017, as
compared to 11.1 basis points of fuel expenditures for 2016. We generally use a roll rate methodology to calculate the amount
necessary for our ending receivable reserve balance. This methodology considers total receivable balances, recent charge off
experience, recoveries on previously charged off accounts, and the dollars that are delinquent to calculate the total reserve. In
addition, management undertakes a detailed evaluation of the receivable balances to help further ensure overall reserve adequacy.
The expense we recognize in each quarter is the amount necessary to bring the reserve to its required level based on accounts
receivable aging and net charge offs.
Technology leasing and support expenses increased $7.6 million in 2017, as compared to 2016. This increase is primarily
due to additional software licensing expense and maintenance, resulting from incremental technological investments in our Fleet
Solutions business, including EFS.
Depreciation and amortization increased $42.4 million in 2017, as compared to 2016, due primarily to a full year of
amortization of intangibles acquired in the EFS acquisition. Refer to Item 8 – Note 3, Business Acquisition of this report for more
information. Additionally, following the acquisition of EFS, we evaluated the estimated useful life of our existing over-the-road
payment processing technology. As a result of this analysis, we accelerated amortization related to this technology during the third
quarter of 2016, resulting in incremental amortization during 2017 as compared to the same period in the prior year. This technology
is fully amortized as of December 31, 2017.
Operating interest expense increased $5.1 million in 2017, as compared to 2016, primarily due to higher interest rates
paid on recently issued certificates of deposit, which replaced previously held non-interest bearing deposits following the expiration
of an agreement with a deposit partner during the fourth quarter of 2016. Additionally, payment processing volume increases and
higher fuel prices contributed to the increase in operating interest expense.
During the second quarter of 2017, we incurred a $16.2 million non-cash impairment and asset write-off related to in-
sourcing certain technology functions. Additionally, as part of a recent technology plan assessment, we streamlined certain payment
processing software offerings and incurred a $5.9 million non-cash software impairment and asset write-off charge.
During 2017, management determined that our Telapoint business did not align with the long-term strategy of our core
Fleet business. During November 2017, the Company sold net assets of $8.9 million of this business, which resulted in a pre-tax
book gain of approximately $21.0 million.
All other operating expenses increased $16.4 million in 2017, as compared to 2016, resulting primarily from higher costs
to support business growth, including incremental expenses as result of the EFS acquisition.
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TRAVEL AND CORPORATE SOLUTIONS SEGMENT
The following table reflects comparative operating results and key operating statistics within our Travel and Corporate
Solutions segment:
(in thousands)
Revenues
Payment processing revenue
Account servicing revenue
Finance fee revenue
Other revenue
Total revenues
Total operating expenses
Operating income
Key operating statistics (a)
Payment processing revenue:
Payment solutions purchase volume
2017
2016
Increase
(decrease)
$
158,660
$
175,762
7,531
760
57,096
224,047
146,061
$
77,986
$
1,247
643
37,595
215,247
130,817
84,430
(10)%
504 %
18 %
52 %
4 %
12 %
(8)%
$ 30,344,752
$ 23,965,023
27 %
(a) As of July 1, 2016, this key operating statistic includes EFS purchase volumes.
Revenues
Payment processing revenue decreased approximately $17.1 million for 2017, as compared to 2016, primarily due to a
decrease in our net interchange rate resulting from contract renegotiations with a large travel customer which went into effect in
January 2017. This unfavorable factor was partly offset by an increase in corporate charge card purchase volume from our WEX
travel product in all our markets, most notably the U.S. and Europe, and the acquisition of EFS.
Account servicing revenue increased approximately $6.3 million for 2017, as compared to 2016, primarily due to the
acquisition of AOC.
Other revenue increased approximately $19.5 million, primarily due to higher international settlement fees.
Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time
to pay, placing a customer on a payment plan or granting waivers of late fees. As of December 31, 2017 and 2016, customer
balances with such concessions totaled $7.9 million and $16.7 million, respectively. The Company waived $2.1 million and $1.3
million in late fees in 2017 and 2016, respectively.
Expenses
The following table compares expense line items within our Travel and Corporate Solutions segment:
(in thousands)
Expense
Salary and other personnel
Service fees
Provision for credit losses
Technology leasing and support
Depreciation and amortization
Operating interest
Impairment charge
All other operating expenses
NM - Not Meaningful
2017
2016
Increase
(decrease)
$
29,273
$
52,199
(68)
9,590
17,703
8,367
22,027
22,728
58,254
5,676
13,991
6,187
2,969
—
$
6,970
$
21,012
29 %
(10)%
(101)%
(31)%
186 %
182 %
NM
(67)%
Salary and other personnel expenses increased $6.5 million in 2017, as compared to 2016, due primarily to the acquisitions
of AOC and EFS.
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Service fees decreased by $6.1 million in 2017, as compared to 2016, due primarily to lower network processing fees
paid as a result of our MasterCard contract renewal executed during the third quarter of 2016, partly offset by incremental expenses
resulting from higher relative purchase volumes.
Provision for credit losses decreased $5.7 million in 2017, as compared to 2016. Prior year results were negatively impacted
by two discrete credit losses, including the bankruptcy of one of our online travel agency customers. We recovered a portion of
this prior year provision for credit loss during 2017.
Technology leasing and support decreased $4.4 million in 2017, as compared to 2016, due primarily to cost savings as a
result of the AOC acquisition. Prior to its acquisition, AOC was one of the Company's important technology providers.
Depreciation and amortization expenses increased $11.5 million in 2017, as compared to 2016, due to a full year of
amortization of intangibles acquired in the EFS acquisition and amortization from our recent AOC acquisition.
Operating interest increased $5.4 million in 2017, as compared to 2016, due to higher deposit interest rates. Following
the expiration of an agreement with a deposit partner during the fourth quarter of 2016, we issued certificates of deposit to replace
previously held non-interest bearing deposits. Additionally, higher payment processing volumes contributed to the increase in
operating interest expense.
Following the acquisition of AOC in the fourth quarter of 2017, the Company reevaluated certain payment processing
software under development. In doing so, we determined the developed technology obtained as part of the AOC acquisition more
closely aligns with our current technological strategy. As result, $22.0 million of previously capitalized software development was
determined to have no future benefit and was therefore written off during 2017.
All other operating expenses decreased $14.0 million in 2017, as compared to 2016. 2016 results were negatively impacted
by a one-time $15.5 million vendor settlement executed in 2016 in exchange for the release of potential claims related to in-
sourcing certain technology.
HEALTH AND EMPLOYEE BENEFIT SOLUTIONS SEGMENT
The following table reflects comparative operating results and key operating statistics within our Health and Employee
Benefit Solutions segment:
(in thousands)
Revenues
Payment processing revenue
Account servicing revenue
Finance fee revenue
Other revenue
Total revenues
Total operating expenses
Operating income
Key operating statistics (a)
Payment processing revenue:
Purchase volume
Account servicing revenue:
Average number of SaaS accounts
2017
2016
Increase
$
50,348
$
103,956
27,486
21,745
203,535
185,880
$
17,655
$
46,957
82,660
13,572
17,963
161,152
147,063
14,089
$
4,317,236
3,823,035
9,213
7,197
7 %
26 %
103 %
21 %
26 %
26 %
25 %
13 %
28 %
(a)
Key operating statistics have been modified to provide added insight into segment revenue trends. Metrics for the years ended December 31, 2016 and 2015
have also been conformed to the current year presentation.
Revenues
Payment processing revenue increased approximately $3.4 million for 2017, as compared to 2016, resulting primarily
from an increase in WEX Health purchase volume due to growth in consumers, partly offset by a slight decline in WEX Latin
America revenues.
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Account servicing revenue increased $21.3 million for 2017, as compared to 2016. This increase was primarily due to
WEX Health customer signings and existing customer growth, which resulted in a higher number of participants using our SaaS
healthcare technology platform.
Finance fee revenue increased $13.9 million in 2017, as compared to 2016, due primarily to growth in revenue earned
on our salary advance product in Brazil.
Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time
to pay, placing a customer on a payment plan or granting waivers of late fees. There were no material concessions granted during
either of the years ended December 31, 2017 or 2016.
Other revenue increased $3.8 million in 2017, as compared to 2016, resulting primarily from an increase in Brazil card
transactions and higher ancillary WEX Health fees as result of a growing customer base.
Expenses
The following table compares selected expense line items within our Health and Employee Benefit Solutions segment:
(in thousands)
Expense
Salary and other personnel
Service fees
Depreciation and amortization
Operating interest
All other operating expenses
2017
2016
Increase
$
75,124
$
28,172
42,721
7,504
$
32,359
$
61,753
19,243
34,604
5,941
25,522
22%
46%
23%
26%
27%
Salary and other personnel expenses increased $13.4 million in 2017, as compared to 2016, primarily due to higher average
WEX Health and WEX Latin America headcount and related employee benefit costs in support of significant business growth.
Additionally, we recognized higher expenses associated with variable compensation plans based on performance.
Service fees increased by $8.9 million in 2017, as compared to 2016, primarily due to costs incurred as a result of the
increase in participants using our SaaS healthcare offerings.
Depreciation and amortization expenses increased $8.1 million in 2017, as compared to 2016, resulting from incremental
amortization of acquired intangibles and higher depreciation expense primarily on capitalized software development costs.
Operating interest increased $1.6 million in 2017, as compared to 2016, primarily due to an increase in customer receivable
balances due to business growth and higher relative average interest rates.
All other operating expenses increased $6.8 million in 2017, as compared to 2016, primarily due to expenses to support
significant business growth and higher revenue-based taxes in Brazil.
NON-OPERATING INCOME AND EXPENSES
The following table reflects comparative results for certain amounts excluded from operating profit:
(in thousands)
Financing interest expense
Net foreign currency gain (loss)
Net unrealized gains on interest rate swap agreements
Non-cash adjustments related to tax receivable agreement
NM - Not Meaningful
2017
2016
(107,067)
(113,418)
29,919
1,314
15,259
(7,665)
12,908
(563)
Increase
(decrease)
(6)%
NM
(90)%
NM
Financing interest expense decreased $6.4 million in 2017, as compared to 2016. 2016 was unfavorably impacted by $30
million of ticking fees incurred for the commitment of funds to finance the acquisition of EFS. The absence of this expense in
2017 was partly offset by higher relative borrowings and effective interest rates under the 2016 Credit Agreement. The Company
recently completed two separate repricings of the 2016 Credit Agreement which reduced the applicable interest rate margin on
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outstanding term loans going forward. See Item 8 - Note 13, Financing Debt and Note 25, Subsequent Event for further information
regarding these repricings.
Our foreign currency exchange exposure is primarily related to the re-measurement of our cash, receivable and payable
balances, including intercompany transactions that are denominated in foreign currencies. In 2017, net foreign currency gain was
$29.9 million, as compared to a net foreign currency loss of $7.7 million in 2016. In 2017, we recognized gains on trade receivables
and intercompany loans primarily from a strengthening of the British Pound Sterling and the Euro relative to the US dollar. In
2016, we experienced foreign currency exchange losses from fluctuations in exchange rates that resulted in a significant devaluation
of major currencies to which our business is exposed, including the British Pound Sterling, the Euro and the Australian dollar.
Net unrealized gains on interest rate swap agreements was $1.3 million in 2017, as compared to $12.9 million in 2016.
In 2017, the favorable impact of increases in the variable interest rates on our swap agreements was almost entirely offset by the
decrease in remaining swap duration.
Non-cash adjustments related to tax receivable agreement were $15.3 million in 2017 resulting from a decrease in a tax
sharing liability due to our former parent company as result of recent tax reform which reduced the federal statutory rate from
35% to 21%.
INCOME TAXES
Our effective tax rate was 10.9 percent for 2017 as compared to 34.0 percent for 2016. The decline in our tax rate is
primarily due the reduction of our net deferred tax liabilities resulting from the change in federal corporate income tax rates effective
January 1, 2018 as part of the 2017 Tax Act, partly offset by the increase in valuation allowance.
In December 2017, the 2017 Tax Act was signed into law making significant changes to the Internal Revenue Code.
Changes include, but are not limited to, a federal corporate tax rate decrease from 35 percent to 21 percent for tax years beginning
after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system and a
one-time transition tax on the mandatory deemed repatriation of foreign earnings. The Company has estimated the provision for
income taxes in accordance with the 2017 Tax Act and guidance available as of the date of this filing and as a result has recorded
a provisional amount of one-time income tax benefit of approximately $60 million in the fourth quarter of 2017, the period in
which the legislation was enacted. This benefit was primarily related to the remeasurement of certain deferred tax assets and
liabilities based on the tax rates at which they are expected to reverse in the future and a reduction in the amount due under our
tax receivable agreement, which decreased primarily as a result of the decline in the federal corporate income tax rate. These
favorable impacts were partly offset by income tax expense related to the one-time transition tax on the mandatory deemed
repatriation of foreign earnings.
The 2017 Tax Act also changes the taxation of foreign earnings, and companies generally will not be subject to United
States federal income taxes upon the receipt of dividends from foreign subsidiaries and will not be permitted foreign tax credits
related to such dividends. However, the 2017 Tax Act creates a new requirement to tax certain foreign earnings relating to Global
Intangible Low Taxed Income (“GILTI”). Based on the recent FASB guidance, the Company can elect an accounting policy choice
of either treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred
or factoring such amounts into the Company’s measurement of its deferred taxes. Because of the complexity of the new GILTI
tax rules, and anticipated guidance from U.S. Treasury we will continue to evaluate this provision of the 2017 Tax Act. Therefore,
we have not recorded any deferred taxes related to GILTI and have not elected an accounting policy for GILTI at this time.
Undistributed earnings of certain foreign subsidiaries of the Company amounted to approximately $59 million and $26
million at December 31, 2017 and 2016, respectively. These earnings are considered to be indefinitely reinvested. Beginning in
2018, except for GILTI, the Company will no longer record United States federal income tax on its share of the income of its
foreign subsidiaries, nor will it record a benefit for foreign tax credits related to that income.
On December 22, 2017, Staff Accounting Bulletin No. 118 was issued to address the application of U.S. GAAP in situations
when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable
detail to complete the accounting for certain income tax effects of the Act. Accordingly, any subsequent adjustments to the amount
of one-time benefit noted above will be recorded to current income tax provision during the measurement period which is not
expected to extend beyond one year from the enactment date. The effects of other provisions of the 2017 Tax Act are not expected
to have a material impact on our results of operations.
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YEAR ENDED DECEMBER 31, 2016, AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2015
FLEET SOLUTIONS SEGMENT
The following table reflects comparative operating results and key operating statistics within our Fleet Solutions segment:
(in thousands, except per transaction and per gallon data)
2016
2015
Increase
(decrease)
Revenues
Payment processing revenue
Account servicing revenue
Finance fee revenue
Other revenue
Total revenues
Total operating expenses
Operating income
Key operating statistics (a)
Payment processing revenue:
Payment processing transactions
Payment processing fuel spend
Average price per gallon of fuel - Domestic – ($USD/gal)
Net payment processing rate
$
297,900
$
305,855
127,106
124,725
92,330
642,061
545,451
100,850
83,554
57,419
547,678
413,595
$
96,610
$
134,083
385,861
342,975
$ 22,838,237
$ 21,911,834
$
2.21
$
1.30%
2.55
1.40%
(3)%
26 %
49 %
61 %
17 %
32 %
(28)%
13 %
4 %
(13)%
(7)%
(a)
Key operating statistics have been modified to provide added insight into segment revenue trends. Metrics for the years ended December 31, 2016 and 2015
have conformed to the current year presentation. As of July 1, 2016, these key operating statistics include our EFS acquisition.
Revenues
Payment processing revenue decreased $8.0 million for 2016, as compared to 2015, due primarily to the impact of a 13%
decrease in the average domestic price per gallon of fuel in the 2016 as compared to 2015 and the unfavorable impact of foreign
currency exchange rates. These unfavorable factors were partly offset by a higher payment processing volume related to the
acquisition of EFS, a large customer portfolio converting from a transaction processing relationship to a payment processing
relationship in the beginning of 2016 and organic growth.
Account servicing revenue increased $26.3 million for 2016, as compared to 2015, resulting from the acquisition of EFS
and organic growth from an increase in fees to certain customers as part of our price modernization efforts.
Other revenues increased $34.9 million in 2016, as compared to 2015, primarily due to the acquisition of EFS.
Finance fee revenue is comprised of the following components:
(in thousands)
Late fee revenue
Factoring fee revenue
Cardholder interest income
Other finance fee revenue
Total finance fee revenue
2016
2015
Increase
$
102,497
$
19,689
544
1,995
67,027
15,585
515
427
$
124,725
$
83,554
53%
26%
6%
367%
49%
Late fees increased $35.5 million in 2016, as compared to 2015. The increase in late fees was primarily due to $39.1
million due to rate increases, partly offset by a decrease of $3.6 million due to the change in overdue balances. During the first
half of 2015, late fee rates ranged from 0 to 3.75 percent monthly with a minimum late fee charge of $50. For the second half of
2015, late fee rate ranges and minimum charges were 0 to 5.50 percent monthly and $75, respectively. During the second quarter
of 2016, late fee ranges were changed to 0 to 6.99 percent monthly, while minimum charges remained at $75. The weighted average
late fee rate, net of related charge-offs was 4.3% and 2.6% for 2016 and 2015, respectively.
Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time
to pay, placing a customer on a payment plan or granting waivers of late fees. There were no material concessions to customers
experiencing financial difficulties during either of the years ended December 31, 2016 and 2015.
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Factoring fee revenue increased $4.1 million in 2016, as compared to 2015. The increase in factoring fee revenue is due
to organic growth and customer demand for our services.
Other finance fee revenue increased $1.6 million in 2016 primarily resulting from the EFS acquisition.
Expenses
The following table compares selected expense line items within our Fleet Solutions segment:
(in thousands)
Expense
Salary and other personnel
Restructuring
Service fees
Provision for credit losses
Technology leasing and support
Occupancy and equipment
Depreciation and amortization
Other
2016
2015
Increase
(decrease)
$
201,817
$
171,122
7,486
95,555
27,264
28,763
17,947
100,860
$
27,043
$
9,010
63,075
20,822
25,099
15,062
54,453
21,718
18 %
(17)%
51 %
31 %
15 %
19 %
85 %
25 %
Salary and other personnel expenses increased $30.7 million for 2016, as compared to 2015, due primarily to the acquisition
of EFS, and to a lesser extent, increases in variable compensation plans and employee benefit costs.
We recorded restructuring costs of approximately $7.5 million and $9.0 million for 2016 and 2015, respectively. The
costs primarily reflect employee termination benefits and office closing costs to be paid through 2018. These initiatives are expected
to streamline our domestic and international fleet businesses, driving acquisition synergies and creating greater efficiencies.
Service fees increased $32.5 million during 2016, as compared to 2015. The increase is due primarily to expenses associated
with the acquisition of EFS and costs to outsource certain back office technology.
Provision for credit losses increased $6.4 million for 2016, as compared to 2015. We generally measure our credit loss
performance by calculating credit losses as a percentage of total fuel expenditures on the payment processing transactions. This
metric for credit losses was 11.9 basis points of fuel expenditures for 2016, as compared to 9.4 basis points of fuel expenditures
for 2015. We generally use a roll rate methodology to calculate the amount necessary for our ending receivable reserve balance.
This methodology considers total receivable balances, recent charge off experience, recoveries on previously charged off accounts,
and the dollars that are delinquent to calculate the total reserve. In addition, management undertakes a detailed evaluation of the
receivable balances to help further ensure overall reserve adequacy. The expense we recognize in each quarter is the amount
necessary to bring the reserve to its required level based on accounts receivable aging and net charge offs.
Technology leasing and support expenses increased $3.7 million in 2016, as compared to 2015, resulting from additional
software maintenance expense, due primarily to the EFS acquisition.
Occupancy and equipment increased $2.9 million in 2016, as compared to 2015, due primarily to higher rent expense,
the majority of which resulted from the EFS acquisition.
Depreciation and amortization increased $46.4 million in 2016, as compared to 2015, due primarily to amortization of
intangibles obtained from the EFS acquisition. Additionally, the Company evaluated the estimated useful life of our existing over-
the-road payment processing technology following the EFS acquisition. As a result of this analysis, we recorded approximately
$10.1 million of accelerated amortization related to this technology during the second half of 2016 and will amortize approximately
$11.5 million of remaining net book value associated with this technology over the next six months.
Other expenses increased $5.3 million in 2016, as compared to 2015, resulting primarily from the EFS acquisition.
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TRAVEL AND CORPORATE SOLUTIONS SEGMENT
The following table reflects comparative operating results and key operating statistics within our Travel and Corporate
Solutions segment:
(in thousands)
Revenues
Payment processing revenue
Account servicing revenue
Finance fee revenue
Other revenue
Total revenues
Total operating expenses
Operating income
Key operating statistics(a)
Payment processing revenue:
2016
2015
Increase
(decrease)
$
175,762
$
151,311
1,247
643
37,595
215,247
130,817
84,430
1,930
326
41,852
195,419
109,101
86,318
16 %
(35)%
97 %
(10)%
10 %
20 %
(2)%
Payment solutions purchase card volume
$ 23,965,023
$ 19,440,663
23 %
(a) As of July 1, 2016, these key operating statistics include our EFS acquisition.
Revenues
Payment processing revenue increased approximately $24.5 million for 2016, as compared to 2015, primarily due to an
increase in corporate charge card purchase volume from our WEX travel product and the acquisition of EFS. These favorable
impacts were partly offset by the unfavorable impact of foreign currency exchange rates, and a decrease in the virtual card net
interchange rate resulting from contract renegotiations and increased volumes in 2016 from certain large customers resulting in
higher rebates. In the fourth quarter of 2016, we renegotiated our contract with one of our large customers, which will increase
the rebates we provide to them effective in the first quarter of 2017.
Other revenue decreased approximately $4.3 million, primarily due to lower rates charged on cross border
transactions.
Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time
to pay, placing a customer on a payment plan or granting waivers of late fees. As of and for the year ended December 31, 2016,
customer balances with such concessions totaled $16.7 million and resulted in approximately $1.3 million in waived late fees.
There were no material concessions granted during the year ended December 31, 2015.
Expenses
The following table compares selected expense line items within our Travel and Corporate Solutions segment:
(in thousands)
Expense
Salary and other personnel
Service fees
Provision for credit losses
Depreciation and amortization
Other
of EFS.
2016
2015
Increase
(decrease)
$
22,728
$
58,254
5,676
6,187
$
16,833
$
21,754
62,162
1,324
2,999
3,961
4 %
(6)%
329 %
106 %
325 %
Salary and other personnel expenses increased $1.0 million in 2016, as compared to 2015, due primarily to the acquisition
Service fees decreased by $3.9 million in 2016, as compared to 2015, due primarily to benefits realized from certain
contract renewals, partly offset by the acquisition of EFS.
Provision for credit losses increased $4.4 million in 2016, as compared to 2015, primarily due to reserves taken for specific
travel customers in Europe, including the bankruptcy of one of our online travel agency customers during the third quarter of 2016.
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Depreciation and amortization expenses increased $3.2 million in 2016, as compared to 2015, resulting from related
amortization on acquired EFS intangible assets.
Other expenses increased $12.9 million in 2016, as compared to 2015, primarily resulting from a one-time $15.5 million
vendor settlement in exchange for the release of potential claims related to in-sourcing certain technology.
HEALTH AND EMPLOYEE BENEFIT SOLUTIONS SEGMENT
The following table reflects comparative operating results and key operating statistics within our Health and Employee
Benefit Solutions segment:
(in thousands)
Revenues
Payment processing revenue
Account servicing revenue
Finance fee revenue
Other revenue
Total revenues
Total operating expenses
Operating income
Key operating statistics(a)
Payment processing revenue:
Purchase volume
Account servicing revenue:
Average number of SaaS accounts
2016
2015
Increase
$
46,957
82,660
13,572
17,963
161,152
147,063
14,089
38,703
53,912
5,113
13,812
111,540
103,148
8,392
$
3,823,035
$
3,533,724
7,197
4,956
21%
53%
165%
30%
44%
43%
68%
8%
45%
(a) Key operating statistics have been modified to provide added insight into segment revenue trends. Metrics for the years ended December 31, 2016 and 2015
have conformed to the current year presentation.
Revenues
Payment processing revenue increased approximately $8.3 million for 2016, as compared to 2015, due primarily to
higher spend volumes resulting from the growth of WEX Health interchange consumers.
Account servicing revenue increased $28.7 million for 2016, as compared to 2015. This increase was due primarily to
WEX Health new and existing customer growth, which resulted in a higher number of participants using our SaaS healthcare
offerings, and revenues from Benaissance, which was acquired in November 2015.
Finance fee revenue increased $8.5 million in 2016, as compared to 2015, due primarily to organic growth in revenue
earned on our salary advance product in Brazil resulting from an increase in the number of installments selected by our
customers in 2016 as compared to the prior year.
Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the
time to pay, placing a customer on a payment plan or granting waivers of late fees. There were no material concessions granted
during either of the years ended December 31, 2016 or 2015.
Other revenue increased $4.2 million in 2016, as compared to 2015, due primarily to growth and other ancillary fees
from the Benaissance acquisition.
Expenses
The following table compares selected expense line items within our Health and Employee Benefit Solutions segment:
(in thousands)
Expense
Salary and other personnel
Service fees
Occupancy and equipment
Depreciation and amortization
2016
2015
Increase
$
$
61,753
19,243
6,336
34,604
$
$
$
$
41,688
13,607
4,455
25,625
48%
41%
42%
35%
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Salary and other personnel expenses increased $20.1 million in 2016, as compared to 2015, primarily due to additional
headcount and variable compensation plan costs at WEX Health to support growth, including the impact from the acquisition of
Benaissance.
Service fees increased by $5.6 million in 2016, as compared to 2015, primarily related to higher costs resulting from
growth in WEX Health consumers and from the acquisition of Benaissance.
Occupancy and equipment expenses increased $1.9 million in 2016, as compared to 2015, primarily due to incremental
facility leasing costs from the acquisition of Benaissance and growth of our WEX Health facilities and related costs.
Depreciation and amortization expenses increased $9.0 million in 2016, as compared to 2015. This increase resulted
from higher amortization expense, primarily on acquired Benaissance intangibles and capitalized software development costs.
NON-OPERATING INCOME AND EXPENSES
The following table reflects comparative results for certain amounts excluded from operating profit:
(in thousands)
Financing interest expense
Net foreign currency loss
Net unrealized gains on interest rate swap agreements
NM - Not Meaningful
2016
2015
(113,418)
(7,665)
12,908
(46,189)
(5,689)
—
Increase
(decrease)
146 %
(35)%
NM
Financing interest expense increased $67.2 million in 2016, as compared to 2015. The increase was primarily due to
ticking fees incurred for the commitment of funds to finance the acquisition of EFS and higher relative borrowings and effective
interest rates under the 2016 Credit Agreement.
Net foreign currency loss increased $2.0 million in 2016, as compared to 2015. In both 2016 and 2015, most prominently
in the fourth quarter of each year, we experienced losses from fluctuations in exchange rates that resulted in a significant devaluation
of major currencies to which our business is exposed, including the British Pound Sterling, the Euro and the Australian dollar. In
2016, this unfavorable factor was partly offset by recognized foreign currency gains related to intercompany loans resulting from
a strengthening of the Euro against the British Pound Sterling.
In November 2016, the Company entered into three forward-fixed interest rate swap agreements to manage the interest
rate risk associated with our outstanding variable-interest rate borrowings. These derivative instruments do not qualify for hedge
accounting. Accordingly, realized and unrealized gains and losses on these derivative instruments affect our net income. During
2016, we recorded an unrealized gain of $12.9 million on these interest rate swap agreements.
INCOME TAXES
Our effective tax rate was 34.0 percent for 2016 as compared to 40.7 percent for 2015. The change in our tax rate reflects
a shift in jurisdictional profitability between 2015 and 2016. Increased profits in 2016 within tax jurisdictions with tax rates lower
than the United States resulted in a reduction to our effective tax rate. Our 2016 tax rate reflects the release of certain historical
foreign reserve positions in Australia, primarily driven by a lapse of statute, as well as a reduction in our domestic production
activities deduction as a result of lower taxable income in the United States.
NON-GAAP FINANCIAL MEASURES
The Company's non-GAAP adjusted net income excludes unrealized gains and losses on derivatives, net foreign currency
remeasurement gains and losses, acquisition-related ticking fees, acquisition-related intangible amortization, other acquisition and
divestiture related items, stock-based compensation, restructuring and other costs, gain on divestiture, a one-time vendor settlement,
debt restructuring and debt issuance cost amortization, non-cash adjustments related to tax receivable agreement, reserves for
regulatory penalties, adjustments attributed to our non-controlling interest and certain tax related items. In addition, for the three
months and year ended December 31, 2017, we have excluded certain impairment charges and asset write-offs as described below.
Although adjusted net income is not calculated in accordance with GAAP, this non-GAAP measure is integral to the
Company's reporting and planning processes and the chief operating decision maker of the Company uses adjusted operating
income to allocate resources among our operating segments. The Company considers this measure integral because it excludes
the above-specified items that the Company's management excludes in evaluating the Company's performance. Specifically, in
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addition to evaluating the Company's performance on a GAAP basis, management evaluates the Company's performance on a
basis that excludes the above items because:
• Exclusion of the non-cash, mark-to-market adjustments on derivative instruments, including fuel-price related derivatives
and interest rate swap agreements, helps management identify and assess trends in the Company's underlying business
that might otherwise be obscured due to quarterly non-cash earnings fluctuations associated with these derivative contracts.
The non-cash, mark-to-market adjustments on derivative instruments are difficult to forecast accurately, making
comparisons across historical and future quarters difficult to evaluate.
• Net foreign currency gains and losses primarily result from the remeasurement to functional currency of cash, receivable
and payable balances, certain intercompany notes denominated in foreign currencies and any gain or loss on foreign
currency hedges relating to these items. The exclusion of these items helps management compare changes in operating
results between periods that might otherwise be obscured due to currency fluctuations.
• The Company considers certain acquisition-related costs, including certain financing costs, ticking fees, investment
banking fees, warranty and indemnity insurance, certain integration related expenses and amortization of acquired
intangibles, as well as gains and losses from divestitures to be unpredictable, dependent on factors that may be outside
of our control and unrelated to the continuing operations of the acquired or divested business or the Company. In addition,
the size and complexity of an acquisition, which often drives the magnitude of acquisition-related costs, may not be
indicative of such future costs. The Company believes that excluding acquisition-related costs and gains or losses of
divestitures facilitates the comparison of our financial results to the Company's historical operating results and to other
companies in our industry.
•
Stock-based compensation is different from other forms of compensation, as it is a non-cash expense. For example, a
cash salary generally has a fixed and unvarying cash cost. In contrast, the expense associated with an equity-based award
is generally unrelated to the amount of cash ultimately received by the employee, and the cost to the Company is based
on a stock-based compensation valuation methodology and underlying assumptions that may vary over time.
• Restructuring and other costs include employee termination benefits from certain identified initiatives to further streamline
the business, improve the Company's efficiency, create synergies and to globalize the Company's operations, all with an
objective to improve scale and increase profitability going forward. We exclude these items when evaluating our continuing
business performance as such items are not consistently occurring and do not reflect expected future operating expense,
nor provide insight into the fundamentals of current or past operations of our business.
•
Impairment charges and asset write-offs represent non-cash asset write-offs related to the following:
Impairment of certain prepaid services following a strategic decision to in-source certain technology functions.
Impairments of certain payment processing software following the acquisition of AOC and as part of our ongoing
platform consolidation strategy, designed to ensure we continue to deliver superior technology to our customers.
These charges do not reflect recurring costs that are relevant to our continuing operations. The Company believes that
excluding these nonrecurring expenses facilitates the comparison of our financial results to the Company's historical
operating results and to other companies in our industry.
• Vendor settlement represents a payment in exchange for the release of potential claims related to insourcing certain
technology, and does not reflect recurring costs that would be relevant to the continuing operations of the Company. The
Company believes that excluding this nonrecurring expense facilitates the comparison of our financial results to the
Company's historical operating results and to other companies in our industry.
• Debt restructuring and debt issuance cost amortization are non-cash items that are unrelated to the continuing operations
of the Company. Debt restructuring costs are not consistently occurring and do not reflect expected future operating
expense, nor provide insight into the fundamentals of current or past operations of our business. In addition, since debt
issuance cost amortization is dependent upon the financing method which can vary widely company to company, we
believe that excluding these costs helps to facilitate comparison to historical results as well as to other companies within
our industry.
• The adjustments attributable to non-controlling interests, including adjustments to the redemption value of a non-
controlling interest, and the non-cash adjustments related to our tax receivable agreement have no significant impact on
the ongoing operations of the business.
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• Regulatory reserves reflect charges related to the impact of a regulatory action which resulted in WEX paying a penalty
in 2016. We have excluded this item when evaluating our continuing business performance as it is not consistently recurring
and does not reflect an expected future operating expense, nor provide insight into the fundamentals of the current or past
operations of our business.
• The tax related items are the difference between the Company’s U.S. GAAP tax provision and a pro forma tax provision
based upon the Company’s adjusted net income before taxes as well as the impact from certain discrete tax items. The
methodology utilized for calculating the Company’s adjusted net income tax provision is the same methodology utilized
in calculating the Company’s U.S. GAAP tax provision.
For the same reasons, WEX believes that adjusted net income may also be useful to investors as one means of evaluating
the Company's performance. However, because adjusted net income is a non-GAAP measure, it should not be considered as a
substitute for, or superior to, net income, operating income or cash flows from operating activities as determined in accordance
with GAAP. In addition, adjusted net income as used by WEX may not be comparable to similarly titled measures employed by
other companies.
The following table reconciles net earnings attributable to shareholders to adjusted net income attributable to shareholders:
Net earnings attributable to shareholders
Unrealized (gains) losses on derivative instruments
Net foreign currency remeasurement (gain) loss
Acquisition-related ticking fees
Acquisition-related intangible amortization
Other acquisition and divestiture related items
Gain on divestiture
Stock-based compensation
Restructuring and other costs
Impairment charges and asset write-offs
Vendor settlement
Debt restructuring and issuance cost amortization
Non-cash adjustments related to tax receivable agreement
Regulatory reserve
ANI adjustments attributable to non-controlling interests
Tax related items
Year ended December 31,
2017
2016
2015
$
160,266
$
60,637
$
101,904
(1,314)
(29,919)
—
153,810
5,000
(20,958)
30,487
11,129
44,171
—
10,519
(15,259)
—
(1,563)
(113,327)
(7,901)
7,665
30,045
97,829
20,879
—
19,742
13,995
—
15,500
12,673
563
—
(2,583)
(79,834)
35,962
5,689
—
47,792
4,137
(1,215)
12,420
9,010
—
—
3,097
(2,145)
1,750
4,996
(32,286)
191,111
Adjusted net income attributable to shareholders
$
233,042
$
189,210
$
LIQUIDITY, CAPITAL RESOURCES AND CASH FLOWS
We believe that our cash generating capability, financial condition and operations, together with our revolving credit
agreement, term loans, and notes outstanding, as well as other available methods of financing (including deposits, participation
loans, borrowed federal funds, and securitization facilities), will be adequate to fund our cash needs for at least the next 12 months.
The table below summarizes our cash activities:
(in thousands)
Net cash provided by (used for) operating activities
Net cash used for investing activities
Net cash provided by (used for) financing activities
2017 Highlights
Year ended December 31,
2017
2016
2015
$
$
132,949
(163,501)
359,385
$
$
(151,131) $
445,100
(1,160,439)
1,216,081
$
(126,658)
(319,538)
• Cash provided by operating activities was primarily due to higher net income adjusted for non-cash charges. This favorable
factor was partly offset cash used by accounts receivables, net of associated payables.
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• Cash used by investing activities was due to the acquisition of AOC and capital additions primarily related to the
development of internal-use software as we expand globally and provide competitive products and services to our
customers. These impacts were partly offset by the sale of our Telapoint business after determining that its operations did
not align with the core strategy of our Fleet business. The AOC acquisition was funded with cash on hand and through
the Company's 2016 Credit Agreement.
• The Company added $100 million of capacity to its revolving line of credit to provide additional liquidity and flexibility.
• Cash provided by financing activities resulted from increased bank deposits to fund accounts receivable, borrowings
under the 2016 Credit Agreement associated with the AOC acquisition and increased third-party bank participation in
customer receivables.
2016 Highlights
• On July 1, 2016, we completed the acquisition of EFS, a provider of customized corporate payment solutions for fleet
and corporate customers with a focus on the large and mid-sized over-the-road fleet segments for approximately $1.4
billion in cash and stock consideration.
In conjunction with the EFS acquisition, we successfully closed on the 2016 Credit Agreement, which increased our
available financing. The 2016 Credit Agreement provides for term loan facilities in the amount of $1.7 billion, a $470
million secured revolving credit facility and the option for additional loans subject to certain criteria.
• During 2016, our increase in accounts receivable resulted in a $442.3 million use of cash, net of the customer receivables
acquired as part of the EFS acquisition. This was primarily funded by operating activities. Accounts receivable increased
as a result of higher revenues during the month ended December 31, 2016 as compared to the same period in 2015,
resulting primarily from an increase in transaction volume.
•
In November 2016, we entered into three forward-fixed interest rate swap agreements to manage the interest rate risk
associated with our outstanding variable-interest rate borrowings. Commencing January 2017, the Company receives
variable interest of 1-month LIBOR under these swaps and pays fixed rates between 0.896% to 1.125%, reducing a portion
of the variability of the future interest payments associated with $800 million of our borrowings.
• During 2016, cash outflows from capital additions totaled $61.8 million, primarily related to the development of internal-
use software as we expand globally and provide competitive products and services to our customers.
2015 Highlights
• During 2015, cash provided by operating activities was primarily provided by a decrease in accounts receivable, net of
the accounts receivable balances acquired with our acquisitions, net income, and depreciation and amortization expense.
Accounts receivable decreased in 2015 over 2014 as a result of decreases in fuel prices.
• On November 18, 2015, we acquired Benaissance for approximately $80.7 million. The transaction was financed through
the Company’s cash on hand and existing credit facility.
• On August 31, 2015, we acquired the remaining 49 percent ownership in UNIK, that we did not previously own, for
approximately $46 million. The transaction was financed through the Company’s cash on hand and existing credit facility.
• On January 7, 2015, we sold our operations of rapid! PayCard for $20.0 million, which resulted in a pre-tax gain of $1.2
million.
• During 2015, we incurred restructuring charges of $9.0 million, of which approximately $1.4 million was paid during
the year. These expenses consist of employee termination benefits and third party service fees.
• During 2015, we had approximately $63 million of capital expenditures. A significant portion of our capital expenditures
are for the development of internal-use computer software primarily to enhance product features and functionality in the
United States and the development of our global fleet platform. Our capital spending is financed primarily through
internally generated funds.
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Liquidity
General
In general, our trade receivables provide for payment terms of 30 days or less. Receivables not paid within the terms of
the customer agreement are generally subject to late fees based upon the outstanding customer receivable balance. Beginning in
the first quarter of 2015, we began to extend revolving credit to certain customers with respect to small fleet receivables. These
accounts are also subject to late fees and balances that are not paid in full are subject to interest charges based on a revolving
balance. As of December 31, 2017 and 2016, we had approximately $12.2 million and $3.4 million, respectively, of receivables
with revolving credit.
At December 31, 2017, approximately 95 percent of the outstanding balance of $2.7 billion of total trade accounts
receivable was 29 days or less past due and approximately 97 percent of the outstanding balance of total trade accounts receivable
was 59 days or less past due. The outstanding balance is made up of receivables from a wide range of industries. No one customer
represented 10 percent of the outstanding receivables balance as of December 31, 2017. One customer represented 11 percent of
the outstanding receivables balance as of December 31, 2016.
Our short-term cash requirements consist primarily of funding the working capital needs of our business, payments on
maturities and withdrawals of brokered deposits and borrowed federal funds, required capital expenditures, repayments on our
credit facility, interest payments on our credit facility and other operating expenses. WEX Bank can fund our short-term domestic
cash requirements through the issuance of brokered deposits and borrowed federal funds. Any remaining cash needs are primarily
funded through operations. Our long-term cash requirements consist primarily of amounts owed on our 2016 Credit Agreement
and Notes, amounts due to Wyndham Worldwide Corporation as part of our tax receivable agreement and various facilities lease
agreements.
Undistributed earnings of certain foreign subsidiaries of the Company amounted to an estimated $58.7 million and $25.8
million at December 31, 2017 and 2016, respectively. These earnings are considered to be indefinitely reinvested. As discussed
in Item 8 - Note 14, Income Taxes, the United States enacted the 2017 Tax Act in December 2017, which impacted undistributed
earnings, among other things. The 2017 Tax Act imposes a one time “transition tax” on foreign undistributed earnings, which will
be paid with our 2017 U.S. Income Tax Return. To determine the amount of the transition tax, the Company must determine, in
addition to other factors, the amount of post-1986 earnings and profits of the relevant foreign subsidiaries, as well as the amount
of non-U.S. income taxes paid on such earnings. The Company is able to make a reasonable estimate of the transition tax and
recorded a provisional transition tax obligation of $9.1 million. However, the Company is continuing to gather additional information
to more precisely compute the amount of the transition tax. Upon distribution of these earnings in the form of dividends or otherwise,
the Company would be subject to withholding taxes payable to the various foreign countries, but would have no further federal
income tax liability, except for the difference in the provisional and actual tax. The Company’s primary tax jurisdictions are the
United States, Australia and the United Kingdom.
Earnings outside of the United States are accompanied by certain financial risks, such as changes in foreign currency
exchange rates. Changes in foreign currency exchange rates may reduce the reported value of our foreign currency revenues, net
of expenses, and cash flows. We cannot predict changes in currency exchange rates, the impact of exchange rate changes, nor the
degree to which we will be able to manage the impact of currency exchange rate changes.
Deposits and Borrowed Federal Funds
WEX Bank issues certificates of deposit in various maturities ranging between 3 month and three years, with interest
rates ranging from 1.00 percent to 2.15 percent as of December 31, 2017, as compared to interest rates ranging from 0.65 percent
to 1.35 percent as of December 31, 2016.
As of December 31, 2017, we had approximately $937.7 million of certificates of deposit outstanding at a weighted
average interest rate of 1.51 percent, compared to $725.6 million of certificates of deposit outstanding at a weighted average interest
rate of 0.96 percent as of December 31, 2016.
WEX Bank also issues interest-bearing money market deposits with variable interest rates ranging from 1.24 percent to
1.55 percent as of December 31, 2017, as compared to variable interest rates ranging from 0.48 percent to 0.87 percent as of
December 31, 2016.
As of December 31, 2017, we had approximately $285.9 million of brokered money market deposits outstanding at a
weighted average interest rate of 1.49 percent, compared to $325.5 million of brokered money market deposits at a weighted
average interest rate of 0.76 percent as of December 31, 2016.
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WEX Bank may issue brokered deposits without limitation, subject to FDIC rules governing minimum financial ratios,
which include risk-based asset and capital requirements. As of December 31, 2017, all brokered deposits were in denominations
of $250,000 or less, corresponding to FDIC deposit insurance limits. Interest-bearing money market funds may be withdrawn at
any time. We believe that our brokered deposits are paying competitive yields and that there continues to be consumer demand
for these instruments.
We also carry non-interest bearing deposits that are required for certain customers as collateral for their credit accounts.
We had $70.2 million and $67.8 million of these deposits on hand at December 31, 2017 and 2016, respectively.
WEX Bank also borrows from lines of credit on a federal funds rate basis to supplement the financing of our accounts
receivable. Our federal funds lines of credit were $400.0 million and $250.0 million as of December 31, 2017 and 2016 respectively,
with no outstanding balance as of December 31, 2017.
2016 Credit Agreement
On July 1, 2016, we entered into the 2016 Credit Agreement in order to permit the additional financing necessary to
facilitate the EFS acquisition. The 2016 Credit Agreement provided for a tranche A term loan facility in an original principal
amount equal to $455 million, a tranche B term loan facility in an original principal amount equal to $1,200 million, and a $470
million secured revolving credit facility, with a $250 million sublimit for letters of credit and a $20 million sublimit for swingline
loans.
Incremental loans of up to the greater of $375 million (plus the amount of certain prepayments) and an unlimited amount
subject to satisfaction of a consolidated leverage ratio test could be made available under the 2016 Credit Agreement upon the
request of the Company, subject to specified terms and conditions, including receipt of lender commitments. Effective July 3,
2017, the Company entered into a First Amendment to the 2016 Credit Agreement, which repriced the secured term loans under
the 2016 Credit Agreement. The consolidated leverage ratio as defined in the 2016 Credit Agreement (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. Effective October 30,
2017, the Company entered into a Second Amendment to the 2016 Credit Agreement, which added $100 million of capacity to its
revolving line of credit to provide additional liquidity and flexibility during 2017. Effective January 17, 2018, the Company entered
into a Third Amendment to the 2016 Credit Agreement, which further repriced the tranche B term loans under the 2016 Credit
Agreement, increased the outstanding amounts on these tranche B term loans from $1.182 billion to $1.335 billion, and made
certain other changes to the 2016 Credit Agreement, including increasing the maximum consolidated leverage ratio for the period
of December 31, 2018 through September 30, 2019 and upon the occurrence of an acquisition meeting certain specified criteria,
permitting the incurrence of unsecured indebtedness as long as the Company is in pro forma compliance with the financial covenants
and resetting and amending the test for incremental loans.
Proceeds from the 2016 Credit Agreement were used to pay the cash portion of the purchase price for the EFS acquisition,
repay amounts outstanding under the 2014 Credit Agreement (which was superseded by the 2016 Credit Agreement), and pay
related fees, expenses and other transaction costs, as well as for working capital and other general corporate purposes.
Our credit agreements contain various financial covenants requiring us to maintain certain financial ratios. In addition to
the financial covenants, the credit agreements contain various customary restrictive covenants including restrictions in certain
situations on the payment of dividends. WEX Bank is not subject to certain of these restrictions. We were in compliance with all
material covenants and restrictions at December 31, 2017.
As of December 31, 2017, we had $136.5 million of outstanding borrowings against our $570.0 million revolving credit
facility, which terminates in July of 2021. The combined outstanding debt under our tranche A term loan facility, which expires
in July of 2021, and our tranche B term loan facility, which expires in July of 2023, totaled $1.6 billion at December 31, 2017. As
of December 31, 2017, amounts outstanding under the 2016 Credit Agreement bore a weighted average effective interest rate of
4.2%.
See Item 8 - Note 13, Financing Debt for further information regarding interest rates, voluntary prepayments rights and
principal payments required under our 2014 and 2016 Credit Agreements.
Ticking Fees
In January 2016, we began to incur ticking fees for the debt financing commitment associated with the 2016 Credit
Agreement in anticipation of the then pending acquisition of EFS. Through June 30, 2016, we recorded $30 million of ticking
fees, which is included in financing interest expense. These ticking fees were calculated based on the financing commitment of
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an aggregate principal amount of $2.125 billion that remained in place until the closing of the EFS acquisition on July 1, 2016.
The total amount of ticking fees paid at the closing of the EFS acquisition was $22.2 million. The excess ticking fees of $7.9
million were netted against the net debt issuance costs related to the 2016 Credit Agreement and will be amortized over the 2016
Credit Agreement's terms using the effective interest method for the tranche A and B term loans and the revolver.
Notes Outstanding
On January 30, 2013, the Company completed a $400 million offering in aggregate principal amount of its 4.750 percent
senior notes due 2023 (the “Notes”) at an issue price of 100.0 percent of the principal amount, plus accrued interest, from January 30,
2013. Proceeds from the Notes were used to pay down the entire outstanding balance of the revolver portion of our 2013 Credit
Agreement. The remaining proceeds are available for working capital purposes, acquisitions, payment of dividends and other
restricted payments, refinancing of indebtedness, and other general corporate purposes.
WEX Latin America Debt
WEX Latin America had debt of approximately $9.7 million and $30.8 million as of December 31, 2017 and 2016,
respectively. This is comprised of credit facilities held in Brazil and loan arrangements related to our accounts receivable, with
various maturity dates. The average interest rate was 21.2 percent and 19.7 percent for the years ended December 31, 2017 and
2016, respectively. This debt is classified in Other debt on the Company’s 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. During the year ended December 31, 2017, the Company increased the funding capacity of these
arrangements by $90.0 million to $185.0 million. Associated 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 $185.0 million and $95.0 million at December 31,
2017 and 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 commitment will mature in amounts of $85.0 million and $50.0 million on
May 30, 2018 and December 31, 2021, respectively, with the remaining $50 million maturing on demand.
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 2.53 percent and 2.65 percent as of December 31, 2017 and 2016,
respectively. The Company had securitized debt under this facility of approximately $90,000 and $78,600 as of December 31,
2017 and 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 our
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 Company had $17.9 million of securitized debt under this facility as of December 31, 2017 at an interest
rate of 1.11 percent and $5.7 million of securitized debt under this facility as of December 31, 2016 at an interest rate of 0.95
percent.
WEX Latin America Securitization Facility
During the second quarter of 2017, WEX Latin America entered into a securitized debt agreement to sell certain unsecured
receivables associated with our salary payment card product to an investment fund managed by an unrelated third-party financial
institution. Under the terms of the agreement, the investment fund's purchase price incorporates a discount relative to the face
value of the transferred receivables. Additionally, the investment fund compensates WEX Latin America for continuing to service
these receivables through their duration, which on average is less than six months.
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During 2017, WEX Latin America securitized approximately $49.1 million of receivables to the investment fund for cash
proceeds of approximately $43.8 million. This $5.3 million discount is recognized as operating interest in the Company's
consolidated statements of income using the effective interest method over the weighted average term of the salary advances. As
of December 31, 2017, the Company had approximately $19.0 million of securitized debt under this facility.
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”) 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 Company obtained a true sale opinion from an independent attorney, which
states that the factoring agreement creates a sale of receivables under local law for amounts transferred both below and above the
established credit limits. Additionally, there are no indications of the Company's continuing involvement in the factored receivables.
As a result, the Purchasing Bank is deemed the purchaser of these receivables and is entitled to enforce payment of these amounts
from the debtor.
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 $574.4
million of receivables under this arrangement during year ended December 31, 2017. Charge-backs on balances in excess of the
credit limit during the year ended December 31, 2017 were insignificant.
Other Liquidity Matters
On July 1, 2016, the Company completed the acquisition of EFS for approximately $1.2 billion in cash and 4 million
shares of its common stock.
At December 31, 2017, we had variable-rate borrowings of $1.7 billion under our 2016 Credit Agreement. We periodically
review our projected borrowings under our 2016 Credit Agreement and the current interest rate environment in order to ascertain
whether interest rate swaps should be used to reduce our exposure to interest rate volatility. During 2016 and 2017, we entered
into five interest rate swap contracts that mature between December 2018 and December 2022. 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% to 2.212%. See Item 8 – Note 11, Derivative Instruments for more information. See Note 17, Fair Value for more information.
Our long-term cash requirements consist primarily of amounts owed on our 2016 Credit Agreement, our outstanding
Notes, amounts due to Wyndham Worldwide Corporation (see Note 15, Tax Receivable Agreement, in Part II, Item 8) as part of
our tax receivable agreement, and various facilities lease agreements.
As of December 31, 2017, we also had $27.5 million in letters of credit outstanding. At December 31, 2017, we had
$1,707.1 million of borrowed funds, and $406.0 million available under the 2016 Credit Agreement, subject to the covenants as
described above.
We currently have authorization from our Board to purchase up to $150 million of our common stock until September
2021, which is entirely unused as of December 31, 2017. The program is funded either through our future cash flows or through
borrowings on our 2016 Credit Agreement. Share repurchases are made on the open market and may be commenced or suspended
at any time. The Company’s management, based on its evaluation of market and economic conditions and other factors, determines
the timing and number of shares repurchased.
We discuss our hedging strategies relative to commodity and interest rate risk in Item 7A below. Our fuel price derivatives
were entered into to mitigate the volatility that domestic fuel prices introduce to our revenue streams. These derivatives restricted
a portion of our fuel price exposure to a collar range, established at the time the fuel price derivatives were purchased. During the
fourth quarter of 2014, we suspended purchases under our fuel derivatives program due to unusually low prices in the commodities
market. After the first quarter of 2016, we were no longer hedged for changes in fuel prices. Management will continue to monitor
the fuel price market and evaluate our alternatives as it relates to this hedging program.
Management believes that we can adequately fund our cash needs for at least the next 12 months.
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Contractual Obligations
The table below summarizes the estimated dollar amounts of payments under contractual obligations as of December 31,
2017, for the periods specified:
(in thousands)
Operating Lease Obligations(a)
Debt Obligations
Term Loans
Interest payments on term loans(b)
$400 million notes offering
Interest on $400 million notes offering
Other debt(c)
Securitization facility(d)
Other Commitments
Certificates of deposit
Minimum volume purchase commitments(e)
Tax receivable agreement(f)
Other(g)
2018
2019
2020
2021
2022 and
Thereafter
Total
$
13,559
$
9,903
$
8,532
$
8,093
$
16,948
$
57,035
34,750
66,330
—
19,000
194,737
126,901
630,879
181,428
9,682
2,500
34,750
64,876
—
19,000
—
—
220,353
181,428
8,698
2,500
34,750
63,423
—
19,000
—
—
86,512
—
1,893
2,500
364,625
1,134,000
1,602,875
57,370
—
19,000
72,948
400,000
20,583
—
—
—
—
—
—
—
—
—
—
2,500
3,300
324,947
400,000
96,583
194,737
126,901
937,744
362,856
20,273
13,300
Total
$ 1,279,766
$
541,508
$
216,610
$
451,588
$ 1,647,779
$ 4,137,251
(a) Operating leases – We lease office space, office equipment and computer equipment under long-term operating leases, which
are recorded in occupancy and equipment or technology leasing and support. See Item 8 - Note 18, Commitments and Contingencies
for more information.
(b) Interest payments on term loans – Interest payments are based on effective rates and credit spreads in effect as of December 31,
2017. See Item 8 - Note 13, Financing Debt for more information.
(c) Other debt – This amount consists of participation debt at WEX Bank and debt balances at one of the Company's subsidiaries.
Interest payments due were not included as the amount was not material.
(d) Securitization facility – Interest payments due on the securitization facility are not included as the amount was not material.
(e) Minimum volume purchase commitments – One of the Company's subsidiaries is required to purchase a minimum amount of
fuel from their suppliers on an annual basis. If the minimum requirement is not fulfilled, they are subject to penalties based on the
amount of spend below the minimum annual volume commitment. Starting in 2020, annual volume commitments reset based on
prior year volume purchased. The table above represents the Company's annual penalty assuming we purchase no fuel under these
commitments after December 31, 2017.
(f) Tax receivable agreement – As a consequence of the Company’s separation from its former parent company in 2005, the tax
basis of the Company’s net tangible and intangible assets increased, reducing the amount of tax that the Company would pay in
the future to the extent the Company generated taxable income in sufficient amounts. The Company is contractually obligated to
remit a portion of any such cash savings to a third party. The estimate of payments owed is reflected as Amounts due under tax
receivable agreement on the consolidated balance sheets. See Item 8 - Note 15, Tax Receivable Agreement for more information.
(g) Other – This amount is comprised of future payments due for contractually obligated outsourced information technology
services.
Uncertain tax liabilities – The Company has excluded $5,037 in gross unrecognized tax benefits as of December 31, 2017 from
the table above due to the uncertainty about the timing of payments to the taxing authority.
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Off-balance Sheet Arrangements
In addition to the operating leases included in the table above, we have the following off-balance sheet arrangements as
of December 31, 2017:
• Extension of credit to customers – We have entered into commitments to extend credit in the ordinary course of business.
We had approximately $6.3 billion of unused commitments to extend credit at December 31, 2017, as part of established
customer agreements. These amounts may increase or decrease during 2018 as we increase or decrease credit to customers,
subject to appropriate credit reviews, as part of our lending product agreements. Many of these commitments are not
expected to be utilized; therefore, we do not believe total unused credit available to customers and customers of strategic
relationships represents future cash requirements. We can adjust most of our customers’ credit lines at our discretion at
any time. We believe that we can adequately fund actual cash requirements related to these credit commitments through
the issuance of certificates of deposit, borrowed federal funds and other debt facilities.
•
Letters of credit – As of December 31, 2017, we had $27.5 million outstanding in irrevocable letters of credit issued by
us in favor of third-party beneficiaries, primarily related to facility lease agreements and virtual card and fuel payment
processing activity at our foreign subsidiaries. These irrevocable letters of credit are unsecured and are renewed on an
annual basis unless the Company chooses not to renew them.
• Accounts receivable factoring – See Item 8 - Note 12, Off-Balance Sheet Arrangements for further information.
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Application of Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with Generally Accepted Accounting Principles. Preparation of these financial
statements requires us to make estimates and judgments that affect reported amounts of assets and liabilities, revenue and expenses
and related disclosure of contingent assets and liabilities at the date of our financial statements. We continually evaluate our
judgments and estimates in determination of our financial condition and operating results. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Estimates are based on information available as of the date of the financial statements and, accordingly, actual results could differ
from these estimates, sometimes materially. Critical accounting policies and estimates are defined as those that are both most
important to the portrayal of our financial condition and operating results and require management’s most subjective judgments.
Our consolidated financial statements are based on the selection and application of critical accounting policies and estimates, the
most significant of which are included in the tables below.
Effect if Actual Results Differ from
Assumptions
In preparing the financial statements,
management must make estimates related to
the contractual terms, customer performance
and sales volume to determine the total
amounts recorded as deductions, such as
rebates and incentives, from revenue.
Management also considers historical results
in making such estimates. The actual amounts
ultimately paid to the customer may be
different from our estimates. Such differences
are recorded once they have been determined
and have historically not been significant.
Revenue Recognition
Description
Assumptions/Approach Used
The Company generally records revenue net of
costs based on the following criteria: (i) the
Company is not the primary obligor in the
arrangement; (ii) the Company has no
inventory risk; (iii) the Company does not have
reasonable latitude with respect to establishing
the price for the product; (iv) the Company
does not make any changes to the product or
have any involvement in the product
specifications; and (v) the amount the
Company earns for its services is fixed, within
a limited range.
The Company enters into contracts with certain
large customers or strategic relationships that
provide for fee rebates tied to performance
milestones. Rebates are recorded as a reduction
in revenue in the same period that revenue is
earned or performance occurs. Rebates and
incentives are calculated based on estimated
performance and the terms of the related
business agreements.
Service related revenues are recognized in the
period that the work is performed.
The Company recognizes SaaS based service
fees in the healthcare market for the per-
participant per-month fee which is recognized
on a monthly basis subsequent to billing being
completed. Interchange fees are recorded as
received and ancillary service revenue is
recognized when the related services have
been provided.
The majority of the Company’s revenues are
comprised of transaction-based fees, which are
generally calculated based on measures such as:
(i) percentage of dollar value of volume processed;
(ii) number of transactions processed; or (iii) some
combination thereof.
In Europe, our Fleet Solutions payment processing
revenue is specifically derived from the difference
between the negotiated price of the fuel from the
supplier and the agreed upon price paid by the
fleets.
Interchange income is earned from the Company’s
suite of card products. Interchange income is a fee
paid by a merchant bank to the card-issuing bank
through the interchange network. Interchange fees
are set by the credit card providers. The Company
recognizes interchange income as it is earned.
The Company assesses fees for providing ancillary
services, such as information products and services,
SaaS based fees, professional services and
marketing services. Other revenues also include
cross-border fees, fees for overnight shipping,
certain customized electronic reporting and
customer contact services provided on behalf of
certain of the Company’s customers.
The Company has entered into agreements with
major oil companies, fuel retailers and vehicle
maintenance providers which provide products and/
or services to the Company’s customers. These
agreements specify that a transaction is deemed to
be captured when the Company has validated that
the transaction has no errors and has accepted and
posted the data to the Company’s records. The
Company recognizes revenues when persuasive
evidence of an arrangement exists, the products and
services have been provided to the client, the sales
price is fixed or determinable and collectability is
reasonably assured.
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Reserve for Credit Losses
Description
Assumptions/Approach Used
The reserve for losses relating to accounts
receivable represents management’s estimate of the
losses inherent in the Company’s outstanding
portfolio of receivables, including losses from
skimming fraud. The reserve for credit losses
reduces the Company’s accounts receivable
balances as reported in its financial statements to
the net realizable value.
Management has consistently considered its
portfolio of charge card receivables as a large
group of smaller balance accounts that it has
collectively evaluated for impairment.
Reserves for losses on these receivables are
primarily based on a model that analyzes
specific portfolio statistics, including average
charge-off rates for various stages of
receivable aging (including: current, 30 days,
60 days, 90 days) over historical periods
including average bankruptcy and recovery
rates. Receivables are generally written off
when they are 150 days past due or declaration
of bankruptcy by the customer.
The reserve reflects management’s judgment
regarding overall reserve adequacy.
Management considers whether to adjust the
reserve that is calculated by the analytic model
based on other factors, such as the actual
charge-offs for the preceding reporting periods,
expected charge-offs and recoveries for the
subsequent reporting periods, a review of
accounts receivable balances which become
past due, changes in customer payment
patterns, known fraudulent activity in the
portfolio, as well as leading economic and
market indicators.
Effect if Actual Results Differ from
Assumptions
To the extent historical credit experience is
not indicative of future performance, actual
loss experience could differ significantly
from management’s judgments and
expectations, resulting in either higher or
lower future provisions for credit losses, as
applicable. As of December 31, 2017, we
have estimated a reserve for credit losses
which is 1.18 percent of the total gross
accounts receivable balance.
An increase or decrease to this reserve by
0.5 percent would increase or decrease the
provision for credit losses for the year by
$12.8 million. As of December 31, 2017,
2016 and 2015, our reserve for credit losses
in an annual period has ranged from 0.91
percent to 1.18 percent of the total receivable
balance.
59
Effect if Actual Results Differ from
Assumptions
We review the carrying values of the
unamortizing and amortizing assets for
impairment annually and whenever events or
changes in business circumstances indicate
that the carrying amount of an asset may not
be recoverable. Such circumstances would
include, but are not limited to, a significant
decrease in the perceived market price of the
intangible, a significant adverse change in the
way the asset is being used, or a history of
operating or cash flow losses associated with
the use of the intangible.
Our goodwill resides in multiple reporting
units. The profitability of individual reporting
units may suffer periodically from downturns
in customer demand or other economic
factors. Individual reporting units may be
more impacted than the Company as a whole.
Specifically, during times of economic
slowdown, our customers may reduce their
expenditures. As a result, demand for the
services of one or more of the reporting units
could decline which could adversely affect
our operations, cash flow, and liquidity and
could result in an impairment of goodwill or
intangible assets.
As of December 31, 2017, the Company had
an aggregate of approximately $3,030 million
on its consolidated balance sheet related to
goodwill and intangible assets of acquired
entities. The results of our goodwill
impairment test indicate an excess of
estimated fair value over the carrying amount
for each of our reporting units by a range of
approximately $90 million to $2.5 billion.
Although no reporting units are deemed at
risk of impairment as of December 31, 2017,
the potential for impairment exists in the
future should actual results deteriorate versus
our current expectations.
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Business Combinations, Acquired Intangible Assets and Goodwill
Description
Assumptions/Approach Used
Business combinations are accounted for at fair
value. The accounting for business combinations
requires estimates and judgment as to expectations
for future cash flows of the acquired business, and
the allocation of those cash flows to identifiable
intangible assets, in determining the estimated fair
value for assets and liabilities acquired.
The fair values assigned to tangible and
intangible assets acquired and liabilities
assumed are based on management’s estimates
and assumptions, as well as other information
compiled by management, including valuations
that utilize customary valuation procedures and
techniques.
Goodwill is comprised of the cost of business
acquisitions in excess of the fair value assigned to
the net tangible and identifiable intangible assets
acquired. Goodwill is not amortized but is
reviewed for impairment annually, or when events
or changes in the business environment indicate
that the carrying value of the reporting unit may
exceed its fair value. Acquired intangible assets
result from the allocation of the cost of an
acquisition. These acquired intangibles include
assets that amortize, primarily software and
customer relationships, and those that do not
amortize, specifically trademarks and certain trade
names. The annual review of goodwill and non-
amortizing intangibles values is performed as of
October 1 of each year.
In the fourth quarter of 2017, we elected to
bypass the qualitative approach and instead
proceeded directly to step one of the two-step
impairment test to assess the fair value of all of
our reporting units. For the reporting units that
carry goodwill balances, our impairment test
consists of a comparison of each reporting
unit’s carrying value to its estimated fair value.
A reporting unit, for the purpose of the
impairment test, is one level below the
operating segment level. We have three
reporting segments that are further broken into
several reporting units for the impairment
review. The estimated fair value of a reporting
unit is primarily based on discounted estimated
future cash flows. An appropriate discount rate
is used, as well as risk premium for specific
business units, based on the Company’s cost of
capital or reporting unit-specific economic
factors. We generally validate the model
through a reconciliation of the fair value of all
our reporting units to our overall market
capitalization. The assumptions used to
estimate the discounted cash flows are based
on our best estimates about payment
processing fees/interchange rates, sales
volumes, costs (including fuel prices), future
growth rates, working capital needs, capital
expenditures and market conditions over an
estimate of the remaining operating period at
the reporting unit level. The discount rate at
each reporting unit is based on the weighted
average cost of capital that is determined by
evaluating the risk free rate of return, cost of
debt, and expected equity premiums.
Non-goodwill intangible assets are considered
non-recoverable if the carrying amount
exceeds the sum of undiscounted cash flows
expected to result from the use of the assets.
The recoverability test is based on
management’s intended use of the assets. If the
asset fails the recoverability test, impairment is
measured as the amount by which the carrying
amount of the asset group exceeds its fair
value. Fair value measurements under FASB
Accounting Standards Codification (“ASC”)
820 - Fair Value Measurements and
Disclosures, are based on the assumptions of
market participants. When determining the fair
value of the asset group, entities must consider
the highest and best use of the assets from a
market-participant perspective.
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Income Taxes
Description
Assumptions/Approach Used
In preparing the consolidated financial statements,
we calculate income tax expense (benefit) based on
our interpretation of the tax laws in the various
jurisdictions where we conduct business. This
requires us to estimate current tax obligations and
to assess temporary differences between the
financial statement carrying amounts and the tax
bases of assets and liabilities. These differences
result in deferred tax assets and liabilities, the net
amount of which we show as a line item on the
consolidated balance sheet. All or a portion of the
benefit of income tax positions is recognized only
when we have made a determination that it is more
likely than not that the tax position will be
sustained upon examination, based upon the
technical merits of the position and other factors.
For tax positions that are determined as more likely
than not to be sustained upon examination, the tax
benefit recognized is the largest amount of benefit
that is greater than 50% likely of being realized
upon ultimate settlement. We must also assess the
likelihood that the deferred tax assets will be
realized.
To the extent we believe that realization is not more
likely than not, we establish a valuation allowance.
When we establish a valuation allowance or
increase this allowance, we generally record a
corresponding income tax expense in the
consolidated statement of income in the period of
the change. Conversely, to the extent circumstances
indicate that realization is more likely than not, the
valuation allowance is decreased to the amount
realizable, which generates an income tax benefit.
Management must make judgments to
determine income tax expense (benefit),
deferred tax assets and liabilities and any
valuation allowance to be recorded against
deferred tax assets. During the ordinary course
of business, there are many transactions and
calculations for which the ultimate tax
determination is uncertain. Changes in our
estimates occur periodically due to changes in
tax rates, changes in business operations,
implementation of tax planning strategies, the
expiration of relevant statutes of limitations,
resolution with taxing authorities of uncertain
tax positions and newly enacted statutory,
judicial and regulatory guidance. We record a
valuation allowance to reduce deferred tax
assets to the amount that is more likely than
not to be realized.
Significant judgment is required in
determining valuation allowances. In
evaluating the ability to recover deferred tax
assets, we consider all available positive and
negative evidence including past operating
results, the existence of cumulative losses in
the most recent years, forecasted earnings,
future taxable income, and prudent and
feasible tax planning strategies. In establishing
a liability for unrecognized tax benefits,
assumptions are made in determining whether,
and to what extent, a tax position may be
sustained. It requires significant management
judgment regarding applicable statutes and
their related interpretation as they apply to our
particular facts and circumstances.
Effect if Actual Results Differ from
Assumptions
Although we believe that our income tax
related judgments and estimates are
reasonable, it is possible that our actual
results could be different than what we
expected, and we may be exposed to a
material change in our total income tax
expense, tax-related balances, or valuation
allowances. Upon income tax audit, any
unfavorable tax settlement may require use of
our cash and result in an increase in our
effective tax rate in the period of settlement.
A favorable tax settlement could be
recognized as a reduction in our effective tax
rate in the period of settlement.
New Accounting Standards
See Item 8 – Note 2, “Recent Accounting Pronouncements” for recently issued accounting standards that have not yet
been adopted.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to interest rates, foreign currency exchange rates and commodity prices.
From time to time, the Company enters into derivative instrument arrangements to manage these risks.
Interest Rate Risk
2016 Credit Agreement
At December 31, 2017, we had variable-rate borrowings of $1.7 billion under our 2016 Credit Agreement. We periodically
review our projected borrowings under our 2016 Credit Agreement and the current interest rate environment in order to ascertain
whether interest rate swaps should be used to reduce our exposure to interest rate volatility. During 2016 and 2017, we entered
into five interest rate swap contracts that mature between December 2018 and December 2022. 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% to 2.212%. See Item 8 – Note 11, Derivative Instruments for more information.
Deposits
At December 31, 2017, WEX Bank had deposits (includes certificates of deposits, interest bearing money market deposits
and participation debt) outstanding of $1.2 billion. The deposits are generally short-term in nature. Upon maturity, the deposits
will likely be replaced by issuing new deposits to the extent they are needed.
Sensitivity Analysis
The following table presents a sensitivity analysis of the impact of changes in interest rates on our deposits and corporate
debt, assuming amounts outstanding, the notional amounts of our interest rate swap agreements, and certificate of deposit maturities
in place as of December 31, 2017 remain constant. Actual results may differ materially.
2016 Credit Agreement
Participation agreements
Certificates of deposits
Money market deposits
Foreign Currency Risk
2018 impact of
1.00% increase in
interest rates
$
4,378
1,850
3,538
2,766
Our exposure to foreign currency fluctuation is due to our financial statements being presented in U.S. dollars and our
foreign subsidiaries transacting in currencies other than the U.S. dollar, which results in gains and losses that are reflected in our
consolidated statements of operations. We currently do not utilize hedging instruments to mitigate these risks. However, growth
in our international operations increases this exposure and we may initiate strategies to hedge certain foreign currency risks in the
future.
Commodity Price Risk
We previously used derivative instruments to manage the impact of volatility in North American fuel prices on our earnings.
We entered into put and call option contracts (“Options”) based on the wholesale price of unleaded gasoline and retail price of
diesel fuel, which settled on a monthly basis through the first quarter of 2016. The Options were intended to lock in a range of
prices during any given quarter on a portion of our forecasted earnings subject to fuel price variations. During the fourth quarter
of 2014, we suspended purchases under our fuel derivatives program due to unusually low prices in the commodities market. After
the first quarter of 2016, we were no longer hedged for changes in fuel prices. Management will continue to monitor the fuel price
market and evaluate its alternatives as it relates to this hedging program.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2017 and 2016
Consolidated Statements of Income for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
64
65
66
67
68
69
71
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of WEX Inc.
South Portland, Maine
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of WEX Inc. and subsidiaries (the "Company”) as of December
31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows,
for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the
"financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of
the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 1, 2018, expressed an unqualified opinion on the Company's internal control over
financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 1, 2018
We have served as the Company's auditor since 2003
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WEX INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Assets
Cash and cash equivalents
Accounts receivable (net of allowances of $30,207 in 2017 and $21,454 in 2016)
Securitized accounts receivable, restricted
Income taxes receivable
Available-for-sale securities
Property, equipment and capitalized software (net of accumulated depreciation of $264,928 in 2017 and $228,336 in
2016)
Deferred income taxes, net
Goodwill
Other intangible assets (net of accumulated amortization of $392,827 in 2017 and $254,142 in 2016)
Other assets
Total assets
Liabilities and Stockholders’ Equity
Accounts payable
Accrued expenses
Income taxes payable
Deposits
Securitized debt
Revolving line-of-credit facility and term loans, net
Deferred income taxes, net
Notes outstanding, net
Other debt
Amounts due under tax receivable agreement
Other liabilities
Total liabilities
Commitments and contingencies (Note 18)
Stockholders’ Equity
Common stock $0.01 par value; 175,000 shares authorized; 47,352 shares issued in 2017 and 47,173 in 2016;
43,022 shares outstanding in 2017 and 42,841 in 2016
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock at cost; 4,428 shares in 2017 and 2016
Total WEX Inc. stockholders' equity
Non-controlling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to consolidated financial statements.
December 31,
2017
2016
$
508,072
$
190,930
$
$
2,527,840
150,235
—
23,358
163,908
7,752
1,876,132
1,154,047
327,831
6,739,175
811,362
323,222
1,076
1,293,854
126,901
1,707,064
119,283
396,269
194,737
20,273
24,576
$
$
2,054,701
97,417
10,765
23,525
167,278
6,934
1,838,441
1,265,468
341,638
5,997,097
617,118
331,579
—
1,118,823
84,323
1,599,291
152,906
395,534
125,755
47,302
18,719
5,018,617
4,491,350
473
569,319
1,404,683
(90,795)
(172,342)
472
547,627
1,244,271
(122,839)
(172,342)
1,711,338
1,497,189
9,220
8,558
1,720,558
1,505,747
$
6,739,175
$
5,997,097
65
WEX INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Table of Contents
Revenues
Payment processing revenue
Account servicing revenue
Finance fee revenue
Other revenue
Total revenues
Expenses
Salary and other personnel
Restructuring
Service fees
Provision for credit losses
Technology leasing and support
Occupancy and equipment
Depreciation and amortization
Operating interest expense
Cost of hardware and equipment
Impairment charges and asset write-offs
Gain on divestitures
Other
Total operating expenses
Operating income
Financing interest expense
Net foreign currency gain (loss)
Net unrealized gains on interest rate swap agreements
Net realized and unrealized gains on fuel price derivatives
Non-cash adjustments related to tax receivable agreement
Income before income taxes
Income taxes
Net income
Less: Net loss from non-controlling interests
Net earnings attributable to WEX Inc.
Accretion of non-controlling interest
Net earnings attributable to shareholders
Net earnings attributable to WEX Inc. per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
See notes to consolidated financial statements.
66
Year ended December 31,
2017
2016
2015
$
569,166
$
520,619
$
276,570
187,582
217,230
211,012
138,940
147,889
$
1,250,548
$
1,018,460
$
363,444
7,139
149,137
61,148
52,179
27,729
203,724
24,482
4,314
44,171
(20,958)
94,769
1,011,278
239,270
(107,067)
29,919
1,314
—
15,259
178,695
19,525
159,170
(1,096)
160,266
—
160,266
3.73
3.72
42,977
43,105
$
$
$
286,298
7,486
173,052
33,348
47,602
25,820
141,651
12,386
3,122
—
—
92,567
823,332
195,128
(113,418)
(7,665)
12,908
711
(563)
87,101
29,625
57,476
(3,161)
60,637
—
60,637
1.49
1.48
40,809
40,914
$
$
$
$
$
$
495,869
156,693
88,993
113,082
854,637
234,564
9,010
138,844
22,825
41,315
20,618
83,077
5,628
3,236
—
(1,215)
67,942
625,844
228,793
(46,189)
(5,689)
—
5,848
2,145
184,908
75,296
109,612
(1,705)
111,317
(9,413)
101,904
2.63
2.62
38,771
38,843
Table of Contents
WEX INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income
Changes in available-for-sale securities, net of tax benefit of $3 in 2017, $144 in 2016 and $49 in 2015
Foreign currency translation
Comprehensive income
Less: Comprehensive income (loss) attributable to non-controlling interest
Comprehensive income attributable to WEX Inc.
See notes to consolidated financial statements.
Year ended December 31,
2017
2016
2015
$
159,170
$
57,476
$
109,612
(5)
33,692
192,857
547
(251)
(19,855)
37,370
(3,879)
(83)
(49,952)
59,577
(7,979)
$
192,310
$
41,249
$
67,556
67
Table of Contents
WEX INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Balance at December 31, 2014
43,021
$
430
$
179,077
$
(50,581)
$ (150,331)
$ 1,081,730
$
17,396
$
1,077,721
Common Stock
Issued
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Retained
Earnings
Non-
Controlling
Interest
Total
Stockholders'
Equity
Stock issued upon exercise of stock options
Tax benefit from stock options and restricted
stock units
Stock issued upon vesting of restricted and
deferred stock units
Stock-based compensation, net of share
repurchases for tax withholdings
Purchase of shares of treasury stock
Changes in available-for-sale securities, net of
tax benefit of $49
Adjustment of redeemable non-controlling
interest
Foreign currency translation
Net income (loss)
3
—
55
—
—
—
—
—
—
Balance at December 31, 2015
43,079
Stock issued upon exercise of stock options
Tax deficiency from stock options and
restricted stock units
Stock issued upon vesting of restricted and
deferred stock units
Stock-based compensation, net of share
repurchases for tax withholdings
21
—
61
—
Stock issued for July 1, 2016 purchase of EFS
4,012
—
—
—
Changes in available-for-sale securities, net of
tax benefit of $144
Foreign currency translation
Net income (loss)
Balance at December 31, 2016
Cumulative-effect adjustment 1
Other
Stock issued upon exercise of stock options
Stock issued upon vesting of restricted and
deferred stock units
Stock-based compensation, net of share
repurchases for tax withholdings
Changes in available-for-sale securities, net
of tax benefit of $3
Foreign currency translation
Net income
—
—
1
—
—
—
—
—
—
431
—
—
1
—
40
—
—
—
33
650
(1)
9,140
—
—
(13,927)
—
—
174,972
300
(100)
(1)
17,543
354,913
—
—
—
—
—
—
—
—
(83)
(9,108)
(43,679)
—
—
—
—
—
(22,011)
—
—
—
—
—
—
—
—
—
—
(9,413)
—
111,317
(103,451)
(172,342)
1,183,634
—
—
—
—
—
(251)
(19,137)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
60,637
47,173
472
547,627
(122,839)
(172,342)
1,244,271
—
—
12
166
1
—
—
—
—
—
—
1
—
—
—
—
—
—
733
(1)
20,960
—
—
—
—
—
—
—
—
(5)
32,049
—
—
—
—
—
—
—
—
—
261
(115)
—
—
—
—
—
160,266
—
—
—
—
—
—
—
(2,063)
(2,896)
12,437
—
—
—
—
—
—
(718)
(3,161)
8,558
—
115
—
—
—
—
1,643
(1,096)
33
650
—
9,140
(22,011)
(83)
(32,448)
(45,742)
108,421
1,095,681
300
(100)
—
17,543
354,953
(251)
(19,855)
57,476
1,505,747
261
—
733
—
20,960
(5)
33,692
159,170
Balance at December 31, 2017
47,352
$
473
$
569,319
$
(90,795)
$ (172,342)
$ 1,404,683
$
9,220
$
1,720,558
1 Includes the impact 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 consolidated financial statements.
68
Table of Contents
WEX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Net unrealized loss (gain)
Stock-based compensation
Depreciation and amortization
Ticking fees expensed
Debt restructuring and debt issuance cost amortization
Gain on divestiture
Deferred income taxes
Provision for credit losses
Impairment charges and asset write-offs
Non-cash adjustments related to tax receivable agreement
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable
Other assets
Accounts payable
Accrued expenses
Income taxes
Other liabilities
Amounts due under tax receivable agreement
Net cash provided by (used for) operating activities
Cash flows from investing activities
Purchases of property, equipment and capitalized software
Purchases of available-for-sale securities
Maturities of available-for-sale securities
Acquisitions and investment, net of cash
Acquisition of an intangible asset
Proceeds from divestitures
Net cash used for investing activities
Cash flows from financing activities
Excess tax benefits from equity instrument share-based payment arrangements
Repurchase of share-based awards to satisfy tax withholdings
Proceeds from stock option exercises
Net change in deposits
Net activity on other debt
Borrowings on revolving line-of-credit facility
Repayments on revolving line-of-credit facility
Borrowings on term loans
Repayments on term loans
Loan origination fees
Net change in securitized debt
Ticking fees paid
Purchase of redeemable non-controlling interest
Purchase of shares of treasury stock
Net cash provided by (used for) financing activities
Effect of exchange rates on cash and cash equivalents
Net change in cash and cash equivalents
69
Year ended December 31,
2017
2016
2015
$
159,170
$
57,476
$
109,612
8,109
30,487
203,724
—
7,957
(20,958)
(888)
61,148
44,171
(15,259)
(542,017)
503
194,542
(2,378)
11,507
4,900
(11,769)
132,949
(79,276)
(474)
631
(26,478)
19,742
141,651
30,045
12,673
—
19,499
33,348
—
—
(436,071)
(63,730)
75,807
1,669
(14,614)
8,086
(10,234)
(151,131)
(61,799)
(5,853)
495
(114,282)
(1,089,282)
—
29,900
(4,000)
—
16,201
12,420
83,077
—
3,097
(1,215)
37,359
22,825
—
—
199,717
(17,653)
(33,201)
16,594
10,687
(2,322)
(12,098)
445,100
(63,491)
(349)
594
(80,677)
—
17,265
(163,501)
(1,160,439)
(126,658)
—
(9,527)
733
173,052
68,525
597
(2,200)
300
248,926
62,474
650
(2,392)
33
(107,345)
(435)
4,367,168
3,505,732
2,203,027
(4,239,241)
(3,707,248)
(2,402,118)
—
1,643,000
(34,750)
(985)
34,410
—
—
—
359,385
(11,691)
317,142
(476,126)
(40,868)
3,665
(22,171)
—
—
1,216,081
6,430
(89,059)
—
(27,500)
—
84,571
—
(46,018)
(22,011)
(319,538)
(3,678)
(4,774)
Table of Contents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flow information
Interest paid
Income taxes paid
Supplemental disclosure of non-cash investing and financing activities
Capital expenditures incurred but not paid
Issuance of common stock in a business combination
See notes to consolidated financial statements.
190,930
508,072
128,888
6,679
$
$
$
4,596
$
— $
279,989
190,930
116,272
23,946
10,900
354,953
$
$
$
$
$
284,763
279,989
49,032
27,186
5,446
—
$
$
$
$
$
70
Table of Contents
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
1.
Summary of Significant Accounting Policies
Business Description
WEX Inc. (“Company”, "we" or "our”) is a provider of corporate card payment solutions. The Company provides products
and services that meet the needs of businesses in various geographic regions including North and South America, Asia Pacific and
Europe. The Company’s Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions segments
provide their customers with security and control for complex payments across a wide spectrum of business sectors. The Company
markets its products and services directly, as well as through strategic relationships which include major oil companies, fuel
retailers, vehicle maintenance providers, online travel agencies and health partners.
Basis of Presentation
The accompanying consolidated financial statements of the Company for the years ended December 31, 2017, 2016 and
2015, include the accounts of the Company and its wholly and majority-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
The Company rounds amounts in the consolidated financial statements to thousands and calculates all percentages and
per-share data from underlying whole-dollar amounts. Thus, certain amounts may not foot, crossfoot, or recalculate based on
reported numbers due to rounding.
Use of Estimates and Assumptions
The Company prepares its consolidated financial statements in conformity with GAAP and with the Rules and Regulations
of the SEC, specifically Regulation S-X and the instructions to Form 10-K. These principles require management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could
differ from those estimates and those differences may be material.
Cash and Cash Equivalents
Highly liquid investments with remaining maturities at the time of purchase of three months or less (that are readily
convertible to cash) are considered to be cash equivalents and are stated at cost, which approximates fair value. Cash equivalents
include federal funds sold, which are unsecured short-term investments entered into with financial institutions.
Restricted Cash
Restricted cash represents funds collected from individuals or employers on behalf of our customers that are to be remitted
to third parties or funds required to be maintained on hand under certain vendor agreements. This restricted cash, which is not
available to fund the Company’s operations, totaled $18,866 and $22,412 as of December 31, 2017 and 2016, respectively, and is
classified in other assets on the Company’s consolidated balance sheets. We maintain an offsetting liability against restricted cash
collected and remitted on behalf of our customers.
Accounts Receivable, Net of Allowances
Accounts receivable is stated at net realizable value. The balance includes a reserve for credit losses which reflects
management’s estimate of uncollectable balances resulting from credit and fraud losses. Management has consistently considered
its portfolio of charge card receivables as a large group of smaller balance accounts that it has collectively evaluated for impairment.
The reserve for credit losses is established based on the determination of the amount of expected credit losses inherent in the
accounts receivable as of the reporting date. Management reviews delinquency reports, historical collection rates, changes in
customer payment patterns, economic trends, geography and other information in order to make judgments as to probable credit
losses. Management also uses historical charge off experience to determine the amount of losses inherent in accounts receivable
at the reporting date. Assumptions regarding probable credit losses are reviewed periodically and may be impacted by actual
performance of accounts receivable and changes in any of the factors discussed above. The balance also includes a reserve for
waived finance fees, which is used to maintain customer goodwill and recorded against the late fee revenue recognized.
71
Table of Contents
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
Available-for-sale Securities
The Company records certain investments as available-for-sale securities. Available-for-sale securities are carried at fair
value, with unrealized gains and losses, net of tax, reported on the consolidated balance sheets in accumulated other comprehensive
loss. Realized gains and losses and declines in fair value determined to be other-than-temporary are included in non-operating
expenses. The cost basis of securities is based on the specific identification method. Interest and dividends earned on securities
classified as available-for-sale are included in other revenue. Available-for-sale securities held by the Company were purchased
and are held by WEX Bank in order to meet the requirements of the Community Reinvestment Act.
Derivatives
From time to time, the Company utilizes derivative instruments as part of its overall strategy to manage its exposure to
fluctuations in fuel prices and to reduce the impact of interest and foreign currency exchange rate volatility. The Company's
derivative instruments are recorded at fair value on the consolidated balance sheets. The Company’s derivative instruments have
not been designated as hedges; therefore, both realized and unrealized gains and losses are recognized in earnings. For the purposes
of cash flow presentation, realized and unrealized gains or losses are included within cash flows from operating activities.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Replacements, renewals and improvements
are capitalized and costs for repair and maintenance are expensed as incurred. Depreciation is primarily computed using the straight-
line method over the estimated useful lives shown below.
Below are the estimated useful lives for assets placed in service during 2017 and beyond:
Furniture, fixtures and equipment
Internal-use computer software
Computer software
Leasehold improvements(a)
Estimated Useful Lives
3 to 5 years
1.5 to 7 years
3 years
up to 5 years
(a) Leasehold improvements are primarily depreciated using the straight-line method over the lesser of the useful life of the asset or the remaining lease term.
Capitalized Software
The Company develops software that is used to provide processing and information management services to customers.
A significant portion of the Company’s capital expenditures is devoted to the development of such internal-use computer software.
Costs incurred during the preliminary project stage are expensed as incurred. Software development costs are capitalized during
the application development stage. Capitalization begins when the preliminary project stage is complete, as well as when
management authorizes and commits to the funding of the project. Capitalization of costs ceases when the software is ready for
its intended use. Costs related to maintenance of internal-use software are expensed as incurred. Software development costs are
amortized using the straight-line method over the estimated useful life of the software.
Below are the amounts of internal-use software capitalized and amortized:
Amounts capitalized for internal-use computer software (including work-in-process)
Amounts expensed for amortization of internal-use computer software
Goodwill and Other Intangible Assets
Year ended December 31,
2017
2016
2015
$
$
50,682
32,582
$
$
55,379
27,581
$
$
52,218
20,316
The Company classifies intangible assets in the following three categories: (1) intangible assets with definite lives subject
to amortization, (2) intangible assets with indefinite lives not subject to amortization and (3) goodwill. The Company tests intangible
assets with definite lives for impairment if conditions exist that indicate the carrying value may not be recoverable. Such conditions
may include a reduction in operating cash flow or a dramatic change in the manner in which the asset is intended to be used. The
Company records an impairment charge when the carrying value of the definite-lived intangible asset is not recoverable from the
undiscounted cash flows generated from the use of the asset.
72
Table of Contents
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
Intangible assets with indefinite lives and goodwill are not amortized. The Company tests these intangible assets and
goodwill for impairment at least annually or more frequently if facts or circumstances indicate that such intangible assets or
goodwill might be impaired. All goodwill and intangible assets are assigned to reporting units, which are one level below the
Company’s operating segments. The Company performs impairment tests at the reporting unit level. Such impairment tests include
comparing the fair value of the respective reporting unit with its carrying value, including goodwill. The Company uses both
discounted cash flow analyses and comparable company pricing multiples to determine the fair value of our reporting units. Such
analyses are corroborated using market analytics. Certain assumptions are used in determining the fair value, including assumptions
about future cash flows and terminal values. When appropriate, the Company considers the assumptions that it believes hypothetical
marketplace participants would use in estimating future cash flows. In addition, an appropriate discount rate is used, based on the
Company’s cost of capital or reporting unit-specific economic factors. When the fair value is less than the carrying value of the
intangible assets or the reporting unit, the Company records an impairment charge to reduce the carrying value of the assets to the
reporting unit's implied fair value. The Company's annual goodwill and intangible asset impairment tests performed as of October
1, 2017, 2016 and 2015 did not identify any impairment.
Intangible assets that are deemed to have definite lives are amortized over their useful lives, which is the period of time
that the asset is expected to contribute directly or indirectly to future cash flows. The Company determines the useful lives of its
identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. The factors
that management considers when determining useful lives include the contractual term of agreements, the history of the asset, the
Company’s long-term strategy for the use of the asset, any laws or other local regulations which could impact the useful life of
the asset and other economic factors, including competition and specific market conditions. An evaluation of the remaining useful
lives of the definite-lived intangible assets is performed periodically to determine if any change is warranted.
Impairment and Disposals of Assets
Long-lived assets are tested for impairment whenever facts or circumstances, such as a reduction in operating cash flow
or a dramatic change in the manner the asset is intended to be used, indicate the carrying amount of the asset may not be recoverable.
The Company compares the estimated undiscounted future cash flows associated with these assets or operations to their carrying
value to determine if a write-down to fair value is required.
During 2017, the Company impaired certain software currently under development for payment processing and prepaid
services related to technology outsourcing as these items were determined to have no future benefit. See Note 22, Impairment and
Restructuring Activities, for further discussion. The Company did not recognize any significant impairment expense on the
Company’s assets during the years ended December 31, 2016 and 2015. Disposals in the ordinary course of business are recorded
in occupancy and equipment in the consolidated statements of income.
Fair Value of Financial Instruments
The Company holds mortgage-backed securities, fixed-income securities, derivatives (see Note 11, 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.
• 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.
73
Table of Contents
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and other
liabilities approximate their respective fair values due to the short-term nature of such instruments. The carrying values of certificates
of deposit, interest-bearing money market deposits and borrowed federal funds approximate their respective fair values as the
interest rates on these financial instruments are variable market-based rates. All other financial instruments are reflected at fair
value on the consolidated balance sheets.
Revenue Recognition
The majority of the Company’s revenues are comprised of transaction-based fees, which are generally calculated based
on measures such as (i) percentage of dollar value of volume processed; (ii) number of transactions processed; or (iii) some
combination thereof. The Company has entered into agreements with major oil companies, fuel retailers, vehicle maintenance
providers, online travel agencies and health partners which provide products and/or services to the Company’s customers. These
agreements specify that a transaction is deemed to be captured when the Company has validated that the transaction has no errors
and has accepted and posted the data to the Company’s records. The Company recognizes revenues when persuasive evidence of
an arrangement exists, the products and services have been provided to the client, the sales price is fixed or determinable and
collectability is reasonably assured.
The Company generally records revenue net of costs based on the following criteria: (i) the Company is not the primary
obligor in the arrangement; (ii) the Company has no inventory risk; (iii) the Company does not have reasonable latitude with
respect to establishing the price for the product; (iv) the Company does not make any changes to the product or have any involvement
in the product specifications; and, (v) the amount the Company earns for its services is fixed, within a limited range.
The Company enters into contracts with certain large customers or strategic relationships that provide for fee rebates tied
to performance milestones. Rebates are recorded as a reduction in revenue in the same period that revenue is earned or performance
occurs. Rebates and incentives are calculated based on estimated performance and the terms of the related business agreements.
A description of the major components of revenue are as follows:
Payment Processing Revenue. Revenue consists of transaction fees as well as interchange income:
•
•
•
Fleet transaction fees are assessed to major oil companies, fuel retailers and vehicle maintenance providers. We
extend short-term credit to the fleet customer and pay the purchase price for the fleet customer’s transaction,
less the payment processing fees we retain, to the merchant. We collect the total purchase price from the fleet
customer. The fee charged is generally based upon a percentage of the total transaction amount; however, it may
also be based on a fixed amount charged per transaction or on a combination of both measures. The Company
records revenue at the time the transaction is captured.
In Europe, our fleet payment processing revenue is specifically derived from the difference between the negotiated
price of the fuel from the supplier and the agreed upon price paid by the fleets.
Interchange income is earned from the Company’s suite of card products in the Fleet Solutions and Health and
Employee Benefit Solutions segments, as well as on our virtual card technology. Interchange income is a fee
paid by a merchant bank to the card-issuing bank through the interchange network. Interchange fees are set by
the credit card providers. The Company recognizes interchange income as earned.
With regard to fleet and travel payment processing revenue, the Company is generally responsible for the collection of
the total transaction amount from the customer and the payment to the merchant of their sales amount, net of the payment processing
revenue earned by the Company, and as such, recognizes revenue net of the cost of the underlying products and services. As a
consequence, the Company’s accounts receivable and accounts payable related to its payment processing revenues are reflective
of the total transaction amount processed by the Company, not the Company’s revenue.
Account Servicing Revenue. In our Fleet Solutions segment, account servicing revenue is primarily comprised of monthly
fees based on vehicles serviced. These fees are primarily in return for providing monthly vehicle data reports. 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 healthcare financial technology platform. Account servicing revenue is recognized monthly, as the Company
fulfills its contractual service obligations.
Finance Fees. 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 a stated late fee rate based on
74
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
the entire balance outstanding from the customer or a minimum, whichever is higher. On occasion, these fees are waived to maintain
customer goodwill. The Company’s established reserve for such waived amounts is estimated and offset against the late fee revenue
recognized. These waived fees amounted to approximately $16,900, $10,900 and $6,000 in 2017, 2016 and 2015, respectively.
The Company engages in factoring, the purchase of accounts receivable from a third party at a discount. Revenue earned in this
transaction is recorded in finance fees. We also recognize fees for interest associated with the Company’s fuel desk product and
revenue earned on the Company’s foreign salary advance product.
Other. The Company earns transaction fees, which are principally based on the number of transactions processed; however,
the fees may be a percentage of the total transaction amount. These fees are recognized at the time the transaction is captured.
The Company assesses fees for providing ancillary services, such as information products and services, professional
services and marketing services. Other revenues also include international settlement fees, fees for overnight shipping, certain
customized electronic reporting and customer contact services provided on behalf of certain of the Company’s customers. Service
related revenues are recognized in the period that the work is performed.
Interest and dividends earned on investments in available-for-sale securities are included in other revenues. Such income
is recognized in the period that it is earned.
The Company sells telematics devices as part of its WEX Telematics program. The Company recognizes revenue from
these sales when the customer has accepted delivery of the product and collectability of the sales amount is reasonably assured.
From time to time the Company enters into agreements with suppliers, partners and customers and offers incentives to
establish access to new channels, enter new market segments and expand the use and acceptance of WEX products and services.
As part of these agreements the Company may agree to pay an up-front bonus or fee. The Company capitalizes these payments
within other assets in the consolidated balance sheets and amortizes each monthly, generally on a straight-line basis against the
related revenue earned throughout the life of the agreement.
Stock-Based Compensation
The Company recognizes the fair value of all stock-based payments to employees in its financial statements. The Company
estimates the fair value of service-based stock option awards and market performance-based stock option awards on the grant date
using a Black-Scholes-Merton valuation model and a Monte Carlo simulation model, respectively. The fair value of Restricted
Stock Units (“RSUs”), including Performance Based Restricted Stock Units (“PBRSUs”), is determined and fixed on the grant
date based on the Company's stock price.
Stock-based compensation expense is net of estimated forfeitures and is recorded over each award's requisite service
period. The Company uses the straight-line methodology for recognizing the expense associated with service-based stock options
and RSU grants and a graded-vesting methodology for the expense recognition of market performance-based stock options and
PBRSUs.
Stock-based compensation is recorded in salary and other personnel expense in the consolidated statements of income.
Advertising Costs
Advertising and marketing costs are expensed in the period incurred. During the years ended December 31, 2017, 2016
and 2015, advertising expense was $17,141, $14,864 and $12,891, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods
in which the associated temporary differences became deductible. A valuation allowance is established for those jurisdictions in
which deferred tax assets realization is deemed less than more likely than not.
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
Current accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. This accounting guidance also provides
guidance on derecognition, classification, interest and penalties, accounting in the interim periods, disclosure, and transition.
Penalties and interest related to uncertain tax positions are recognized as a component of income tax expense. To the extent penalties
and interest are not assessed with respect to uncertain tax positions, amounts accrued are reduced and reflected as a reduction of
the overall income tax provision.
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 (“DSUs”) 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 and assumed issuance of unvested RSUs and DSUs and unvested PBRSUs 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 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 table summarizes net earnings attributable to shareholders and reconciles basic and diluted shares
outstanding used in the earnings per share computations:
Net earnings attributable to shareholders
Weighted average common shares outstanding – Basic
Dilutive impact of share based compensation awards
Weighted average common shares outstanding – Diluted
Foreign Currency Movement
Year ended December 31,
2017
2016
2015
$
160,266
$
60,637
$
101,904
42,977
128
43,105
40,809
105
40,914
38,771
72
38,843
The financial statements of the Company’s foreign subsidiaries, where the local currency is the functional currency, are
translated to U.S. dollars using year-end spot exchange rates for assets and liabilities, average exchange rates for revenue and
expenses and historical exchange rates for equity transactions. The resulting foreign currency translation adjustment is recorded
as a component of accumulated other comprehensive loss.
Realized and unrealized gains and losses on foreign currency transactions as well as the re-measurement of the Company's
cash, receivable and payable balances that are denominated in foreign currencies, are recorded directly in net foreign currency
gain (loss) in the consolidated statements of income. However, gains or losses resulting from intercompany transactions where
repayment is not anticipated for the foreseeable future are not recognized in the consolidated statements of income. In these
situations, the gains or losses are deferred and included as a component of accumulated other comprehensive loss. In addition,
gains and losses associated with the Company's foreign currency exchange derivatives are recorded in net foreign currency gain
(loss) in the consolidated statements of income.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss includes unrealized gains and losses on available-for-sale securities and foreign
currency translation adjustments pertaining to the net investment in foreign operations. Amounts are recognized net of tax to the
extent applicable. Realized gains or losses on securities transactions are classified as non-operating in the consolidated statements
of income.
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
2.
Recent Accounting Pronouncements
The following table provides a brief description of recent accounting pronouncements that could have a material effect
on our financial statements:
Standard
Description
Adopted During the Year Ended December 31, 2017
Accounting Standards
Update (“ASU”)
2016-09 Compensation-
Stock Compensation
(Topic 718):
Improvements to
Employee Share-Based
Payment Accounting
This standard 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.
Date/Method of Adoption
January 1, 2017
Effect on financial statements or other significant
matters
Prior to the adoption of this guidance, the Company used
the "with and without" method to determine when excess
tax benefits were realized. As a result of certain US net
operating loss carryforwards, excess tax benefits to date
have not reduced taxes paid and therefore were not
previously recognized in our financial statements.
This standard required prospective recognition of all the
tax effects related to share-based payments in the income
statement. The impact of adoption was recorded as a
cumulative effect adjustment to retained earnings of
$261. For the year ended December 31, 2017, the
Company recognized approximately $1,600 of excess tax
benefits within our income tax provision. 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 has not impacted the Company's
minimum statutory tax withholding practices.
ASU 2017-09
Compensation—Stock
Compensation (Topic
718): Scope of
Modification
Accounting
This standard 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.
Not Yet Adopted as of December 31, 2017
ASU 2016-18
Statement of Cash
Flows (Topic 230):
Restricted Cash
ASU 2016-13
Financial Instruments-
Credit Losses (Topic
326): Measurement of
Credit Losses on
Financial Instruments
This standard clarifies the
classification and presentation of
restricted cash in the statement of
cash flows. 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.
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 Company elected to early
adopt this standard effective
July 1, 2017.
The adoption has not impacted the Company's
consolidated financial statements and related disclosures.
The standard is effective for
annual reporting periods
beginning after December 15,
2017, including interim
periods within those fiscal
years, and requires
retrospective application to all
periods presented. Early
adoption is permitted.
The standard is effective for
annual reporting periods
beginning after December 15,
2019, including interim
periods within those fiscal
years.
Upon adoption, restricted cash will be included in cash
and restricted cash equivalents when reconciling the
beginning of year and end of year amounts presented on
the consolidated statements of cash flows. Restricted
cash totaled $18,866 and $22,412 as of December 31,
2017 and 2016, respectively, and is recorded in other
assets on the consolidated balance sheets.
The Company is evaluating the impact the standard will
have on the consolidated financial statements and related
disclosures.
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
Standard
Description
ASU 2016-02 Leases
(Topic 842)
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.
ASU 2016-01 Financial
Instruments - Overall
(Subtopic 825-10):
Recognition and
Measurement of
Financial Assets and
Financial Liabilities
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.
Date/Method of Adoption
The standard is effective for
annual reporting periods
beginning after December 15,
2018, including interim
periods within that reporting
period.
When transitioning, the
standard requires leases to be
recognized and measured at
the beginning of the earliest
period presented using a
modified retrospective
approach.
The standard is effective for
annual reporting periods
beginning after December 15,
2017, including interim
periods within that reporting
period.
Effect on financial statements or other significant
matters
The Company is evaluating the impact the standard will
have on the consolidated financial statements and related
disclosures.
The Company is evaluating the impact the
pronouncement will have on the consolidated financial
statements and related disclosures.
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
Standard
Description
ASU 2014-09 Revenue
from Contracts with
Customers (Topic 606)
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.
Date/Method of Adoption
The Company adopted this
standard 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 adopted the
standard using the modified
retrospective method.
Effect on financial statements or other significant
matters
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. In addition, fees associated with cardholder
arrangements are outside the scope of Topic 606. As a
result of detailed analysis, management has determined
that approximately 30 percent of consolidated revenues
for the year ended December 31, 2017 are outside the
scope of Topic 606.
The Company’s revenue from discount and interchange,
transaction processing and certain fees is within the
scope of Topic 606. FASB and its Transition Resource
Group have issued clarifications on various aspects of
ASU 2014-09. The Company has determined there will
be two significant changes in the classification on our
consolidated statement of income which will impact
reported total revenues and operating expenses but have
no impact on income from operations.
•
•
•
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 net of revenues, will be reflected as
a selling expense going forward. Based on
2017 results, this change would have
increased both reported revenues and
expenses by approximately $52,000.
Network fees paid to Visa and MasterCard by
all three of our segments, which have
previously been presented within service fees
expense, will be presented net of revenue
going forward. Based on 2017 results, this
change would have reduced both reported
revenues and expenses by approximately
$24,000. The majority of network fee
expenses are incurred by our Travel and
Corporate Solutions segment.
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. We have evaluated our worldwide
sales commission structure and determined
that the vast majority of commission expense
will continue to be expensed. In 2017, we
incurred approximately $1,000 of sales
commissions which meet the criteria for
capitalization under the new guidance.
Except for the items mentioned above, we have
determined that the timing and measurement of revenue
associated with the Company’s transaction processing
services, including discount and interchange and other
transaction processing fees, will not be significantly
impacted by the new standard. As such, we estimate that
applying the modified retrospective method to
outstanding contracts as of our January 1, 2018
implementation date will have an immaterial cumulative
effect on the opening balance of 2018 retained earnings.
The Company has implemented changes to its accounting
policies, business processes and internal controls to
support the recognition, measurement and disclosure
requirements under the new standard.
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
3.
Business Acquisitions and Other Intangible Asset Acquisitions
The Company incurred and expensed costs directly related to completed acquisitions of $956, $19,168 and $342 in 2017,
2016 and 2015, respectively, which are included primarily within service fees in the consolidated statements of income.
AOC
Effective October 18, 2017, the Company acquired certain assets and assumed certain liabilities of AOC Solutions and
one of its affiliate companies, 3Delta Systems, Inc. (collectively “AOC”), an industry leader in commercial payments technology.
The acquisition of AOC, a longstanding technology provider for our virtual card product, will broaden the Company's capabilities,
increase our pool of employees with payments platform expertise and allow the Company to evolve with the needs of its customers
and partners through the use of AOC’s payments processing technology platforms.
The Company purchased AOC for $129,828, which was funded with cash on hand and through borrowings under the
2016 Credit Agreement. The Company records adjustments to the assets acquired and liabilities assumed throughout the
measurement period, which may be up to one year from the acquisition date. The Company has obtained information to assist in
determining the fair values of certain assets acquired and liabilities assumed since the acquisition, 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 has not finalized the purchase accounting and is currently evaluating the tax basis and the allocation of
book basis to the assets acquired and liabilities assumed in this business combination. Specifically, the Company is still reviewing
the valuation as well as performing procedures to verify the completeness and accuracy of the data used in the independent valuation
for intangible assets identified in the table below. Additionally, we are assessing the value of acquired in-process research and
development software. The preliminary estimates could change significantly upon completion of this evaluation. The goodwill
recognized in this business combination will be deductible for income tax purposes.
The following is a summary of the preliminary allocation of the purchase price to the assets and liabilities acquired:
Total consideration
Less:
Cash
Accounts receivable
Property and equipment
Customer relationships(a)
Developed technologies(b)
Trademarks and trade names(c)
Other liabilities
Recorded goodwill
(a) Weighted average life – 8.9 years.
(b) Weighted average life – 3.4 years.
(c) Weighted average life – 4.0 years.
(a) (b) (c) The weighted average life of these amortized intangible assets is 5.4 years.
As Reported
December 31, 2017
129,828
15,546
4,171
2,530
15,000
24,100
1,460
(685)
67,706
$
$
Since the acquisition date, the operations of AOC contributed net revenues of approximately $6,685 and net loss before
taxes of approximately $620 during 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.
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EFS
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
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
enabled 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 13, Financing Debt. The value of the total cash and stock consideration
paid for the acquisition of EFS was approximately $1,444,000, net of approximately $93,000 in cash acquired.
The Company obtained information to determine the fair values of certain assets acquired and liabilities assumed
throughout the one year measurement period and recorded adjustments to the assets acquired and liabilities assumed, 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 Company finalized the EFS purchase
accounting in the second quarter of 2017.
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 has determined that approximately $557,000 of the goodwill recognized in this business combination will be
deductible for income tax purposes.
The following represents the components and final allocation of the purchase price:
Total consideration, net of cash acquired
$
1,444,235
$
— $
1,444,235
As Reported December
31, 2016
Measurement Period
Adjustments
As Reported, Final
Less:
Accounts receivable
Property and equipment
Customer relationships(a)(b)
Developed technologies(a)(c)
Trademarks and trade names(a)(d)
Deferred income tax assets
Other assets
Accounts payable
Accrued expenses
Deferred income tax liabilities
162,684
2,387
842,700
32,120
13,700
34,992
—
(153,777)
(128,267)
(91,194)
—
1
(1,300)
—
—
6,352
739
248
9,361
28,071
162,684
2,388
841,400
32,120
13,700
41,344
739
(153,529)
(118,906)
(63,123)
Recorded goodwill(a)
$
685,418
(a) $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.
(b) (c) (d) The weighted average life of these amortized intangible assets is 7.9 years.
(43,472) $
728,890
$
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. In addition,
non-recurring costs that were incurred in 2016 and are directly attributable to the acquisition have been reflected in pro forma
results for the year ended December 31, 2015. Such adjustments include $19,168 of transaction costs and $7,074 of expenses
81
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
incurred as part of the July 2016 debt modification and extinguishment, net of the related income tax results. 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. Subsequent to the July 1, 2016 acquisition date, the operations of EFS contributed revenues of approximately
$83,300 and net income before taxes of approximately $5,800 to the Company's 2016 consolidated statement of income.
The following represents unaudited pro forma operational results as if the acquisition had occurred as of January 1, 2015:
Total revenues
Net earnings attributable to shareholders
Pro forma net income attributable to shareholders per common share:
Basic
Diluted
Benaissance
Year Ended December 31,
2016
2015
$
$
$
$
1,089,880
42,821
1.00
1.00
$
$
$
$
994,619
36,763
0.86
0.86
On November 18, 2015, the Company purchased the stock of Benaissance for $80,677. The transaction was financed
through the Company’s cash on hand and existing credit facility. Benaissance provides financial management for health benefits
administration by offering SaaS solutions for individual single point and consolidated group premium billing. The Company
acquired Benaissance to enhance the Company's positioning in the growing healthcare market.
The Company obtained information to determine the fair values of certain assets acquired and liabilities assumed
throughout the one year measurement period and recorded adjustments to the assets acquired and liabilities assumed, resulting in
the recording of other intangible assets and goodwill as described below. Goodwill is expected to be deductible for tax purposes.
Since the acquisition date, the operations of Benaissance contributed net revenues of approximately $2,085 and net income
of approximately $399 during 2015. The results of operations for Benaissance are presented in the Company's Health and Employee
Benefit Solutions segment.
The following is a summary of the final allocation of the purchase price to the assets and liabilities acquired:
Consideration paid (net of cash acquired)
Less:
Accounts receivable
Other tangible assets and liabilities, net
Acquired software and developed technology(a)
Customer relationships(b)
Trade name(c)
Recorded goodwill
(a) Weighted average life – 5.0 years.
(b) Weighted average life – 7.6 years.
(c) Weighted average life – 8.1 years
(a) (b) (c) The weighted average life of these amortized intangible assets is 6.9 years.
$
80,677
1,594
314
10,300
27,700
1,500
39,269
$
No pro forma information has been included in these financial statements as the operations of Benaissance for the period
that they were not part of the Company are not material to the Company's revenues, net income and earnings per share.
Acquisition of remaining 49% of UNIK
On August 31, 2015, the Company acquired the remaining 49 percent ownership in UNIK for $46,018.
82
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
4.
Divestitures
Telapoint
During the year ended December 31, 2017, the Company sold $8,942 in net assets of its Telapoint business for proceeds
of $29,900, subject to a working capital adjustment. The sale resulted in a pre-tax book gain of $20,958. Costs incurred related to
this divestiture were immaterial. Prior to the sale, the Telapoint business was assigned to our North American Fleet reporting unit,
which is included within our Fleet Solutions reportable segment.
The divestiture was not material to the Company's annual revenue, net income or earnings per share. The Company does
not view this divestiture as a strategic shift in its operations.
rapid! PayCard
On January 7, 2015, the Company sold the assets of its rapid! PayCard operations for $20,000, which resulted in a pre-
tax book gain of approximately $1,215. The Company's primary focus in the U.S. continues to be in the fleet, travel, and healthcare
industries. As such, the Company divested the operations of rapid! PayCard, which were not material to the Company's annual
revenue, net income or earnings per share. The Company does not view this divestiture as a strategic shift in its operations.
5.
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
$12,200 and $3,400 in receivables with revolving credit balances as of December 31, 2017 and 2016, respectively.
Concentration of Credit Risk
The receivables portfolio consists of a large group of homogeneous smaller balances from customers across a wide range
of industries, which are collectively evaluated for impairment. No one customer represented 10 percent or more of the outstanding
receivables balance as of December 31, 2017. One customer represented 11 percent of the outstanding receivables balance as of
December 31, 2016. The following table presents the outstanding balance of accounts receivable that are less than 60 days past
due, in each case as a percentage of total trade accounts receivable:
Delinquency Status
29 days or less past due
59 days or less past due
Reserves for Accounts Receivable
December 31,
2017
2016
95%
97%
93%
98%
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.
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
The following table presents changes in the accounts receivable allowances:
Balance, beginning of year
Provision for credit losses1
Charges to other accounts2
Charge-offs
Recoveries of amounts previously charged-off
Currency translation
Balance, end of year
Year ended December 31,
2017
2016
2015
$
$
21,454
$
14,672
$
61,148
16,869
(77,229)
7,526
439
33,348
10,166
(43,309)
6,201
376
30,207
$
21,454
$
14,627
22,825
6,155
(33,885)
5,202
(252)
14,672
1 During 2017, the majority of the increase relates to higher incidences of magnetic stripe card skimming fraud.
2 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 customer 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.
Investments
Available-for-sale Securities
The Company’s available-for-sale securities as of December 31, 2017 and 2016, are presented below:
2017
Mortgage-backed securities
Asset-backed securities
Municipal bonds
Equity securities(b)
Total available-for-sale securities
2016
Mortgage-backed securities
Asset-backed securities
Municipal bonds
Equity securities(b)
Total available-for-sale securities
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value(a)
$
$
$
$
$
$
$
325
350
539
22,888
24,102
498
650
697
22,414
24,259
$
4
—
1
—
5
15
—
1
—
16
$
$
$
$
24
$
5
6
714
749
23
2
16
709
750
$
$
$
305
345
534
22,174
23,358
490
648
682
21,705
23,525
(a) The Company’s techniques used to measure the fair value of its investments are discussed in Note 17, Fair Value.
(b) Excludes $6,798 and $5,673 in equity securities designated as trading as of December 31, 2017 and 2016, respectively, included in other assets on the consolidated
balance sheets. See Note 16, Employee Benefit Plans for additional information.
The Company reviews its investments to identify and evaluate indications of possible impairment. Factors considered in
determining whether a loss is temporary include the length of time and extent to which the fair value has been less than the cost
basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold the investment
for a period of time sufficient to allow for any anticipated recovery in market value. Substantially all of the Company’s fixed
income securities are rated investment grade or better. The amount of available-for-sale securities that have been in a continuous
unrealized loss position for more than twelve months is insignificant. The Company’s management has determined that these gross
unrealized losses at December 31, 2017 and 2016 are temporary in nature.
The Company had maturities of available-for-sale securities of $631, $495 and $594 for the years ended December 31
2017, 2016 and 2015, respectively.
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
The maturity dates of the Company’s available-for-sale securities are as follows:
Due after 1 year through year 5
Due after 5 years through year 10
Due after 10 years
Mortgage-backed securities with original maturities of 30 years
Equity securities with no maturity dates
Total
December 31,
2017
2016
Cost
Fair Value
Cost
Fair Value
$
— $
— $
390
499
325
385
494
305
$
165
529
653
498
22,888
22,174
22,414
$
24,102
$
23,358
$
24,259
$
165
529
636
490
21,705
23,525
7.
Property, Equipment and Capitalized Software, Net
Property, equipment and capitalized software, net consist of the following:
Furniture, fixtures and equipment
Computer software
Software under development
Leasehold improvements
Capital leases
Total
Less: accumulated depreciation and amortization
Total property, equipment and capitalized software, net
December 31,
2017
2016
$
75,015
$
308,362
21,452
23,248
759
428,836
(264,928)
$
163,908
$
69,513
254,163
49,922
21,257
759
395,614
(228,336)
167,278
Depreciation expense was $49,913, $43,821 and $35,285 in 2017, 2016 and 2015, respectively. During the year ended
December 31, 2017, the Company impaired approximately $28,000 of software under development. See Note 22, Impairment and
Restructuring Activities for further information. The Company did not incur significant impairment charges during 2016 and 2015.
85
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
8.
Goodwill and Other Intangible Assets
Goodwill
The changes in goodwill during the period January 1 to December 31, 2017 were as follows:
Gross goodwill, January 1, 2017
Acquisition adjustments for EFS
Acquisition of AOC
Divestiture of Telapoint
Impact of foreign currency translation
Gross goodwill, December 31, 2017
Accumulated impairment, January 1, 2017
Impact of foreign currency translation
Accumulated impairment, December 31, 2017
Net goodwill, January 1, 2017
Net goodwill, December 31, 2017
$
$
$
Fleet
Solutions
Segment
Travel and Corporate
Solutions
Segment
Health and Employee
Benefit Solutions
Segment
Total
$
1,293,138
$
202,771
$
353,722
$
1,849,631
(37,296)
—
(4,469)
18,345
1,269,718
(855)
(72)
(6,176)
67,706
—
740
265,041
(10,335)
(873)
(927) $
(11,208) $
—
—
—
(214)
353,508
—
—
— $
(43,472)
67,706
(4,469)
18,871
1,888,267
(11,190)
(945)
(12,135)
1,292,283
1,268,791
$
$
192,436
253,833
$
$
353,722
353,508
$
$
1,838,441
1,876,132
The changes in goodwill during the period January 1 to December 31, 2016 were as follows:
Fleet
Solutions
Segment
Travel and Corporate
Solutions
Segment
Health and Employee
Benefit Solutions
Segment
Total
Gross goodwill, January 1, 2016
$
735,770
$
38,134
$
350,321
$
Acquisition of EFS
Acquisition adjustments
Impact of foreign currency translation
Gross goodwill, December 31, 2016
Accumulated impairment, January 1, 2016
Impact of foreign currency translation
Accumulated impairment, December 31, 2016
Net goodwill, January 1, 2016
Net goodwill, December 31, 2016
$
$
$
561,119
—
(3,751)
1,293,138
(867)
12
167,771
—
(3,134)
202,771
(10,480)
145
(855) $
(10,335) $
—
502
2,899
353,722
—
—
— $
1,124,225
728,890
502
(3,986)
1,849,631
(11,347)
157
(11,190)
734,903
1,292,283
$
$
27,654
192,436
$
$
350,321
353,722
$
$
1,112,878
1,838,441
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
Other Intangible Assets
Other intangible assets consist of the following:
December 31, 2017
December 31, 2016
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Definite-lived intangible assets
Acquired software and developed technology
$
203,861
$
(96,197) $
107,664
$
187,499
$
(69,483) $
118,016
Customer relationships
Licensing agreements
Non-compete agreement
Patent
Trade name
Indefinite-lived intangible assets
Trademarks, trade names and brand names
Total
1,257,232
34,546
—
2,581
44,079
(269,216)
(15,029)
—
(2,076)
(10,309)
988,016
1,247,624
(167,301)
1,080,323
19,517
—
505
33,770
30,760
4,000
2,380
41,029
(9,126)
—
(1,724)
(6,508)
21,634
4,000
656
34,521
$ 1,542,299
$
(392,827) $
1,149,472
$ 1,513,292
$
(254,142) $
1,259,150
4,575
$
1,154,047
6,318
$
1,265,468
During the years ended December 31, 2017, 2016 and 2015, amortization expense was $153,811, $97,829 and $47,792,
respectively. The following table presents the estimated amortization expense related to the definite-lived intangible assets listed
above for each of the next five fiscal years:
2018
2019
2020
2021
2022
9.
Accounts Payable
Accounts payable consists of:
Merchant payables
Other payables
Accounts payable
$
$
141,583
127,393
116,164
100,367
89,267
December 31,
2017
2016
$
$
720,553
90,809
811,362
$
$
520,058
97,060
617,118
10.
Deposits, Borrowed Federal Funds and Other Debt
Deposits and Borrowed Federal Funds
WEX Bank has issued certificates of deposit with maturities ranging from 3 months to 3 years and with interest rates
ranging from 1.00 percent to 2.15 percent as of December 31, 2017. WEX Bank may issue certificates of deposits without limitation,
subject to FDIC rules governing minimum financial ratios, which include risk-based asset and capital requirements. As of
December 31, 2017, all certificates of deposit were in denominations of $250 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 money market deposits are issued in denominations of $250 or less, and pay interest
87
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
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.
The following table presents information about deposits:
Certificates of deposit with maturities within 1 year
Certificates of deposit with maturities greater than 1 year and less than 5 years
Interest-bearing money market deposits
Customer deposits
Total deposits
Weighted average cost of funds on certificates of deposit outstanding
Weighted average cost of interest-bearing money market deposits
December 31,
2017
2016
$
630,879
$
517,524
306,865
285,899
70,211
208,048
325,464
67,787
$
1,293,854
$
1,118,823
1.51%
1.49%
0.96%
0.76%
The Company also had federal funds lines of credit totaling $400,000 and $250,000 at December 31, 2017 and 2016,
respectively. There were no borrowings against these lines of credit at December 31, 2017 and 2016.
Other Debt
WEX Latin America Debt
WEX Latin America had debt of approximately $9,747 and $30,755 as of December 31, 2017 and 2016, respectively.
This is comprised of credit facilities and loan arrangements with various maturity dates.
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. During the year ended December 31, 2017, the Company increased the funding capacity of these
arrangements by $90,000 to $185,000. Associated 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 $185,000 and $95,000 at December 31, 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 commitment will mature in amounts of approximately $85,000 and $50,000 on May 30,
2018 and December 31, 2021, respectively, with the remaining $50,000 maturing on demand.
The following table presents the average interest rates and balances for deposits, borrowed federal funds and other debt:
Average interest rate:
Deposits
Borrowed federal funds
Interest-bearing money market deposits
WEX Latin America debt
Participation agreement
11.
Derivative Instruments
Year ended December 31,
2017
2016
2015
1.22%
1.24%
1.12%
21.21%
3.46%
0.94%
0.69%
0.50%
19.70%
2.94%
0.65%
0.39%
0.25%
15.21%
2.57%
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.
88
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
Interest Rate Swap Agreements
At December 31, 2017, we had variable-rate borrowings of $1.7 billion under our 2016 Credit Agreement. 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% to 2.212%.
The notional amounts, fixed and variable interest rates and maturities of the interest rate swap agreements are as
follows:
Notional amount at inception
$300,000
$200,000
$400,000
$150,000
$250,000
Tranche A
Tranche B
Tranche C
Tranche D
Tranche E
Amortization
Maturity date
Fixed interest rate
N/A
N/A
5% annually
N/A
N/A
12/30/2022
12/30/2022
12/31/2020
12/31/2020
12/31/2018
2.204%
2.212%
1.108%
1.125%
0.896%
See Note 17, Fair Value for more information regarding the valuation of the Company's interest rate swaps.
Foreign Currency Exchange Program
The Company utilizes a limited foreign currency exchange hedging program, entering into short-term foreign currency
swaps to convert the foreign currency exposures of certain foreign currency denominated intercompany loans and investments to
the base currency. The Company will continue to monitor its foreign currency exposure for discrete items and may, from time to
time, hedge certain foreign currency transactions.
The following table summarizes the contracts related to the Company's foreign currency swaps, which settle in U.S.
dollars at various dates within 5 days after year-end:
Australian dollar
Aggregate Notional Amount
December 31,
2017
2016
A$
5,000 A$
15,000
The amount of gains and losses associated with these foreign currency swaps were not material for the years ended
December 31, 2017, 2016 and 2015.
Fuel Derivatives Program
The Company previously utilized fuel price derivative instruments, which were designed to reduce the volatility of the
Company’s cash flows associated with its fuel price-related earnings exposure in North America. After the first quarter of 2016,
the Company was 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.
The following table summarizes the changes in fair value of the fuel price derivatives which have been recorded on the
consolidated statements of income:
Realized gains
Change in unrealized fuel price derivatives
Net realized and unrealized gains on fuel price derivatives
Year ended December 31,
2016
2015
$
$
5,718
(5,007)
711
$
$
41,810
(35,962)
5,848
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
Consolidated Derivative Instruments
The following table presents information on the location and amounts of derivative fair values on the consolidated balance
sheets, which are recorded at fair value:
Asset Derivatives
Liability Derivatives
December 31, 2017
December 31, 2016
December 31, 2017
December 31, 2016
Derivatives Not Designated as Hedging
Instruments
Balance
Sheet
Location
Fair
Value
Balance
Sheet
Location
Fair
Value
Interest rate swaps
Other assets
$ 15,919 Other assets
$ 12,908
Foreign currency contracts
Accounts
receivable
$
—
Accounts
receivable
$
29
Balance
Sheet
Location
Other
liabilities
Accounts
payable
Fair
Value
$ 1,697
$
—
Balance
Sheet
Location
Other
liabilities
Accounts
payable
Fair
Value
$
$
—
—
The following table presents information on the location and amounts of derivative gains and losses:
Derivatives Not Designated as Hedging
Instruments
Location of Gain Recognized in
Income on Derivative
Foreign currency contracts
Net foreign currency gain
Interest rate swap agreements - unrealized portion
Net unrealized gains on interest rate swap agreements
Interest rate swap agreements - realized portion
Financing interest income
Commodity contracts
Net realized and unrealized gains on fuel price derivatives
12. Off-Balance Sheet Arrangements
WEX Europe Services Accounts Receivable Factoring
Amount of Gain (Loss)
Recognized in
Income on Derivative
December 31,
2017
2016
2015
$
$
$
$
— $
59
$ 27,236
1,314
$ 12,908
$
214
$
— $
—
—
— $
711
$
5,848
During the first quarter of 2017, WEX Europe Services 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 Company obtained a true sale opinion from an independent attorney, which
states that the factoring agreement creates a sale of receivables under local law for amounts transferred both below and above the
established credit limits. Additionally, there are no indications of the Company's continuing involvement in the factored receivables.
As a result, the Purchasing Bank is deemed the purchaser of these receivables and is entitled to enforce payment of these amounts
from the debtor.
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 $574,400
of receivables under this arrangement during year ended December 31, 2017. Proceeds received are recorded net of applicable
expenses, interest and commissions. This resulted in a loss on factoring of approximately $3,700 for the year ended December 31,
2017, which was recorded in Other expenses in the consolidated statement of income. As of December 31, 2017, the Company
had associated factoring receivables of approximately $61,800, of which approximately $3,700 were in excess of the established
credit limit. Charge-backs on balances in excess of the credit limit during the year ended December 31, 2017 were insignificant.
WEX Latin America Accounts Receivable Factoring
During the first quarter of 2017, WEX Latin America entered into a factoring agreement to sell certain unsecured
receivables associated with our salary payment card product, 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 $16,300 of receivables during the year
ended December 31, 2017. This resulted in a loss on factoring of $800 for the year ended December 31, 2017, which was recorded
in Other expenses in the consolidated statement of income. The receivables sold under this agreement were recorded as a reduction
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
of accounts receivable and proceeds as cash provided by operating activities. There were no sales under this factoring arrangement
during the second half of 2017; a securitization agreement replaced this factoring arrangement as Brazil's primary funding
mechanism. See Note 13, Financing Debt, for more information on this securitization arrangement.
13.
Financing Debt
The following table summarizes the Company's outstanding borrowings under the agreements outlined below:
Revolving line-of-credit facility
Term loans
Revolving line-of-credit facility and term loans(a)
Unamortized debt issuance costs
Revolving line-of-credit facility and term loans, net
Notes outstanding(a)
Unamortized debt issuance costs
Notes outstanding, net
Year ended December 31,
2017
2016
$
$
$
$
$
136,535
1,602,875
1,739,410
(32,346)
1,707,064
400,000
(3,731)
396,269
$
$
$
$
$
—
1,637,625
1,637,625
(38,334)
1,599,291
400,000
(4,466)
395,534
(a) See Note 17, Fair Value for more information regarding the Company's 2016 Credit Agreement and notes outstanding.
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 provided for term loan facilities and a secured revolving credit facility, with a sublimit for letters of credit
and swingline loans. Effective October 30, 2017, the Company entered into a Second Amendment to the 2016 Credit Agreement,
which added $100,000 of capacity to its revolving line of credit to provide additional liquidity and flexibility. As amended, the
2016 Credit Agreement provides for a tranche A term loan facility in an amount equal to $455,000, a tranche B term loan facility
in an amount equal to $1,200,000 and a $570,000 secured revolving credit facility. Under this agreement, $1,025,000 matures on
July 1, 2021 and $1,200,000 matures on July 1, 2023. Prior to maturity, amounts under the credit facility will be reduced by
mandatory payments. Additional loans may be made available under the 2016 Credit Agreement upon request of the Company
subject to specified terms and conditions, including receipt of lender commitments. Proceeds from the 2016 Credit Agreement
may be used for working capital purposes, acquisitions, payment of dividends and other restricted payments, refinancing of
indebtedness and other general corporate purposes.
As of December 31, 2017, the Company had $570,000 borrowing capacity, subject to the covenants as described below.
As of December 31, 2017 and 2016, the Company has posted approximately $27,500 and $13,300, respectively, in letters of credit
as collateral for lease agreements and virtual card and fuel payment processing activity at its foreign subsidiaries. The Company
had approximately $406,000 available under the revolving credit facility as of December 31, 2017. As of both December 31, 2017
and 2016, amounts outstanding under the 2016 Credit Agreement bore a weighted average effective interest rate of 4.2%.
Effective July 3, 2017, the Company repriced the secured term loans under the 2016 Credit Agreement (the “2016 First
Amendment”), which reduced the applicable interest rate margin at current borrowing levels for both LIBOR borrowings and base
rate borrowings for the Company's tranche A term loans and tranche B term loans. The consolidated leverage ratio as defined in
the 2016 Credit Agreement (i.e. consolidated funded indebtedness less up to $350,000 in permitted securitization transactions of
the Company and its subsidiaries 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.
After giving effect to the terms of the 2016 First Amendment, amounts outstanding under the 2016 Credit Agreement
were repriced to bear interest at a rate equal to, at the Company’s option, (a) the Eurocurrency Rate, as defined in the 2016 Credit
Agreement, plus a margin of between 1.75% to 3.25% (2.75% at December 31, 2017) with respect to the revolving credit facility,
between 1.75% to 2.75% (2.25% at December 31, 2017) with respect to the tranche A term loan facility, which represents a reduction
of 50 basis points and 2.75% with respect to the tranche B term loan facility, which represents a reduction of 75 basis points (with
the Eurocurrency Rate subject to a 0.00% floor), in each case, based on the consolidated leverage ratio 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%,
91
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
in each case plus a margin of 0.75% to 2.25% (1.75% at December 31, 2017) with respect to the revolving credit facility, 0.75%
to 1.75% (1.25% at December 31, 2017) with respect to the tranche A term loan facility and 2.25% with respect to the tranche B
term loan facility, with the margin determined in the case of the revolving credit facility and the tranche A term loan facility based
on the consolidated leverage ratio. 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 11, Derivative Instruments, for
further discussion.
In addition, the Company has agreed to pay a quarterly commitment fee at a rate per annum ranging from 0.30% to 0.50%
(0.45% at December 31, 2017) based on the consolidated leverage ratio 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%.
As the debt repricings under the 2016 First Amendment were not considered substantially different, the Company applied
modification accounting and no gain or loss was recognized as a result of the debt modification. Amounts paid as part of this
repricing were not material.
The 2016 Credit Agreement requires the Company to prepay outstanding term loans, subject to certain exceptions:
•
solely with respect to the tranche B term loan facility, currently with 50% (subject to reduction to 25% and 0%
based upon the Company’s consolidated leverage ratio) of the Company’s annual Excess Cash Flow (as defined
in the 2016 Credit Agreement);
• with 100% of the net cash proceeds of certain asset sales where the proceeds exceed certain thresholds, and
certain casualty and condemnation events, subject to reinvestment rights and certain other exceptions; and
• with 100% of the net cash proceeds of any incurrence or issuance of certain debt, other than debt permitted under
the 2016 Credit Agreement.
The Company may voluntarily prepay outstanding loans from time to time, subject to certain conditions, without premium
or penalty other than customary “breakage” costs with respect to Eurocurrency Rate loans, provided, however, that if on or prior
to the date that is six (6) months following the 2016 First Amendment effective date, the Company prepays any loans under the
tranche B term loan facility in connection with a repricing transaction, the Company must pay a prepayment premium of 1.00%
of the aggregate principal amount of the tranche B term loans so prepaid.
The Company is required to make scheduled quarterly payments each equal to 1.25% in the case of the tranche A term
loan facility, and 0.25% in the case of the tranche B term loan facility, of the original principal amount of the respective term loans
made on the closing date, with the balance due at maturity.
The 2016 Credit Agreement contains customary representations and warranties, as well as affirmative and negative
covenants. The 2016 Credit Agreement also requires, solely for the benefit of the lenders under the tranche A term loan facility
and the revolving credit facility, that the Company maintain at the end of each fiscal quarter the following financial ratios:
•
•
a consolidated EBITDA to consolidated interest charge coverage ratio of no less than 3.25 to 1.00; and
a consolidated funded indebtedness (excluding (i) up to an agreed amount of consolidated funded indebtedness
under permitted securitization transactions and (ii) the non-recourse portion of any permitted factoring
transaction) to consolidated EBITDA ratio of, initially, no more than 5.40 to 1.00, which ratio shall step down
to 5.25 to 1.00 at December 31, 2016, 5.00 to 1.00 at December 31, 2017, 4.25 to 1.00 at December 31, 2018
and 4.00 to 1.00 at December 31, 2019.
The obligations under the 2016 Credit Agreement are secured by a security interest in, subject to certain exceptions,
substantially all of the assets of the Company pursuant to the terms of a U.S. Security Agreement, dated as of July 1, 2016, in favor
of Bank of America, as collateral agent for the lenders.
Debt Covenants
The 2016 Credit Agreement and the Indenture contain covenants that limit the Company and its subsidiaries’ ability and
the ability of 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
92
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
substantially all, of the Company’s assets. These covenants are subject to important exceptions and qualifications. At any time that
the Notes are rated investment grade, which is not currently the case, and subject to certain conditions, certain covenants will be
suspended with respect to the Notes. WEX Bank and the Company’s other regulated subsidiaries will not be subject to some of
the restrictive covenants in the Indenture that place limitations on the Company and its restricted subsidiaries’ actions, and where
WEX Bank and the Company’s regulated subsidiaries are subject to covenants, there are significant exceptions and limitations on
the application of those covenants to WEX Bank and the Company’s regulated subsidiaries.
2014 Credit Agreement
On July 1, 2016, concurrently with the financing transactions discussed above, the Company repaid in full all outstanding
amounts under the 2014 Credit Agreement and terminated all commitments by the lenders to extend further credit thereunder and
all guarantees and security interests granted by the Company to the lenders thereunder. The Company did not incur any early
termination penalties in connection with the termination of the 2014 Credit Agreement.
As of June 30, 2016, the Company had borrowings, net of loan origination fees, of $282,639 and $445,000 against its
revolving credit facility and amortizing term loan arrangement, respectively. As of June 30, 2016, amounts outstanding under the
amortizing term loan bore interest at a rate of LIBOR plus 200 basis points. The revolving credit facility bore interest at a rate
equal to, at the Company's option, (a) LIBOR plus 200 basis points, (b) the prime rate plus 100 basis points for domestic borrowings;
and the Eurocurrency rate plus 200 basis points for international borrowings.
Notes Outstanding
On January 30, 2013, the Company completed a $400,000 offering in an aggregate principal amount of 4.750 percent
senior notes due 2023 (the “Notes”) at an issue price of 100.0 percent of the principal amount, plus accrued interest, from January 30,
2013, in a private placement to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933, as
amended (the “Securities Act”), and in offshore transactions pursuant to Regulation S under the Securities Act. The Notes were
issued pursuant to the Indenture among the Company, the guarantors listed therein, and The Bank of New York Mellon Trust
Company, N.A., as trustee.
The Notes will mature on February 1, 2023, and interest will accrue at the rate of 4.750 percent per annum. Interest is
only payable semiannually in arrears on February 1 and August 1 of each year, commencing on August 1, 2013.
The Notes are guaranteed on a senior secured basis by each of the Company’s restricted subsidiaries and each of the
Company’s regulated subsidiaries that guarantees the Company’s 2013 Credit Agreement, which, as of the issue date, consist of
four of the Company’s restricted subsidiaries. WEX Bank, which represents a substantial amount of the Company’s operations, is
not a guarantor and is not subject to many of the restrictive covenants in the indenture governing the Notes.
The Notes and guarantees described above are general senior secured obligations ranking equally with the Company’s
existing and future senior debt, senior in right of payment to all of the Company’s subordinated debt, and effectively equal in lien
priority to the Company’s 2016 Credit Agreement. In addition, the Notes and the guarantees are structurally subordinated to all
liabilities of the Company’s subsidiaries that are not guarantors, including WEX Bank.
At any time on or after February 1, 2018, the Company may redeem the Notes, in whole or in part, at the following
redemption prices (expressed as a percentage of principal amount of the Notes) if redeemed during the twelve month period
beginning on February 1 of the following years: (i) 102.375 percent in 2018, (ii) 101.583 percent in 2019, (iii) 100.792 percent in
2020, and (iv) 100.0 percent in 2021 and thereafter; plus, in each case, accrued and unpaid interest, if any, to, but excluding, the
date of redemption. At any time prior to February 1, 2018, the Company could have redeemed the Notes, in whole or in part, at a
redemption price equal to 100.0 percent of the principal amount of such Notes redeemed plus a “make-whole” premium (as
described in the Indenture), together with any accrued and unpaid interest, if any, to, but excluding, the date of redemption.
Upon the occurrence of a change of control of the Company (as described in the Indenture), the Company must offer to
repurchase the Notes at 101 percent of the principal amount of the Notes, plus accrued and unpaid interest, if any, to, but excluding,
the date of repurchase.
93
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
Debt Commitments
The table below summarizes the Company's annual principal payments on its term loans under the 2016 Credit Agreement
for each of the next five years:
2018
2019
2020
2021
2022
$
$
34,750
34,750
34,750
364,625
12,000
WEX Latin America Securitization Facility
During the second quarter of 2017, WEX Latin America entered into a securitized debt agreement to sell certain unsecured
receivables associated with our salary payment card product to an investment fund managed by an unrelated third-party financial
institution. Under the terms of the agreement, the investment fund's purchase price incorporates a discount relative to the face
value of the transferred receivables. Additionally, the investment fund compensates WEX Latin America for continuing to service
these receivables through their duration, which on average is less than six months.
This securitization arrangement does not meet the derecognition conditions and accordingly WEX Latin America continues
to report the transferred receivables in our consolidated balance sheet with no change in the basis of accounting. Additionally, we
recognize the cash proceeds received from the investment fund and record offsetting securitized debt in our consolidated balance
sheet.
During 2017, WEX Latin America securitized approximately $49,100 of receivables to the investment fund for cash
proceeds of approximately $43,800. This $5,300 discount is recognized as operating interest in the Company's consolidated
statements of income using the effective interest method over the weighted average term of the salary advances. The Company
received approximately $3,000 of servicing fee income upon the sale of these receivables, which is recognized as other revenue
in our consolidated statements of income on a straight-line basis over the anticipated loan servicing period. As of December 31,
2017, approximately $19,000 of securitized debt is recognized on our consolidated balance sheet related to this securitization
arrangement.
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 2.53 percent and 2.65 percent as of December 31, 2017 and 2016,
respectively. The Company had securitized debt under this facility of approximately $90,000 and $78,600 as of December 31,
2017 and 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 are determined by management
on a monthly basis. The interest rate was 1.11 percent and 0.95 percent as of December 31, 2017 and 2016, respectively. The
Company had securitized debt under this facility of approximately $17,900 and $5,700 as of December 31, 2017 and 2016,
respectively.
94
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
Debt Issuance Cost
In the third quarter of 2016, the Company capitalized approximately $49,810 of debt issuance costs, including an original
issue discount of $12,000 associated with the 2016 Credit Agreement. These debt issuance costs are being amortized into interest
expense over the 2016 Credit Agreement's term using the effective interest method for the tranche A and B term loans and the
revolver. Additionally, the Company expensed approximately $5,056 during the third quarter of 2016 related to noncapitalizable
third-party costs incurred in connection with the modification of the certain 2014 Credit Agreement syndicate loans.
The Company recognized a loss of $2,018 associated with the early extinguishment of the 2014 Credit Agreement during
the year ended December 31, 2016, including a partial write-off of previously capitalized debt issuance costs and newly paid lender
fees associated with the extinguishment of syndicate borrowings.
In January 2016, the Company began to incur ticking fees for the debt financing commitment associated with the 2016
Credit Agreement in anticipation of the then pending acquisition of EFS. Pursuant to the terms set forth in the bank commitment
letter, the ticking fees were calculated based on the financing commitment in the aggregate amount of $2,125,000, and remained
in place until the closing of the EFS acquisition on July 1, 2016 (see Note 3, Business Acquisitions and Other Intangible Asset
Acquisitions). Total ticking fees expensed to financing interest were $30,045 for the year ended December 31, 2016. In conjunction
with the continued negotiation of the Company's new credit agreement, the amount of ticking fees to be paid at the time of closing
was reduced by $7,874 to $22,171. The excess ticking fees were reflected as a reduction of the $49,810 debt issuance costs related
to the 2016 Credit Agreement noted above and will be amortized over the 2016 Credit Agreement's term using the effective interest
method for the tranche A and B term loans and the revolver.
Other
As of December 31, 2017, WEX Bank pledged approximately $343,800 of fleet receivables held by WEX Bank to the
Federal Reserve Bank as collateral for potential borrowings, through the Federal Reserve Bank Discount Window. Amounts that
can be borrowed are based on the amount of collateral pledged to the Federal Reserve Bank and were $277,326 as of December 31,
2017. WEX Bank had no borrowings on this line of credit through the Federal Reserve Bank Discount Window as of December 31,
2017.
14.
Income Taxes
Income (losses) before income taxes consisted of the following:
United States
Foreign
Total
Year ended December 31,
2017
2016
2015
$
$
149,344
29,351
178,695
$
$
32,622
54,479
87,101
$
$
203,692
(18,784)
184,908
Income taxes from continuing operations consisted of the following for the years ended December 31:
United States
State
and Local
Foreign
Total
2017
Current
Deferred
Income taxes
2016
Current
Deferred
Income taxes
2015
Current
Deferred
Income taxes
2,253
$
(11,234) $
3,687
13,280
$
$
14,473
(2,934)
(1,232) $
21,565
$
3,033
$
(5,106) $
8,325
3,040
22,570
37,553
$
$
4,288
5,631
$
$
9,173
(3,919)
$
$
$
$
$
$
20,413
(888)
19,525
10,126
19,499
29,625
36,031
39,265
75,296
$
$
$
$
$
$
95
Table of Contents
2017 Tax Act
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
On December 22, 2017, the 2017 Tax Act was signed into law making significant changes to the Internal Revenue Code.
Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after
December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system and a one-
time transition tax on the mandatory deemed repatriation of foreign earnings. The Company has estimated the provision for income
taxes in accordance with the 2017 Tax Act and guidance available as of the date of this filing and as a result has recorded a
provisional amount of one-time income tax benefit of $60,636 in the fourth quarter of 2017, the period in which the legislation
was enacted.
The one-time income tax benefit includes:
•
•
•
a tax benefit of $62,488 related to the remeasurement of certain deferred tax assets and liabilities based on the tax rates
at which they are expected to reverse in the future;
as discussed in Note 15, Tax Receivable Agreement, for the year ended December 31, 2017, the amount due under our
tax receivable agreement decreased primarily as a result of the decline in the federal corporate income tax rate, resulting
in the Company recognizing non-taxable income of $15,259. The favorable tax effect of this permanent difference was
$5,726;
an income tax expense of $9,098 related to the one-time transition tax on the mandatory deemed repatriation of foreign
earnings; and
•
the reversal of net deferred tax liabilities of $1,520 related to the cumulative undistributed earnings.
The 2017 Tax Act also changes the taxation of foreign earnings, and companies generally will not be subject to United
States federal income taxes upon the receipt of dividends from foreign subsidiaries and will not be permitted foreign tax credits
related to such dividends. However, the 2017 Tax Act creates a new requirement to tax certain foreign earnings relating to GILTI.
Based on the recent FASB guidance, the Company can elect an accounting policy choice of either treating taxes due on future U.S.
inclusions in taxable income related to GILTI as a current period expense when incurred or factoring such amounts into the
Company’s measurement of its deferred taxes. Because of the complexity of the new GILTI tax rules, and anticipated guidance
from the U.S. Treasury, we will continue to evaluate this provision of the 2017 Tax Act. Therefore, we have not recorded any
deferred taxes related to GILTI and have not elected an accounting policy for GILTI at this time.
Undistributed earnings of certain foreign subsidiaries of the Company amounted to $58,675 and $25,824 at December 31,
2017 and 2016, respectively. These earnings are considered to be indefinitely reinvested. Beginning in 2018, except for GILTI,
the Company will no longer record United States federal income tax on its share of the income of its foreign subsidiaries, nor will
it record a benefit for foreign tax credits related to that income. Accordingly, the Company reversed net deferred tax liabilities
related to its cumulative undistributed foreign earnings and deferred tax assets for related foreign tax credits, resulting in a
corresponding net tax benefit in 2017. Upon distribution of these earnings in the form of dividends or otherwise, the Company
would be subject to withholding taxes payable, where applicable, to foreign countries, but would have no further federal income
tax liability.
On December 22, 2017, Staff Accounting Bulletin No. 118 was issued to address the application of U.S. GAAP in situations
when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable
detail to complete the accounting for certain income tax effects of the 2017 Tax Act. Accordingly, any subsequent adjustments to
the amount of one-time benefit of $60,636 will be recorded to current income tax provision during the measurement period which
is not expected to extend beyond one year from the enactment date. The effects of other provisions of the 2017 Tax Act are not
expected to have a material impact on our consolidated financial statements.
96
Table of Contents
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
The reconciliation between the income tax computed by applying the U.S. federal statutory rate and the reported effective
tax rate on income from continuing operations is as follows:
Federal statutory rate
State income taxes (net of federal income tax benefit)
Foreign income tax rate differential
Revaluation of deferred tax assets for foreign and state tax rate changes, net
Research and development credit
Release of tax reserves
Withholding taxes
2017 Tax Act
Domestic production exclusions
Change in valuation allowance
Nondeductible expenses
Incremental tax benefit from share-based compensation awards
Other
Effective tax rate
Year ended December 31,
2017
2016
2015
35.0%
2.0
(0.6)
0.4
—
—
0.2
(33.9)
—
5.8
0.9
(0.9)
2.0
10.9%
35.0%
35.0%
1.1
(4.4)
(0.9)
(0.5)
(4.9)
0.3
—
—
2.3
3.4
—
2.6
2.5
1.4
0.7
0.2
—
—
—
(1.8)
1.6
0.3
—
0.8
34.0%
40.7%
Our effective tax rate was 10.9 percent for 2017 as compared to 34.0 percent for 2016. The decline in our tax rate is
primarily due the reduction of our net deferred tax liabilities resulting from the change in federal corporate income tax rate to 21
percent from 35 percent effective January 1, 2018 as part of the 2017 Tax Act, partly offset by the increase in valuation allowance.
Our effective tax rate was 34.0 percent for 2016 as compared to 40.7 percent for 2015. The change in our tax rate reflects
a shift in jurisdictional profitability between 2015 and 2016. Increased profits in 2016 within tax jurisdictions with tax rates lower
than the United States resulted in a reduction to our effective tax rate. Our 2016 tax rate reflects the release of certain historical
foreign reserve positions in Australia, primarily driven by a lapse of statute, as well as a reduction in our domestic production
activities deduction as a result of lower taxable income in the United States.
The tax effects of temporary differences in the recognition of income and expense for tax and financial reporting purposes
that give rise to significant portions of the deferred tax assets and the deferred tax liabilities are presented below:
Deferred assets related to:
Reserve for credit losses
Tax credit carryforwards
Stock-based compensation, net
Net operating loss carry forwards
Accruals
Deferred financing costs
Other
Total
Deferred tax liabilities related to:
Other liabilities
Deferred financing costs
Property, equipment and capitalized software
Intangibles
Investment in partnership
Total
Valuation allowance
Deferred income taxes, net
97
December 31,
2017
2016
$
6,562
$
1,283
9,858
54,700
7,355
—
—
7,122
5,178
12,729
56,501
18,985
5,420
164
79,758
106,099
2,060
7,219
22,315
141,908
—
173,502
17,787
643
—
32,759
118,695
94,354
246,451
5,620
$
(111,531) $
(145,972)
Table of Contents
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
Net deferred tax (liabilities) assets by jurisdiction are as follows:
United States
Australia
United Kingdom
New Zealand
The Netherlands
Brazil
Canada
Deferred income taxes, net
December 31,
2017
2016
$
(116,229) $
(148,389)
(945)
7,315
188
249
(1,073)
(1,036)
(2,020)
6,474
183
206
(2,497)
71
$
(111,531) $
(145,972)
The 2017 decrease in our net deferred tax liabilities resulted from the change in federal corporate income tax rate to 21
percent from 35 percent effective January 1, 2018 as part of 2017 Tax Act, partly offset by current year activity. The Company
also recorded $34,462 as a reduction to net deferred tax liabilities related to the finalization of purchase price accounting of the
EFS acquisition.
At December 31, 2017, the Company changed the tax structure of EFS to convert the limited liability company from a
partnership to an entity disregarded as separate from its owners for federal tax purposes. Accordingly, investment in partnership
deferred tax liability was allocated to the deferred tax liabilities and assets related to the underlying assets, primarily intangibles.
The Company had approximately $294,318 of post apportionment state, $112,688 of federal and $77,622 of foreign net operating
loss carry forwards at December 31, 2017 and approximately $211,010 of post apportionment state, $103,739 of federal and
$54,062 of foreign net operating loss carry forwards at December 31, 2016. The U.S. losses expire at various times through 2037.
Foreign losses in Brazil and the UK have indefinite carry forward periods.
At December 31, 2017, the Company maintained valuation allowances for the following items: (i) acquired and certain
net operating losses in the UK (ii) Evolution1’s equity investment in its minority-owned subsidiaries, (iii) state tax credits, and
(iv) certain net operating losses and estimated non-deductible expenses. In each case, the Company has determined it is not likely
that the benefits will be utilized. No other valuation allowances have been established for any other deferred tax assets as the
Company believes it is more likely than not that its deferred tax assets will be utilized within the carry forward periods. During
2017 and 2016, the Company recorded tax expense of $12,167 and $2,000, respectively, for net increases to the valuation allowance.
The substantial majority of the 2017 increase in valuation allowance was related to the state net operating losses for our parent
company’s separate state filings.
At December 31, 2017, the Company had $4,859 of unrecognized tax benefits, net of federal income tax benefit, of which
$3,944, if fully recognized, would decrease our effective tax rate. No significant changes to the existing unrecognized tax benefits
are expected within the next 12 months. The Company recognizes interest and penalties related to unrecognized tax benefits in
income tax expense. The Company recorded tax expense of $12 and $263 for interest and penalties related to uncertain tax positions
for the years ended December 31, 2017 and December 21, 2015, respectively while a tax benefit of $2,251 was recorded for the
year ended December 21, 2016. As of December 31, 2017 and 2016, the Company had no material amounts accrued for interest
and penalties related to unrecognized tax benefits.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits excluding interest and
penalties is as follows:
Beginning balance
Increases related to prior year tax positions
Decreases related to prior year tax positions, due to foreign currency exchange
Decreases related to prior year tax positions
Settlements
Lapse of statute
Ending balance
98
Year ended December 31,
2017
2016
2015
$
4,960
$
4,776
$
1,332
—
—
(1,255)
—
4,960
—
(431)
—
(4,345)
4,856
431
(511)
—
—
—
$
5,037
$
4,960
$
4,776
Table of Contents
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
The Company’s primary tax jurisdictions are the United States, Australia and the United Kingdom. The Company or one
of its subsidiaries files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions, where
required. In the normal course of business, the Company is no longer subject to income tax examination after the Internal Revenue
Service statute of limitations of three years. The Internal Revenue Service is currently in the process of examining the Company’s
US federal income tax returns for 2010 through 2015. The Company is currently appealing adjustments proposed by the Internal
Revenue Service in connection with the ongoing audits. The Company is also subject to an ongoing examination in New Zealand
by Inland Revenue for calendar tax years 2013, 2014 and 2015, but no adjustments have been proposed, and the Company believes
its position does not warrant a reserve.
15.
Tax Receivable Agreement
As a consequence of the Company’s separation from its former parent company in 2005, the tax basis of the Company’s
net tangible and intangible assets increased (the “Tax Basis Increase”). The Tax Basis Increase reduced the amount of tax that the
Company would pay in the future to the extent the Company generated taxable income in sufficient amounts. The Company was
contractually obligated, pursuant to its 2005 Tax Receivable Agreement with the Company’s former parent company (Cendant
Corporation), to remit 85 percent of any such cash savings.
Pursuant to the Separation and Distribution Agreement dated as of July 27, 2006, by and among Cendant Corporation (now
known as Avis Budget Group, Inc. or “Avis”), Realogy Corporation (“Realogy”), Wyndham Worldwide Corporation (“Wyndham”)
and Travelport Inc., Realogy acquired from Cendant the right to receive 62.5 percent of the payments by WEX Inc. to Cendant
and Wyndham acquired from Cendant the right to receive 37.5 percent of the payments by WEX Inc. to Cendant under the 2005
Tax Receivable Agreement.
On June 26, 2009, the Company entered into a Tax Receivable Prepayment Agreement with Realogy, pursuant to which
the Company paid Realogy $51,000, net of bank fees and legal expenses, as prepayment in full to settle the remaining obligations
to Realogy under the 2005 Tax Receivable Agreement. In connection with the Tax Receivable Prepayment Agreement with Realogy,
the Company entered into a Ratification Agreement on June 26, 2009 (the “Ratification Agreement”) with Avis, Realogy and
Wyndham which amended the 2005 Tax Receivable Agreement to require the Company to pay 31.875 percent of the future tax
savings related to the Tax Basis Increase to Wyndham.
The estimated amount of future payments owed to Wyndham is reflected as amounts due under tax receivable agreement
on the consolidated balance sheets. The estimate is dependent upon future statutory tax rates and the Company’s ability to generate
sufficient taxable income adequate to cover the tax depreciation, amortization and interest expense associated with the Tax Basis
Increase. Estimated blended tax rates are impacted by a number of factors including tax law changes, statutory tax rate changes,
state apportionment and state filing combinations. The Company regularly reviews its estimated blended tax rates and projections
of future taxable earnings to determine whether changes in the estimated liability are required. Any changes to the estimated future
payments due to changes in estimated blended tax rates are recorded in the consolidated statements of income as non-cash
adjustments related to tax receivable agreement.
There has been a reassessment of the projected blended tax rates for each period presented. For the year ended December 31,
2017, the net future benefits decreased, primarily as a result of the decline in Federal statutory tax rate as part of the 2017 Tax Act,
which decreased the associated liability to Wyndham, resulting in a $15,259 offset to non-operating expense. In addition, the
liability decreased due to payments of $11,769 made during the year ended December 31, 2017. For the year ended December 31,
2016, the net future benefits increased, which increased the associated liability to Wyndham, resulting in a charge to non-operating
expense of $563. In addition, the liability decreased due to payments of $10,797 made during the year ended December 31, 2016.
For the year ended December 31, 2015, the net future benefits decreased, which decreased the associated liability to Wyndham,
resulting in a $2,145 offset to non-operating expense.
16.
Employee Benefit Plans
The Company sponsors a 401(k) retirement and savings plan. Eligible employees may participate in the plan immediately.
The Company’s employees who are at least 18 years of age, have worked at least 1,000 hours in the past year, and have completed
one year of service are eligible for Company matching contributions in the plan. The Company matches 100 percent of each
employee’s contributions up to a maximum of 6 percent of each employee’s eligible compensation. All contributions vest
immediately. WEX Inc. has the right to discontinue the plan at any time. Contributions to the plan are voluntary. The Company
contributed $6,710, $5,297 and $4,571 in matching funds to the plan for the years ended December 31, 2017, 2016 and 2015,
respectively.
99
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
During 2016, the Company acquired EFS, which as of the date of the acquisition had its own employee savings plan (“the
EFS Plan”). As of December 31, 2016, the EFS Plan was merged with the existing WEX plan, and the existing WEX plan recorded
a receivable for the amount of net assets available for benefits expected to be received from the EFS Plan. On February 1, 2017,
the WEX plan received net assets available for benefits totaling $15,159 in a transfer from the EFS Plan. On January 1, 2017, EFS
employees became eligible to participate in the existing WEX plan.
During 2014, the Company acquired Evolution1 which, as of the date of the acquisition, had its own employee savings
plan, (“the Evolution1 Plan”). As of December 31, 2014, the Evolution1 Plan was merged with the existing WEX plan, and the
existing plan recorded a receivable for the amount of net assets available for benefits it expected to receive from the Evolution1
Plan. Net assets available for benefits totaling $21,739 were received by the plan on January 2, 2015, in a transfer from the
Evolution1 Plan. On January 1, 2015, Evolution1 employees became eligible to participate in the existing WEX plan.
The Company also sponsors a defined contribution plan for certain employees designated by the Company. Participants
may elect to defer receipt of designated percentages or amounts of their compensation. The Company maintains a grantor’s trust
to hold the assets under the Company’s defined contribution plan. The obligation related to the defined contribution plan totaled
$6,798 and $5,673 at December 31, 2017 and 2016, respectively, and are included in other liabilities on the consolidated balance
sheets. The assets held in trust are designated as trading securities and, as such, these trading securities are to be recorded at fair
value with any changes recorded currently to earnings. The aggregate market value of the securities within the trust was $6,798
and $5,673 at December 31, 2017 and 2016, respectively, and are included in other assets on the consolidated balance sheets.
The Company has defined benefit pension plans in Germany and Norway. The total net unfunded status for the Company’s
foreign defined benefit pension plans was $291 and $5,979 as of December 31, 2017 and 2016, respectively, recognized as accrued
expenses in the consolidated balance sheets. The Company will measure these plan obligations on an annual basis. The change in
fair value to the defined benefit pension plans is recorded through the consolidated statements of income. The expense under each
of these defined benefit pension plans for 2017 and 2016 was not material to the consolidated financial statements.
17.
Fair Value
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis and
the related hierarchy levels:
Assets:
Mortgage-backed securities
Asset-backed securities
Municipal bonds
Fixed-income mutual fund
Available-for-sale securities
Executive deferred compensation plan trust (a)
Interest rate swaps (a)
Liabilities:
Interest rate swaps (b)
(a) The fair value is recorded in other assets.
(b) The fair value is recorded in other liabilities.
Fair Value
Hierarchy
December 31,
2017
2016
2
2
2
1
1
2
2
$
$
305
345
534
22,174
23,358
6,798
15,919
490
648
682
21,705
23,525
5,673
12,908
$
1,697
$
—
We did not have any transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the years ended
December 31, 2017 and 2016. See Note 1, Summary of Significant Accounting Policies for a description of the levels of the fair
value hierarchy.
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
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
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 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.
Notes Outstanding
On January 30, 2013, the Company completed an offering in an aggregate principal amount of $400,000 of 4.750 percent
senior notes due February 1, 2023, with interest payable semiannually. The Notes outstanding have a fair value of $410,000 and
$390,000 as of December 31, 2017 and December 31, 2016, respectively. The fair value is based on market rates for the issuance
of our debt. The Company determined the fair value of its Notes outstanding is classified as Level 2 in the fair value hierarchy.
2016 Credit Agreement
The Company determines the fair value of the amount outstanding under its 2016 Credit Agreement 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 December 31, 2017
and 2016, the carrying value of the 2016 Credit Agreement approximated its fair value.
18.
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 sought to represent a nationwide class of recipients of unauthorized
facsimile advertisements from the Company (collectively, the "Plaintiffs") and requested statutory damages for each facsimile
advertisement. The Plaintiffs further alleged 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, the Company’s wholly-owned subsidiary. On May 10, 2017, the parties agreed to a settlement
in principle to resolve the class claims, which was preliminarily approved by the court on October 6, 2017. The court entered its
final judgment approving the settlement agreement on January 19, 2018. The settlement amount is not material to the Company's
financial position, results of operations, cash flows or liquidity.
In addition, from time to time, we are subject to legal proceedings and claims in the ordinary course of business. As of
the date of this filing, the current estimate of a reasonably possible loss contingency from all legal proceedings is not material to
the Company's consolidated financial position, results of operations, cash flows or liquidity.
Extension of Credit to Customers
The Company had aggregate unused commitments of approximately $6,300,000 and $5,400,000 at December 31, 2017
and 2016, respectively, related to payment processing services, primarily related to commitments to extend credit to customers
and customers of strategic relationships as part of the Company’s established lending product agreements. Many of these
commitments are not expected to be used; therefore, total unused credit available to customers and customers of strategic
relationships does not represent future cash requirements. The Company can increase or decrease its customers’ credit lines at its
discretion at any time, subject to limited notice requirements in some instances. These amounts are not recorded on the consolidated
balance sheets.
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
Operating Leases
The Company leases office space and equipment under non-cancelable operating lease agreements that expire at various
dates through 2026. In addition, the Company rents office equipment under agreements that may be canceled at any time. Rental
expense related to office space, equipment, and vehicle leases amounted to $15,471, $15,104 and $11,310 for the years ended
December 31, 2017, 2016 and 2015, respectively. These amounts were included in occupancy and equipment on the consolidated
statements of income. The Company leases information technology hardware and software under agreements that may be terminated
by the Company at any time. Lease and rental expense related to information technology hardware and software leases totaled
$8,765, $12,875 and $11,288 for the years ended December 31, 2017, 2016 and 2015, respectively. These amounts were included
in technology leasing and support on the consolidated statements of income.
Future minimum lease payments under non-cancelable operating leases are as follows:
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
Minimum Volume Purchase Commitments
$
$
13,559
9,903
8,532
8,093
6,734
10,214
57,035
One of the Company's subsidiaries is required to purchase a minimum amount of fuel from suppliers on an annual basis
through 2024. Should the Company fail to meet these minimum volume commitments, a penalty will be assessed as defined under
the contracts. Starting in 2020, annual volume commitments reset based on prior year volume purchased. If the Company does
not purchase fuel under these commitments after December 31, 2017, it would incur total penalties through 2019 totaling $362,856.
During the year ended December 31, 2017, the Company incurred $1,217 in shortfall penalties under these contracts. During the
years ended December 31, 2016 and 2015, the Company did not incur material shortfall penalties under these contracts. The
Company considers the associated risk of loss to be remote based on current operations.
19.
Accumulated Other Comprehensive Loss
A reconciliation of accumulated other comprehensive loss for the years ended December 31, 2017 and 2016, is as follows:
Beginning balance
Other comprehensive loss
Ending balance
2017
2016
Unrealized
Losses on
Available-
for-Sale
Securities
Foreign
Currency
Items
Unrealized
Losses on
Available-
for-Sale
Securities
Foreign
Currency
Items
$
$
(463) $ (122,376) $
(212) $
(103,239)
(5)
32,049
(251)
(19,137)
(468) $
(90,327) $
(463) $
(122,376)
No significant amounts were reclassified from accumulated other comprehensive loss in the periods presented.
The change in foreign currency items is primarily due to the foreign currency translation of non-cash assets such as
goodwill and other intangible assets related to the Company's foreign subsidiaries. The total tax effect on foreign currency translation
adjustments was $4,851 and $5,416 as of December 31, 2017 and 2016, respectively.
20.
Dividend Restrictions
The Company has certain restrictions on the dividends it may pay under its revolving credit agreement, including pro
forma compliance with a ratio of consolidated funded indebtedness to consolidated EBITDA of 2.50:1.00 for the most recent
period of four fiscal quarters. However, if the Company's leverage ratio does not exceed 5.25 through September 30, 2017, 5.00
through September 30, 2018, 4.50 through September 30, 2019, or 4.00 from December 31, 2019 and thereafter, after execution
102
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
of a restricted payment, the Company may pay $50,000 per annum for restricted payments, including dividends, of which 100%
of unused amounts may be carried over into subsequent years. The Company has not declared any dividends on its common stock
since it commenced trading on the NYSE on February 16, 2005.
Dividends paid by WEX Bank have provided a substantial part of the Company’s operating funds and for the foreseeable
future it is anticipated that dividends paid by WEX Bank will continue to be a source of operating funds to the Company. Capital
adequacy requirements serve to limit the amount of dividends that may be paid by WEX Bank. WEX Bank is chartered under the
laws of the State of Utah and the FDIC insures its deposits. Under Utah law, WEX Bank may only pay a dividend out of net profits
after it has (i) provided for all expenses, losses, interest and taxes accrued or due from WEX Bank and (ii) transferred to a surplus
fund 10 percent of its net profits before dividends for the period covered by the dividend, until the surplus reaches 100 percent of
its capital stock. For purposes of these Utah dividend limitations, WEX Bank’s capital stock is $5,250 and its capital surplus
exceeds 100 percent of capital stock.
Under FDIC regulations, WEX Bank may not pay any dividend if, following the payment of the dividend, WEX Bank
would be “undercapitalized,” as defined under the Federal Deposit Insurance Act and applicable regulations. The FDIC also has
the authority to prohibit WEX Bank from engaging in business practices that the FDIC considers to be unsafe or unsound, which,
depending on the financial condition of WEX Bank, could include the payment of dividends.
WEX Bank complied with the aforementioned dividend restrictions for each of the years ended December 31, 2017, 2016
and 2015.
21.
Stock-Based Compensation
In 2010, the Company adopted the WEX Inc. 2010 Equity Incentive Plan (the “Plan”), which replaced the Company’s
2005 Equity and Incentive Plan. In May 2015, the Company adopted the 2015 Section 162(m) Performance Incentive Plan
(collectively the “Plans”). The Plans, which are stockholder-approved, permit the grant of stock options, stock appreciation rights,
restricted stock, restricted stock units and other stock-based or cash-based awards to non-employee directors, officers, employees,
advisors or consultants. The Plans permit the Company to grant a total number of shares which is the sum of; (i) 3,800 shares of
common stock; (ii) plus such additional number of shares of common stock (up to 1,596) that were reserved for issuance under
the Company’s Amended and Restated 2005 Equity and Incentive Plan (the “Prior Plan”) that remained available for grant under
the Prior Plan at the time the 2010 Plan was adopted. There were 1,617,334 units of common stock available for grant for future
equity-incentive compensation awards under the Plan at December 31, 2017.
On December 31, 2017, the Company had four stock-based compensation award types, which are described below. The
compensation cost that has been charged against income for these programs totals $30,487, $19,742 and $12,420 for 2017, 2016
and 2015, respectively. The associated tax benefit related to these costs was $7,347, $7,200 and $4,542, for 2017, 2016 and 2015,
respectively.
Restricted Stock Units
The Company periodically grants restricted stock units (“RSUs”), which represent a right to receive a specific number
of shares of the Company's common stock at a specified date, to non-employee directors and certain employees. RSUs granted to
non-employee directors vest 12 months from the date of grant, or upon termination of board service if the director elects to defer
receipt. RSUs issued to certain employees generally vest evenly over up to three years and provide for accelerated vesting if there
is a change of control (as defined in the Plan). The fair value of each RSU award is based on the closing market price of the
Company’s stock on the day of grant as reported by the New York Stock Exchange (“NYSE”).
The following is a summary of RSU activity during the year ended December 31, 2017:
Restricted Stock Units
Outstanding at January 1, 2017
Granted
Shares released, including 26 shares withheld for tax (a)
Forfeited
Outstanding at December 31, 2017
103
Weighted-
Average Grant-
Date Fair
Value
Units
$
206
111
(86)
(58)
173
$
88.78
105.64
84.51
98.98
98.31
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(a) The Company withholds shares of common stock to pay the minimum required statutory taxes due upon RSU vesting. Cash is then remitted by the Company
to the appropriate taxing authority.
As of December 31, 2017, there was $9,613 of total unrecognized compensation cost related to RSUs. That cost is expected
to be recognized over a weighted-average period of 1.3 years. The total grant-date fair value of RSUs granted was $11,700, $18,826
and $7,846 during 2017, 2016 and 2015, respectively. The total fair value of RSUs that vested during 2017, 2016 and 2015 was
$7,310, $3,648 and $4,521, respectively.
Performance-Based Restricted Stock Units
The Company periodically grants performance-based restricted stock units (“PBRSUs”) to employees. A PBRSU is a
right to receive stock based on the achievement of both performance goals and continued employment during the vesting period.
In a PBRSU, the number of shares earned varies based upon meeting certain performance goals. PBRSU awards generally have
performance goals spanning one to three years, depending on the nature of the performance goal. The fair value of each PBRSU
award is based on the closing market price of the Company’s stock on the grant date as reported by the NYSE.
The following is a summary of PBRSU activity during the year ended December 31, 2017:
Performance-Based Restricted Stock Units
Outstanding at January 1, 2017
Granted
Forfeited
Vested, including 64 shares withheld for tax (a)
Performance adjustment
Outstanding at December 31, 2017
Weighted-
Average
Grant-Date
Fair Value
Shares
$
310
185
(27)
(174)
20
314
$
84.83
105.15
85.31
91.92
89.85
93.18
(a) The Company withholds shares of common stock to pay the minimum required statutory taxes due upon PBRSU vesting. Cash is then remitted by the Company
to the appropriate taxing authority.
As of December 31, 2017, there was $13,430 of unrecognized compensation cost related to the PBRSUs that is expected
to be recognized over a weighted-average period of 1.9 years. The total grant-date fair value of PBRSUs granted during 2017,
2016 and 2015 was $15,014, $15,921 and $6,860, respectively. The total fair value of PBRSUs that vested during 2017, 2016 and
2015 was $15,948, $4,858 and $2,035, respectively.
Stock Options
Market Performance-Based Stock Options
In May 2017, the Company granted market 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 Hurdles are not met by the end of a defined measurement period, these options will be canceled.
The grant date fair value of these 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.
The table below summarizes the assumptions used to calculate the fair value:
Exercise price
Expected stock price volatility
Risk-free interest rate
Weighted average fair value of performance options granted
$
$
99.69
31.14%
2.18%
28.69
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
The Company will expense these 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
Stock options granted to certain officers and employees under the Plan 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.
Based on the Company's lack of historical option exercise experience and granting of stock options with "plain vanilla”
characteristics, the Company uses the simplified method to estimate the expected term of its employee stock options. The fair
value of each option award is estimated on the grant date using the following assumptions and a Black-Scholes-Merton option-
pricing model. The expected term assumption as it relates to the valuation of the options represents the period of time that options
granted are expected to be outstanding. The Company also estimates expected volatilities that are based on implied volatilities
from traded options on the Company's stock, historical volatility of the Company’s stock, and other factors. The option-pricing
model includes a risk-free interest rate for the period matching the expected term of the option and is based on the U.S. Treasury
yield curve in effect at the time of the grant. The dividend yield used in the option-pricing model is the calculated yield on the
Company’s stock at the time of the grant.
The table below summarizes the assumptions used to calculate the fair value by year of grant:
Weighted average expected life (in years)
Weighted average exercise price
Weighted average volatility
Weighted average risk-free rate
Weighted average fair value
2017
2016
2015
6.0
6.0
6.0
104.95
$
77.20
$
103.40
30.67%
2.13%
31.93%
1.62%
35.58
$
26.14
$
30.46%
1.73%
33.93
$
$
The following is a summary of all stock option activity during the year ended December 31, 2017:
Stock Options
Outstanding at January 1, 2017
Granted
Exercised
Forfeited
Outstanding at December 31, 2017
Exercisable on December 31, 2017
Vested and expected to vest at December 31, 2017
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Remaining
Contractual
Term (in
years)
Aggregate
Intrinsic
Value
180
682
(12)
(16)
834
66
760
$
$
$
$
81.90
100.72
59.43
78.96
97.70
88.90
98.45
9.07
7.77
9.18
$
$
$
36,302
3,452
32,529
As of December 31, 2017, there was $17,077 of total unrecognized compensation cost related to options. That cost is
expected to be recognized over a weighted-average period of 1.2 years. The total intrinsic value of options exercised during the
years ended December 31, 2017, 2016 and 2015 was $642, $1,712 and $216, respectively. The total grant-date fair value of options
granted during 2017, 2016 and 2015 was $20,516, $3,297, and $1,855, respectively.
Deferred Stock Units
Non-employee directors may elect to defer their cash fees and RSUs in the form of deferred stock units ("DSUs"). The
Company previously granted non-employee directors fully vested RSUs. These awards were fully vested upon grant and are
distributed as common stock on the date which is 200 days immediately following the date upon which such director’s service as
a member of the Company’s Board of Directors terminates for any reason. There were approximately 94 and 101 DSUs outstanding
as of December 31, 2017 and 2016, respectively. Unvested DSUs as of December 31, 2017 and 2016 were not material.
105
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
22.
Impairment and Restructuring Activities
Impairment Charges and Asset Write-Offs
Following the acquisition of AOC in the fourth quarter of 2017, the Company reevaluated software currently under
development for payment processing within our Travel and Corporate Solutions segment. From this, we determined the developed
technology obtained in the AOC acquisition more closely aligns with our technological strategy. As result, approximately $22,000
of software under development was determined to have no future benefit and therefore impaired during the year ended December
31, 2017. We also impaired approximately $6,000 of computer software within the Fleet Solutions segment in 2017 as a result of
our ongoing platform consolidation strategy, designed to ensure we continue to deliver superior technology to our customers.
During the year ended December 31, 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
approximately $16,000 of prepaid services had no future benefit and were therefore written off within the Fleet Solutions segment
during the same period.
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 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 programs. The Company has determined the amount of expenses related to these initiatives is
probable and reasonably estimable. As such, it has recorded the impact on the consolidated statements of income and in accrued
expenses on the consolidated balance sheets. Restructuring charges incurred to date under these initiatives were $24,479 as of
December 31, 2017.
The balances under these initiatives are expected to be paid through 2018. Based on current plans, which are subject to
change, the amount of additional restructuring costs that the Company expects to incur is immaterial.
The following table presents the Company's 2015 Restructuring Initiative liability:
Balance, beginning of year
Restructuring charges1
Reserve release
Cash paid
Other2
Impact of foreign currency translation
Balance, end of year
1 Primarily consists of employee costs.
2 In 2017, the liability was transferred to the 2016 Restructuring Initiative.
Years Ended December 31,
2017
2016
$
$
5,231
$
2,642
(77)
(4,020)
(1,158)
62
2,680
$
7,249
2,182
(816)
(3,921)
(166)
703
5,231
106
—
3,506
—
(4)
166
(6)
3,662
—
2,614
—
(850)
—
—
Years Ended December 31,
2017
2016
1,764
$
6,121
(242)
(2,650)
107
(7)
5,093
$
1,764
Table of Contents
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
The following table presents the Company's 2016 Restructuring Initiative liability:
Balance, beginning of year
Restructuring charges1
Reserve release
Cash paid
Other2
Impact of foreign currency translation
Balance, end of year
Years Ended December 31,
2017
2016
$
$
3,662
$
285
(1,590)
(3,479)
1,158
702
738
$
1 Primarily consists of employee costs.
2 In 2017, the liability was transferred from the 2015 Restructuring Initiative.
The following table presents the Company's Acquisition Integration Restructuring Initiative liability:
Balance, beginning of year
Restructuring charges1
Reserve release
Cash paid
Other
Impact of foreign currency translation
Balance, end of year
1 Primarily consists of office closure costs.
The following table presents the Company's total restructuring liability:
$
$
Balance, beginning of year
Restructuring charges
Reserve release
Cash paid
Other
Impact of foreign currency translation
Balance, end of year
Years Ended December 31,
2017
2016
$
10,657
$
9,048
(1,909)
(10,149)
107
757
7,249
8,302
(816)
(4,775)
—
697
$
8,511
$
10,657
107
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
23.
Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available
and is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess
performance. The Company's CODM is its Chief Executive Officer. The operating segments are aggregated into the three reportable
segments described below.
• Fleet Solutions provides customers with payment and transaction processing services specifically designed for the needs
of commercial and government fleets. This segment also provides information management services to these fleet
customers.
•
Travel and Corporate Solutions focuses on the complex payment environment of business-to-business payments,
providing customers with payment processing solutions for their corporate payment and transaction monitoring needs.
• Health and Employee Benefit Solutions provides healthcare payment products and SaaS consumer directed platforms, as
well as payroll related benefits to customers.
During the third quarter of 2017, the Company revised its operating segment measurement from adjusted pre-tax income
to adjusted operating income. The Company no longer allocates financing interest expense to our operating segments as management
believes this item can obscure underlying business trends. As such, we believe adjusted operating income reflects an enhanced
measurement of segment profitability. Segment results for the years ended December 31, 2016 and 2015 have been revised to
reflect this change in operating segment measurement.
Adjusted operating income adjusts operating income to exclude: (i) acquisition and divestiture related items (including
acquisition-related intangible amortization); (ii) stock-based compensation; (iii) restructuring and other costs; (iv) gains on
divestitures; (v) debt restructuring costs (vi) reserves for regulatory penalties, (vii) impairment charges and asset write-offs. For
the year ended December 31, 2016, adjusted operating income excluded a vendor settlement.
The accounting policies of the reportable segments are generally the same as those described in the summary of significant
accounting policies. Assets are not allocated to the segments for internal reporting purposes.
The following tables present the Company’s reportable segment results on an adjusted operating income basis for the
years ended December 31, 2017, 2016 and 2015:
Year Ended December 31, 2017
Fleet Solutions
Travel and
Corporate Solutions
Health and
Employee Benefit
Solutions
Total
Payment processing revenue
Account servicing revenue
Finance fee revenue
Other revenue
Total revenue
Depreciation and amortization
Adjusted operating income
$
$
$
$
360,158
$
158,660
$
50,348
$
165,083
159,336
138,389
7,531
760
57,096
103,956
27,486
21,745
569,166
276,570
187,582
217,230
822,966
$
224,047
$
203,535
$
1,250,548
143,301
297,322
$
$
17,703
117,432
$
$
42,720
50,718
$
$
203,724
465,472
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
Year Ended December 31, 2016
Fleet Solutions
Travel and
Corporate Solutions
Health and
Employee Benefit
Solutions
Total
Payment processing revenue
Account servicing revenue
Finance fee revenue
Other revenue
Total revenue
Depreciation and amortization
Adjusted operating income
Year Ended December 31, 2015
Payment processing revenue
Account servicing revenue
Finance fee revenue
Other revenue
Total revenue
Depreciation and amortization
Adjusted operating income
$
$
$
$
$
$
$
$
297,900
$
175,762
$
46,957
$
127,106
124,725
92,330
1,247
643
37,595
82,660
13,572
17,963
520,619
211,013
138,940
147,888
642,061
$
215,247
$
161,152
$
1,018,460
100,860
215,424
$
$
6,187
104,531
$
$
34,604
43,118
$
$
141,651
363,073
Fleet Solutions
Travel and Corporate
Solutions
Health and
Employee Benefit
Solutions
Total
305,855
$
151,311
$
38,703
$
100,850
83,554
57,419
1,930
326
41,852
53,912
5,113
13,812
547,678
$
195,419
$
111,540
$
54,453
186,731
$
$
2,999
87,380
$
$
25,625
28,576
$
$
495,869
156,692
88,993
113,083
854,637
83,077
302,687
No one customer accounted for more than 10 percent of the total consolidated revenue in 2017, 2016 or 2015.
The following table presents the Company's interest income by segment for the years ended December 31, 2017, 2016
and 2015:
Fleet Solutions
Travel and Corporate Solutions
Health and Employee Benefit Solutions
Total interest income
2017
2016
2015
$
$
3,681
$
3,053
$
717
27,507
498
13,581
31,905
$
17,132
$
1,704
348
5,116
7,168
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
The following table reconciles adjusted operating income to income before income taxes:
Fleet Solutions
Travel and Corporate Solutions
Health and Employee Benefit Solutions
Adjusted operating income
Acquisition-related intangible amortization
Other acquisition and divestiture related items
Stock-based compensation
Restructuring and other costs
Impairment charges and asset write-offs
Gain on divestiture
Vendor settlement
Debt restructuring
Regulatory reserve
Operating income
Financing interest expense
Net foreign currency gain (loss)
Net unrealized gains on interest rate swap agreements
Net realized and unrealized gains on fuel price derivatives
Non-cash adjustments related to tax receivable agreement
Income before income taxes
Geographic Data
Year ended December 31,
2017
2016
2015
$
$
297,322
$
215,424
$
186,731
117,432
50,718
104,531
43,118
87,380
28,576
465,472
$
363,073
$
302,687
(153,810)
(5,000)
(30,487)
(11,129)
(44,171)
20,958
—
(2,563)
—
(97,829)
(20,879)
(19,742)
(13,995)
—
—
(15,500)
—
—
(47,792)
(4,137)
(12,420)
(9,010)
—
1,215
—
—
(1,750)
$
239,270
$
195,128
$
228,793
(107,067)
(113,418)
29,919
1,314
—
15,259
(7,665)
12,908
711
(563)
(46,189)
(5,689)
—
5,848
2,145
$
178,695
$
87,101
$
184,908
Revenue by principal geographic area, based on the country in which the sale originated, was as follows:
United States
Australia
Other international1
Total revenues
Year ended December 31,
2017
2016
2015
$
1,037,322
$
839,917
$
691,088
62,030
151,196
53,068
125,475
$
1,250,548
$
1,018,460
$
50,387
113,162
854,637
1 No single country, other than the United States and Australia, made up more than 5 percent of total revenues for any of the years presented.
Net property, equipment and capitalized software are subject to geographic risks because they are generally difficult to
move and relatively illiquid. Net property, equipment and capitalized software by principal geographic area was as follows:
United States
Australia
Other international
Net property, equipment and capitalized software
24.
Supplementary Regulatory Capital Disclosure
Year ended December 31,
2017
2016
2015
$
$
148,490
$
146,165
$
5,432
9,986
5,493
15,620
79,265
5,445
53,875
163,908
$
167,278
$
138,585
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,
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
and possible additional 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, 2017 and 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.
The following table presents WEX Bank's actual and regulatory minimum capital amounts and ratios:
Minimum for
Capital
Adequacy
Purposes
Amount
Ratio
Minimum to Be
Well
Capitalized
Under Prompt
Corrective
Action
Provisions
Amount
Actual Amount
Ratio
December 31, 2017
Total Capital to risk-weighted assets
Tier 1 Capital to average assets
Common equity to risk-weighted assets
Tier 1 Capital to risk-weighted assets
December 31, 2016
Total Capital to risk-weighted assets
Tier 1 Capital to average assets
Common equity to risk-weighted assets
Tier 1 Capital to risk-weighted assets
$
$
$
$
316,129
304,555
304,555
304,555
228,402
214,847
214,847
214,847
25.
Subsequent Event
13.38 % $
12.50 %
12.89 %
12.89 % $
188,991
97,452
106,308
141,743
8.00 % $
4.00 %
4.50 %
6.00 % $
12.59 % $
145,182
8.00 % $
11.10 %
11.84 %
77,413
81,665
4.00 %
4.50 %
11.84 % $
108,887
6.00 % $
236,239
121,815
153,555
188,991
181,477
96,767
117,961
145,183
Ratio
10.00 %
5.00 %
6.50 %
8.00 %
10.00 %
5.00 %
6.50 %
8.00 %
On January 17, 2018, the Company further repriced the secured term loans under the 2016 Credit Agreement, which
reduced the applicable interest rate margin for the Company’s tranche B term loans by 50 basis points for both LIBOR borrowings
and base rate borrowings, increased the outstanding amounts on these tranche B term loans from $1.182 billion to $1.335 billion,
and made certain other changes to the 2016 Credit Agreement, including increasing the maximum consolidated leverage ratio for
the period of December 31, 2018 through September 30, 2019 and upon the occurrence of an acquisition meeting certain specified
criteria, permitting the incurrence of unsecured indebtedness as long as the Company is in pro forma compliance with the financial
covenants, resetting the six month soft call 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 LIBOR borrowings and 1.25% for base rate borrowings. The Company incurred approximately $6 million of expenses upon
the closing of this repricing.
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WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
26. Quarterly Financial Results (Unaudited)
Summarized quarterly results for the years ended December 31, 2017 and 2016, are as follows:
2017
Total revenues
Operating income
Net earnings attributable to shareholders(a)
Earnings per share:(a)
Basic
Diluted
2016
Total revenues(b)
Operating income(b)
Net earnings attributable to shareholders(b)
Earnings per share:(b)
Basic
Diluted
Three months ended
March 31
June 30
September 30
December 31
$
$
$
$
$
$
$
$
$
$
291,357
60,752
29,401
0.69
0.68
205,928
41,127
23,086
0.60
0.59
$
$
$
$
$
$
$
$
$
$
303,884
47,581
17,090
0.40
0.40
233,936
51,635
12,567
0.32
0.32
$
$
$
$
$
$
$
$
$
$
324,002
63,723
33,971
0.79
0.79
287,756
54,568
19,696
0.46
0.46
$
$
$
$
$
$
$
$
$
$
331,305
67,214
79,804
1.86
1.85
290,840
47,798
5,288
0.12
0.12
(a) The three months ended December 31, 2017 includes a tax benefit of approximately $60 million as a result of the 2017 Tax Act.
(b)
Results for three months ended September 30, 2016 and December 31, 2016 include the operations of EFS and the issuance of approximately 4,000 shares of
common stock for the acquisition of EFS on July 1, 2016.
Basic and diluted net income per share are computed independently for each quarter presented. Therefore, the sum of
quarterly basic and diluted net income per share information may not equal annual basic and diluted net income per share.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The principal executive officer and principal financial officer of WEX Inc. evaluated the effectiveness of the Company’s
disclosure controls and procedures as of the end of the period covered by this report. “Disclosure controls and procedures” are
controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company
in the reports that it files or submits under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s
rules and forms, is recorded, processed, summarized and reported, and is accumulated and communicated to the company’s
management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure. Based on their evaluation, the principal executive officer and principal financial officer of WEX
Inc. concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2017.
Management’s Annual Report on Internal Control Over Financial Reporting
WEX Inc.'s management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Exchange Act as a process designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control
over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions and
disposition of assets; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial
statements; providing reasonable assurance that receipts and expenditures are made only in accordance with management and
Board authorizations; and providing reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations,
internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements
would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures
may deteriorate.
Under the supervision and with the participation of management, including the principal executive officer and principal
financial and accounting officer, an evaluation was conducted of the effectiveness of the internal control over financial reporting
based on the framework in Internal Control - Integrated Framework (2013) issued by The Committee of Sponsoring Organizations
of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework (2013),
management concluded that WEX Inc.’s internal control over financial reporting was effective as of December 31, 2017. The
effectiveness of our internal control over financial reporting as of December 31, 2017, has been audited by Deloitte & Touche
LLP, an independent registered public accounting firm, as stated in their attestation report which is included herein.
Changes in Internal Control Over Financial Reporting
In the course of completing its assessment of internal control over financial reporting as of December 31, 2016,
management identified a number of deficiencies related to the design and operating effectiveness of information technology (“IT”)
general controls for certain information systems that comprise part of the Company’s system of internal control over financial
reporting and are relevant to the preparation of its consolidated financial statements (such information technology systems are
referred to as the “affected IT systems”). These deficiencies involved user access controls and program change management
controls. These controls are intended to ensure that access to financial applications and data is adequately restricted to appropriate
personnel, and that changes affecting the financial applications and underlying account records are made by only authorized
individuals.
As a result of the deficiencies identified as of December 31, 2016, management concluded that, as of December 31, 2016,
there was a material weakness in internal control over financial reporting related to information technology general controls in
the areas of user access and program change management for the affected IT systems. A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
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Over the course of 2017, we actively engaged in the implementation of a remediation plan to ensure that controls
contributing to this material weakness were redesigned appropriately and would operate effectively in the future. The remediation
actions taken included the following:
•
Improving the design, operation and monitoring of control activities and procedures associated with user and administrator
access to the affected IT systems, through the implementation of preventive and detective control activities;
• Redesigning and implementing detective monitoring controls within IT to directly mitigate the risks;
• Enhancing resources in the functional areas that support and monitor our IT controls; and
• Exercising direct performance of the controls related to effected IT systems.
Based upon the actions taken during 2017, which were substantially completed in the fourth quarter of 2017, and our
testing and evaluation of the effectiveness of our internal control over financial reporting, we have concluded that the material
weakness in internal control over financial reporting related to information technology general controls no longer existed as of
December 31, 2017.
Other than the changes discussed above, there has been no change in our internal control over financial reporting during
the quarter ended December 31, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of WEX Inc.
South Portland, Maine
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of WEX Inc. and subsidiaries (the “Company”) as of December 31,
2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated
Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report
dated March 1, 2018, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on
Internal Control Over Financial Reporting appearing at Item 9A. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 1, 2018
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ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
See the information in the Company’s proxy statement for the 2018 Annual Meeting of Stockholders captioned “Members
of the Board of Directors,” “Non-Director Members of the Executive Management Team,” “Section 16(a) Beneficial Ownership
Reporting Compliance,” “Director Nominations,” “Communications with the Board of Directors,” “Board and Committee
Meetings” and “Corporate Governance Information,” which information is incorporated herein by reference.
Website Availability of Corporate Governance and Other Documents
The following documents are available on the Corporate Governance page of the investor relations section of the Company’s
website, www.wexinc.com: (1) the Code of Business Conduct and Ethics, which covers all employees, officers and our board of
directors, (2) the Company’s Corporate Governance Guidelines and (3) key Board Committee charters, including charters for the
Audit, Corporate Governance and Compensation Committees. Stockholders also may obtain printed copies of these documents
by submitting a written request to Investor Relations, WEX Inc., 97 Darling Avenue, South Portland, Maine USA 04106. The
Company intends to post on its website, www.wexinc.com, all disclosures that are required by law or New York Stock Exchange
listing standards concerning any amendments to, or waivers from, the Code of Business Conduct and Ethics.
ITEM 11. EXECUTIVE COMPENSATION
See the information in the Company’s proxy statement for the 2018 Annual Meeting of Stockholders captioned “Executive
Compensation” and the related subsections, “Director Compensation” and “Compensation Committee Interlocks and Insider
Participation,” which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
See the information in the Company’s proxy statement for the 2018 Annual Meeting of Stockholders captioned “Securities
Authorized for Issuance Under Equity Compensation Plans” and “Principal Stockholders” and the related subsections, which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
See the information in the Company’s proxy statement for the 2018 Annual Meeting of Stockholders captioned “Director
Independence” and “Certain Relationships and Related Transactions,” which information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
See the section of the Company’s proxy statement for the 2018 Annual Meeting of Stockholders captioned “Auditor
Selection and Fees,” which information is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
1. Financial Statements (see Index to Consolidated Financial Statements on page 63).
2. The exhibit index attached to this Annual Report on Form 10-K is hereby incorporated by reference.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
Exhibit
No.
EXHIBIT INDEX
Description
2.1
3.1
3.2
3.3
4.1
4.2
4.3
10.1
10.2
10.3
10.4
Unit Purchase Agreement, dated October 18, 2015, by and among WEX Inc., Mustang HoldCo 1 LLC, Warburg Pincus Private
Equity (E&P) XI - B, L.P., Warburg Pincus Private Equity XI C, L.P., WP XI Partners, L.P., Warburg Pincus Private Equity XI B,
L.P., WP Mustang Co Invest B, L.P., WP Mustang Co Invest C L.P., Warburg Pincus XI (E&P) Partners B, L.P., Warburg Pincus
(E&P) XI, L.P., WP Mustang Topco LLC and Warburg Pincus Private Equity XI (Lexington), LLC (incorporated by reference to
Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on October 19, 2015, File No. 001-32426)
Certificate of Incorporation (incorporated by reference to Exhibit No. 3.1 to our Current Report on Form 8-K filed with the SEC on
March 1, 2005, File No. 001-32426)
Certificate of Ownership and Merger merging WEX Transitory Corporation with and into Wright Express Corporation
(incorporated by reference to Exhibit No. 3.1 to our Current Report on Form 8-K filed with the SEC on October 30, 2012, File No.
001-32426)
Amended and Restated By-Laws of WEX Inc. (incorporated by reference to Exhibit No. 3.1 to our Current Report on Form 8-K
filed with the SEC on March 18, 2014, File No. 001-32426)
Indenture, dated as of January 30, 2013, among WEX Inc., the Guarantors named therein, and The Bank of New York Mellon Trust
Company, N.A. (incorporated by reference to Exhibit No. 4.1 to our Current Report on Form 8-K filed with the SEC on February
1, 2013, File No. 001-32426)
Supplemental Indenture, dated as of July 1, 2016 to the Indenture, dated as of January 30, 2013 among WEX Inc., the additional
subsidiary guarantors thereto and The Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit No.
4.1 to our Current Report on Form 8-K filed with the SEC on July 1, 2016, File No. 001-32426)
U.S. Security Agreement, made by WEX Inc., and the certain of its subsidiaries, as pledgors, assignors and debtors dated as of July
1, 2016, in favor of Bank of America, as collateral agent for the Lenders (incorporated by reference to Exhibit No. 4.2 to our
Current Report on Form 8-K filed with the SEC on July 1, 2016, File No. 001-32426)
Form of director indemnification agreement (incorporated by reference to Exhibit No. 10.1 to our Current Report on Form 8-K
filed with the SEC on June 8, 2009, File No. 001-32426)
Tax Receivable Agreement, dated as of February 22, 2005, by and between Cendant Corporation and Wright Express Corporation
(incorporated by reference to Exhibit No. 10.3 to our Current Report on Form 8-K filed with the SEC on March 1, 2005, File No.
001-32426)
Tax Receivable Prepayment Agreement dated June 26, 2009 by and between Wright Express Corporation and Realogy Corporation
(incorporated by reference to Exhibit No. 10.1 to our Current Report on Form 8-K filed with the SEC on July 2, 2009, File No.
001-32426)
Ratification Agreement dated June 26, 2009 by and among Wright Express Corporation, Realogy Corporation, Wyndham
Worldwide Corporation and Avis Budget Group, Inc. (incorporated by reference to Exhibit No. 10.2 to our Current Report on Form
8-K filed with the SEC on July 2, 2009, File No. 001-32426)
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Table of Contents
10.5
10.6
10.7
10.8
10.9
10.10
†10.11
†10.12
†10.13
†10.14
† 10.15
† 10.16
† 10.17
† 10.18
† 10.19
† 10.20
† 10.21
Guarantee, dated as of June 26, 2009, by Apollo Investment Fund VI, L.P., Apollo Overseas Partners VI, L.P., Apollo Overseas
Partners (Delaware) VI, L.P., Apollo Overseas Partners (Delaware892) VI, L.P. and Apollo Overseas Partners (Germany) VI, L.P.
in favor of Wright Express Corporation (incorporated by reference to Exhibit No. 10.3 to our Quarterly Report on Form 10-Q filed
with the SEC on July 30, 2009, File No. 001-324426)
Investors Rights Agreement, dated as of July 1, 2016, by and among WEX Inc., Mustang HoldCo 1 LLC, Warburg Pincus Private
Equity (E&P) XI B, L.P., Warburg Pincus Private Equity XI – C, L.P., WP XI Partners, L.P., Warburg Pincus Private Equity XI –
B, L.P., WP Mustang Co-Invest – B L.P., WP Mustang Co-Invest – C L.P., Warburg Pincus XI (E&P) Partners – B, L.P., Warburg
Pincus (E&P) XI, L.P., WP (Lexington) Holdings II, L.P., Warburg Pincus Private Equity (Lexington) XI – A, L.P., Warburg Pincus
XI (Lexington) Partners – A , L.P., WP Mustang Co-Invest LLC and the other investors party thereto (incorporated by reference to
Exhibit No. 10.1 to our Current Report on Form 8-K filed with the SEC on July 1, 2016, File No. 001-32426)
Credit Agreement among WEX Inc., certain of its subsidiaries as borrowers, WEX Card Holding Australia Pty Ltd., as designated
borrower, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the other lenders party thereto
(incorporated by reference to Exhibit No. 10.2 to our Current Report on Form 8-K filed with the SEC on July1, 2016, File No.
001-32426)
First Amendment to Credit Agreement dated July 3, 2017, between WEX Inc., Wright Express International Holdings Limited,
WEX Card Holdings Australia Pty Ltd. and Bank of America (incorporated by reference to Exhibit 10.1 to our Current Report on
Form 8-K filed with the SEC on July 3, 2017, File No. 001-32426)
Second Amendment to Credit Agreement dated October 30, 2017, between WEX Inc., Wright Express International Holdings
Limited, WEX Card Holdings Australia Pty Ltd., Bank of America and Santander Bank, N.A. (incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on November 3, 2017, File No. 001-32426)
Third Amendment to Credit Agreement dated January 17, 2018, between WEX Inc., Wright Express International Holdings Limited,
WEX Card Holdings Australia Pty Ltd., Bank of America (incorporated by reference to Exhibit 10.1 to our Current Report on Form
8-K filed with the SEC on January 18, 2018, File No. 001-32426)
Wright Express Corporation Amended 2010 Equity and Incentive Plan (incorporated by reference to Exhibit No. 99.1 to our
Current Report on Form 8-K filed with the SEC on May 21, 2010, File No. 001-32426)
Wright Express Corporation Amended and Restated Non-Employee Directors Deferred Compensation Plan (incorporated by
reference to Exhibit No. 10.2 to our Current Report on Form 8-K filed with the SEC on January 7, 2009, File No. 001-32426)
2014 Form of Annual Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form
10-Q filed with the SEC on April 30, 2014, File No. 001-32426)
Form of 2014 Growth Grant - Performance-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.4 to
our Quarterly Report on Form 10-Q filed with the SEC on April 30, 2014, File No. 001-32426)
2015 Section 162(m) Performance Incentive Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K
filed with the SEC on May 21, 2015, File No. 001-32426)
WEX Inc. Severance Plan for Officers (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the
SEC on October 1, 2015, File No. 001-32426)
Form of Employment Agreement for David Maxsimic and Melissa Smith (incorporated by reference to Exhibit No. 10.6 to our
Current Report on Form 8-K filed with the SEC on January 7, 2009, File No. 001-32426)
Form of Employment Agreement for Robert Cornett, Hilary Rapkin and Jamie Morin (incorporated by reference to Exhibit No.
10.7 to our Current Report on Form 8-K filed with the SEC on January 7, 2009, File No. 001-32426)
Form of Long Term Incentive Program Award Agreement under the Amended and Restated Wright Express Corporation 2005
Equity and Incentive Plan (incorporated by reference to Exhibit No. 99.1 to our Current Report on Form 8-K filed with the SEC on
April 6, 2006, File No. 001-32426)
Form of Non-Employee Director Long Term Incentive Program Award Agreement under the Amended and Restated Wright
Express Corporation 2005 Equity and Incentive Plan (for grants received prior to December 31, 2006) (incorporated by reference
to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed with the SEC on August 5, 2008, File No. 001-32426)
Form of Wright Express Corporation Long Term Incentive Program 2010 Growth Grant Stock Non-Statutory Stock Option Award
Agreement under the Amended and Restated Wright Express Corporation 2005 Equity and Incentive Plan (incorporated by
reference to Exhibit No. 10.5 to our Quarterly Report on Form 10-Q filed with the SEC on April 30, 2010, File No. 001-32426)
118
Table of Contents
† 10.22
† 10.23
† 10.24
† 10.25
† 10.26
Form of Wright Express Corporation Option Agreement under the Wright Express Corporation 2010 Equity and Incentive Plan
(incorporated by reference to Exhibit No. 10.29 to our Annual Report on Form 10-K filed with the SEC on February 28, 2011, File
No. 001-32426)
2015 Form of WEX Inc. Long Term Incentive Program Non-Statutory Stock Option Award Agreement (incorporated by reference
to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed with the SEC on May 1, 2015, File No. 001-32426)
Form of Wright Express Corporation Non-Employee Director Compensation Plan Award Agreement under the Wright Express
Corporation 2010 Equity and Incentive Plan (incorporated by reference to Exhibit No. 10.31 to our Annual Report on Form 10-K
filed with the SEC on February 28, 2011, File No. 001-32426)
Offer Letter dated November 3, 2015 between WEX Inc. and Mr. Simon (incorporated by reference to Exhibit 10.1 to our Current
Report on Form 8-K filed with the SEC on November 5, 2015, File No. 001-32426)
Severance and Restricted Covenant Agreement between Roberto Simon and WEX Inc., dated March 3, 2016 (incorporated by
reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed with the SEC on April 28, 2016, File No. 001-32426)
† 10.27
Form of Non Employee Director Compensation Plan effective September 21, 2016 (incorporated by reference to Exhibit 10.1 to
our Quarterly Report on Form 10-Q filed with the SEC on August 9, 2017, File No. 001-32426)
† 10.28
Form of Non Employee Director Compensation Plan effective October 1, 2017 (incorporated by reference to Exhibit 10.1 to our
Quarterly Report on Form 10-Q filed with the SEC on November 8, 2017, File No. 001-32426)
* † 10.29
Employment Agreement for Scott Phillips dated October 16, 2015.
* † 10.30
Noncompetition, Nonsolicitation, Confidentiality, and Inventions Agreement for Scott Phillips dated October 16, 2015.
* † 10.31
First Amendment to Employment Agreement for Scott Phillips dated November 1, 2017.
* † 10.32
First Amendment to Noncompetition, Nonsolicitation, Confidentiality, and Inventions Agreement for Scott Phillips dated
November 1, 2017.
10.33
10.34
10.35
10.36
10.37
10.38
Southern Cross WEX 2015-1 Trust - Receivables Acquisition and Servicing Agreement (incorporated by reference to Exhibit 10.1
to our Quarterly Report on Form 10-Q filed with the SEC on July 31, 2015, File No. 001-32426)
Southern Cross WEX 2015-1 Trust - Guarantee and Indemnity (incorporated by reference to Exhibit 10.2 to our Quarterly Report
on Form 10-Q filed with the SEC on July 31, 2015, File No. 001-32426)
Southern Cross WEX 2015-1 Trust General Security Agreement (incorporated by reference to Exhibit 10.3 to our Quarterly Report
on Form 10-Q filed with the SEC on July 31, 2015, File No. 001-32426)
Southern Cross WEX 2015-1 Trust Class A Facility Deed (incorporated by reference to Exhibit 10.4 to our Quarterly Report on
Form 10-Q filed with the SEC on July 31, 2015, File No. 001-32426)
Southern Cross WEX 2015-1 Trust Class B Facility Deed (incorporated by reference to Exhibit 10.5 to our Quarterly Report on
Form 10-Q filed with the SEC on July 31, 2015, File No. 001-32426)
Commitment Letter, dated as of October 18, 2015, by and among WEX Inc., Bank of America, N.A., Merrill Lynch, Pierce, Fenner
& Smith Incorporated, SunTrust Bank, SunTrust Robinson Humphrey and MUFG Union Bank, N.A (incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on October 19, 2015, File No. 001-32426)
* 21.1
Subsidiaries of the registrant
* 23.1
Consent of Independent Registered Accounting Firm – Deloitte & Touche LLP
* 31.1
Certification of Chief Executive Officer of WEX INC. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act
of 1934, as amended
119
Table of Contents
* 31.2
* 32.1
* 32.2
Certification of Chief Financial Officer of WEX INC. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act
of 1934, as amended
Certification of Chief Executive Officer of WEX INC. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act
of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code
Certification of Chief Financial Officer of WEX INC. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act
of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code
* 101.INS
XBRL Instance Document
* 101.SCH
XBRL Taxonomy Extension Schema Document
* 101.CAL
XBRL Taxonomy Calculation Linkbase Document
* 101.LAB
XBRL Taxonomy Label Linkbase Document
* 101.PRE
XBRL Taxonomy Presentation Linkbase Document
* 101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
Filed with this report.
Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b) of
this Form 10-K.
SIGNATURES
*
†
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
WEX INC.
March 1, 2018
By:
/s/ Roberto Simon
Roberto Simon
Chief Financial Officer (principal financial officer
and principal accounting officer)
120
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
/s/ Melissa D. Smith
Melissa D. Smith
President, Chief Executive Officer and Director
(principal executive officer)
/s/ Roberto Simon
Roberto Simon
Chief Financial Officer
(principal financial and accounting officer)
/s/ Michael E. Dubyak
Michael E. Dubyak
Chairman of the Board
/s/ Rowland T. Moriarty
Rowland T. Moriarty
Lead Director
/s/ John E. Bachman
John E. Bachman
Director
/s/ Shikhar Ghosh
Shikhar Ghosh
Director
/s/ George L. McTavish
George L. McTavish
Director
/s/ James C. Neary
James C. Neary
Director
/s/ Kirk Pond
Kirk Pond
Director
/s/ Regina O. Sommer
Regina O. Sommer
Director
/s/ Jack A. VanWoerkom
Jack A. VanWoerkom
Director
121
DIRECTORS
MICHAEL E. DUBYAK
Chairman of WEX Inc.
Former CEO of WEX Inc.
ROWLAND T. MORIARTY
Lead Director and
Vice Chairman of WEX Inc.
Chairman, CRA International, Inc.
JOHN JEB E. BACHMAN
Retired Partner, PwC
SHIKHAR GHOSH
Professor, Harvard Business School
GEORGE L. MCTAVISH
Business Consultant
JAMES NEARY
Managing Director, Warburg Pincus
KIRK POND
Former Chairman, President and
CEO of Fairchild Semiconductor
International, Inc.
CORPORATE HEADQUARTERS
WEX Inc.
97 Darling Avenue
South Portland, ME 04106
(207) 773-8171
Email: newsroom@wexinc.com
www.wexinc.com
TRANSFER AGENT
American Stock Transfer
and Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116-5022
(617) 437-2000
MELISSA D. SMITH
President and
Chief Executive Officer of WEX Inc.
KENNETH W. JANOSICK
Chief Portfolio Risk and
Operations Officer
REGINA O. SOMMER
Financial and Business Consultant
JACK VANWOERKOM
General Counsel and
Chief Compliance Officer of
Porch Light Capital
EXECUTIVE OFFICERS
MELISSA D. SMITH
President and
Chief Executive Officer
DAVID COOPER
Chief Technology Officer
JAY DEARBORN
President, Corporate Payments
NICOLA S. MORRIS
Chief Corporate Development
Officer
SCOTT PHILLIPS
President, Global Fleet
HILARY A. RAPKIN
Chief Legal Officer
ROBERTO SIMON
Chief Financial Officer
MELANIE TINTO
Chief Human Resources Officer
JEFF YOUNG
President, Health
ATTORNEYS
Wilmer Cutler Pickering Hale
and Dorr LLP
60 State Street
Boston, MA 02109
(617) 526-6000
STOCKHOLDERS’ MEETING
Date: May 11, 2018
Time: 8:00 a.m.
Location:
WEX Inc. Long Creek Campus
225 Gorham Road
South Portland, Maine
(207) 773-8171
TICKER SYMBOL
NYSE: WEX
INVESTOR RELATIONS
Steve Elder
Senior Vice President, Global Investor Relations
(207) 523-7769
Steve.Elder@wexinc.com
FORM 10-K
A copy of the Company’s Form 10-K,
filed with the Securities and Exchange
Commission, is available without charge
upon written request to: WEX Inc.
Investor Relations, 97 Darling Avenue
South Portland, ME 04106; by calling
(866) 230-1633; or by emailing
investors@wexinc.com.
97 darling avenue | south portland, maine | 04106 (207) 773.8171
newsroom @wexinc.com | www.wexinc.com