WEX 2014.06.30 10-Q
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 _________________________________________
FORM 10-Q
  _________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-32426
  _________________________________________
 
WEX INC.
(Exact name of registrant as specified in its charter)
  _________________________________________
Delaware
 
01-0526993
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
97 Darling Avenue, South Portland, Maine
 
04106
(Address of principal executive offices)
 
(Zip Code)
(207) 773-8171
(Registrant’s telephone number, including area code) 
 _________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
  
Outstanding at July 23, 2014
Common Stock, $0.01 par value per share
  
38,757,313 shares


Table of Contents


TABLE OF CONTENTS
 
 
Page
 
 
 
PART I-FINANCIAL INFORMATION
 
 
 
Item 1.
 3
 
 
 
Item 2.
 23
 
 
 
Item 3.
 34
 
 
 
Item 4.
 34
 
 
 
PART II-OTHER INFORMATION
 
 
 
Item 1.
 36
 
 
 
Item 1A.
 36
 
 
 
Item 2.
 36
 
 
 
Item 6.
 37
 
 
             SIGNATURE
 
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for statements that are forward-looking and are not statements of historical facts. This Quarterly Report includes forward-looking statements including, but not limited to, statements about management’s plan and goals and statements about the consummation of pending transactions. Any statements in this Quarterly Report that are not statements of historical facts are forward-looking statements. When used in this Quarterly Report, the words “may,” “could,” “anticipate,” “plan,” “continue,” “project,” “intend,” “estimate,” “believe,” “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. Forward-looking statements relate to our future plans, objectives, expectations and intentions and are not historical facts and accordingly involve known and unknown risks and uncertainties and other factors that may cause the actual results or performance to be materially different from future results or performance expressed or implied by these forward-looking statements. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report, in press releases and in oral statements made by our authorized officers: the effects of general economic conditions on fueling patterns as well as payments and transaction processing activity; the effects of the Company’s business expansion and acquisition efforts; the Company’s failure to successfully integrate the businesses it has acquired; the Company's failure to consummate a previously announced transaction, including the acquisition of ExxonMobil's European commercial fuel card program; the failure of corporate investments to result in anticipated strategic value; the impact and size of credit losses; the impact of changes to the Company's credit standards; breaches of the Company’s technology systems and any resulting negative impact on our reputation, liabilities, or loss of relationships with customers or merchants; fuel price volatility; the Company’s failure to maintain or renew key agreements; failure to expand the Company’s technological capabilities and service offerings as rapidly as the Company’s competitors; the actions of regulatory bodies, including banking and securities regulators, or possible changes in banking regulations impacting the Company’s industrial bank and the Company as the corporate parent; the impact of foreign currency exchange rates on the Company’s operations, revenue and income; changes in interest rates; the impact of the Company’s outstanding notes on its operations; financial loss if the Company determines it necessary to unwind its derivative instrument position prior to the expiration of a contract; the incurrence of impairment charges if our assessment of the fair value of certain of our reporting units changes; the uncertainties of litigation; as well as other risks and uncertainties identified in Item 1A of our Annual Report for the year ended December 31, 2013, filed on Form 10-K with the Securities and Exchange Commission on February 27, 2014. Our 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 the initial filing of this Quarterly Report and undue reliance should not be placed on these statements. We disclaim any obligation to update any forward-looking statements as a result of new information, future events or otherwise.

2

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PART I
Item 1. Financial Statements.
WEX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
 
 
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Cash and cash equivalents
$
319,023

 
$
361,486

Accounts receivable (less reserve for credit losses of $12,537 in 2014 and $10,396 in 2013)
2,205,689

 
1,712,061

Available-for-sale securities
18,808

 
15,963

Property, equipment and capitalized software (net of accumulated depreciation of $159,261 in 2014 and $145,400 in 2013)
81,507

 
72,275

Deferred income taxes, net
72,842

 
88,965

Goodwill
833,886

 
819,892

Other intangible assets, net
195,254

 
206,744

Other assets
159,643

 
154,892

Total assets
$
3,886,652

 
$
3,432,278

Liabilities and Stockholders’ Equity
 
 
 
Accounts payable
$
698,977

 
$
512,878

Accrued expenses
100,781

 
92,335

Income taxes payable
14,333

 
16,066

Deposits
1,251,377

 
1,088,930

Revolving line-of-credit facilities and term loan
277,500

 
285,000

Deferred income taxes, net
12,929

 
13,528

Notes outstanding
400,000

 
400,000

Other debt
30,108

 
7,278

Amounts due under tax receivable agreement
73,036

 
77,785

Fuel price derivatives, at fair value
9,431

 
7,358

Other liabilities
9,514

 
9,094

Total liabilities
2,877,986

 
2,510,252

Commitments and contingencies (Note 13)

 

Redeemable non-controlling interest
19,732

 
18,729

Stockholders’ Equity
 
 
 
Common stock $0.01 par value; 175,000 shares authorized; 42,989 shares issued in 2014 and 42,901 in 2013; 38,864 shares outstanding in 2014 and 38,987 in 2013
430

 
429

Additional paid-in capital
172,445

 
168,891

Non-controlling interest
859

 
519

Retained earnings
959,394

 
879,519

Accumulated other comprehensive income
6,137

 
(15,495
)
Less treasury stock at cost; 4,218 shares in 2014 and 4,007 shares in 2013
(150,331
)
 
(130,566
)
Total stockholders’ equity
988,934

 
903,297

Total liabilities and stockholders’ equity
$
3,886,652

 
$
3,432,278

See notes to unaudited condensed consolidated financial statements.

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WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME
(in thousands, except per share data)
(unaudited)
 
 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Fleet payment solutions
$
145,828

 
$
131,040

 
$
281,263

 
$
257,079

Other payment solutions
55,753

 
47,245

 
102,386

 
86,576

Total revenues
201,581

 
178,285

 
383,649

 
343,655

Expenses
 
 
 
 
 
 
 
Salary and other personnel
43,426

 
40,647

 
87,328

 
80,724

Service fees
27,831

 
26,608

 
54,136

 
50,413

Provision for credit losses
6,803

 
4,915

 
15,893

 
8,671

Technology leasing and support
7,151

 
6,428

 
14,178

 
11,913

Occupancy and equipment
3,761

 
4,191

 
8,127

 
7,996

Depreciation, amortization and impairment
15,176

 
14,501

 
30,194

 
29,108

Operating interest expense
1,599

 
1,082

 
2,887

 
2,229

Cost of hardware and equipment sold
2,255

 
1,137

 
3,203

 
2,211

Other
13,250

 
11,695

 
25,837

 
22,779

Total operating expenses
121,252

 
111,204

 
241,783

 
216,044

Operating income
80,329

 
67,081

 
141,866

 
127,611

Financing interest expense
(7,276
)
 
(7,369
)
 
(14,632
)
 
(14,708
)
Net gain (loss) on foreign currency transactions
1,238

 
(1,028
)
 
2,271

 
(1,260
)
Net realized and unrealized (loss) gain on fuel price derivatives
(7,561
)
 
8,614

 
(5,716
)
 
859

Income before income taxes
66,730

 
67,298

 
123,789

 
112,502

Income taxes
23,881

 
25,246

 
44,860

 
41,873

Net income
42,849

 
42,052

 
78,929

 
70,629

Less: Net loss attributable to non-controlling interests
(484
)
 
(161
)
 
(946
)
 
(273
)
Net earnings attributable to WEX Inc.
$
43,333

 
$
42,213

 
$
79,875

 
$
70,902

Net earnings attributable to WEX Inc. per share:
 
 
 
 
 
 
 
Basic
$
1.12

 
$
1.08

 
$
2.05

 
$
1.82

Diluted
$
1.11

 
$
1.08

 
$
2.05

 
$
1.81

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
38,856

 
38,934

 
38,911

 
38,911

Diluted
38,946

 
39,039

 
39,031

 
39,136

See notes to unaudited condensed consolidated financial statements.

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WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
42,849

 
$
42,052

 
$
78,929

 
$
70,629

Changes in available-for-sale securities, net of tax effect of $88 and $(199) for the three months ended June 30, 2014 and 2013, and $131 and $(246) in for the six months ended June 30, 2014 and 2013
152

 
(341
)
 
226

 
(419
)
Foreign currency translation
7,883

 
(46,431
)
 
22,662

 
(45,973
)
Comprehensive income (loss)
50,884


(4,720
)
 
101,817

 
24,237

Less: comprehensive (loss) income attributable to non-controlling interests
(8
)
 
(2,205
)
 
310

 
(2,012
)
Comprehensive income (loss) attributable to WEX Inc.
$
50,892

 
$
(2,515
)
 
$
101,507

 
$
26,249

See notes to unaudited condensed consolidated financial statements.

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WEX INC.
CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount at par
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Retained
Earnings
 
Non-controlling interest in subsidiaries
 
Total
Stockholders’
Equity
Balance at December 31, 2012
38,908

 
$
426

 
$
162,470

 
$
37,379

 
$
(112,655
)
 
$
730,311

 
$

 
$
817,931

Stock issued upon exercise of stock options
59

 
1

 
1,526

 

 

 

 

 
1,527

Tax benefit from stock option and restricted stock units

 

 
6,280

 

 

 

 

 
6,280

Stock issued upon vesting of restricted and deferred stock units
245

 
2

 
(2
)
 

 

 

 

 

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

 

 
(6,527
)
 

 

 

 

 
(6,527
)
Purchase of shares of treasury stock
(241
)
 

 

 

 
(17,911
)
 

 

 
(17,911
)
Changes in available-for-sale securities, net of tax effect of $(246)

 

 

 
(419
)
 

 

 

 
(419
)
Foreign currency translation

 

 

 
(44,234
)
 

 

 

 
(44,234
)
Net income

 

 

 

 

 
70,902

 

 
70,902

Balance at June 30, 2013
38,971


$
429


$
163,747


$
(7,274
)

$
(130,566
)

$
801,213


$


$
827,549

Balance at December 31, 2013
38,987

 
$
429

 
$
168,891

 
$
(15,495
)
 
$
(130,566
)
 
$
879,519

 
$
519

 
$
903,297

Stock issued upon exercise of stock options
12

 

 
158

 

 

 

 

 
158

Tax benefit from stock option and restricted stock units

 

 
1,232

 

 

 

 

 
1,232

Stock issued upon vesting of restricted and deferred stock units
76

 
1

 
(1
)
 

 

 

 

 

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


 

 
2,165

 

 

 

 

 
2,165

Purchase of shares of treasury stock
(211
)
 

 

 

 
(19,765
)
 

 

 
(19,765
)
Changes in available-for-sale securities, net of tax effect of $131

 

 

 
226

 

 

 

 
226

Foreign currency translation

 

 

 
21,406

 

 

 
4

 
21,410

Noncontrolling interest investment

 

 

 

 

 

 
1,033

 
1,033

Net income (loss)

 

 

 

 

 
79,875

 
(697
)
 
79,178

Balance at June 30, 2014
38,864

 
$
430

 
$
172,445

 
$
6,137

 
$
(150,331
)
 
$
959,394

 
$
859

 
$
988,934

See notes to unaudited condensed consolidated financial statements.

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WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six months ended
 June 30,
 
2014
 
2013
Cash flows from operating activities
 
 
 
Net income
$
78,929

 
$
70,629

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
 
Fair value change of fuel price derivatives
2,073

 
(3,967
)
Stock-based compensation
5,540

 
4,388

Depreciation, amortization and impairment
31,383

 
30,251

Deferred taxes
14,631

 
18,703

Provision for credit losses
15,893

 
8,671

Loss on disposal of property, equipment and capitalized software
338

 
555

Changes in operating assets and liabilities, net of effects of acquisition:
 
 
 
Accounts receivable
(499,349
)
 
(301,165
)
Other assets
(4,647
)
 
(8,239
)
Accounts payable
181,664

 
205,774

Accrued expenses
7,289

 
14,047

Income taxes
(2,707
)
 
(4,149
)
Other liabilities
350

 
1,313

Amounts due under tax receivable agreement
(4,749
)
 
(4,411
)
Net cash (used for) provided by operating activities
(173,362
)
 
32,400

Cash flows from investing activities
 
 
 
Purchases of property, equipment and capitalized software
(22,604
)
 
(13,017
)
Purchases of available-for-sale securities
(2,654
)
 
(1,632
)
Maturities of available-for-sale securities
166

 
583

Net cash used for investing activities
(25,092
)
 
(14,066
)
Cash flows from financing activities
 
 
 
Excess tax benefits from equity instrument share-based payment arrangements
1,232

 
6,280

Repurchase of share-based awards to satisfy tax withholdings
(3,375
)
 
(10,917
)
Proceeds from stock option exercises
158

 
1,526

Net change in deposits
162,442

 
97,480

Net change in borrowed federal funds

 
(48,400
)
Other debt
22,262

 
(1,215
)
Loan origination fee

 
(12,023
)
Borrowings on notes outstanding

 
400,000

Net activity on 2011 revolving line-of-credit

 
(438,500
)
Net activity on 2011 term loan

 
(182,500
)
Net activity on 2013 term loan
(7,500
)
 
292,500

Purchase of shares of treasury stock
(19,765
)
 
(17,911
)
Net cash provided by financing activities
155,454

 
86,320

Effect of exchange rate changes on cash and cash equivalents
537

 
(2,757
)
Net change in cash and cash equivalents
(42,463
)
 
101,897

Cash and cash equivalents, beginning of period
361,486

 
197,662

Cash and cash equivalents, end of period
$
319,023

 
$
299,559

Supplemental cash flow information
 
 
 
Interest paid
$
16,822

 
$
7,291

Income taxes paid
$
32,115

 
$
21,256

Significant non-cash transactions
 
 
 
Increase in UNIK estimated earn out
$

 
$
198

See notes to unaudited condensed consolidated financial statements.

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WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 
1.
Basis of Presentation
The acronyms and abbreviations identified below are used in the accompanying unaudited condensed consolidated financial statements and the notes thereto. The following is provided to aid the reader and provide a reference point when reviewing the unaudited condensed consolidated financial statements.
2011 Credit Agreement
 
Credit agreement entered into on May 23, 2011 among the Company, as borrower, WEX Card Holdings Australia Pty Ltd, a wholly-owned subsidiary of the Company, as specified designated borrower, Bank of America, N.A., as administrative agent and letter of credit issuer, and the other lenders party thereto
2013 Credit Agreement
 
Amended and restated credit agreement entered into on January 18, 2013 by and among the Company and certain of our subsidiaries, as borrowers, and WEX Card Holdings Australia Pty Ltd, as specified designated borrower, with a lending syndicate
Adjusted Net Income or ANI
 
A non-GAAP metric that adjusts net earnings attributable to WEX Inc. for fair value changes of derivative instruments, the amortization of purchased intangibles, the expense associated with stock-based compensation, acquisition related expenses, the net impact of tax rate changes on the Company’s deferred tax asset and related changes in the tax-receivable agreement, deferred loan costs associated with the extinguishment of debt, certain non-cash asset impairment charges, gains on the extinguishment of a portion of the tax receivable agreement and adjustments attributable to non-controlling interests, as well as the related tax impacts of the adjustments
ASU 2013-11
 
Accounting Standards Update No. 2013-11 Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
ASU 2014-08
 
Accounting Standards Update No. 2014-08 Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
ASU 2014-09
 
Accounting Standards Update No. 2014-09 Revenue from Contracts with Customers (Topic 606)

Company
 
WEX Inc. and all entities included in the unaudited condensed consolidated financial statements
Esso Card
 
ExxonMobil’s European commercial fuel card portfolio
Evolution1
 
Evolution1, Inc., a wholly owned subsidiary acquired by the Company on July 16, 2014
FASB
 
Financial Accounting Standards Board
GAAP
 
Generally Accepted Accounting Principles in the United States
Indenture
 
The Notes were issued pursuant to an indenture dated as of January 30, 2013 among the Company, the guarantors listed therein, and The Bank of New York Mellon Trust Company, N.A., as trustee
NCI
 
Non-controlling interest
NOL
 
Net operating loss
Notes
 
$400 million notes with a 4.75% fixed rate, issued on January 30, 2013
NOW deposits
 
Negotiable order of withdrawal deposits
Pacific Pride
 
Pacific Pride Services, LLC, a wholly owned subsidiary
SEC
 
Securities and Exchange Commission
UNIK
 
UNIK S.A., the Company's Brazilian 51 percent majority-owned subsidiary
WEX
 
WEX Inc.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by GAAP for complete financial statements. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to consolidated financial statements included in the Annual Report on Form 10-K of WEX Inc. for the year ended December 31, 2013. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 27, 2014. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been

8

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included. Operating results for the three and six months ended June 30, 2014, are not necessarily indicative of the results that may be expected for any future quarter(s) or the year ending December 31, 2014.

Certain prior-year amounts have been reclassified to conform with current year’s presentation. Specifically, UNIK debt previously included in Other liabilities was reclassified to Other debt on the condensed consolidated balance sheet.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and other liabilities approximate their respective fair values due to the short-term nature of such instruments. The carrying values of certificates of deposit, NOW deposits, interest-bearing money market deposits, borrowed federal funds and credit agreement borrowings, approximate their respective fair values as the interest rates on these financial instruments are variable. All other financial instruments are reflected at fair value on the condensed consolidated balance sheet.

2.
New Accounting Standards

In April 2014, the FASB issued ASU 2014-08. Under the new guidance, only disposals representing a strategic shift in operations that has a major effect on the organization's operations and financial results, or a business activity classified as held for sale, should be presented as discontinued operations. Additionally, these amendments expanded the disclosure requirements for discontinued operations that will provide financial statement users with more information regarding the assets, liabilities, income and expenses of discontinued operations. This update is effective for interim and annual periods beginning after December 15, 2014. In addition, early adoption is permitted and the Company has elected to adopt this standard as of April 1, 2014. The adoption of this standard update affects presentation only and, as such, is not expected to have a material impact on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, which will supersede most existing revenue recognition guidance under U.S. GAAP. The new revenue recognition standard requires entities to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new standard is effective for interim and annual reporting periods beginning after December 15, 2016. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method.

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

3.
Business Acquisitions
Acquisition of FastCred
On October 15, 2013, UNIK acquired all of the stock of FastCred, a provider of fleet cards to the heavy truck or over-the-road segment of the Brazilian fleet market, for approximately $12,309, net of cash acquired. The Company purchased FastCred to expand its Fleet Payment Solutions segment. During the fourth quarter of 2013, the Company preliminarily allocated $4,282 of the cost of the acquisition to goodwill and $12,594 to other intangible assets, primarily customer relationships and acquired software. During the first quarter of 2014, the Company obtained additional information to assist in determining the fair values of certain tangible and intangible assets acquired and liabilities assumed as of the FastCred acquisition date. Based on such information, the Company retrospectively adjusted the fiscal year 2013 comparative information resulting in an increase in goodwill of $1,490, a decrease in intangible assets of $2,253, a decrease in property, equipment and capitalized software of $2, and a decrease in deferred income tax liabilities of $765. There were no changes to the previously reported consolidated statements of operations or statements of cash flows. The valuation of all assets and liabilities have been finalized. The total weighted average useful life of the intangible assets acquired from FastCred is four years for customer relationships and three years for acquired software. Goodwill recorded as a result of the FastCred acquisition is not currently deductible for income tax purposes. No pro forma information has been included in these financial statements as the operations of FastCred for the period that they were not part of the Company are not material to the Company’s revenues, net income or earnings per share.

4.
Reserves for Credit Losses
In general, the Company’s trade receivables provide for payment terms of 30 days or less. The Company does not extend revolving credit to its customers with respect to these receivables. The portfolio of receivables consists of a large group of smaller balance homogeneous amounts that are collectively evaluated for impairment. No customer made up more than six percent of the outstanding receivables at June 30, 2014.
As of June 30, 2014, approximately 97 percent of the outstanding balance of total trade accounts receivable was current and approximately 99 percent of the outstanding balance of total trade accounts receivable was less than 60 days past due. As of June 30, 2013, approximately 97 percent of the outstanding balance of total trade accounts receivable was current and approximately 99 percent of the outstanding balance was less than 60 days past due.The outstanding balance is made up of receivables from a wide range of industries.
The following table presents changes in reserves for credit losses related to accounts receivable:
 
Six months ended June 30,
 
2014
 
2013
Balance, beginning of period
$
10,396

 
$
11,709

Provision for credit losses
15,893

 
8,671

Charge-offs
(17,515
)
 
(12,683
)
Recoveries of amounts previously charged-off
3,644

 
3,111

Currency translation
119

 
(378
)
Balance, end of period
$
12,537

 
$
10,430

 

10

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



5.
Goodwill and Other Intangible Assets
Goodwill
The changes in goodwill during the first six months of 2014 were as follows:
 
Fleet Payment Solutions Segment
 
Other
Payment
Solutions
Segment
 
Total
Gross goodwill, January 1, 2014
$
754,886

 
$
82,514

 
$
837,400

Impact of foreign currency translation
11,718

 
2,276

 
13,994

Gross goodwill, June 30, 2014
766,604

 
84,790

 
851,394

Accumulated impairment, June 30, 2014
(1,337
)
 
(16,171
)
 
(17,508
)
Net goodwill, June 30, 2014
$
765,267

 
$
68,619

 
$
833,886

As described in Note 3, the Company adjusted the amount of goodwill and intangible assets as of December 31, 2013 in the accompanying condensed consolidated balance sheet to account for the measurement period adjustments to the FastCred purchase price allocation.
The Company had no impairments to goodwill during the six months ended June 30, 2014.
Other Intangible Assets
The changes in other intangible assets during the first six months of 2014 were as follows:
 
 
Net
Carrying
Amount,
January 1,
2014
 
Amortization
 
Impact of
foreign
currency
translation
 
Net Carrying
Amount, June 30, 2014
Definite-lived intangible assets
 
 
 
 
 
 
 
Acquired software
$
61,590

 
$
(3,871
)
 
$
1,203

 
$
58,922

Customer relationships
127,403

 
(12,069
)
 
3,402

 
118,736

Patent
1,672

 
(150
)
 
88

 
1,610

Trade names
8,835

 
(527
)
 
103

 
8,411

Indefinite-lived intangible assets
 
 
 
 
 
 
 
Trademarks and trade names
7,244

 

 
331

 
7,575

Total
$
206,744

 
$
(16,617
)
 
$
5,127

 
$
195,254

The following table presents the estimated amortization expense related to the definite-lived intangible assets listed above for the remainder of 2014 and for each of the five succeeding fiscal years: 
Remaining 2014
$
16,577

2015
$
30,279

2016
$
26,636

2017
$
22,683

2018
$
19,461

2019
$
16,056


11

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

 Other intangible assets, net consist of the following:
 
June 30, 2014
 
December 31, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Definite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
Acquired software
$
85,628

 
$
(26,706
)
 
$
58,922

 
$
83,844

 
$
(22,254
)
 
$
61,590

Non-compete agreement
100

 
(100
)
 

 
100

 
(100
)
 

Customer relationships
203,425

 
(84,689
)
 
118,736

 
197,424

 
(70,021
)
 
127,403

Patent
3,121

 
(1,511
)
 
1,610

 
2,935

 
(1,263
)
 
1,672

Trademarks and trade names
10,237

 
(1,826
)
 
8,411

 
10,112

 
(1,277
)
 
8,835

 
$
302,511

 
$
(114,832
)
 
187,679

 
$
294,415

 
$
(94,915
)
 
199,500

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
Trademarks and trade names
 
 
 
 
7,575

 
 
 
 
 
7,244

Total
 
 
 
 
$
195,254

 
 
 
 
 
$
206,744


6.
Earnings per Share
The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computations for the three and six months ended June 30, 2014 and 2013:
 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2014
 
2013
 
2014
 
2013
Net earnings attributable to WEX Inc. available for common stockholders – Basic and Diluted
$
43,333

 
$
42,213

 
$
79,875

 
$
70,902

Weighted average common shares outstanding – Basic
38,856

 
38,934

 
38,911

 
38,911

Unvested restricted stock units
68

 
61

 
96

 
174

Stock options
22

 
44

 
24

 
51

Weighted average common shares outstanding – Diluted
38,946

 
39,039

 
39,031

 
39,136

No shares were considered anti-dilutive during the periods reported.

12

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

7.
Derivative Instruments
The Company is exposed to certain risks relating to its ongoing business operations. Derivative instruments are utilized to manage the Company's commodity price risk. The Company enters into put and call option contracts related to the Company’s commodity price risk, which are based on the wholesale price of gasoline and the retail price of diesel fuel and settle on a monthly basis. These put and call option contracts, or fuel price derivative instruments, are designed to reduce the volatility of the Company’s cash flows associated with its fuel price-related earnings exposure in North America.

Beginning in April 2014, the Company initiated a partial foreign exchange hedging program. The Company uses currency forward contracts to offset the foreign currency impact of balance sheet translation. These derivatives have one month terms. The gains or losses on the currency forward contracts are reported in earnings within the same condensed consolidated statement of income line as the impact of the foreign currency translation, net gain (losses) on foreign currency translations.
Accounting guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheet. The Company’s fuel price derivative instruments and foreign currency instruments do not qualify for hedge accounting treatment under current guidance, and therefore, no such hedging designation has been made.
Derivatives Not Designated as Hedging Instruments
For derivative instruments that are not designated as hedging instruments, the gain or loss on the derivative is recognized in current earnings. As of June 30, 2014, the Company had the following put and call option contracts, which are not designated as hedging contracts and settle on a monthly basis: 
 
Aggregate
Notional
Amount
(gallons) (a)
Fuel price derivative instruments – unleaded fuel
 
Option contracts settling July 2014 – December 2015
39,510

Fuel price derivative instruments – diesel
 
Option contracts settling July 2014 – December 2015
19,080

Total fuel price derivative instruments
58,590

(a) 
The settlement of the put and call option contracts is based upon the New York Mercantile Exchange’s New York Harbor Reformulated Gasoline Blendstock for Oxygenate Blending and the U.S. Department of Energy’s weekly retail on-highway diesel fuel price for the month.
The following table presents information on the location and amounts of derivative fair values in the condensed consolidated balance sheets:
 
 
Derivatives Classified as Liabilities
 
 
June 30, 2014
 
December 31, 2013
 
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
Commodity contracts
 
Fuel price
derivatives,
at fair value
 
$
9,431

 
Fuel price
derivatives,
at fair value
 
$
7,358

The following table present information on the location and amounts of derivative gains and losses in the condensed consolidated statements of income:

13

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

 
 
 
Amount of Gain or
(Loss) Recognized in
Income on  Derivative
Derivatives Not Designated as Hedging Instruments
Location of Gain or (Loss)
Recognized in
 
Three months ended June 30,
 
Six months ended
 June 30,
Income on Derivative
 
2014
 
2013
 
2014
 
2013
Commodity contracts
Net realized and unrealized gain (loss) on fuel price derivatives
 
$
(7,561
)
 
$
8,614

 
$
(5,716
)
 
$
859

Foreign exchange contracts
Net realized gain (loss) on currency forward contracts
 
(1,284
)
 
$

 
(1,284
)
 
$

 

8.
Financing and Other Debt
2013 Credit Agreement
On January 18, 2013, the Company entered into the 2013 Credit Agreement. The 2013 Credit Agreement provides for a five-year amortizing $300,000 term loan facility, and a five-year $800,000 secured revolving credit facility with a $150,000 sub-limit for letters of credit. The 2013 Credit Agreement replaced the 2011 Credit Agreement and increased the outstanding amount of the term loan from $185,000 to $300,000 and increased the amount of the revolving loan from $700,000 to $800,000. On January 30, 2013, the revolving loan commitment under the 2013 Credit Agreement was reduced to $700,000. The reduction was required due to the issuance of the Notes described below.
$400 Million Note Offering
On January 30, 2013, the Company completed a $400,000 offering in aggregate principal amount of 4.75 percent senior notes due in 2023 at an issue price of 100.0 percent of the principal amount, plus accrued interest, from January 30, 2013, in a private placement for resale to “qualified institutional buyers” as defined in Rule 144A under the Securities Act, and in offshore transactions pursuant to Regulation S under the Securities Act. The Notes were issued pursuant to the 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. The Notes will mature on February 1, 2023, and interest accrues at the rate of 4.750 percent per annum. Interest is payable semiannually in arrears on February 1 and August 1 of each year, commencing on August 1, 2013.
The Company used the net proceeds of this offering to repay the outstanding amount under the revolving portion of its 2013 Credit Agreement and to pay related fees and expenses and for general corporate purposes.
Other debt
UNIK debt
UNIK had approximately $10,108 of debt as of June 30, 2014, and $7,278 of debt as of December 31, 2013. UNIK's debt is comprised of various credit facilities held in Brazil, with various maturity dates. The weighted average annual interest rate was 19.5 percent as of June 30, 2014, and 15.8 percent as of December 31, 2013. This debt is classified in other debt on the Company’s consolidated balance sheets for the periods presented. 
Participation debt
WEX Bank is subject to certain regulatory lending limits to a single customer.  During the second quarter of 2014, WEX Bank entered into an agreement with a third party bank to fund a customer balance that exceeds the lending limit. This participation agreement allows WEX Bank to fund the portion of the customer balance that exceeds the lending limit. The amount of the receivable that is funded by the third party bank is classified as a secured borrowing.  This borrowing carries a variable interest rate of 3-month LIBOR plus a margin of 2.25 percent.  The balance of the participation debt as of June 30, 2014, was $20,000, which is secured by a participation interest in the underlying customer receivable. The participation debt balance will fluctuate on a daily basis based on customer funding needs, and will range from $0 to $45,000. The participation debt agreement will mature on April 1, 2016. This debt is classified in other debt on the Company’s consolidated balance sheets for the periods presented. 


14

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

9.
Fair Value
The Company holds mortgage-backed securities, fixed income and equity securities, derivatives (see Note 7, Derivative Instruments) and certain other financial instruments which are carried at fair value. The Company determines fair value based upon quoted prices when available or through the use of alternative approaches, such as model pricing, when market quotes are not readily accessible or available. In determining the fair value of the Company’s obligations, various factors are considered, including: closing exchange or over-the-counter market price quotations; time value and volatility factors underlying options and derivatives; price activity for equivalent instruments; and the Company’s own credit standing.
These valuation techniques may be based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Instruments whose significant value drivers are unobservable.
The following table presents the Company’s assets and liabilities that are measured at fair value and the related hierarchy levels as of June 30, 2014: 
 
 
 
Fair Value Measurements
at Reporting Date Using
 
June 30, 2014
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Mortgage-backed securities
$
846

 
$

 
$
846

 
$

Asset-backed securities
1,272

 

 
1,272

 

Municipal bonds
551

 

 
551

 

Equity securities
16,139

 
16,139

 

 

Total available-for-sale securities
$
18,808

 
$
16,139

 
$
2,669

 
$

Executive deferred compensation plan trust (a)
$
5,473

 
$
5,473

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
Fuel price derivatives – unleaded fuel (b)
$
7,506

 
$

 
$
7,506

 
$

Fuel price derivatives – diesel (b)
1,925

 

 

 
1,925

Total fuel price derivatives
$
9,431


$


$
7,506


$
1,925

 
(a) 
The fair value of these instruments is recorded in other assets.
(b) 
The balance sheet presentation combines unleaded fuel and diesel fuel positions.

15

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

The following table presents the Company’s assets and liabilities that are measured at fair value and the related hierarchy levels as of December 31, 2013:
 
 
 
Fair Value Measurements
at Reporting Date Using
 
December 31, 2013
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Mortgage-backed securities
$
839

 
$

 
$
839

 
$

Asset-backed securities
1,391

 

 
1,391

 

Municipal bonds
519

 

 
519

 

Equity securities
13,214

 
13,214

 

 

Total available-for-sale securities
$
15,963

 
$
13,214

 
$
2,749

 
$

Executive deferred compensation plan trust (a)
$
4,339

 
$
4,339

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
Fuel price derivatives – unleaded fuel (b)
$
5,216

 
$

 
$
5,216

 
$

Fuel price derivatives – diesel (b)
2,142

 

 

 
2,142

Total fuel price derivatives
$
7,358

 
$

 
$
5,216

 
$
2,142

(a) 
The fair value of these instruments is recorded in other assets.
(b) 
The balance sheet presentation combines unleaded fuel and diesel fuel positions.

The following table presents a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended:
 
 
June 30, 2014
 
June 30, 2013
 
 
Fuel Price
Derivatives –
Diesel
 
Contingent
Consideration
 
Fuel Price
Derivatives –
Diesel
Beginning balance
 
$
(623
)
 
$
(310
)
 
$
(929
)
Total gains and (losses) – realized/unrealized
 
 
 
 
 
 
Included in earnings (a)
 
(1,302
)
 
(201
)
 
1,427

Included in other comprehensive income
 

 

 

Purchases, issuances and settlements
 

 

 

Transfers (in)/out of Level 3
 

 
511

 

Ending balance
 
$
(1,925
)
 
$

 
$
498

 
(a) 
Gains and losses (realized and unrealized) associated with fuel price derivatives, included in earnings for the three months ended June 30, 2014 and 2013, are reported in net realized and unrealized losses on fuel price derivatives on the condensed consolidated statements of income. Gains associated with contingent consideration, included in earnings for the three months ended June 30, 2013, are reported in other expenses and loss of foreign currency transactions on the condensed consolidated statements of income.

16

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


The following table presents a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended:
 
 
June 30, 2014
 
June 30, 2013
 
 
Fuel Price
Derivatives –
Diesel
 
Contingent
Consideration
 
Fuel Price
Derivatives –
Diesel
Beginning balance
 
$
(2,142
)
 
$
(313
)
 
$
(107
)
Total (losses) and gains – realized/unrealized
 
 
 
 
 
 
Included in earnings (a)
 
217

 
(198
)
 
605

Included in other comprehensive income
 

 

 

Purchases, issuances and settlements
 

 

 

Transfers (in)/out of Level 3
 

 
511

 

Ending balance
 
$
(1,925
)
 
$

 
$
498

(a) 
Gains and losses (realized and unrealized) associated with fuel price derivatives, included in earnings for the six months ended June 30, 2014 and 2013, are reported in net realized and unrealized losses on fuel price derivatives on the condensed consolidated statements of income. Gains associated with contingent consideration, included in earnings for the six months ended June 30, 2014 and 2013, are reported in other expenses and loss of foreign currency transactions on the condensed consolidated statements of income.
$400 Million Notes outstanding
The Notes outstanding as of June 30, 2014, have a carrying value of $400,000 and fair value of $386,000. As of December 31, 2013, the carrying value of the $400,000 in Notes outstanding had a fair value of $365,000. The fair value is based on market rates for the issuance of our debt. The Company determined the fair value of its Notes outstanding are based on current quoted market prices (Level 1 in the fair value hierarchy).
Available-for-sale securities and executive deferred compensation plan trust
When available, the Company uses quoted market prices to determine the fair value of available-for-sale securities; such items are classified in Level 1 of the fair-value hierarchy. These securities primarily consist of exchange-traded equity securities.
For mortgage-backed and asset-backed debt securities and bonds, the Company generally uses quoted prices for recent trading activity of assets with similar characteristics to the debt security or bond being valued. The securities and bonds priced using such methods are generally classified as Level 2.
Fuel price derivatives
The majority of derivatives entered into by the Company are executed over-the-counter and are valued using internal valuation techniques, as no quoted market prices exist for such instruments. The valuation technique and inputs depend on the type of derivative and the nature of the underlying instrument. The principal technique used to value these instruments is a comparison of the spot price of the underlying instrument to its related futures curve adjusted for the Company’s assumptions of volatility and present value, where appropriate. The fair values of derivative contracts reflect the expected cash the Company will pay or receive upon settlement of the respective contracts.
The key inputs depend upon the type of derivative and the nature of the underlying instrument and include interest rate yield curves, the spot price of the underlying instruments, volatility, and correlation. The item is placed in either Level 2 or Level 3 depending on the observability of the significant inputs to the model. Correlation and inputs with longer tenures are generally less observable.
Fuel price derivatives – diesel. The assumptions used in the valuation of the diesel fuel price derivatives use both observable and unobservable inputs. There is a lack of price transparency with respect to forward prices for diesel fuel. Such unobservable inputs are significant to the diesel fuel derivative contract valuation methodology.
Quantitative Information About Level 3 Fair Value Measurements. The significant unobservable inputs used in the fair value measurement of the Company’s diesel fuel price derivative instruments designated as Level 3 as of June 30, 2014, are as

17

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

follows:
 
Fair Value at
June 30, 2014
 
Valuation
Technique
 
Unobservable Input
 
Range
$ per gallon
Fuel price derivatives – diesel
$
(1,925
)
 
Option model
 
Future retail price of diesel fuel after June 30, 2014
 
$3.79 – 3.87
Sensitivity to Changes in Significant Unobservable Inputs. As presented in the table above, the significant unobservable inputs used in the fair value measurement of the Company’s diesel fuel price derivative instruments are the future retail price of diesel fuel from the third quarter of 2014 through the fourth quarter of 2015. Significant changes in these unobservable inputs in isolation would result in a significant change in the fair value measurement.
Contingent consideration
The Company had classified its liability for contingent consideration related to its acquisition of UNIK within Level 3 of the fair value hierarchy because the fair value is determined using significant unobservable inputs, which include the projected revenues of UNIK over a four month period. The fair value determination included assessing the probability of meeting certain milestones required to earn the contingent consideration.
On June 30, 2013, the Company finalized the contingent consideration amount based on current performance milestones and determined it to be approximately $511, which was paid on July 1, 2013.

10.
Accumulated Other Comprehensive Income
A reconciliation of accumulated other comprehensive income for the three month periods ended June 30, 2014 and 2013, is as follows:
 
2014
 
2013
 
Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
 
Foreign
Currency
Items
 
Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
 
Foreign
Currency
Items
Beginning balance
$
(359
)
 
$
(1,063
)
 
$
119

 
$
37,335

Other comprehensive income (loss)
152

 
7,407

 
(341
)
 
(44,387
)
Ending balance
$
(207
)
 
$
6,344

 
$
(222
)
 
$
(7,052
)

A reconciliation of accumulated other comprehensive income for the six month periods ended June 30, 2014 and 2013, is as follows:
 
2014
 
2013
 
Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
 
Foreign
Currency
Items
 
Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
 
Foreign
Currency
Items
Beginning balance
$
(433
)
 
$
(15,062
)
 
$
197

 
$
37,182

Other comprehensive (loss) income
226

 
21,406

 
(419
)
 
(44,234
)
Ending balance
$
(207
)
 
$
6,344

 
$
(222
)
 
$
(7,052
)
No amounts were reclassified from accumulated other comprehensive income 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.

18

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

The total tax effect on net accumulated unrealized gains, as of June 30, 2014, was $364, and the total tax effect on net accumulated unrealized losses, as of June 30, 2013, was $73.

11.
Non-controlling interests
On August 30, 2012, the Company acquired a 51 percent ownership interest in UNIK. Redeemable non-controlling interest was measured at fair value at the date of acquisition. The redeemable non-controlling interest is reported on the Company’s condensed consolidated balance sheets as “Redeemable non-controlling interest."
A reconciliation of redeemable non-controlling interest for the three and six month periods ended June 30, 2014 and June 30, 2013, is as follows:
 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2014
 
2013
 
2014
 
2013
Balance, beginning of period
$
19,338

 
$
21,855

 
$
18,729

 
$
21,662

Net loss attributable to non-controlling interest
(82
)
 
(161
)
 
(249
)
 
(273
)
Currency translation adjustment
476

 
(2,044
)
 
1,252

 
(1,739
)
Ending balance
$
19,732

 
$
19,650

 
$
19,732

 
$
19,650


On November 8, 2013, the Company announced that it plans to acquire the assets of the Esso Card program through a majority owned subsidiary, WEX Europe Services Limited. The Company formed this entity during 2013 and has 75 percent ownership.

A reconciliation of non-controlling interest for the three and six month periods ended June 30, 2014 is as follows:
 
Three months ended June 30, 2014
 
Six months ended June 30, 2014
Balance, beginning of period
$
228

 
$
519

Non-controlling interest investment
1,033

 
1,033

Net loss attributable to non-controlling interest
(402
)
 
(697
)
Currency translation adjustment

 
4

Ending balance
$
859


$
859


12.
Income Taxes
Undistributed earnings of certain foreign subsidiaries of the Company amounted to $8,714 at June 30, 2014, and $4,665 at December 31, 2013. These earnings are considered to be indefinitely reinvested, and accordingly, no U.S. federal and state income taxes have been provided thereon. Upon distribution of these earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. The Company has determined that the amount of taxes attributable to these undistributed earnings is not practicably determinable.

13.
Commitments and Contingencies
Litigation
The Company is involved in pending litigation in the ordinary course of business. In the opinion of management, such litigation will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
 

19

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

14.
Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The operating segments are reviewed separately as each operating segment represents a strategic business unit that generally offers different products and serves different markets.
The Company’s chief operating decision maker evaluates the operating results of the Company’s reportable segments based upon revenues and “adjusted net income,” which is defined by the Company as net income adjusted for fair value changes of derivative instruments, the amortization of purchased intangibles, expense associated with stock-based compensation, acquisition related expenses, the net impact of tax rate changes on the Company’s deferred tax asset and related changes in the tax-receivable agreement, deferred loan costs associated with the extinguishment of debt, certain non-cash asset impairment charges, the gains on the extinguishment of a portion of the tax receivable agreement and adjustments attributable to non-controlling interests.
The Company operates in two reportable segments, Fleet Payment Solutions and Other Payment Solutions. The Fleet Payment Solutions segment provides customers with payment and transaction processing services specifically designed for the needs of vehicle fleet customers. This segment also provides information management services to those fleet customers. The Other Payment Solutions segment provides customers with a payment processing solution for their corporate purchasing and transaction monitoring needs. Revenue in this segment is derived from the Company’s corporate purchase cards and virtual and prepaid card products. The corporate purchase card products are used by businesses to facilitate purchases of their products and to utilize the Company’s information management capabilities.
Financing interest expense from the Company’s corporate debt, including the term loan and bond issuance, and net realized and unrealized losses on derivative instruments are allocated to the Fleet Payment Solutions segment in the computation of segment results for internal evaluation purposes. Total assets are not allocated to the segments.
The following table presents the Company’s reportable segment results on an adjusted pre-tax net income before NCI basis for the three months ended June 30, 2014 and 2013:
 
Total
Revenues
 
Operating
Interest
Expense
 
Depreciation
and
Amortization
 
Adjusted Pre-Tax Income before NCI
Three months ended June 30, 2014
 
 
 
 
 
 
 
Fleet payment solutions
$
145,828

 
$
586

 
$
6,436

 
$
58,933

Other payment solutions
55,753

 
1,013

 
410

 
24,640

Total
$
201,581

 
$
1,599

 
$
6,846

 
$
83,573

Three months ended June 30, 2013
 
 
 
 
 
 
 
Fleet payment solutions
$
131,040

 
$
151

 
$
5,855

 
$
53,539

Other payment solutions
47,245

 
931

 
512

 
14,026

Total
$
178,285

 
$
1,082

 
$
6,367

 
$
67,565

The following table presents the Company’s reportable segment results on an adjusted pre-tax net income before NCI basis for the six months ended June 30, 2014 and 2013:

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

 
Total
 Revenues 
 
 Operating 
Interest
Expense
 
Depreciation
and
 Amortization 
 
Adjusted Pre-Tax Income before NCI
Six months ended June 30, 2014
 
 
 
 
 
 
 
Fleet payment solutions
$
281,263

 
$
1,110

 
$
12,813

 
$
106,607

Other payment solutions
102,386

 
1,777

 
764

 
41,912

Total
$
383,649


$
2,887


$
13,577


$
148,519

Six months ended June 30, 2013
 
 
 
 
 
 
 
Fleet payment solutions
$
257,079

 
$
965

 
$
11,591

 
$
105,715

Other payment solutions
86,576

 
1,264

 
1,004

 
24,725

Total
$
343,655


$
2,229


$
12,595


$
130,440

The following table reconciles adjusted pre-tax income before NCI to income before income taxes:
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Adjusted pre-tax income before NCI
$
83,573

 
$
67,565

 
$
148,519

 
$
130,440

Unrealized gain (loss) on fuel price derivatives
(4,896
)
 
9,849

 
(2,073
)
 
3,967

Amortization of acquired intangible assets
(8,330
)
 
(8,134
)
 
(16,617
)
 
(16,513
)
Stock-based compensation
(3,117
)
 
(1,982
)
 
(5,540
)
 
(4,388
)
Deferred loan costs associated with the extinguishment of debt

 

 

 
(1,004
)
Acquisition related expenses
(500
)
 

 
(500
)
 

Income before income taxes
$
66,730


$
67,298


$
123,789


$
112,502

Beginning in the first half of 2014, adjusted pre-tax income before NCI excludes the expense of stock-based compensation and acquisition related expenses. For comparative purposes, adjusted pre-tax income before NCI for the prior periods has been adjusted to reflect the exclusion of stock-based compensation and differs from the figures previously reported due to this adjustment. No acquisition expenses were incurred during the first half of 2013.We believe this adjustment makes this non-GAAP measurement more comparable to our peers.


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


15.
Subsequent Event

Acquisition of Evolution1

On July 16, 2014, the Company completed the acquisition of the stock of Evolution1, a leading provider of cloud-based technology and payment solutions within the healthcare industry for approximately $532,500 in cash. The transaction was financed through the Company’s cash on hand and existing credit facility. Evolution1 developed and operates a all-in-one, multi-tenant technology platform, card products, and mobile offering that supports a full range of healthcare account types. This includes consumer-directed payments for Health Savings Accounts, Health Reimbursement Arrangements, Flexible Spending Accounts, Voluntary Employee Beneficiary Associations, and defined contribution and wellness programs. The Company acquired Evolution1 to advance the Company's capabilities in the healthcare market and enhance the Company's positioning and exposure to this growing market. The Company expects Evolution1 to contribute approximatly $80,000 in annual revenues. The results of operations for Evolution1 will be presented in the Company's Other Payment Solutions segment.

Due to the timing of the transaction during the third quarter of 2014, the Company has not completed its purchase accounting of Evolution1 and is unable to provide further information regarding the assets, liabilities and intangible assets acquired in the purchase.

Sale of Pacific Pride

On July 29, 2014, the Company signed an agreement to sell its wholly owned subsidiary Pacific Pride for $50,000, which represents an approximate pre-tax gain of $29,000. The transfer of the operations of Pacific Pride is scheduled to occur on July 31, 2014. 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 operations of Pacific Pride are not material to the Company's annual revenue, net income or earnings per share. Simultaneously with the sale, the Company entered into a multi-year agreement with the buyer that will continue to allow WEX branded card acceptance at Pacific Pride locations. The Company does not view this divestiture as a strategic shift in its Fleet Payment Solution segment.



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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting estimates affect our financial statements. The discussion also provides information about the financial results of the two segments of our business to provide a better understanding of how those segments and their results affect our financial condition and results of operations as a whole. This discussion should be read in conjunction with our audited consolidated financial statements as of December 31, 2013, the notes accompanying those financial statements and management’s discussion and analysis as contained in our Annual Report on Form 10-K filed with the SEC on February 27, 2014 and in conjunction with the unaudited condensed consolidated financial statements and notes in Item 1 of Part I of this report.

Overview
WEX is a leading provider of corporate card payment solutions. We have expanded the scope of our business into a multi-channel provider of corporate payment solutions. We currently operate in two business segments: Fleet Payment Solutions and Other Payment Solutions. Our business model enables us to provide exceptional payment security and control across a spectrum of payment sectors. The Fleet Payment Solutions segment provides customers with fleet vehicle payment processing services specifically designed for the needs of commercial and government fleets. Fleet Payment Solutions revenue is earned primarily from payment processing, account servicing and transaction processing, with the majority of revenue generated by payment processing. Management estimates that WEX fleet cards are accepted at over 90 percent of fuel locations in each of the United States and Australia. The Other Payment Solutions segment provides customers with payment processing solutions for their corporate purchasing and transaction monitoring needs through our payment products. Other Payment Solutions revenue is earned primarily from payment processing revenue from our virtual card product. The Other Payment Solutions segment has operations in North America, Europe, Australia and Brazil.
The Company’s U.S. operations include WEX, and our wholly owned subsidiaries Fleet One and WEX Bank and rapid! Paycard. Our international operations include our wholly-owned subsidiaries WEX Fuel Cards Australia, WEX Prepaid Cards Australia, WEX New Zealand, WEX Europe, located in England, and our majority equity positions in UNIK, a Brazil based company, and our majority owned subsidiary WEX Europe Services, located in the United Kingdom.
Recent Events
Acquisition of Evolution1
On July 16, 2014, we completed the acquisition of the stock of Evolution1, a leading provider of cloud-based technology and payment solutions within the healthcare industry for approximately $533 million in cash. The transaction was financed through our cash on hand and existing credit facility. Evolution1 developed and operates a all-in-one, multi-tenant technology platform, card products, and mobile offering that supports a full range of healthcare account types. This includes consumer-directed payments for Health Savings Accounts, Health Reimbursement Arrangements, Flexible Spending Accounts, Voluntary Employee Beneficiary Associations, and defined contribution and wellness programs. We acquired Evolution1 to advance the our capabilities in the healthcare market and enhance our positioning and exposure to this growing market. We expect Evolution1 to contribute approximately $80 million in annual revenues. The results of operations for Evolution1 will be presented in our Other Payment Solutions segment.
Due to the timing of the transaction during the third quarter of 2014, we have not completed the purchase accounting of Evolution1 and are unable to provide further information regarding the assets, liabilities and intangible assets acquired in the purchase.
ESSO Card Program
July 17, 2014, we announced the execution of the definitive purchase and sale agreement relating to the previously announced proposed acquisition of the Esso Card program through a majority owned subsidiary, WEX Europe Services Limited. In addition, all necessary regulatory approvals have been received and the employee information and consultation processes have been cleared. The transaction is expected to close in late 2014 or early 2015.
Sale of Pacific Pride
On July 29, 2014, we signed an agreement to sell our wholly owned subsidiary Pacific Pride for $50 million, which represents an approximate pre-tax gain of $29 million. The transfer of the operations of Pacific Pride is scheduled to occur on July 31, 2014. We decided to sell the operations of Pacific Pride as it did not align with the long-term strategy of the core fleet business. The operations of Pacific Pride are not material to our annual revenue, net income or earnings per share. Simultaneously with the sale, the Company entered into a multi-year agreement with the buyer that will continue to allow WEX

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branded card acceptance at Pacific Pride locations. The Company does not view this divestiture as a strategic shift in its Fleet Payment Solution segment.

Summary
Below are selected items from the second quarter of 2014:
Corporate charge card purchase volume grew by approximately $1.2 billion from the second quarter of 2013 to $4.3 billion for the second quarter of 2014, an increase of 36.4 percent.
Average number of vehicles serviced increased 6.7 percent from the second quarter of 2013 to approximately 7.9 million for the second quarter of 2014.
Total fuel transactions processed increased 5.6 percent from the second quarter of 2013 to 98.6 million for the second quarter of 2014. Total payment processing transactions in our Fleet Payment Solutions Segment increased 6.2 percent to 78.4 million for the second quarter of 2014 as compared to the same quarter in 2013. Transaction processing transactions increased 3.0 percent to 20.2 million for the second quarter of 2014, as compared to the same quarter in 2013.
Average expenditure per payment processing transaction in our Fleet Payment Solutions Segment increased 3.1 percent to $88.46 for the second quarter of 2014, from $85.78 for the same period in the prior year. The average U.S. fuel price per gallon during the second quarter of 2014, was $3.76, a 1.6 percent increase over the same period in the prior year. The average Australian fuel price per gallon during the second quarter of 2014, was US$5.44, a 4.0 percent increase as compared to the same period in the prior year.
Credit loss expense in the Fleet Payment Solutions segment was $6.3 million during the second quarter of 2014, as compared to $4.8 million during the second quarter of 2013. Spend volume increased 9.5 percent in the second quarter of 2014, as compared to the same quarter last year and our credit losses were 9.1 basis points of fuel expenditures for the second quarter of 2014, as compared to 7.6 basis points of fuel expenditures for the same period last year.
Realized losses on our fuel price derivatives during the second quarter of 2014 were $2.7 million as compared to $1.2 million for the same period in the prior year.
We purchased approximately 30 thousand shares of our common stock at cost of approximately $2.8 million during the second quarter of 2014.
Our effective tax rate was 35.8 percent for the second quarter of 2014 as compared to 37.5 percent for the second quarter of 2013. Future tax rates may fluctuate due to changes in the mix of earnings among different tax jurisdictions. Our tax rate may also fluctuate due to the impacts that rate and mix changes have on our net deferred tax assets.

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Results of Operations
Fleet Payment Solutions
The following table reflects comparative operating results and key operating statistics within our Fleet Payment Solutions segment:
(in thousands, except per transaction and per gallon data)
Three months ended June 30,
 
Increase (decrease)
 
Six months ended  June 30,
 
Increase (decrease)
2014
 
2013
 
Amount
 
Percent
 
2014
 
2013
 
Amount
 
Percent
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Payment processing revenue
$
94,550

 
$
88,422

 
$
6,128

 
7
 %
 
$
180,252

 
$
171,616

 
$
8,636

 
5
 %
Transaction processing revenue
5,250

 
4,897

 
353

 
7
 %
 
10,140

 
9,507

 
633

 
7
 %
Account servicing revenue
20,112

 
18,615

 
1,497

 
8
 %
 
39,467

 
37,178

 
2,289

 
6
 %
Finance fees
17,661

 
13,733

 
3,928

 
29
 %
 
34,981

 
26,981

 
8,000

 
30
 %
Other
8,255

 
5,373

 
2,882

 
54
 %
 
16,423

 
11,797

 
4,626

 
39
 %
Total revenues
145,828

 
131,040

 
14,788

 
11
 %
 
281,263

 
257,079

 
24,184

 
9
 %
Total operating expenses
88,682

 
77,599

 
11,083

 
14
 %
 
177,414

 
152,473

 
24,941

 
16
 %
Operating income
57,146


53,441

 
3,705

 
7
 %
 
103,849

 
104,606

 
(757
)
 
(1
)%
Gain (loss) on foreign currency transactions
1,146

 
(33
)
 
1,179

 
(3,573
)%
 
1,029

 
(116
)
 
1,145

 
(987
)%
Financing interest expense (a)
(7,276
)
 
(7,368
)
 
92

 
(1
)%
 
(14,632
)
 
(14,707
)
 
75

 
(1
)%
Net realized and unrealized (losses) gains on derivative instruments (a)
(7,561
)
 
8,614

 
(16,175
)
 
(188
)%
 
(5,716
)
 
859

 
(6,575
)
 
(765
)%
Income before income taxes
$
43,455

 
$
54,654

 
$
(11,199
)
 
(20
)%
 
$
84,530

 
$
90,642

 
$
(6,112
)
 
(7
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Key operating statistics
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Payment processing revenue: