10-Q 1 wex0331201910-q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10–Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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
   logoa10.jpg
WEX INC.
(Exact name of registrant as specified in its charter)
Delaware
 
01–0526993
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1 Hancock St., Portland, ME
 
04101
(Address of principal executive offices)
 
(Zip Code)
(207) 773–8171
(Registrant’s telephone number, including area code) 
N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes   ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S–T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes   ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
Emerging growth company

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

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 Ticker Symbol
Name of each exchange on which registered
Common Stock, $0.01 par value
WEX
New York Stock Exchange

Number of shares of common stock outstanding as of April 30, 2019 was 43,249,922.



TABLE OF CONTENTS




2


Unless otherwise indicated or required by the context, the terms “we,” “us,” “our,” “WEX,” or the “Company,” in this
Quarterly Report on Form 10–Q mean WEX Inc. and all of its subsidiaries that are consolidated under Generally Accepted Accounting Principles in the United States.
FORWARD–LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for statements that are forward-looking and are not statements of historical facts. This Quarterly Report includes forward-looking statements including, but not limited to, statements about management’s plan and goals. Any statements in this Quarterly Report that are not statements of historical facts are forward-looking statements. When used in this Quarterly Report, the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. Forward-looking statements relate to our future plans, objectives, expectations and intentions and are not historical facts and accordingly involve known and unknown risks and uncertainties and other factors that may cause the actual results or performance to be materially different from future results or performance expressed or implied by these forward-looking statements. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report and in oral statements made by our authorized officers:
the effects of general economic conditions on fueling patterns as well as payment and transaction processing activity;
the impact of foreign currency exchange rates on the Company’s operations, revenue and income;
changes in interest rates;
the impact of fluctuations in fuel prices;
the effects of the Company’s business expansion and acquisition efforts;
potential adverse changes to business or employee relationships, including those resulting from the completion of an acquisition;
competitive responses to any acquisitions;
uncertainty of the expected financial performance of the combined operations following completion of an acquisition;
the failure to successfully integrate the Company’s acquisitions;
the ability to realize anticipated synergies and cost savings;
unexpected costs, charges or expenses resulting from an acquisition;
the Companys failure to successfully acquire, integrate, operate and expand commercial fuel card programs;
the failure of corporate investments to result in anticipated strategic value;
the impact and size of credit losses;
the impact of changes to the Company’s credit standards;
breaches of the Company’s technology systems or those of our third-party service providers and any resulting negative impact on our reputation, liabilities or relationships with customers or merchants;
the Companys failure to maintain or renew key commercial agreements;
failure to expand the Company’s technological capabilities and service offerings as rapidly as the Company’s competitors;
failure to successfully implement the Company’s information technology strategies and capabilities in connection with its technology outsourcing and insourcing arrangements and any resulting cost associated with that failure;
the actions of regulatory bodies, including banking and securities regulators, or possible changes in banking or financial regulations impacting the Company’s industrial bank, the Company as the corporate parent or other subsidiaries or affiliates;
the impact of the material weaknesses disclosed in Item 9A of the Company’s annual report on Form 10–K for the year ended December 31, 2018 and the effects of the Company’s investigation and remediation efforts in connection with certain immaterial errors in the financial statements of our Brazilian subsidiary;
the impact of the Company’s outstanding notes on its operations;
the impact of increased leverage on the Company’s operations, results or borrowing capacity generally, and as a result of acquisitions specifically;
the incurrence of impairment charges if our assessment of the fair value of certain of our reporting units changes;
the uncertainties of litigation; as well as
other risks and uncertainties identified in Item 1A of our annual report on Form 10–K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on March 18, 2019.
Our forward-looking statements and these factors do not reflect the potential future impact of any alliance, merger, acquisition, disposition or stock repurchases. The forward-looking statements speak only as of the date of the initial filing of this Quarterly Report and undue reliance should not be placed on these statements. We disclaim any obligation to update any forward-looking statements as a result of new information, future events or otherwise.

3


ACRONYMS AND ABBREVIATIONS
The acronyms and abbreviations identified below are used in this Quarterly Report, including the unaudited condensed consolidated financial statements and the notes thereto. The following is provided to aid the reader and provide a reference point when reviewing this Quarterly Report.
2016 Credit Agreement
Credit agreement entered into on July 1, 2016, as amended from time to time, 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.
2017 Tax Act
2017 Tax Cuts and Jobs Act
Adjusted Net Income or ANI

A non-GAAP measure that adjusts net income attributable to shareholders to exclude unrealized gains and losses on financial instruments, net foreign currency remeasurement gains and losses, acquisition-related intangible amortization, other acquisition and divestiture related items, stock-based compensation, restructuring and other costs, debt restructuring and debt issuance cost amortization, adjustments attributed to our non-controlling interests and certain tax related items.
ASC
Accounting Standards Codification
ASU 2014–09
Accounting Standards Update No. 2014–09 Revenue from Contracts with Customers (Topic 606)
ASU 2016–02
Accounting Standards Update No. 2016–02 Leases (Topic 842)
ASU 2016–13
Accounting Standards Update No. 2016-13 Financial Instruments – Credit Losses (Topic 326)
ASU 2018–15
Accounting Standards Update No. 2018–15 Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350–40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
Australian Securitization Subsidiary
Southern Cross WEX 2015–1 Trust, a special purpose entity consolidated by the Company
Average expenditure per payment processing transaction
Average total dollars of spend in a funded fuel transaction
Company
WEX Inc. and all entities included in the unaudited condensed consolidated financial statements
Discovery Benefits (or “DBI”)
Discovery Benefits, Inc.
EBITDA
A non-GAAP measure that adjusts income before income taxes to exclude interest, depreciation and amortization
EFS
Electronic Funds Source, LLC, a provider of customized corporate payment solutions for fleet and corporate customers with a focus on the large and mid-sized over-the-road fleets. On July 1, 2016, the Company acquired WP Mustang Topco LLC, the indirect parent of Electronic Funds Source, LLC and Warburg Pincus Private Equity XI (Lexington), LLC, an affiliated entity, from investment funds affiliated with Warburg Pincus LLC
European Securitization Subsidiary
Gorham Trade Finance B.V., a special purpose entity consolidated by the Company
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
GAAP
Generally Accepted Accounting Principles in the United States
ICS
Insured Cash Sweep
Indenture
The Notes were issued pursuant to an indenture dated as of January 30, 2013 among the Company, the guarantors listed therein, and The Bank of New York Mellon Trust Company, N.A., as trustee
NCI
Non-controlling interest
Notes
$400 million notes with a 4.75 percent fixed rate, issued on January 30, 2013
Noventis
Noventis, Inc.
NYSE
New York Stock Exchange
Over-the-road
Typically heavy trucks traveling long distances
Pavestone Capital
Pavestone Capital, LLC
Payment solutions purchase volume
Total amount paid by customers for transactions
Payment processing transactions
Funded payment transactions where the Company maintains the receivable for total purchase
PPG
Price per gallon of fuel
Redeemable non-controlling interest
The portion of U.S. Health business’ net assets owned by a non-controlling interest subject to redemption rights held by the non-controlling interest 
SaaS
Software-as-a-service
SEC
Securities and Exchange Commission
Segment adjusted operating income
A non-GAAP measure that adjusts operating income to exclude specified items that the Company’s management excludes in evaluating segment performance, including acquisition and divestiture related expenses and adjustments including the amortization of purchased intangibles, the expense associated with stock-based compensation, restructuring and other costs, debt restructuring costs and unallocated corporate expenses.
Total fuel transactions
Total of transaction processing and payment processing transactions of our Fleet Solutions segment
U.S. Health business
WEX Health and DBI, collectively
WEX Latin America
UNIK S.A., the Company’s Brazilian subsidiary, which has been subsequently branded WEX Latin America
WEX
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

4


PART I
Item 1. Financial Statements.
WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
 
 
Three Months Ended March 31,
 
2019
 
2018
Revenues
 
 
 
Payment processing revenue
$
186,798

 
$
168,454

Account servicing revenue
87,086

 
78,704

Finance fee revenue
46,373

 
48,881

Other revenue
61,619

 
57,989

Total revenues
381,876

 
354,028

Cost of services
 
 
 
Processing costs
91,119

 
73,106

Service fees
14,246

 
12,326

Provision for credit losses
17,791

 
14,226

Operating interest
9,564

 
8,485

Depreciation and amortization
20,513

 
20,450

Total cost of services
153,233

 
128,593

General and administrative
64,405

 
55,309

Sales and marketing
64,119

 
56,541

Depreciation and amortization
31,184

 
29,726

Operating income
68,935

 
83,859

Financing interest expense
(31,112
)
 
(27,337
)
Net foreign currency (loss) gain
(3,885
)
 
390

Net unrealized (loss) gain on financial instruments
(11,912
)
 
13,508

Income before income taxes
22,026

 
70,420

Income taxes
5,818

 
17,749

Net income
16,208

 
52,671

Less: Net income from non-controlling interests
74

 
701

Net income attributable to shareholders
$
16,134

 
$
51,970

 
 
 
 
Net income attributable to WEX Inc. per share:
 
 
 
Basic
$
0.37

 
$
1.21

Diluted
$
0.37

 
$
1.20

Weighted average common shares outstanding:
 
 
 
Basic
43,220

 
43,049

Diluted
43,572

 
43,450

See notes to unaudited condensed consolidated financial statements.


5


WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
 
Three Months Ended March 31,
 
2019
 
2018
Net income
$
16,208

 
$
52,671

Foreign currency translation
4,371

 
1,693

Comprehensive income
20,579


54,364

Less: Comprehensive income attributable to non-controlling interests
36

 
991

Comprehensive income attributable to WEX Inc.
$
20,543

 
$
53,373

See notes to unaudited condensed consolidated financial statements.

6


WEX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited) 
 
March 31,
2019
 
December 31,
2018
Assets
 
 
 
Cash and cash equivalents
$
387,274

 
$
541,498

Restricted cash
138,804

 
13,533

Accounts receivable (net of allowances of $46,742 in 2019 and $46,948 in 2018)
2,830,555

 
2,584,203

Securitized accounts receivable, restricted
135,438

 
109,871

Prepaid expenses and other current assets
153,093

 
149,021

Total current assets
3,645,164

 
3,398,126

Property, equipment and capitalized software (net of accumulated depreciation of $325,067 in 2019 and $307,750 in 2018)
196,977

 
187,868

Goodwill
2,331,110

 
1,832,129

Other intangible assets (net of accumulated amortization of $542,833 in 2019 and $509,055 in 2018)
1,382,279

 
1,034,194

Investment securities
24,772

 
24,406

Deferred income taxes, net
11,091

 
9,643

Other assets
363,849

 
284,229

Total assets
$
7,955,242

 
$
6,770,595

Liabilities and Stockholders’ Equity
 
 
 
Accounts payable
$
1,093,128

 
$
814,742

Accrued expenses
278,413

 
312,268

Restricted cash payable
138,804

 
13,533

Short-term deposits
835,338

 
927,444

Short-term debt, net
184,357

 
216,517

Other current liabilities
86,388

 
27,067

Total current liabilities
2,616,428

 
2,311,571

Long-term debt, net
2,809,361

 
2,133,923

Long-term deposits
300,349

 
345,231

Deferred income taxes, net
203,274

 
151,685

Other liabilities
108,949

 
32,261

Total liabilities
6,038,361

 
4,974,671

Commitments and contingencies (Note 15)
 
 

Redeemable non-controlling interest
99,993

 

Stockholders’ Equity
 
 
 
Common stock $0.01 par value; 175,000 shares authorized; 47,674 issued in 2019 and 47,557 in 2018; 43,246 shares outstanding in 2019 and 43,129 in 2018
476

 
475

Additional paid-in capital
635,046

 
593,262

Retained earnings
1,456,327

 
1,481,593

Accumulated other comprehensive loss
(112,882
)
 
(117,291
)
Treasury stock at cost; 4,428 shares in 2019 and 2018
(172,342
)
 
(172,342
)
Total WEX Inc. stockholders’ equity
1,806,625

 
1,785,697

Non-controlling interest
10,263

 
10,227

Total stockholders’ equity
1,816,888

 
1,795,924

Total liabilities and stockholders’ equity
$
7,955,242

 
$
6,770,595

See notes to unaudited condensed consolidated financial statements.

7


WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
 
Common Stock Issued
 
 Additional
Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Treasury Stock
 
 Retained
Earnings
 
 Non-Controlling Interests
 
Total Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2017
47,352

 
$
473

 
$
569,319

 
$
(89,230
)
 
$
(172,342
)
 
$
1,312,660

 
$
9,220

 
$
1,630,100

Cumulative-effect adjustment1

 

 

 

 

 
638

 

 
638

Balance at January 1, 2018
47,352

 
$
473

 
$
569,319

 
$
(89,230
)
 
$
(172,342
)
 
$
1,313,298

 
$
9,220

 
$
1,630,738

Stock issued
148

 
2

 
574

 

 

 

 

 
576

Share repurchases for tax withholdings

 

 
(11,810
)
 

 

 

 

 
(11,810
)
Stock-based compensation expense

 

 
8,955

 

 

 

 

 
8,955

Foreign currency translation

 

 

 
1,403

 

 

 
290

 
1,693

Net income

 

 

 

 

 
51,970

 
701

 
52,671

Balance at March 31, 2018
47,500


$
475


$
567,038


$
(87,827
)
 
$
(172,342
)
 
$
1,365,268

 
$
10,211

 
$
1,682,823

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2019
47,557

 
$
475

 
$
593,262

 
$
(117,291
)
 
$
(172,342
)
 
$
1,481,593

 
$
10,227

 
$
1,795,924

Stock issued
117

 
1

 
404

 

 

 

 

 
405

Share repurchases for tax withholdings

 

 
(9,723
)
 

 

 

 

 
(9,723
)
Stock-based compensation expense

 

 
9,703

 

 

 

 

 
9,703

Adjustments of redeemable non-controlling interest

 

 
41,400

 

 

 
(41,400
)
 

 

Foreign currency translation

 

 

 
4,409

 

 

 
(38
)
 
4,371

Net income

 

 

 

 

 
16,134

 
74

 
16,208

Balance at March 31, 2019
47,674

 
$
476

 
$
635,046

 
$
(112,882
)
 
$
(172,342
)
 
$
1,456,327

 
$
10,263

 
$
1,816,888

1 Includes the impact of the Company’s modified retrospective adoption as part of Topic 606.
See notes to unaudited condensed consolidated financial statements.

8


WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net income
$
16,208

 
$
52,671

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
 
Net unrealized loss (gain)
12,870

 
(12,780
)
Stock-based compensation
9,703

 
8,955

Depreciation and amortization
51,697

 
50,176

Debt restructuring and debt issuance cost amortization
2,095

 
3,676

Provision for deferred taxes
3,402

 
16,296

Provision for credit losses
17,791

 
14,226

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable and securitized accounts receivable
(239,658
)
 
(264,475
)
Prepaid expenses and other current and other long-term assets
(7,109
)
 
121,622

Accounts payable
245,657

 
119,334

Accrued expenses and restricted cash payable
(43,554
)
 
(17,404
)
Income taxes
(1,153
)
 
(1,339
)
Other current and other long-term liabilities
2,161

 
(3,152
)
Net cash provided by operating activities
70,110

 
87,806

Cash flows from investing activities
 
 
 
Purchases of property, equipment and capitalized software
(28,385
)
 
(14,770
)
Acquisitions, net of cash acquired
(568,426
)
 

Purchase of equity investment

 
(2,307
)
Purchases of investment securities
(140
)
 
(121
)
Maturities of investment securities
85

 
72

Net cash used for investing activities
(596,866
)
 
(17,126
)
Cash flows from financing activities
 
 
 
Repurchase of share-based awards to satisfy tax withholdings
(9,723
)
 
(11,810
)
Proceeds from stock option exercises
405

 
576

Net change in deposits
(136,717
)
 
(185,433
)
Net activity on other debt
(57,556
)
 
(19,027
)
Borrowings on revolving credit facility
863,756

 
488,503

Repayments on revolving credit facility
(693,600
)
 
(625,821
)
Borrowings on term loans
550,000

 
153,000

Repayments on term loans
(15,871
)
 
(9,076
)
Debt issuance costs
(3,443
)
 
(2,907
)
Net change in securitized debt
(1,191
)
 
19,402

Net cash provided by (used for) financing activities
496,060

 
(192,593
)
Effect of exchange rates on cash, cash equivalents and restricted cash
1,743

 
(587
)
Net change in cash, cash equivalents and restricted cash
(28,953
)
 
(122,500
)
Cash, cash equivalents and restricted cash, beginning of period
555,031

 
522,385

Cash, cash equivalents and restricted cash, end of period
$
526,078

 
$
399,885

 
 
 
 
Supplemental disclosure of non-cash investing and financing activities
 
 
 
Capital expenditures incurred but not paid
$
2,046

 
$
4,801


See notes to unaudited condensed consolidated financial statements.
 
 
 
 


9


WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
1.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10–Q and Rule 10–01 of Regulation S–X. Accordingly, they do not include all information and notes required by GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements that are included in the Company’s Annual Report on Form 10–K for the year ended December 31, 2018, filed with the SEC on March 18, 2019 and our Form 10–K/A filed with the SEC on March 20, 2019. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results for any future periods or the year ending December 31, 2019.
Effective January 1, 2019, the Company modified the presentation of the unaudited condensed balance sheets to separately classify its restricted cash payable. The prior period has been reclassified to conform with this presentation. There was no change to current liabilities as a result of this change.
We apply the same accounting policies in preparing our quarterly and annual financial statements, with the exception of the new leasing standard which is required to be adopted on a prospective basis. Refer to Note 2, Recent Accounting Pronouncements, for more information. The Company rounds amounts in the unaudited condensed consolidated financial statements to thousands and calculates all per-share data from underlying whole-dollar amounts. Thus, certain amounts may not foot, crossfoot or recalculate based on reported numbers due to rounding.
Revision of Prior Period Unaudited Condensed Consolidated Financial Statements for Correction of Immaterial Errors
As more fully described in our 2018 Form 10–K, in 2018 we revised our prior year financial statements to correct for immaterial errors in the financial statements of our Brazilian subsidiary and certain other immaterial errors impacting prior years that were not previously recorded. The accompanying quarterly financial statements have been revised for these errors. Collectively, hereinafter these revisions to correct are referred to as the “Revised” financial statements or the “Revision”. Management believes that the effects of this Revision are not material to our previously issued unaudited condensed consolidated financial statements.
The effects of the Revision on our unaudited condensed consolidated statements of income and cash flows were as follows:
 
Three months ended March 31, 2018
(In thousands, except per share data)
As Previously Reported
 
Brazil Adjustments
 
Other Immaterial Adjustments
 
As Revised
Total revenues
$
354,829

 
$
(801
)
 
$

 
$
354,028

Processing costs
$
79,640

 
$
(6,534
)
 
$

 
$
73,106

Provision for credit losses
$
13,990

 
$
236

 
$

 
$
14,226

Operating income
$
78,362

 
$
5,497

 
$

 
$
83,859

Income taxes
$
15,589

 
$
2,343

 
$
(183
)
 
$
17,749

Net income
$
49,334

 
$
3,154

 
$
183

 
$
52,671

Net income attributable to shareholders
$
48,633

 
$
3,154

 
$
183

 
$
51,970

 
 
 
 
 
 
 
 
Net income attributable to WEX Inc. per share
 
 
 
 
 
 
 
Basic
$
1.13

 
$
0.08

 
$

 
$
1.21

Diluted
$
1.12

 
$
0.08

 
$

 
$
1.20

 
Three months ended March 31, 2018
(In thousands)
As Previously Reported
 
Brazil Adjustments
 
Other Immaterial Adjustments
 
As Revised
Net cash provided by operating activities
$
85,243

 
$

 
$
2,563

 
$
87,806

Effect of exchange rates on cash, cash equivalents and restricted cash
$
(2,577
)
 
$

 
$
1,990

 
$
(587
)
Cash, cash equivalents and restricted cash, beginning of period
$
526,938

 
$

 
$
(4,553
)
 
$
522,385


10

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


2.
Recent Accounting Pronouncements
The following table provides a brief description of accounting pronouncements adopted during the three months ended March 31, 2019 and recent accounting pronouncements that could have a material effect on our financial statements:
Standard
 
Description
 
Date/Method of Adoption
 
Effect on financial statements or other significant matters
Adopted During the Three Months Ended March 31, 2019
ASU 2016–02
 
This standard requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements.
 
The Company adopted ASU 2016–02 effective January 1, 2019, using the modified retrospective approach, and all practical expedients permitted under the transition guidance.
 
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016–02, Leases (Topic 842), which requires leases with a duration greater than twelve months to be recognized on the balance sheet as right-of-use (“ROU”) assets and lease liabilities.
We adopted the new standard using the modified retrospective approach and have elected the package of practical expedients permitted under the transition guidance, including the hindsight practical expedients for expired or existing contracts, which allowed us to carryforward our historical determination of (i) whether a contract is or contains a lease, (ii) lease classification and (iii) initial direct costs. Additionally, we elected the practical expedients which allowed us to (i) not perform an allocation of lease and non-lease components for real estate leases, (ii) continue to account for short-term leases under Topic 840 and (iii) utilize our incremental borrowing rate (“IBR”), rather than the rate implicit in each lease, to calculate the present value of the remaining lease payments. As such, the unaudited condensed consolidated financial statements for the period ended March 31, 2019 are presented under the new standard, while comparative periods presented continue to be reported in accordance with Topic 840.
The most significant impact of adoption was the recording of operating lease ROU assets and operating lease liabilities on our unaudited condensed consolidated balance sheets at January 1, 2019. Refer to Note 14, Leases, for more information. The standard did not materially impact our results of operations or cash flows.

ASU 201815
 
This standard clarifies the accounting for capitalizing implementation costs in a cloud computing arrangement that is a service contract. The standard provides that implementation costs be treated using the same criteria used for internal-use software development costs, with amortization expense being recorded in the same income statement expense line as the hosted service costs and over the expected term of the hosting arrangement.
 
Effective January 1, 2019, the Company early adopted ASU 2018–15 on a prospective basis.
 
Under the standard, we now capitalize implementation costs related to our cloud migration of technology platforms to the cloud. Such amounts are amortized over the lesser of the term of the hosting arrangement, considering any explicit renewal options for which we are reasonably certain to exercise, or the useful life of the underlying hosted software. We do not expect that adoption of this standard will have a material impact on our results of operations, cash flows or consolidated financial position.
 
 
 
 
 
 
 
Not Yet Adopted as of March 31, 2019
ASU 201613
 
This standard requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses will be based on historical experience, current conditions and reasonable and supportable forecasts that impact the collectability of the reported amount.
 
The standard is effective January 1, 2020.
 
The Company is evaluating the impact the standard will have on its consolidated financial statements and related disclosures.


11

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


3.
Revenue
In accordance with Topic 606, revenue is recognized when, or as, performance obligations are satisfied as defined by the terms of the contract, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for goods or services provided. The vast majority of the Company’s Topic 606 revenue is derived from stand-ready commitments to provide payment processing, transaction processing and SaaS services and support. Revenue is recognized based on the value of services transferred to date using a time elapsed output method. For payment processing and transaction processing, services are considered to be transferred when a transaction is captured and the Company has validated that the transaction has no errors. Point-in-time revenue recognized during the three months ended March 31, 2019 and 2018 was not material.
Topic 606 does not apply to rights or obligations associated with financial instruments, including the Company’s finance fee and interest income from banking relationships and cardholders, certain other fees associated with cardholder arrangements and commissions paid related to such agreements, which continue to be within the scope of Topic 310, Receivables. In addition, gains on sale of WEX Latin America receivables are included in other revenue and are within the scope of ASC 860, Transfers and Servicing.    
We disaggregate our revenue from contracts with customers by service-type for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. See Note 18, Segment Information, for further information.
The following table disaggregates our consolidated revenue for the three months ended March 31, 2019:
 
Three Months Ended March 31, 2019
(In thousands)
Fleet Solutions
 
Travel and Corporate Solutions
 
Health and Employee Benefit Solutions
 
Total
Topic 606 revenues
 
 
 
 
 
 
 
Payment processing revenue
$
107,408

 
$
59,998

 
$
19,392

 
$
186,798

Account servicing revenue
6,800

 
10,585

 
37,262

 
54,647

Other revenue
16,986

 
1,105

 
6,776

 
24,867

Total Topic 606 revenues
$
131,194

 
$
71,688

 
$
63,430

 
$
266,312

 
 
 
 
 
 
 
 
Non-Topic 606 revenues
 
 
 
 
 
 
 
Account servicing revenue
$
32,439

 
$

 
$

 
$
32,439

Finance fee revenue
45,864

 
357

 
152

 
46,373

Other revenue
23,285

 
9,603

 
3,864

 
36,752

Total non-Topic 606 revenues
$
101,588

 
$
9,960

 
$
4,016

 
$
115,564

 
 
 
 
 
 
 
 
Total revenues
$
232,782

 
$
81,648

 
$
67,446

 
$
381,876


    








12

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


The following table disaggregates our consolidated revenue for the three months ended March 31, 2018:
 
Three Months Ended March 31, 2018
(In thousands)
Fleet Solutions
 
Travel and Corporate Solutions
 
Health and Employee Benefit Solutions
 
Total
Topic 606 revenues
 
 
 
 
 
 
 
Payment processing revenue
$
106,978

 
$
44,777

 
$
16,699

 
$
168,454

Account servicing revenue
8,466

 
9,469

 
27,025

 
44,960

Other revenue
17,042

 
1,117

 
8,142

 
26,301

Total Topic 606 revenues
$
132,486

 
$
55,363

 
$
51,866

 
$
239,715

 
 
 
 
 
 
 
 
Non-Topic 606 revenues
 
 
 
 
 
 
 
Account servicing revenue
$
33,744

 

 

 
$
33,744

Finance fee revenue
43,604

 
259

 
5,018

 
48,881

Other revenue
20,531

 
11,157

 

 
31,688

Total non-Topic 606 revenues
$
97,879

 
$
11,416

 
$
5,018

 
$
114,313

 
 
 
 
 
 
 
 
Total revenues
$
230,365

 
$
66,779

 
$
56,884

 
$
354,028

Payment Processing Revenue
Payment processing revenue consists primarily of interchange income. Interchange income is a fee paid by a merchant bank (“merchant”) to the card-issuing bank (generally the Company) in exchange for the Company facilitating and processing transactions with cardholders. Interchange fees are set by the card network. WEX processes transactions through both closed-loop and open-loop networks.
Our Fleet Solutions segment interchange income primarily relates to revenue earned on transactions processed through the Company’s proprietary closed-loop fuel networks. In closed-loop fuel network arrangements, written contracts are entered into between the Company and merchants, which determine the interchange fee charged on transactions. The Company extends short-term credit to the fleet cardholder and pays the merchant the purchase price for the cardholder’s transaction, less the interchange fees the Company retains. The Company collects the total purchase price from the fleet cardholder. In Europe, interchange income is specifically derived from the difference between the negotiated price of fuel from the supplier and the agreed upon price paid by fleet cardholders.
Interchange income in our Travel and Corporate Solutions and Health and Employee Benefit Solutions segments relates to revenue earned on transactions processed through open-loop networks. In open-loop network arrangements, there are several intermediaries involved between the merchant and the cardholder, and written contracts do not exist between all parties involved in the process. Rather, the transaction is governed by the rates determined by the payment network at the point-of-sale. This framework dictates the interchange rate, the risk of loss, dispute procedures and timing of payment. For these transactions, there is an implied contract between the Company and the merchant. In our Travel and Corporate Solutions segment, the Company remits payment to the card network for the purchase price of the cardholder transaction, less the interchange fees the Company earns. The Company collects the total purchase price from the cardholder. In our Health and Employee Benefit Solutions segment, funding of transactions and collections from cardholders is performed by third-party sponsor banks, who remit a portion of the interchange fee to us.
The Company has determined that the merchant is the customer as it relates to interchange income regardless of the type of network through which transactions are processed. The Company’s primary performance obligation to merchants is a stand-ready commitment to provide payment and transaction processing services as the merchant requires, which is satisfied over time in daily increments. Since the timing and quantity of transactions to be processed by us is not determinable, the total consideration is determined to be variable consideration. The variable consideration for our payment and transaction processing service is usage-based and therefore specifically relates to our efforts to satisfy our obligation. The variability is satisfied each day the service is provided to the customer. We directly ascribe variable fees to the distinct day of service to which it relates, and we consider the services performed each day in order to ascribe the appropriate amount of total fees to that day. Therefore, we measure interchange income on a daily basis based on the services that are performed on that day.

13

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


The Company determined that WEX does not control the services performed by merchant acquirers, card networks, sponsor banks and online bill payment aggregators as each of these parties is the primary obligor for their portion of payment and transaction processing services performed. Therefore, interchange income is recognized net of any fees owed to these intermediaries. The Company determined that services performed by third-party payment processors are controlled by WEX as the Company is responsible for directing how the third-party payment processor authorizes and processes transactions on the Company’s behalf. Therefore, such fees paid to third-party payment processors are recorded as service fees within cost of services.
Additionally, the Company enters into contracts with certain large customers or strategic cardholders that provide for fee rebates tied to performance milestones. If such fee rebates constitute consideration payable to a customer or to another party that purchases services from the customer, they are considered variable consideration and are recorded as a reduction in payment processing revenue in the same period that the related interchange income is recognized. For the three months ended March 31, 2019 and 2018, such variable consideration totaled $198.7 million and $198.5 million, respectively. Certain other fee rebates that constitute costs to obtain a contract are recorded as sales and marketing expenses.
Account Servicing Revenue
In our Fleet Solutions segment, account servicing revenue is primarily comprised of monthly fees charged to cardholders based on the number of vehicles serviced. These fees are primarily in return for providing monthly vehicle data reports and are recognized on a monthly basis as the service is provided. Additionally, account servicing revenue includes other fees recognized as revenue when assessed to the cardholder as part of the lending relationship, which is outside the scope of Topic 606. The Company also recognizes account servicing revenue related to reporting services on telematics hardware placements and permit sales to our over-the-road fleet customer base, both of which are within the scope of Topic 606.
In our Travel and Corporate Solutions segment, account servicing primarily consists of licensing fees for the use of our accounts receivable and accounts payable SaaS platforms.
In our Health and Employee Benefit Solutions segment, we recognize account servicing fees for the per-participant per-month fee charged on our SaaS healthcare technology platform. Customers including health plans, third-party administrators, financial institutions and payroll companies typically enter into three to five year contracts, which contain significant termination penalties.
Our Travel and Corporate Solutions and Health and Employee Benefit Solutions segments provide SaaS services and support, which are stand-ready commitments and are satisfied over time in a series of daily increments. Revenue is recognized based on an output method using days elapsed to measure progress as the Company transfers control evenly over each monthly subscription period.
Finance Fee Revenue
The Company earns revenue on overdue accounts, which is recognized as revenue at the time the fees are assessed. The finance fee is calculated using the greater of a minimum charge or a stated late fee rate multiplied by the outstanding balance that is subject to a late fee charge. On occasion, these fees are waived to maintain customer goodwill. The established reserve for such waived amounts is estimated and offset against the late fee revenue recognized. These waived fees amounted to $4.5 million and $4.4 million during the three months ended March 31, 2019 and 2018, respectively. Finance fee revenue includes amounts earned by the Company’s factoring business, which purchases accounts receivable from third parties at a discount. Through June 2018, the Company also recognized finance fee revenue earned on the Company’s foreign salary advance product. Subsequently, the Company revised its WEX Latin America securitized debt agreement and recognizes gains on the sale of these receivables within “Other revenue” below. See Note 10, Off-Balance Sheet Arrangements, for further information on our WEX Latin America securitization.
Other Revenue
Other revenue includes transaction processing revenue, professional services including software development projects and other services sold subsequent to the core offerings, and the sales of telematics hardware, all of which are within the scope of Topic 606. Revenue is recognized when control of the services or hardware is transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those services. In addition, international settlement fees and certain other cardholder fees (e.g. replacement card fees) and gains on sale of WEX Latin America receivables are included in other revenue. This revenue is outside the scope of Topic 606 and is recognized upon completion of the related service or the sale date of the receivables.

14

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


Contract Balances
The Company’s contract assets consist of upfront payments made to customers under long-term contracts and are recorded upon payment or when due. The resulting asset is amortized against revenue as the Company performs its obligations under these arrangements. The Company’s contract liabilities consist of customer payments received before the Company has satisfied the associated performance obligations and upfront payments due to the customer.
The following table provides information about these contract balances.
(In thousands)
 
 
 
 
 
 
Contract balance
 
Location on the unaudited condensed consolidated balance sheets
 
March 31, 2019
 
December 31, 2018
Receivables1
 
Accounts receivable, net
 
$
41,092

 
$
32,949

Contract assets
 
Prepaid expenses and other current assets
 
$
5,576

 
$
3,819

Contract assets
 
Other assets
 
$
20,280

 
$
19,232

Contract liabilities
 
Other current liabilities
 
$
6,594

 
$
7,612

1 The majority of the Company’s receivables, which are excluded from the table above, are either due from cardholders, who have not been deemed our customer as it relates to interchange income, or from revenues earned outside of the scope of Topic 606.
In the three months ended March 31, 2019, we recognized revenue of $2.8 million related to contract liabilities at December 31, 2018. In the three months ended March 31, 2018, revenue recognized related to contract liabilities at January 1, 2018 was immaterial.
Remaining Performance Obligations
The Company’s unsatisfied, or partially unsatisfied performance obligations as of March 31, 2019 represent the remaining minimum monthly fees on a portion of contracts across the lines of business and contractually obligated professional services yet to be provided by the Company. It is not indicative of the Company’s future revenue, as it relates to an insignificant portion of the Company’s operations.
The following table includes revenue expected to be recognized related to remaining performance obligations at the end of the reporting period.
(In thousands)
Remaining 2019
 
2020
 
2021
 
2022
 
2023
 
2024
 
Total
Minimum monthly fees1
$
45,776

 
$
40,285

 
$
23,227

 
$
12,313

 
$
3,753

 
$
639

 
$
125,993

Professional services2
11,655

 
515

 

 

 

 

 
12,170

Total remaining performance obligations
$
57,431

 
$
40,800

 
$
23,227

 
$
12,313

 
$
3,753

 
$
639

 
$
138,163

1 The transaction price allocated to the remaining performance obligations represents the minimum monthly fees on certain service contracts, which contain substantive termination penalties that require the counterparty to pay the Company for the aggregate remaining minimum monthly fees upon an early termination for convenience.
2 Includes software development projects and other services sold subsequent to the core offerings, to which the customer is contractually obligated.

15

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


4.
Acquisitions
Asset Acquisition
In December 2016, the Company entered into a contract with Chevron to issue and operate branded commercial fleet cards commencing in 2018. During October 2018, the Company entered into a definitive asset purchase agreement to acquire Chevron’s existing trade accounts receivable and customer portfolio from a third party for approximately $223.4 million, of which a portion will be paid during 2019. During 2018, the consideration paid consisted of approximately $162.8 million to acquire the customer portfolio, with $38.9 million paid into escrow for the carrying value of a portion of the accounts receivable at the date of purchase.
As of March 31, 2019, the deposits for the customer portfolio and accounts receivable are recorded in other assets and prepaid expenses and other current assets on the unaudited condensed consolidated balance sheets, respectively. During the second quarter of 2019, when the Company obtains control of the customer portfolio and the customer accounts are converted onto the Company’s payment processing platform, the amounts will be reclassified to other intangible assets and accounts receivable, respectively. We will account for this transaction under the asset acquisition method of accounting.
    Concurrently with entering into the asset purchase agreement, we modified a number of contract terms, including extending the term of Chevron’s agreement, which is the period that we will use to amortize the other intangible asset on a straight-line basis. Transaction costs related to the acquisition were insignificant and expensed as incurred.
Business Acquisitions

In both the three months ended March 31, 2019 and 2018, the acquisition and merger related costs related to completed business combinations were immaterial. 
Discovery Benefits, Inc.
On March 5, 2019, the Company acquired Discovery Benefits, an employee benefits administrator, for a total purchase price of $525.6 million, including $50 million which is payable in January 2020. The acquisition was primarily funded with cash on hand and through borrowings under the 2016 Credit Agreement. The seller of Discovery Benefits obtained a 4.9 percent equity interest in the U.S. Health business. The fair value of the equity interest was determined to be $100.0 million on the acquisition date. See Note 12, Redeemable Non-Controlling Interest, for further information.
This acquisition has been accounted for as a business combination, with preliminary goodwill reflecting the comprehensive suite of products and services for our partners and customers and opening go-to-market channels to include consulting firms and brokers in our Health and Employee Benefit Solutions segment. The majority of the goodwill associated with this acquisition is deductible for tax purposes.

16

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


The following is a summary of the preliminary allocation of the purchase price to the assets and liabilities acquired, based on the estimated fair value at the date of acquisition:
(In thousands)
 
 
Cash consideration, net of cash and restricted cash acquired of $125,865
 
$
249,781

Fair value of redeemable non-controlling interest
 
100,000

Deferred cash consideration
 
50,000

Total consideration, net of cash and restricted cash acquired
 
$
399,781

Less:
 
 
Accounts receivable
 
10,367

Property and equipment
 
4,904

Customer relationships(a)(d)
 
213,600

Developed technologies(b)(d)
 
38,900

Trademarks and trade names(c)(d)
 
13,800

Other assets
 
13,589

Accounts payable
 
(3,024
)
Accrued expenses
 
(7,399
)
Restricted cash payable
 
(125,346
)
Deferred income taxes
 
(22,200
)
Other liabilities
 
(10,015
)
Recorded goodwill
 
$
272,605

(a) Weighted average life - 7.3 years.
(b) Weighted average life - 5.4 years.
(c) Weighted average life - 7.3 years.
(d) The weighted average life of all amortizable intangible assets acquired in this business combination is 7.0 years.
Since the acquisition date, DBI has contributed $8.6 million in total revenues and $1.1 million income before income taxes to Company operations.
Noventis, Inc.
On January 24, 2019, the Company acquired Noventis, a long-time customer and electronic payments network focused on optimizing payment delivery for bills and invoices to commercial entities, for $343.1 million, which was primarily funded with cash on hand and through borrowings under the 2016 Credit Agreement. Excluded from the consideration is $5.6 million paid to certain Noventis shareholders who held unvested option awards at the acquisition date.  The modification of these awards to accelerate the vesting resulted in the Company recording this expense as general and administrative expense in our unaudited condensed consolidated statement of income.
This acquisition, which expands our reach as a corporate payments supplier and provides more channels to billing aggregators and financial institutions in our Travel and Corporate Payment Solutions segment, was accounted for as a business combination, resulting in the recording of goodwill. The goodwill associated with this acquisition is not deductible for tax purposes.


17

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


The following is a summary of the preliminary allocation of the purchase price to the assets and liabilities acquired, based on the estimated fair value at the date of acquisition:
(In thousands)
 
 
Total consideration, net of cash and restricted cash acquired of $51,538
 
$
291,564

 
 
 
Less:
 
 
Accounts receivable
 
23,002

Property and equipment
 
549

Network relationships(a) (c)
 
100,900

Developed technologies(b) (c)
 
15,000

Other assets
 
2,487

Accounts payable
 
(36,794
)
Deferred income tax liabilities
 
(24,121
)
Other liabilities
 
(2,518
)
Recorded goodwill
 
$
213,059

(a) Weighted average life - 8.3 years.
(b) Weighted average life - 2.9 years.
(c) The weighted average life of all amortizable intangible assets acquired in this business combination is 7.6 years.
Since the acquisition date, Noventis has contributed $9.2 million in total revenues and $1.8 million loss before income taxes to Company operations.
Pavestone Capital, LLC
On February 14, 2019, the Company acquired Pavestone Capital, a recourse factoring company that provides working capital to businesses, for a purchase price of $28.1 million, subject to net working capital adjustments. This acquisition, which has been accounted for as a business combination, complements our existing factoring business and as a result the purchase price is primarily allocated to goodwill and accounts receivable in amounts of $12.8 million and $14.6 million, respectively. The goodwill associated with this acquisition is deductible for tax purposes.
Since the acquisition date, Pavestone Capital revenues and income before income taxes, which are recorded in our Fleet Solutions segment, were not material to Company operations. No pro forma information has been included in these financial statements as the operations of Pavestone Capital 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.
The Company has not finalized the purchase accounting for Discovery Benefits, Noventis or Pavestone and is currently evaluating the tax basis and allocation of the net assets acquired. Additionally, the Company is performing a valuation of intangible assets acquired in the business combinations. The preliminary estimates could change significantly upon completion of these valuations.
Pro Forma Supplemental Information
The pro forma information below gives effect to the Discovery Benefits and Noventis acquisitions as if they had been completed on January 1, 2018. These pro forma results have been calculated after applying the Company’s accounting policies, adjustments to reflect amortization associated with intangibles acquired and interest expense associated with the incremental borrowings under the 2016 Credit Agreement used to fund the acquisition and related income tax results. The pro forma financial information is presented for comparative purposes only, based on certain estimates and assumptions, which the Company believes to be reasonable but not necessarily indicative of future results of operations or the results that would have been reported if the acquisitions had been completed on January 1, 2018.

18

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


The following represents unaudited pro forma operational results as if the acquisitions had occurred January 1, 2018:
 
Three Months Ended March 31,
 
2019
 
2018
Total revenues
$
400,982

 
$
381,826

Net income attributable to shareholders
$
18,810

 
$
42,487

Net income attributable to WEX Inc. per share:
 
 
 
Basic
$
0.44

 
$
0.99

Diluted
$
0.43

 
$
0.98

GO Fuel Card
On March 26, 2019, the Company entered into an agreement to acquire Go Fuel Card, a European fuel card business, for a total purchase price of €235.0 million (equivalent of $265.5 million on date of agreement). We expect that this acquisition will strengthen our position in the European market and reduce our sensitivity to retail fuel prices. This transaction is expected to close late in the second quarter or early in the third quarter of 2019, subject to regulatory approvals and other customary closing conditions.
5.
Accounts Receivable
In general, the Company’s trade receivables provide for payment terms of 30 days or less. Receivables not paid within the terms of the agreement are generally subject to late fees based upon the outstanding receivable balance.
The Company extends revolving credit to certain small fleets, which are subject to interest charges based on the revolving balance not paid in full. The Company had approximately $43.0 million and $18.9 million in receivables with revolving credit balances as of March 31, 2019 and December 31, 2018, respectively. The increase in revolving credit balances during the three months ended March 31, 2019 was due to the onboarding of a significant customer portfolio.
Concentration of Credit Risk
The receivables portfolio consists of a large group of homogeneous smaller balances across a wide range of industries, which are collectively evaluated for impairment. No one customer receivable balance represented 10 percent or more of the outstanding receivables balance at March 31, 2019 or December 31, 2018. The following table presents the outstanding balance of trade accounts receivable that are less than 30 and 60 days past due, in each case, as a percentage of total trade accounts receivable:
Delinquency Status
March 31, 2019
 
December 31, 2018
29 days or less past due
96
%
 
95
%
59 days or less past due
98
%
 
98
%
Reserves for Accounts Receivable
Receivables are generally written off when they are 150 days past due or upon declaration of bankruptcy of the customer. The reserve for credit losses is primarily calculated by an analytic model that also takes into account other factors, such as the actual charge-offs for the preceding reporting periods, expected charge-offs and recoveries for the subsequent reporting periods, a review of past due accounts receivable balances, changes in payment patterns, known fraudulent activity in the portfolio, as well as leading economic and market indicators.

19

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


The following table presents changes in the accounts receivable allowances:
 
Three Months Ended March 31,
  (In thousands)
2019
 
2018
Balance, beginning of year
$
46,948

 
$
33,387

Provision for credit losses
17,791

 
14,226

Charges to other accounts1
4,533

 
4,442

Charge-offs
(24,800
)
 
(19,221
)
Recoveries of amounts previously charged-off
2,215

 
1,926

Currency translation
55

 
99

Balance, end of period
$
46,742

 
$
34,859

1 The Company earns revenue by assessing monthly finance fees on accounts with overdue balances. These fees are recognized as revenue at the time the fees are assessed. The finance fee is calculated using the greater of a minimum charge or a stated late fee rate multiplied by the outstanding balance that is subject to a late fee charge. On occasion, these fees are waived to maintain relationship goodwill. Charges to other accounts represents the offset against the late fee revenue recognized when the Company establishes a reserve for such waived amounts.
6.
Earnings per Share
Basic earnings per share is computed by dividing net income attributable to shareholders by the weighted average number of shares of common stock and vested deferred stock units (“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 performance-based awards for which the performance condition has been met as of the date of determination using the treasury stock method unless the effect is anti-dilutive. The treasury stock method assumes that proceeds, including cash received from the exercise of employee stock options and the average unrecognized compensation expense for unvested share-based compensation awards, would be used to purchase the Company’s common stock at the average market price during the period.
The following table summarizes net income attributable to shareholders and reconciles basic and diluted shares outstanding used in the earnings per share computations:
 
Three Months Ended March 31,
 (In thousands)
2019
 
2018
Net income attributable to shareholders
$
16,134

 
$
51,970

 
 
 
 
Weighted average common shares outstanding – Basic
43,220

 
43,049

Dilutive impact of share-based compensation awards
352

 
401

Weighted average common shares outstanding – Diluted
43,572

 
43,450

For the three months ended March 31, 2019 and March 31, 2018, an immaterial number of outstanding share-based compensation awards were excluded from the computation of diluted earnings per share, as the effect of including these awards would be anti-dilutive.
7.
Derivative Instruments
The Company is exposed to certain market risks relating to its ongoing business operations. From time to time, the Company enters into derivative instrument arrangements to manage various risks including interest rate risk.
As of December 31, 2018 we had four interest rate swap contracts in effect with a notional amount at inception collectively of $1.0 billion, with maturity dates from December 30, 2020 to December 31, 2022, at interest rates between 1.108 percent and 2.212 percent. On March 12, 2019, the Company entered into three additional interest rate swap contracts.

20

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


The following table presents the notional amounts, fixed interest rates and maturities of the interest rate swap agreements entered into during the three months ended March 31, 2019:


 
Tranche A
 
Tranche B
 
Tranche C
Notional amount at inception (in thousands)
 
$150,000
 
$100,000
 
$200,000
Maturity date
 
3/12/2022
 
3/12/2022
 
3/12/2023
Fixed interest rate
 
2.41750%
 
2.42500%
 
2.41325%
Collectively, as of March 31, 2019, these outstanding interest rate swap contracts are intended to fix the future interest payments associated with $1.5 billion of our variable rate borrowings. At March 31, 2019, we had variable-rate borrowings of $2.4 billion under our 2016 Credit Agreement.
The following table presents information on the location and amounts of interest rate swap gains and losses:
(In thousands)
 
 
 
Three Months Ended March 31,
Derivatives
Not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in Income Statement
 
2019
 
2018
Interest rate swap agreements – unrealized portion
 
Net unrealized (loss) gain on financial instruments
 
$
(12,209
)
 
$
13,508

Interest rate swap agreements – realized portion
 
Financing interest income
 
$
2,116

 
$
313

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

WEX Bank has issued certificates of deposit with maturities ranging from one year to five years, with interest rates ranging from 1.30 percent to 3.52 percent as of both March 31, 2019 and December 31, 2018. WEX Bank may issue brokered deposits, subject to FDIC rules governing minimum financial ratios, which include risk-based asset and capital requirements. As of March 31, 2019, all brokered deposits were in denominations of $250 thousand or less, corresponding to FDIC deposit insurance limits.
The Company requires deposits from certain customers as collateral for credit that has been extended. These deposits are generally non-interest bearing. Interest-bearing brokered money market deposits are issued at variable rates based on LIBOR or the Federal Funds rate. Money market deposits may be withdrawn by the holder at any time, although notification may be required and the monthly number of transactions is limited. Interest-bearing brokered money market deposits, customer deposits and certificates of deposit with maturities within one year are classified as short-term deposits on our unaudited condensed consolidated balance sheets.
WEX Bank is required to maintain reserves against a percentage of certain customer deposits by keeping balances with the Federal Reserve Bank. The required reserve based on the outstanding customer deposits was $11.2 million and $11.1 million at March 31, 2019 and December 31, 2018, respectively.
The following table presents the composition of deposits:
  (In thousands)
March 31, 2019
 
December 31, 2018
Interest-bearing brokered money market deposits
$
238,940

 
$
283,790

Customer deposits
128,402

 
138,072

Certificates of deposit with maturities within 1 year(a)
467,996

 
505,582

Short-term deposits
835,338

 
927,444

Certificates of deposit with maturities greater than 1 year and less than 5 years(a)
300,349

 
345,231

Total deposits
$
1,135,687

 
$
1,272,675

 
 
 
 
Weighted average cost of funds on certificates of deposit outstanding
2.40
%
 
2.36
%
Weighted average cost of interest-bearing brokered money market deposits
2.55
%
 
2.49
%
(a) Certificates of deposit are classified as short-term or long-term within our unaudited condensed consolidated balance sheets based on maturity date.

21

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


Sources of Funds
ICS Purchases
WEX Bank participates in the ICS service offered by Promontory Interfinancial Network, which allows WEX Bank to purchase brokered money market demand accounts and demand deposit accounts in an amount not to exceed $125.0 million as part of a one-way buy program. There were no outstanding balances for ICS purchases at March 31, 2019 and December 31, 2018.
9.
Financing and Other Debt
The following table summarizes the Company’s total outstanding debt:
(In thousands)
March 31, 2019
 
December 31, 2018
Revolving line-of-credit facility under 2016 Credit Agreement(a)
$
169,206

 
$

Term loans under 2016 Credit Agreement(a)
2,279,213

 
1,745,084

Notes outstanding(a)
400,000

 
400,000

Securitized debt
105,932

 
106,872

Participation debt
55,677

 
114,849

Borrowed federal funds
591

 

WEX Latin America debt
17,052

 
16,242

Total gross debt
$
3,027,671

 
$
2,383,047

 
 
 
 
Current portion of gross debt
$
192,736

 
$
223,241

Less: Unamortized debt issuance costs
(8,379
)
 
(6,724
)
Short-term debt, net
$
184,357

 
$
216,517

 
 
 
 
Long-term gross debt
$
2,834,935

 
$
2,159,806

Less: Unamortized debt issuance costs
(25,574
)
 
(25,883
)
Long-term debt, net
$
2,809,361

 
$
2,133,923

 
 
 
 
Supplemental information under 2016 Credit Agreement:
 
 
 
Letters of credit(b)
$
53,534

 
$
53,514

Borrowing capacity on revolving credit facility(c)
$
547,260


$
666,486

(a) See Note 11, Fair Value, for more information regarding the Company’s 2016 Credit Agreement and Notes.
(b) Collateral for lease agreements, virtual card and fuel payment processing activity at the Company’s foreign subsidiaries.
(c) Contingent on maintaining compliance with the financial covenants as defined in the Company’s 2016 Credit Agreement.
2016 Credit Agreement
As of December 31, 2018, the 2016 Credit Agreement, as amended, provided for a secured tranche A term loan in an original principal amount of $480.0 million, a secured tranche B term loan in an original principal amount of $1,335.0 million and a $720.0 million secured revolving credit facility, with a $250.0 million sublimit for letters of credit and $20.0 million sublimit for swingline loans. Under the 2016 Credit Agreement, the Company has granted a security interest in substantially all of the assets of the Company, subject to exceptions including the assets of WEX Bank and certain foreign subsidiaries.
On January 18, 2019, the Company entered into a Fifth Amendment to the 2016 Credit Agreement, which provided additional tranche A term loans in the principal amount of $300 million, increasing the outstanding principal on the tranche A term loans to $723.7 million as of such date. In addition, subject to certain conditions, the Fifth Amendment provided delayed draw commitments for an incremental $275.0 million tranche A term loan and an incremental $25.0 million of revolving credit commitments (subject to conversion of the delayed draw incremental tranche A term loan commitments and incremental revolving credit commitments to commitments of the other type). On March 5, 2019, the Company drew down this commitment in order to fund the acquisition of Discovery Benefits, consisting of $250.0 million of tranche A term loans and an incremental $50.0 million of revolving credit commitments.

22

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


Amounts due under the 2016 Credit Agreement mature in July 2023, subject to earlier maturity as more fully described below. Prior to maturity, amounts borrowed under the credit facility will be reduced by mandatory quarterly payments of $12.5 million and $3.4 million for tranche A and tranche B term loan facilities, respectively.
The revolving loans and tranche A loans outstanding under the 2016 Credit Agreement bear interest at variable rates, at the Company’s option, plus an applicable margin determined based on the Company’s consolidated leverage ratio. The tranche B loans bear interest at a variable rate plus a margin equal to 2.25 percent for base rate loans and 1.25 percent for eurocurrency rate loans. As of March 31, 2019 and December 31, 2018, amounts outstanding under the 2016 Credit Agreement bore a weighted average effective interest rate of 4.6 percent and 4.7 percent, respectively. The Company maintains interest rate swap agreements to manage the interest rate risk associated with its outstanding variable-interest rate borrowings under the 2016 Credit Agreement. See Note 7, Derivative Instruments, for further discussion.
The Company accounted for the January 2019 Credit Agreement amendment as a debt modification. As part of this transaction, the Company incurred and expensed $4.4 million of third party costs, which are classified within general and administrative expenses in our unaudited condensed consolidated statements of income. In addition, the Company incurred and capitalized $3.4 million of lender costs associated with the January 2019 debt amendment. These debt issuance costs are being amortized into interest expense over the 2016 Credit Agreement’s term using the effective interest method.    
Debt Covenants
As more fully described in the Company’s Annual Report on Form 10K for the year ended December 31, 2018, the 2016 Credit Agreement and the Indenture contain covenants that limit the ability of the Company and its subsidiaries, including its restricted subsidiaries and, in certain limited circumstances, WEX Bank and the Company’s other regulated subsidiaries, to (i) incur additional debt, (ii) pay dividends or make other distributions on, redeem or repurchase capital stock, or make investments or other restricted payments, (iii) enter into transactions with affiliates, (iv) dispose of assets or issue stock of restricted subsidiaries or regulated subsidiaries, (v) create liens on assets, or (vi) effect a consolidation or merger or sell all, or substantially all, of the Company’s assets. As of March 31, 2019, the Company was in compliance with all material covenants of its 2016 Credit Agreement and the Indenture.
Notes Outstanding
As of both March 31, 2019 and December 31, 2018, the Company had $400.0 million of 4.75 percent fixed-rate senior notes outstanding, which will mature on February 1, 2023. Interest is payable semiannually in arrears on February 1 and August 1 of each year.
Australian Securitization Facility
The Company maintains a securitized debt agreement with the Bank of Tokyo-Mitsubishi UFJ, Ltd., which expires April 2019. Subsequent to March 31, 2019, this agreement was extended through April 2020. 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 2.90 percent and 2.89 percent as of March 31, 2019 and December 31, 2018, respectively. The Company had $78.7 million and $87.0 million of securitized debt under this facility as of March 31, 2019 and December 31, 2018, respectively.

23

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


European Securitization Facility
On April 7, 2016, the Company entered into a five year securitized debt agreement with the Bank of Tokyo-Mitsubishi UFJ, Ltd. Under the terms of the agreement, the Company sells certain of its receivables from selected European countries to its European Securitization Subsidiary. The European Securitization Subsidiary, in turn, uses the receivables as collateral to issue securitized debt. The amount collected on the securitized receivables is restricted to pay the securitized debt and is not available for general corporate purposes. The amounts of receivables to be securitized under this agreement is determined by management on a monthly basis. The interest rate was 0.87 percent and 0.98 percent as of March 31, 2019 and December 31, 2018, respectively. The Company had $26.4 million and $18.0 million of securitized debt under this facility as of March 31, 2019 and December 31, 2018, respectively.
Participation Debt
From time to time, WEX Bank enters into participation agreements with third-party banks to fund customers’ balances that exceed WEX Bank’s lending limit to individual customers. Associated unsecured borrowings carry a variable interest rate of 1 month to 3 month LIBOR plus a margin of 225 basis points.
The following table provides the amounts outstanding under the participation debt agreements in place:
 
 
March 31, 2019
 
December 31, 2018
(In thousands)
 
Amounts Outstanding
 
Remaining Funding Capacity
 
Amounts Outstanding
 
Remaining
Funding Capacity
Short-term debt, net(a)
 
$
5,677

 
$
124,323

 
$
64,849

 
$
65,151

Long-term debt, net(b)
 
$
50,000

 
$

 
$
50,000

 
$

 
 
 
 
 
 
 
 
 
Average interest rate
 
4.85
%
 
 
 
4.30
%
 
 
(a) Amounts outstanding under agreements terminating on June 30, 2019 and on demand.
(b) Amounts outstanding under an agreement terminating on August 31, 2020.
Borrowed Federal Funds
WEX Bank borrows from uncommitted federal funds lines to supplement the financing of the Company’s accounts receivable. Our federal funds lines of credit were $327.4 million and $309.0 million as of March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019 there were outstanding borrowings of $0.6 million at an interest rate of 2.64 percent. There were no outstanding borrowings as of December 31, 2018.
WEX Latin America Debt
WEX Latin America had debt of approximately $17.1 million and $16.2 million as of March 31, 2019 and December 31, 2018, respectively. This is comprised of credit facilities and loan arrangements related to our accounts receivable. These borrowings are recorded in short-term debt, net on the Company’s unaudited condensed consolidated balance sheets. As of March 31, 2019 and December 31, 2018, the interest rate was 24.74 percent and 23.59 percent, respectively.
10.
Off–Balance Sheet Arrangements
WEX Europe Services Accounts Receivable Factoring
During the first quarter of 2017, WEX Europe Services entered into a factoring arrangement with an unrelated third-party financial institution (the “Purchasing Bank”). Under this arrangement, the Purchasing Bank establishes a credit limit for each customer account. The factored receivables are without recourse to the extent that the customer balances are maintained at or below the established credit limit. For customer receivable balances in excess of the Purchasing Bank’s credit limit, the Company maintains the risk of default. Additionally, there are no indications of the Company’s continuing involvement in the factored receivables. The Company obtained a true-sale opinion from an independent attorney, which states that the factoring agreement provides legal isolation upon WEX Europe Services bankruptcy or receivership under local law and creates a sale of receivables for amounts transferred both below and above the established credit limits. As such, transfers under this arrangement are treated as sales and

24

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


are accounted for as reductions in trade receivables because the agreements transfer effective control of the receivables to the Purchasing Bank. The Company records the proceeds as cash provided by operating activities.
The Company sold approximately $150.0 million and $170.2 million of receivables under this arrangement during the three months ended March 31, 2019 and March 31, 2018, respectively. Proceeds received are recorded net of applicable expenses, interest and commissions. The loss on factoring was $0.8 million and $1.1 million for the three months ended March 31, 2019 and 2018, respectively, and was recorded within cost of services in the unaudited condensed consolidated statements of income. As of March 31, 2019 and December 31, 2018, an immaterial amount of outstanding transferred receivables were in excess of the established credit limit. Charge-backs on balances in excess of the credit limit during the three months ended March 31, 2019 and during the three months ended March 31, 2018 were insignificant.
WEX Bank Accounts Receivable Factoring
In August 2018, WEX Bank entered into a receivables purchase agreement with an unrelated third-party financial institution to sell certain of our trade receivables under non-recourse transactions. WEX Bank continues to service the receivables post-transfer with no participating interest. The Company obtained a true-sale opinion from an independent attorney, which states that the factoring agreement provides legal isolation upon WEX Bank bankruptcy or receivership under local law. As such, transfers under this arrangement are treated as a sale and are accounted for as a reduction in trade receivables because the agreements transfer effective control of the receivables to the buyer.
The Company sold approximately $2.0 billion of receivables under this arrangement during the three months ended March 31, 2019. Proceeds from the sale, which are reported net of a negotiated discount rate, are recorded in operating activities within the Company’s unaudited condensed consolidated statement of cash flows. The loss on factoring was $0.6 million for the three months ended March 31, 2019 and was recorded within cost of services in the unaudited condensed consolidated statements of income.
WEX Latin America Securitization of Receivables
During the second quarter of 2017, WEX Latin America entered into a securitized debt agreement to transfer certain unsecured receivables associated with our salary payment card product to an investment fund managed by an unrelated third-party financial institution. WEX Latin America holds a non-controlling equity interest in the investment fund. During the three months ended March 31, 2019, the Company did not make equity contributions to the investment fund.
As of December 31, 2017 and through June 30, 2018, this securitization arrangement did not meet the derecognition conditions due to continuing involvement with the transferred assets and accordingly WEX Latin America reported the transferred receivables and securitized debt on our unaudited condensed consolidated balance sheets. During the three months ended March 31, 2018, the Company recognized approximately $2.1 million of operating interest expense under this financing arrangement.
During the third quarter of 2018, the securitization agreements were amended, resulting in the Company giving up effective control of the transferred receivables to the buyer. Additionally, the Company received a true-sale opinion from an independent attorney stating that the amended agreements provide legal isolation upon WEX Latin America bankruptcy or receivership under local law. As such, transfers under this arrangement are treated as a sale and are accounted for as a reduction in trade receivables.
During the three months ended March 31, 2019, the Company sold $20.7 million of receivables and recognized a $3.7 million gain on sale, consisting of the difference between the sales price and the carrying value of the receivables, which is recorded within other revenue in our unaudited condensed consolidated statement of income. Cash proceeds from the transfer of these receivables is reflected as an operating activity within our unaudited condensed consolidated statement of cash flows.
11.
Fair Value
The Company holds mortgage-backed securities, fixed-income securities, money market funds, derivatives (see Note 7, Derivative Instruments) and certain other financial instruments that are carried at fair value. The Company determines fair value based upon quoted prices when available or through the use of alternative approaches, such as model pricing, when market quotes are not readily accessible or available. Various factors are considered in determining the fair value of the Company’s obligations, including: closing exchange or over-the-counter market price quotations; time value and volatility factors underlying options and derivatives; price activity for equivalent instruments; and the Company’s own credit standing.

25

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


These valuation techniques may be based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Instruments whose significant value drivers are unobservable.
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. We did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during either of the three months ended March 31, 2019 or March 31, 2018.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company’s financial instruments that are measured at fair value:
 (In thousands)
Fair Value Hierarchy
March 31, 2019
 
December 31, 2018
Financial Assets:
 
 
 
 
Money market funds(a)
1
$
5,991

 
$
71,228

Investment securities
 
 
 
 
Municipal bonds
2
$
334

 
$
404

Asset-backed securities
2
271

 
279

Mortgage-backed securities
2
268

 
260

Fixed-income mutual fund
1
23,899

 
23,463

Total investment securities
 
$
24,772

 
$
24,406

Executive deferred compensation plan trust(b)
1
$
7,585

 
$
6,398

Interest rate swaps(c)
2
$
10,805

 
$
17,994

 
 
 
 
 
Liabilities
 
 
 
 
Interest rate swaps(d)
2
$
5,020

 
$

(a) The fair value is recorded in cash and cash equivalents.
(b) The fair value is recorded in prepaid expenses and other current assets and other assets based on the timing of payment obligations.
(c) The fair value is recorded in prepaid expenses and other current assets or other assets depending on the timing of expected discounted cash flows.
(d) The fair value is recorded in other current liabilities or other liabilities depending on the timing of expected discounted cash flows.
Money Market Funds
A portion of the Company’s cash and cash equivalents are invested in a money market fund that primarily consists of short-term government securities, which are classified as Level 1 in the fair value hierarchy because they are valued using quoted market prices in an active market.
Investment Securities
When available, the Company uses quoted market prices to determine the fair value of investment securities; such inputs are classified as Level 1 of the fair-value hierarchy. These securities primarily consist of an open-ended mutual fund, which is invested in fixed-income securities and is held in order to satisfy the regulatory requirements of WEX Bank. For mortgage-backed and asset-backed debt securities and municipal bonds, the Company generally uses quoted prices for recent trading activity of assets with similar characteristics to the debt security or bond being valued. The securities and bonds priced using such methods are generally valued using Level 2 inputs.

26

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


Executive Deferred Compensation Plan Trust
The investments held in the executive 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.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Notes Outstanding
The Notes outstanding had a fair value of $399.0 million and $392.0 million as of March 31, 2019 and December 31, 2018, respectively. The fair value of the Notes is based on market rates for the issuance of our debt and 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 March 31, 2019 and December 31, 2018, the carrying value of the 2016 Credit Agreement approximated its fair value.
Other Assets and Liabilities
Our financial instruments, other than those presented above, include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities. The carrying values of such assets and liabilities approximate their respective fair values due to their short-term nature. The carrying values of certificates of deposit, interest-bearing brokered money market deposits, securitized debt, participation debt 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 unaudited condensed consolidated balance sheets.    
12.
Redeemable Non-Controlling Interest
On March 5, 2019, the Company acquired Discovery Benefits, an employee benefits administrator. The seller of Discovery Benefits obtained a 4.9 percent equity interest in the newly formed parent company of WEX Health and Discovery Benefits (“the U.S. Health business”). The seller’s 4.9 percent non-controlling interest in WEX Health and DBI was initially established at carrying value and fair value, respectively. On the date of acquisition, the excess of the fair value of the 4.9 percent equity interest in WEX Health over its carrying value was recognized as an equity transaction, resulting in a $41.4 million increase to additional paid-in capital.
The agreement provides the seller with a put right and the Company with a call right for the equity interest, which can be exercised no earlier than five and seven years following the date of acquisition, respectively. Upon exercise of the put or call right, the purchase price is calculated based on a revenue multiple of peer companies (as defined in the agreement) applied to trailing twelve month revenues of the U.S. Health business. The put option makes the non-controlling interest redeemable and, therefore, the non-controlling interest is classified as temporary equity outside of stockholders’ equity. The redeemable non-controlling interest is reported at the higher of its redemption value or the non-controlling interest holder’s proportionate share of the U.S. Health business’ net carrying value.
Subsequent remeasurement of the equity interest to fair value resulted in an increase to redeemable non-controlling interest of $41.4 million and an offsetting decrease to retained earnings that did not impact earnings per share. As of March 31, 2019, the carrying amount for this redeemable non-controlling interest was greater than the redemption value, resulting in no adjustment to reflect the non-controlling interest at redemption value. Subsequent increases or decreases in the redemption value of the non-controlling interest will be offset against retained earnings and impact earnings per share.

27

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


The following table presents the changes in the Company’s redeemable non-controlling interest:
 (In thousands)
Three months ended March 31, 2019
Balance, beginning of period
$

Acquisition of Discovery Benefits at fair value
25,757

Establishing redeemable non-controlling interest for WEX Health at carrying value
32,843

Adjustment to redeemable non-controlling interest to reflect WEX Health at fair value
41,400

Net loss attributable to redeemable non-controlling interest
(7
)
Balance, end of period
$
99,993

13.
Income Taxes
The Company’s effective tax rate was 26.4 percent for the first quarter of 2019 as compared to 25.2 percent for the first quarter of 2018. The increase in our tax rate was primarily due to the increase in unrecognized tax benefits in 2019.
While our accounting for the impact of the 2017 Tax Cut and Jobs Act (“TCJA”) as of December 31, 2018 was deemed to be complete, amounts recorded were based on prevailing regulations and available information as of December 31, 2018. Additional guidance issued by the Internal Revenue Service (“IRS”) may continue to impact our recorded amounts after December 31, 2018.
Undistributed earnings of certain foreign subsidiaries of the Company amounted to $77.0 million and $64.9 million at March 31, 2019 and December 31, 2018, respectively. These earnings and profits are considered to be indefinitely reinvested. 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.
14.
Leases
We have operating leases for buildings, primarily for office space. For building leases with terms greater than twelve months, we account for lease and non-lease components as a single lease component. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Short-term lease payments are recognized on a straight-line basis and variable short-term lease payments are recognized in the period in which the obligation is incurred. We determine whether or not a contract contains a lease at inception of the contract. Many of our lease agreements contain renewal or termination clauses that we factor into our determination of the lease term if we are reasonably certain to exercise any such options.
The following table presents supplemental balance sheet information related to our leases:
 (In thousands)
 
Balance Sheet Location
 
March 31, 2019
Assets
 
 
 
 
Operating lease ROU assets
 
Other assets
 
$
80,806

Liabilities
 
 
 
 
Current operating lease liabilities
 
Other current liabilities
 
12,135

Non-current operating lease liabilities
 
Other liabilities
 
80,320

Total lease liabilities
 
 
 
$
92,455

    

28

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


The following table presents the weighted average remaining lease term and discount rate:
Operating leases
 
 
 
March 31, 2019
Weighted average remaining term (in years)
 
 
 
8.7

Weighted average discount rate
 
 
 
4.6
%
The following table presents the maturities of our lease liabilities:
 (In thousands)
 
March 31, 2019
Remaining 2019
 
$
12,070

2020
 
15,275

2021
 
14,810

2022
 
13,420

2023
 
11,238

2024 and thereafter
 
47,688

Total lease payments
 
$
114,501

Less: Imputed interest
 
22,046

Total lease obligations
 
$
92,455

Less: Current portion of lease obligations
 
12,135

Long-term lease obligations
 
$
80,320

In addition to the total lease obligations presented in the table above, we have a 14 year building operating lease with undiscounted payment obligations of $30.0 million that is expected to commence during 2020.
We recognized $4.0 million of operating lease expense during the three months ended March 31, 2019, which includes immaterial short-term leases and variable lease costs. These amounts are classified as general and administrative expense on our unaudited condensed consolidated statements of income.
The following table presents supplemental cash flow and other information related to our leases:
(In thousands)
 
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
4,075

Right-of-use assets obtained in exchange for lease liabilities:
 
 
Operating leases
 
$
14,646

15.
Commitments and Contingencies
Litigation
The Company is 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.
Commitments
Significant commitments and contingencies as of March 31, 2019 are consistent with those discussed in Note 19, Commitments and Contingencies, to the consolidated financial statements in the Annual Report on Form 10–K for the year ended December 31, 2018.
16.
Stock–Based Compensation
The fair value of restricted stock units (“RSUs”), DSUs, performance-based restricted stock units (“PBRSUs”) and service-based stock options awarded during the three months ended March 31, 2019 totaled $38.1 million, as compared to $27.4 million for the three months ended March 31, 2018. The fair value of RSUs, DSUs and PBRSUs is based on the closing market price of

29

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


the Company’s stock on the grant date as reported by the NYSE. The fair value of each service-based stock option award is estimated on the grant date using a Black-Scholes-Merton option-pricing model.
The table below presents the weighted average fair value of service-based stock options by year of grant and the assumptions used in estimating those fair values:
 
 
2019
 
2018
Weighted average fair value
 
$
58.28

 
$
51.27

 
 
 
 
 
Weighted average expected life (in years)
 
6.0

 
6.0

Weighted average exercise price
 
$
184.81

 
$
158.23

Expected stock price volatility
 
27.21
%
 
27.35
%
Risk-free interest rate
 
2.37
%
 
2.69
%
17.
Restructuring Activities
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, improve the Company’s efficiency and 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 third restructuring program in the third quarter of 2016 (the “Acquisition Integration Restructuring Initiative”).
Total restructuring charges incurred to date under these initiatives, which primarily consisted of employee costs and office closure costs, were $24.8 million as of March 31, 2019. Restructuring charges incurred during the three months ended March 31, 2019 and 2018 were immaterial. Based on current plans, which are subject to change, the Company does not expect to incur any material charges under these initiatives.
18.
Segment Information
The Company determines its operating segments and reports information in accordance with how the Company’s chief operating decision maker (“CODM”) allocates resources and assesses performance. The Company’s CODM is its Chief Executive Officer. The operating segments are aggregated into the three reportable segments described below.
Fleet Solutions primarily 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.

30

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


The following tables present the Company’s reportable segment revenues:
 
Three Months Ended March 31, 2019
(In thousands)
Fleet Solutions
 
Travel and Corporate Solutions
 
Health and Employee
Benefit Solutions
 
Total
Revenues
 
 
 
 
 
 
 
Payment processing revenue
$
107,408

 
$
59,998

 
$
19,392

 
$
186,798

Account servicing revenue
39,239

 
10,585

 
37,262

 
87,086

Finance fee revenue
45,864

 
357

 
152

 
46,373

Other revenue
40,271

 
10,708

 
10,640

 
61,619

Total revenues
$
232,782

 
$
81,648

 
$
67,446

 
$
381,876

 
 
 
 
 
 
 
 
Interest income
$
2,221

 
$
377

 
$
159

 
$
2,757

 
Three Months Ended March 31, 2018
(In thousands)
Fleet Solutions
 
Travel and Corporate Solutions
 
Health and Employee Benefit Solutions
 
Total
Revenues
 
 
 
 
 
 
 
Payment processing revenue
$
106,978

 
$
44,777

 
$
16,699

 
$
168,454

Account servicing revenue
42,210

 
9,469

 
27,025

 
78,704

Finance fee revenue
43,604

 
259

 
5,018

 
48,881

Other revenue
37,573

 
12,274

 
8,142

 
57,989

Total revenues
$
230,365

 
$
66,779

 
$
56,884

 
$
354,028

 
 
 
 
 
 
 
 
Interest income
$
995

 
$
421

 
$
5,967

 
$
7,383

The CODM evaluates the financial performance of each segment using segment adjusted operating income, which excludes: (i) acquisition and divestiture related items (including acquisition-related intangible amortization); (ii) debt restructuring costs; (iii) stock-based compensation; (iv) restructuring and other costs; and (v) unallocated corporate expenses. Additionally, we do not allocate foreign currency gains and losses, financing interest expense, unrealized and realized gains and losses on financial instruments, income taxes and net gains or losses from non-controlling interests to our operating segments.

31

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


The following table reconciles segment adjusted operating income to income before income taxes:
 
Three Months Ended March 31,
(In thousands)
2019
 
2018
Segment adjusted operating income
 
 
 
Fleet Solutions
$
92,975

 
$
107,973

Travel and Corporate Solutions
34,387

 
25,249

Health and Employee Benefit Solutions
19,780

 
18,071

Total segment adjusted operating income
$
147,142

 
$
151,293

 
 
 
 
Reconciliation:
 
 
 
Total segment adjusted operating income
$
147,142

 
$
151,293

Less:
 
 

Unallocated corporate expenses
16,942

 
13,920

Acquisition-related intangible amortization
33,888

 
35,236

Other acquisition and divestiture related items
9,780

 
637

Debt restructuring costs
4,400

 
3,015

Stock-based compensation
10,442

 
8,955

Restructuring and other costs
2,755

 
5,671

Operating income
68,935

 
83,859

Financing interest expense
(31,112
)
 
(27,337
)
Net foreign currency (loss) gain
(3,885
)
 
390

Net unrealized (loss) gain on financial instruments
(11,912
)
 
13,508

Income before income taxes
$
22,026

 
$
70,420

19.
Supplementary Regulatory Capital Disclosure
The Company’s subsidiary, WEX Bank, is subject to various regulatory capital requirements administered by the FDIC and the Utah Department of Financial Institutions. 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. WEX Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could limit our business activities and have a material effect on our business, results of operations and financial condition.
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 March 31, 2019, 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.


32

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


The following table presents WEX Bank’s actual and regulatory minimum capital amounts and ratios:
(In thousands)
Actual Amount
 
Ratio
 
Minimum for Capital Adequacy Purposes Amount
 
Ratio
 
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions Amount
 
Ratio
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Total Capital to risk-weighted assets
$
317,780

 
12.01
%
 
$
211,64