WEX 2013.09.30 10-Q
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 _________________________________________
FORM 10-Q
  _________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-32426
  _________________________________________
 
WEX INC.
(Exact name of registrant as specified in its charter)
  _________________________________________
Delaware
 
01-0526993
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
97 Darling Avenue, South Portland, Maine
 
04106
(Address of principal executive offices)
 
(Zip Code)
(207) 773-8171
(Registrant’s telephone number, including area code) 
 _________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
  
Outstanding at October 24, 2013
Common Stock, $0.01 par value per share
  
38,875,635 shares


Table of Contents


TABLE OF CONTENTS
 
 
 
Page
 
 
 
PART I-FINANCIAL INFORMATION
 
 
 
Item 1.
 3
 
 
 
Item 2.
 25
 
 
 
Item 3.
 36
 
 
 
Item 4.
 36
 
 
 
PART II-OTHER INFORMATION
 
 
 
Item 1.
 37
 
 
 
Item 1A.
 37
 
 
 
Item 2.
 37
 
 
 
Item 6.
 38
 
 
            SIGNATURE
 
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for statements that are forward-looking and are not statements of historical facts. This Quarterly Report includes forward-looking statements. Any statements in this Quarterly Report that are not statements of historical facts may be deemed to be forward-looking statements. When used in this Quarterly Report, the words “may,” “could,” “anticipate,” “plan,” “continue,” “project,” “intend,” “estimate,” “believe,” “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. Forward-looking statements relate to our future plans, objectives, expectations and intentions and are not historical facts and accordingly involve known and unknown risks and uncertainties and other factors that may cause the actual results or performance to be materially different from future results or performance expressed or implied by these forward-looking statements. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report, in press releases and in oral statements made by our authorized officers: the effects of general economic conditions on fueling patterns and the commercial activity of fleets; the effects of the Company’s international business expansion and integration efforts and any failure of those efforts; the impact and range of credit losses; breaches of the Company’s technology systems and any resulting negative impact on our reputation, liability, or loss of relationships with customers or merchants; the Company’s failure to successfully integrate the businesses it has acquired; fuel price volatility; the Company’s failure to maintain or renew key agreements; failure to expand the Company’s technological capabilities and service offerings as rapidly as the Company’s competitors; the actions of regulatory bodies, including banking, derivatives and securities regulators, or possible changes in banking regulations impacting the Company’s industrial bank and WEX Inc. as the corporate parent; the impact of foreign currency exchange rates on the Company’s operations, revenue and income; changes in interest rates; financial loss if the Company determines it necessary to unwind its derivative instrument position prior to the expiration of a contract; the incurrence of impairment charges if our assessment of the fair value of certain of our reporting units changes; the uncertainties of litigation; as well as other risks and uncertainties identified in Item 1A of our Annual Report for the year ended December 31, 2012, filed on Form 10-K with the Securities and Exchange Commission on March 1, 2013. Our forward-looking statements and these factors do not reflect the potential future impact of any alliance, merger, acquisition or disposition. The forward-looking statements speak only as of the date of the initial filing of this Quarterly Report and undue reliance should not be placed on these statements. We disclaim any obligation to update any forward-looking statements as a result of new information, future events or otherwise.

2

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PART I
Item 1. Financial Statements.
WEX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
 
 
September 30,
2013
 
December 31,
2012
 
 
 
(As Adjusted)
Assets
 
 
 
Cash and cash equivalents
$
391,171

 
$
197,662

Accounts receivable (less reserve for credit losses of $8,954 in 2013 and $11,709 in 2012)
1,913,614

 
1,556,275

Available-for-sale securities
16,208

 
16,350

Fuel price derivatives, at fair value
488

 

Property, equipment and capitalized software (net of accumulated depreciation of $139,684 in 2013 and $125,659 in 2012)
70,097

 
60,097

Deferred income taxes, net
92,693

 
121,007

Goodwill
824,307

 
847,986

Other intangible assets, net
209,074

 
241,950

Other assets
139,805

 
90,538

Total assets
$
3,657,457

 
$
3,131,865

Liabilities and Stockholders’ Equity
 
 
 
Accounts payable
$
706,927

 
$
527,838

Accrued expenses
79,754

 
67,419

Income taxes payable
14,228

 
10,038

Deposits
1,158,196

 
890,345

Borrowed federal funds

 
48,400

Revolving line-of-credit facilities and term loan
288,750

 
621,000

Deferred income taxes, net
11,464

 
18,407

Notes outstanding
400,000

 

Amounts due under tax receivable agreement
79,705

 
86,550

Fuel price derivatives, at fair value
983

 
1,729

Other liabilities
15,822

 
20,546

Total liabilities
2,755,829

 
2,292,272

Commitments and contingencies (Note 14)

 

Redeemable noncontrolling interest (Note 11)
19,762

 
21,662

Stockholders’ Equity
 
 
 
Common stock $0.01 par value; 175,000 shares authorized; 42,897 in 2013 and 42,586 in 2012 shares issued; 38,982 in 2013 and 38,908 in 2012 shares outstanding
429

 
426

Additional paid-in capital
166,615

 
162,470

Retained earnings
845,051

 
730,311

Accumulated other comprehensive income
337

 
37,379

Less treasury stock at cost; 4,007 shares in 2013 and 3,766 in 2012
(130,566
)
 
(112,655
)
Total stockholders’ equity
881,866

 
817,931

Total liabilities and stockholders’ equity
$
3,657,457

 
$
3,131,865

See notes to unaudited condensed consolidated financial statements.

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WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME
(in thousands, except per share data)
(unaudited)
 
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
Fleet payment solutions
$
136,874

 
$
117,877

 
$
393,953

 
$
341,709

Other payment solutions
54,651

 
43,090

 
141,227

 
112,444

Total revenues
191,525

 
160,967

 
535,180

 
454,153

Expenses
 
 
 
 
 
 
 
Salary and other personnel
41,469

 
28,823

 
122,193

 
87,501

Service fees
29,352

 
28,968

 
79,765

 
74,046

Provision for credit losses
5,015

 
5,647

 
13,686

 
14,874

Technology leasing and support
6,799

 
4,577

 
18,712

 
13,718

Occupancy and equipment
3,822

 
3,032

 
11,818

 
9,062

Depreciation, amortization and impairment
14,160

 
27,877

 
43,268

 
50,591

Operating interest expense
976

 
1,243

 
3,205

 
3,430

Cost of hardware and equipment sold
1,055

 
759

 
3,266

 
2,270

Other
10,984

 
8,764

 
33,763

 
26,541

Total operating expenses
113,632

 
109,690

 
329,676

 
282,033

Operating income
77,893

 
51,277

 
205,504

 
172,120

Financing interest expense
(7,369
)
 
(2,302
)
 
(22,077
)
 
(6,877
)
Gain (loss) on foreign currency transactions
2,968

 
180

 
1,708

 
(312
)
Net realized and unrealized loss on fuel price derivatives
(3,640
)
 
(14,026
)
 
(2,781
)
 
(12,046
)
Decrease in tax refund due to former shareholders of RD Card Holdings Australia

 

 

 
9,750

Decrease in amount due under tax receivable agreement
150

 

 
150

 

Income before income taxes
70,002

 
35,129

 
182,504

 
162,635

Income taxes
26,224

 
20,845

 
68,097

 
94,780

Net income
43,778

 
14,284

 
114,407

 
67,855

Less: Net loss from noncontrolling interest
(60
)
 
(14
)
 
(333
)
 
(14
)
Net earnings attributable to WEX Inc.
$
43,838

 
$
14,298

 
$
114,740

 
$
67,869

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

 
$
0.37

 
$
2.95

 
$
1.75

Diluted
$
1.12

 
$
0.37

 
$
2.93

 
$
1.74

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
38,978

 
38,793

 
38,934

 
38,832

Diluted
39,081

 
38,995

 
39,102

 
39,084

See notes to unaudited condensed consolidated financial statements.

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WEX INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
43,778

 
$
14,284

 
$
114,407

 
$
67,855

Changes in available-for-sale securities, net of tax effect of $(43) and $(289) in 2013 and $27 and $68 in 2012
(73
)
 
44

 
(492
)
 
114

Changes in interest rate swap, net of tax effect of $35 for the nine months ended 2012

 

 

 
60

Foreign currency translation
7,856

 
9,229

 
(38,117
)
 
7,412

Comprehensive income
51,561

 
23,557

 
75,798

 
75,441

Less: comprehensive income (loss) attributable to noncontrolling interest
112

 
209

 
(1,900
)
 
209

Comprehensive income attributable to WEX Inc.
$
51,449

 
$
23,348

 
$
77,698

 
$
75,232

See notes to unaudited condensed consolidated financial statements.

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WEX INC.
CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount at par
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Retained
Earnings
 
Total
Stockholders’
Equity
Balance at December 31, 2011
42,252

 
$
423

 
$
146,282

 
$
30,588

 
$
(101,367
)
 
$
633,389

 
$
709,315

Stock issued to employees exercising stock options
136

 
1

 
1,862

 

 

 

 
1,863

Tax benefit from employees’ stock option and restricted stock units

 

 
3,049

 

 

 

 
3,049

Stock issued to employees for vesting of restricted stock units
100

 
1

 

 

 

 

 
1

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

 

 
5,865

 

 

 

 
5,865

Purchase of shares of treasury stock

 

 

 

 
(11,288
)
 

 
(11,288
)
Changes in available-for-sale securities, net of tax effect of $68

 

 

 
114

 

 

 
114

Changes in interest rate swaps, net of tax effect of $35

 

 

 
60

 

 

 
60

Foreign currency translation

 

 

 
7,189

 

 

 
7,189

Net earnings attributable to WEX Inc.

 

 

 

 

 
67,869

 
67,869

Balance at September 30, 2012
42,488

 
$
425

 
$
157,058

 
$
37,951

 
$
(112,655
)
 
$
701,258

 
$
784,037

Balance at December 31, 2012
42,586

 
$
426

 
$
162,470

 
$
37,379

 
$
(112,655
)
 
$
730,311

 
$
817,931

Stock issued to employees exercising stock options
70

 
1

 
1,671

 

 

 

 
1,672

Tax benefit from employees’ stock option and restricted stock units

 

 
6,509

 

 

 

 
6,509

Stock issued to employees for vesting of restricted stock units
241

 
2

 
(2
)
 

 

 

 

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

 

 
(4,033
)
 

 

 

 
(4,033
)
Purchase of shares of treasury stock

 

 

 

 
(17,911
)
 

 
(17,911
)
Changes in available-for-sale securities, net of tax effect of $(289)

 

 

 
(492
)
 

 

 
(492
)
Foreign currency translation

 

 

 
(36,550
)
 

 

 
(36,550
)
Net earnings attributable to WEX Inc.

 

 

 

 

 
114,740

 
114,740

Balance at September 30, 2013
42,897

 
$
429

 
$
166,615

 
$
337

 
$
(130,566
)
 
$
845,051

 
$
881,866

See notes to unaudited condensed consolidated financial statements.

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WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine months ended 
 September 30,
 
2013
 
2012
Cash flows from operating activities
 
 
 
Net income
$
114,407

 
$
67,855

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
 
Fair value change of fuel price derivatives
(1,234
)
 
1,841

Stock-based compensation
6,882

 
8,806

Depreciation, amortization and impairment
45,021

 
35,604

Goodwill impairment

 
16,171

Deferred taxes
23,207

 
35,392

Provision for credit losses
13,686

 
14,874

Loss on disposal of property, equipment and capitalized software
637

 

Changes in operating assets and liabilities, net of effects of acquisition:
 
 
 
Accounts receivable
(384,715
)
 
(306,350
)
Other assets
(39,289
)
 
(55,572
)
Accounts payable
185,284

 
163,203

Accrued expenses
13,030

 
(5,755
)
Income taxes
5,463

 
16,904

Other liabilities
(826
)
 
(12,034
)
Amounts due under tax receivable agreement
(6,841
)
 
(6,245
)
Net cash used for operating activities
(25,288
)
 
(25,306
)
Cash flows from investing activities
 
 
 
Purchases of property, equipment and capitalized software
(30,122
)
 
(21,796
)
Purchases of available-for-sale securities
(1,704
)
 
(224
)
Maturities of available-for-sale securities
1,065

 
1,228

Acquisitions, net of cash

 
(26,217
)
Net cash used for investing activities
(30,761
)
 
(47,009
)
Cash flows from financing activities
 
 
 
Excess tax benefits from equity instrument share-based payment arrangements
6,509

 
3,049

Repurchase of share-based awards to satisfy tax withholdings
(10,917
)
 
(2,941
)
Proceeds from stock option exercises
1,671

 
1,862

Net change in deposits
267,859

 
512,456

Net change in borrowed federal funds
(48,400
)
 
(6,900
)
Other financing debt
(3,003
)
 
(19,560
)
Loan origination fee
(12,023
)
 

Borrowings on notes outstanding
400,000

 

Net activity on 2011 revolving line-of-credit
(438,500
)
 
12,200

Net activity on 2011 term loan
(182,500
)
 
(7,500
)
Net activity on 2013 term loan
288,750

 

Purchase of shares of treasury stock
(17,911
)
 
(11,288
)
Net cash provided by financing activities
251,535

 
481,378

Effect of exchange rate changes on cash and cash equivalents
(1,977
)
 
449

Net change in cash and cash equivalents
193,509

 
409,512

Cash and cash equivalents, beginning of period
197,662

 
25,791

Cash and cash equivalents, end of period
$
391,171

 
$
435,303

Supplemental cash flow information
 
 
 
Interest paid
$
20,291

 
$
9,676

Income taxes paid
$
33,013

 
$
39,455

Significant non-cash transactions
 
 
 
Reduction of rapid! – estimated earn out
$

 
$
839

Acquisition of UNIK - estimated earn out
$

 
$
991

Increase in UNIK – estimated earn out
$
198

 
$


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See notes to unaudited condensed consolidated financial statements.

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WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 
1.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles (“GAAP”) for complete financial statements. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to consolidated financial statements included in the Annual Report on Form 10-K of WEX Inc. for the year ended December 31, 2012. 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, 2012, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2013. When used in these notes, the term “Company” means WEX Inc. and all entities included in the consolidated financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2013, are not necessarily indicative of the results that may be expected for any future quarter(s) or the year ending December 31, 2013.
The Company adjusted the balance sheet amounts at December 31, 2012, where appropriate, to account for the measurement period adjustments related to the CorporatePay, UNIK and Fleet One purchase price allocations discussed in Note 3, Business Acquisitions, below.
The presentation of the Company’s consolidated balance sheet for the period ended December 31, 2012 has been corrected for an immaterial error in the classification of foreign deferred tax liabilities. As of December 31, 2012, the foreign jurisdiction deferred tax liability balance was erroneously netted with the domestic deferred tax asset balance and presented on the Consolidated Balance Sheet as a deferred tax asset. This correction of the error resulted in an increase in deferred tax assets and total assets of $18,407 and a corresponding increase in deferred tax liabilities, total liabilities, and total liabilities and stockholders’ equity of $18,407. The result of this correction did not impact the Company’s consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for any period presented.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and other liabilities approximate their respective fair values due to the short-term nature of such instruments. The carrying values of certificates of deposit, interest-bearing money market deposits, borrowed federal funds and credit agreement borrowings, approximate their respective fair values as the interest rates on these financial instruments are variable. All other financial instruments are reflected at fair value on the condensed consolidated balance sheet.
The notes outstanding as of September 30, 2013, have a carrying value of $400,000 and fair value of $360,000. The fair value is based on market rates for the issuance of debt.
 
2.
New Accounting Standards
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-11 Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11"). The amendments in ASU 2013-11 require entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss ("NOL") carryforward, a similar tax loss, or a tax credit carryforward except when the following exist: (i) an NOL carryforward, a similar tax loss, or a tax credit carryforward is not available as of the reporting date under the governing tax law to settle taxes that would result from the disallowance of the tax position, and (ii) the entity does not intend to use the deferred tax asset for this purpose (provided the tax law permits a choice). If either of these conditions exists, entities should present an unrecognized tax benefit in the financial statements as a liability and should not net the unrecognized tax benefit with a deferred tax asset. ASU 2013-11 is effective for interim and annual periods beginning after December 15, 2013. The Company does not believe that the adoption of ASU 2013-11 will have a material impact on its results of operations when adopted in 2014.
In February 2013, the FASB issued Accounting Standards Update No. 2013-02 Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This guidance is intended to provide disclosure on items reclassified out of accumulated other comprehensive income either in the notes or parenthetically on the face of the income statement. The required disclosure is in Note 10, Comprehensive Income.

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

3.
Business Acquisitions
Acquisition of CorporatePay
On May 11, 2012, the Company acquired all of the stock of CorporatePay, a provider of corporate prepaid solutions to the travel industry in the United Kingdom for approximately GBP17,000 (US$27,783 at the time of the acquisition), net of cash acquired. The Company purchased CorporatePay to expand its Other Payment Solutions segment. During the second quarter of 2012, the Company allocated the purchase price of the acquisition based upon a preliminary estimate of the fair values of the assets acquired and liabilities assumed. During the first quarter of 2013, the Company obtained information to assist in determining the fair values of certain tangible and intangible assets acquired and liabilities assumed as of the CorporatePay acquisition date. Based on such information, the Company retrospectively adjusted the fiscal year 2012 comparative information resulting in an increase in accounts receivable of $508, a decrease in deferred taxes of $32, an increase in intangible assets of $140, a decrease in goodwill of $247, and an increase in accrued expenses of $369. There were no changes to the previously reported consolidated statements of operations or statements of cash flows. The valuations of all assets and liabilities have been finalized.
The following is a summary of the allocation of the purchase price to the assets and liabilities acquired:
Consideration paid (net of cash)
$
27,783

Less:
 
Accounts receivable
1,585

Accounts payable
(629
)
Other tangible liabilities, net
(4,040
)
Acquired software(a)
8,233

Customer relationships(b)
1,614

Trademarks and trade name(c)
1,453

Recorded goodwill
$
19,567

 
(a) 
Weighted average life – 6.2 years.
(b) 
Weighted average life – 6.3 years.
(c) 
Weighted average life – 5.3 years.
Acquisition of Ownership Interest in UNIK
On August 30, 2012, the Company acquired a 51 percent ownership interest in UNIK S.A. (“UNIK”), a privately-held provider of payroll cards in Brazil. The Company purchased its interest in UNIK to expand its Other Payment Solutions segment. UNIK is a provider of payroll cards, private label and processing services in Brazil specializing in the retail, government and transportation sectors.
The investment was achieved through the purchase of newly issued shares of UNIK for approximately R$44,800 (approximately US$22,800, at the time of the acquisition). The purchase agreement also includes a contingent consideration component based on performance milestones. Although the contingent consideration was not capped, the Company estimated the amount of the liability, at the time of acquisition, to be approximately R$2,000 (approximately US$1,000). On June 30, 2013, the Company revised the estimate based on current performance milestones to be approximately US$511, which was paid on July 1, 2013. The agreement further provides the Company with a call option which allows the Company to acquire the remaining shares at specific times over a three-year period. Additionally, the purchase agreement provides the noncontrolling shareholders with the right to put their interest back to the Company at specific times. The put options are exercisable at specific dates subject to the achievement of performance hurdles. Pricing for both the call and put options are based upon multiples of UNIK’s trailing twelve month EBITDA. Subsequent to the acquisition of UNIK, UNIK paid down approximately US$19,600 of existing financing debt. As of September 30, 2013, UNIK has approximately US$6,764 of financing debt, classified in other liabilities on the Company’s condensed consolidated balance sheets.
During the third quarter of 2012, the Company allocated the purchase price of the acquisition based upon a preliminary estimate of the fair values of the assets acquired and liabilities assumed. Goodwill associated with the transaction is not expected to be deductible for income tax purposes. In addition, the Company has recognized and measured a redeemable noncontrolling interest. The redeemable noncontrolling interest represents the portion of UNIK’s net assets owned by the

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

noncontrolling shareholders and is presented in the mezzanine section on the Company’s condensed consolidated balance sheets. During the third quarter of 2013, the Company obtained information to assist in determining the fair values of certain tangible and intangible assets acquired and liabilities assumed as of the UNIK acquisition date. Based on such information, the Company retrospectively adjusted the fiscal year 2012 comparative information resulting in an increase in deferred taxes of $2,243, an increase in goodwill of $4,355, and an increase in accrued expenses of $6,598. There were no changes to the previously reported consolidated statements of operations or statements of cash flows. The valuations of all assets and liabilities have been finalized.
The following is a summary of the allocation of the purchase price to the assets and liabilities acquired:
Total UNIK value
$
44,701

Less: Redeemable noncontrolling interest
21,904

Total purchase price (includes estimated earn out of $991)
$
22,797

Less:
 
Cash
1,566

Accounts receivable
11,726

Accounts payable
(12,640
)
Other tangible liabilities, net
(36,866
)
Acquired software(a)
14,193

Customer relationships(b)
15,171

Trademarks and trade name(c)
1,272

Recorded goodwill
$
28,375

 
(a) 
Weighted average life – 6.2 years.
(b) 
Weighted average life – 5.9 years.
(c) 
Weighted average life – 5.5 years. 
Acquisition of Fleet One
On October 4, 2012, the Company acquired certain assets of Fleet One, a privately-held provider of value-based business payment processing and information management solutions. The Company purchased Fleet One to expand its fuel card and fleet management information services, as well as to accelerate its presence in the over the road market.
During the fourth quarter of 2012, the Company allocated the purchase price of the acquisition based upon a preliminary estimate of the fair values of the assets acquired and liabilities assumed. During the third quarter of 2013, the Company obtained information to assist in determining the fair values of certain tangible and intangible assets acquired and liabilities assumed as of the Fleet One acquisition date. Based on such information, the Company retrospectively adjusted the fiscal year 2012 comparative information resulting in an decrease in accounts receivable of $47, an increase in deferred taxes of $261, a decrease in goodwill of $407, a decrease in taxes payable of $113 and a decrease in accrued expenses of $80. There were no changes to the previously reported consolidated statements of operations or statements of cash flows. The valuations of all assets and liabilities have been finalized.
The following is a summary of the allocation of the purchase price to the assets and liabilities acquired:
Consideration paid (net of cash)
$
376,258

Less:
 
Accounts receivable
152,527

Accounts payable
(151,647
)
Other tangible liabilities, net
(693
)
Acquired software(a)
35,000

Customer relationships(b)
74,000

Trademarks and trade name(c)
4,000

Recorded goodwill
$
263,071


11

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

 
(a) 
Weighted average life – 6.7 years.
(b) 
Weighted average life – 5.5 years.
(c) 
Weighted average life – 5.5 years. 
4.
Reserves for Credit Losses
In general, the Company’s trade receivables provide for payment terms of 30 days or less. The Company does not extend revolving credit to its customers with respect to these receivables. The portfolio of receivables consists of a large group of smaller balance homogeneous amounts that are collectively evaluated for impairment.
The following table presents the Company’s aging of accounts receivable:
 
Age Analysis of Past Due Financing Receivables, Gross
as of September 30, 2013, and September 30, 2012
 
Current
and Less
Than 30
Days Past
Due
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater
Than
90 Days
Past
Due
 
Total
2013
 
 
 
 
 
 
 
 
 
Accounts receivable, trade
$
1,852,563

 
$
50,691

 
$
10,718

 
$
8,596

 
$
1,922,568

Percent of total
96.4
%
 
2.6
%
 
0.6
%
 
0.4
%
 
 
2012
 
 
 
 
 
 
 
 
 
Accounts receivable, trade
$
1,595,483

 
$
32,031

 
$
6,123

 
$
7,130

 
$
1,640,767

Percent of total
97.2
%
 
2.0
%
 
0.4
%
 
0.4
%
 
 
The following table presents changes in reserves for credit losses related to accounts receivable:
 
Nine months ended 
 September 30,
 
2013
 
2012
Balance, beginning of period
$
11,709

 
$
11,526

Provision for credit losses
13,686

 
14,874

Charge-offs
(21,150
)
 
(20,397
)
Recoveries of amounts previously charged-off
5,031

 
4,065

Currency translation
(322
)
 

Balance, end of period
$
8,954

 
$
10,068

 


5.
Goodwill and Other Intangible Assets
Goodwill
The changes in goodwill during the first nine months of 2013 were as follows:
 
Fleet Payment Solutions Segment
 
Other
Payment
Solutions
Segment
 
Total
Gross goodwill, January 1, 2013, as adjusted
$
779,654

 
$
85,840

 
$
865,494

Impact of foreign currency translation
(21,123
)
 
(2,556
)
 
(23,679
)
Gross goodwill, September 30, 2013
758,531

 
83,284

 
841,815

Accumulated impairment, September 30, 2013
(1,337
)
 
(16,171
)
 
(17,508
)
Net goodwill, September 30, 2013
$
757,194

 
$
67,113

 
$
824,307


12

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

The Company had no impairments to goodwill during the nine months ended September 30, 2013.
Other Intangible Assets
The changes in other intangible assets during the first nine months of 2013 were as follows:
 
 
Net
Carrying
Amount,
January 1,
2013
 
Transfer from indefinite-lived intangible assets to definite-lived intangible assets
 
Amortization
 
Impact of
foreign
currency
translation
 
Net Carrying
Amount,
September 30,
2013
 
(As adjusted)
 
 
 
 
 
 
 
 
Definite-lived intangible assets
 
 
 
 
 
 
 
 
 
Acquired software
$
71,343

 
$

 
$
(6,350
)
 
$
(1,584
)
 
$
63,409

Customer relationships
150,290

 

 
(17,264
)
 
(5,819
)
 
127,207

Patent
2,365

 

 
(341
)
 
(176
)
 
1,848

Trade names
7,407

 
2,421

 
(609
)
 
(116
)
 
9,103

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 

Trademarks and trade names
10,545

 
(2,421
)
 

 
(617
)
 
7,507

Total
$
241,950

 
$

 
$
(24,564
)
 
$
(8,312
)
 
$
209,074

The Company adjusted the balance sheet amount for goodwill and intangible assets at December 31, 2012, to account for the measurement period adjustments related to the CorporatePay, UNIK and Fleet One purchase price allocations.
During the third quarter of 2013, the Company determined that the intangible asset recorded for the trade name associated with Wright Express Corporation should be reclassified from an indefinite-lived intangible asset to a definite-lived intangible asset due to the current re-branding efforts of changing from the Wright Express brand to the WEX brand initiated domestically and abroad. The Company determined a 10 year life would be appropriate in conjunction with the re-branding strategy initiated during the third quarter of this year.
The following table presents the estimated amortization expense related to the definite-lived intangible assets listed above for the remainder of 2013 and for each of the five succeeding fiscal years: 
Estimated Amortization Expense
Remaining 2013
$
8,188

2014
$
31,541

2015
$
28,918

2016
$
25,360

2017
$
21,625

2018
$
18,606

 Other intangible assets consist of the following:

13

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

 
September 30, 2013
 
December 31, 2012
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Definite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
Acquired software
$
84,023

 
$
(20,614
)
 
$
63,409

 
$
86,527

 
$
(15,184
)
 
$
71,343

Non-compete agreement
100

 
(100
)
 

 
100

 
(100
)
 

Customer relationships
192,846

 
(65,639
)
 
127,207

 
202,061

 
(51,771
)
 
150,290

Patent
3,083

 
(1,235
)
 
1,848

 
3,430

 
(1,065
)
 
2,365

Trademarks and trade names
10,137

 
(1,034
)
 
9,103

 
7,827

 
(420
)
 
7,407

 
$
290,189

 
$
(88,622
)
 
201,567

 
$
299,945

 
$
(68,540
)
 
231,405

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
Trademarks and trade names
 
 
 
 
7,507

 
 
 
 
 
10,545

Total
 
 
 
 
$
209,074

 
 
 
 
 
$
241,950


6.
Earnings per Share
The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computations for the three and nine months ended September 30, 2013 and 2012:
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Net earnings attributable to WEX Inc. available for common stockholders – Basic and Diluted
$
43,838

 
$
14,298

 
$
114,740

 
$
67,869

Weighted average common shares outstanding – Basic
38,978

 
38,793

 
38,934

 
38,832

Unvested restricted stock units
74

 
96

 
125

 
130

Stock options
29

 
106

 
43

 
122

Weighted average common shares outstanding – Diluted
39,081

 
38,995

 
39,102

 
39,084

No shares were considered anti-dilutive during the periods reported.
7.
Derivative Instruments
The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is commodity price risk. The Company enters into put and call option contracts related to the Company’s commodity price risk, which are based on the wholesale price of gasoline and retail price of diesel fuel and settle on a monthly basis. These put and call option contracts, or fuel price derivative instruments, are designed to reduce the volatility of the Company’s cash flows associated with its fuel price-related earnings exposure in North America. In 2010, the Company entered into an interest rate swap arrangement designed as a cash flow hedge to reduce a portion of the variability of the interest payments under the existing credit agreement borrowings. The interest rate swap agreement expired in March of 2012.
Accounting guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position. The Company designates interest rate swap arrangements as cash flow hedges of the forecasted interest payments on a portion of its variable-rate credit agreement. The Company’s fuel price derivative instruments do not qualify for hedge accounting treatment under current guidance, and therefore, no such hedging designation has been made. Because the derivatives are either accounting or economic hedges of operational exposures, cash flows from the settlement of such contracts are included in “Cash flows from operating activities” on the condensed consolidated statements of cash flows.

Cash Flow Hedges

14

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

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. As of September 30, 2013, the Company had no outstanding cash flow hedges.
Derivatives Not Designated as Hedging Instruments
For derivative instruments that are not designated as hedging instruments, the gain or loss on the derivative is recognized in current earnings. As of September 30, 2013, the Company had the following put and call option contracts which settle on a monthly basis: 
 
Aggregate
Notional
Amount
(gallons) (a)
Fuel price derivative instruments – unleaded fuel
 
Option contracts settling October 2013 – March 2015
36,953

Fuel price derivative instruments – diesel
 
Option contracts settling October 2013 – March 2015
17,402

Total fuel price derivative instruments
54,355

(a) 
The settlement of the put and call option contracts is based upon the New York Mercantile Exchange’s New York Harbor Reformulated Gasoline Blendstock for Oxygen Blending and the U.S. Department of Energy’s weekly retail on-highway diesel fuel price for the month.
The following table presents information on the location and amounts of derivative fair values in the condensed consolidated balance sheets:
 
Derivatives Classified as Assets
 
Derivatives Classified as Liabilities
 
September 30, 2013
 
December 31, 2012
 
September 30, 2013
 
December 31, 2012
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
Fuel price
derivatives,
at fair value
 
$
488

 
Fuel price
derivatives,
at fair value
 

 
Fuel price
derivatives,
at fair value
 
$
983

 
Fuel price
derivatives,
at fair value
 
$
1,729

The following tables present information on the location and amounts of derivative gains and losses in the condensed consolidated statements of income:
 
 
 
Amount of Gain or (Loss)
Recognized in
Income on Derivative
Derivatives Not Designated as Hedging Instruments
Location of Gain or (Loss)
Recognized in
 
Three months ended September 30,
Income on Derivative
 
2013
 
2012
Commodity contracts
Net realized and unrealized loss on fuel price derivatives
 
$
(3,640
)
 
$
(14,026
)


15

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

  
 
Amount of Gain or
(Loss) Recognized in
OCI on Derivative
(Effective
Portion) (a)
 
Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective  Portion)
 
Amount of Gain
or (Loss)
Reclassified
from
Accumulated
OCI  into
Income
(Effective
Portion)
 
Location of Gain or
(Loss) Recognized in
Income on Derivative
(Ineffective  Portion
and Amount Excluded
from Effectiveness
Testing) (b)
 
Amount of Gain or
(Loss) Recognized in
Income on  Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
Derivatives in Cash Flow Hedging
Relationships
 
Nine months ended September 30,
 
Nine months ended September 30,
 
Nine months ended September 30,
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Interest rate contracts
 
$

 
$
60

 
Financing interest expense
 
$

 
$
(109
)
 
Financing interest expense
 
$

 
$

 
  
Location of Gain or
(Loss) Recognized in
Income on Derivative
 
Amount of Gain or
(Loss) Recognized in
Income on  Derivative
 
Nine months ended September 30,
Derivatives Not Designated as Hedging Instruments
2013
 
2012
Commodity contracts
Net realized and unrealized loss on fuel price derivatives
 
$
(2,781
)
 
$
(12,046
)
(a) 
The amount of gain or (loss) recognized in other comprehensive income ("OCI") on the Company’s interest rate swap arrangements has been recorded net of tax impact of $35 in 2012.
(b) 
No ineffectiveness was reclassified into earnings nor was any amount excluded from effectiveness testing.

8.
Financing Debt
2013 Credit Agreement
On January 18, 2013, the Company entered into an amended and restated credit agreement (the “2013 Credit Agreement”), among the Company and a syndicate of lenders. The 2013 Credit Agreement provides for a five-year amortizing $300,000 term loan facility, and a five-year $800,000 secured revolving credit facility with a $150,000 sub-limit for letters of credit. The indebtedness covenant under the 2013 Credit Agreement requires that the Company reduce the revolving commitments under the 2013 Credit Agreement on a dollar-for-dollar basis to the extent that the Company issued more than $300,000 in principal amount of senior or senior subordinated notes of the Company. Subject to certain conditions, including obtaining relevant commitments, the Company has the option to increase the facility by up to an additional $100,000.
The 2013 Credit Agreement replaced the 2011 Credit Agreement, dated as of May 23, 2011. The 2013 Credit Agreement increased the outstanding amount of the term loan from $185,000 to $300,000 and increased the amount of the revolving loan from $700,000 to $800,000. On January 30, 2013, the revolving loan commitment under the 2013 Credit Agreement was reduced to $700,000. The reduction was required due to the completion of the $400,000, 4.75 percent senior notes due in 2023, described below.
$400 Million Note Offering
On January 18, 2013, the Company completed a $400,000 offering in aggregate principal amount of 4.75 percent senior notes due in 2023 (the “Notes”) at an issue price of 100.0 percent of the principal amount, plus accrued interest, from January 18, 2013, in a private placement for resale to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and in offshore transactions pursuant to Regulation S under the Securities Act. The Notes were issued pursuant to an indenture dated as of January 18, 2013 (the “Indenture”) among the Company, the guarantors listed therein, and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”). The Notes mature on February 1, 2023, and interest accrues at the rate of 4.75 percent per annum. Interest is payable semiannually in arrears on February 1 and August 1 of each year, commencing on August 1, 2013.

16

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

 The Notes are guaranteed on a senior unsecured basis by each of the Company’s restricted subsidiaries and each of the Company’s regulated subsidiaries that guarantees the Company’s 2013 Credit Agreement, which, as of the issue date, consisted of four of the Company’s restricted subsidiaries. WEX Bank, which represents a substantial amount of the Company’s operations, is not a guarantor and is not subject to many of the restrictive covenants in the indenture governing the Notes.
The Notes and guarantees described above are general senior unsecured obligations ranking equally with the Company’s existing and future senior debt, senior in right of payment to all of the Company’s subordinated debt, and effectively junior in right of payment to all of the Company’s existing and future secured debt, including the Company’s 2013 Credit Agreement, to the extent of the value of the collateral securing such debt. In addition, the Notes and the guarantees are structurally subordinated to all liabilities of the Company’s subsidiaries that are not guarantors, including WEX Bank.
Prior to February 1, 2016, the Company may, subject to certain conditions, redeem up to 35 percent of the Notes from the proceeds of certain equity offerings at a redemption price of 104.75 percent of the principal amount, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption.
Prior to February 1, 2018, the Company may redeem the Notes, in whole or in part, at a redemption price equal to 100.0 percent of the principal amount of such Notes redeemed plus a “make-whole” premium (as described in the Indenture), together with any accrued and unpaid interest up to the date of redemption.
At any time on or after February 1, 2018, the Company may redeem the Notes, in whole or in part, at the following redemption prices (expressed as a percentage of principal amount of the Notes), plus accrued and unpaid interest, if any, to, but excluding, the date of redemption if redeemed during the twelve month period beginning on February 1 of the following years:
Years beginning on February 1
 
Percentage of Principal
Amount of Notes
2018
 
102.375
2019
 
101.583
2020
 
100.792
2021 and thereafter
 
100.000
Upon the occurrence of a change in control of the Company (as described in the Indenture), the Company must offer to repurchase the Notes at 101 percent of the principal amount of the Notes, plus accrued and unpaid interest up to the date of repurchase.
The Indenture contains covenants that, among other things, limit the Company’s ability and the ability of its restricted subsidiaries and, in certain limited circumstances, WEX Bank and the Company’s other regulated subsidiaries, to (i) incur additional debt, (ii) pay dividends or make other distributions on, redeem or repurchase capital stock, or make investments or other restricted payments, (iii) enter into transactions with affiliates, (iv) dispose of assets or issue stock of restricted subsidiaries or regulated subsidiaries, (v) create liens on assets, or (vi) effect a consolidation or merger or sell all, or substantially all, of the Company’s assets.
These covenants are subject to important exceptions and qualifications. At any time that the Notes are rated investment grade, which is not currently the case, and subject to certain conditions, certain covenants will be suspended with respect to the Notes. WEX Bank and the Company’s other regulated subsidiaries will not be subject to some of the restrictive covenants in the Indenture that place limitations on the Company and its restricted subsidiaries’ actions, and where WEX Bank and the Company’s regulated subsidiaries are subject to covenants, there are significant exceptions and limitations on the application of those covenants to WEX Bank and the Company’s regulated subsidiaries.
The Company used the net proceeds of this offering to repay the outstanding amount under the revolving portion of its 2013 Credit Agreement and to pay related fees and expenses and for general corporate purposes.
 
9.
Fair Value
The Company holds mortgage-backed securities, fixed income and equity securities, derivatives and certain other financial instruments which are carried at fair value. The Company determines fair value based upon quoted prices when available or through the use of alternative approaches, such as model pricing, when market quotes are not readily accessible or available. In determining the fair value of the Company’s obligations, various factors are considered, including: closing exchange or over-the-counter market price quotations; time value and volatility factors underlying options and derivatives; price activity for equivalent instruments; and the Company’s own credit standing.

17

Table of Contents
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(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 inactive markets.
Level 2 – Quoted prices for similar instruments inactive markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Instruments whose significant value drivers are unobservable.
The following table presents the Company’s assets and liabilities that are measured at fair value and the related hierarchy levels as of September 30, 2013: 
 
 
 
Fair Value Measurements
at Reporting Date Using
 
September 30, 2013
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Mortgage-backed securities
$
867

 
$

 
$
867

 
$

Asset-backed securities
1,490

 

 
1,490

 

Municipal bonds
535

 

 
535

 

Equity securities
13,316

 
13,316

 

 

Total available-for-sale securities
$
16,208

 
$
13,316

 
$
2,892

 
$

Executive deferred compensation plan trust (a)
$
4,048

 
$
4,048

 
$

 
$

Fuel price derivatives – unleaded fuel (b)
$
22

 
$

 
$
22

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Fuel price derivatives – diesel (b)
517

 

 

 
517

 
(a) 
The fair value of these instruments is recorded in other assets.
(b) 
The balance sheet presentation combines unleaded fuel and diesel fuel positions.
The Notes outstanding at September 30, 2013, have a carrying value of $400,000 and fair value of $360,000. The fair value is based on market rates for the issuance of debt.

18

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

The following table presents the Company’s assets and liabilities that are measured at fair value and the related hierarchy levels as of December 31, 2012:
 
 
 
Fair Value Measurements
at Reporting Date Using
 
December 31, 2012
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,839

 
$

 
$
1,839

 
$

Asset-backed securities
1,654

 

 
1,654

 

Municipal bonds
641

 

 
641

 

Equity securities
12,216

 
12,216

 

 

Total available-for-sale securities
$
16,350

 
$
12,216

 
$
4,134

 
$

Executive deferred compensation plan trust (a)
$
2,921

 
$
2,921

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
Fuel price derivatives – unleaded fuel (b)
$
1,622

 
$

 
$
1,622

 
$

Fuel price derivatives – diesel (b)
107

 

 

 
107

Total fuel price derivatives
$
1,729

 
$

 
$
1,622

 
$
107

Contingent consideration (c)
$
313

 

 

 
$
313

(a) 
The fair value of these instruments is recorded in other assets.
(b) 
The balance sheet presentation combines unleaded fuel and diesel fuel positions.
(c) 
The fair value of the contingent consideration is recorded in accrued expenses.
The following table presents a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended:
 
 
September 30, 2013
 
September 30, 2012
 
 
Fuel Price
Derivatives –
Diesel
 
Contingent
Consideration
 
Fuel Price
Derivatives –
Diesel
Beginning balance
 
$
498

 
$

 
$
3,398

Total (losses) and gains – realized/unrealized
 
 
 
 
 
 
Included in earnings (a)
 
(1,015
)
 

 
(3,812
)
Included in other comprehensive income
 

 

 

Purchases, issuances and settlements
 

 
(991
)
 

Transfers (in)/out of Level 3
 

 

 

Ending balance
 
$
(517
)
 
$
(991
)
 
$
(414
)
 
(a) 
Gains and losses (realized and unrealized), associated with fuel price derivatives, included in earnings for the three months ended September 30, 2013 and 2012, are reported in net realized and unrealized losses on fuel price derivatives on the unaudited condensed consolidated statements of income. Gains associated with contingent consideration, included in earnings for the three months ended September 30, 2012, are reported in other expenses and loss of foreign currency transactions on the unaudited condensed consolidated statements of income.

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

The following table presents a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended:
 
September 30, 2013
 
September 30, 2012
 
Contingent
Consideration
 
Fuel Price
Derivatives –
Diesel
 
Contingent
Consideration
 
Fuel Price
Derivatives –
Diesel
Beginning balance
$
(313
)
 
$
(107
)
 
$
(9,325
)
 
$
(25
)
Total (losses) and gains – realized/unrealized
 
 
 
 
 
 
 
Included in earnings (a)
(198
)
 
(410
)
 
839

 
(389
)
Included in other comprehensive income

 

 

 

Purchases, issuances and settlements

 

 
(991
)
 

Transfers (in)/out of Level 3
511

 

 
8,486

 

Ending balance
$

 
$
(517
)
 
$
(991
)
 
$
(414
)
(a) 
Gains and losses (realized and unrealized), associated with fuel price derivatives, included in earnings for the nine months ended September 30, 2013 and 2012, are reported in net realized and unrealized losses on fuel price derivatives on the unaudited condensed consolidated statements of income. Gains associated with contingent consideration, included in earnings for the nine months ended September 30, 2013 and 2012, are reported in other expenses and loss of foreign currency transactions on the unaudited condensed consolidated statements of income.
Available-for-sale securities and executive deferred compensation plan trust
When available, the Company uses quoted market prices to determine the fair value of available-for-sale securities; such items are classified in Level 1 of the fair-value hierarchy. These securities primarily consist of exchange-traded equity securities.
For mortgage-backed and asset-backed debt securities and bonds, the Company generally uses quoted prices for recent trading activity of assets with similar characteristics to the debt security or bond being valued. The securities and bonds priced using such methods are generally classified as Level 2.
Fuel price derivatives and interest rate swap arrangements
The majority of derivatives entered into by the Company are executed over-the-counter and are valued using internal valuation techniques as no quoted market prices exist for such instruments. The valuation technique and inputs depend on the type of derivative and the nature of the underlying instrument. The principal technique used to value these instruments is a comparison of the spot price of the underlying instrument to its related futures curve adjusted for the Company’s assumptions of volatility and present value, where appropriate. The fair values of derivative contracts reflect the expected cash the Company will pay or receive upon settlement of the respective contracts.
The key inputs depend upon the type of derivative and the nature of the underlying instrument and include interest rate yield curves, the spot price of the underlying instruments, volatility, and correlation. The item is placed in either Level 2 or Level 3 depending on the observability of the significant inputs to the model. Correlation and inputs with longer tenures are generally less observable.
Fuel price derivatives – diesel. The assumptions used in the valuation of the diesel fuel price derivatives use both observable and unobservable inputs. There is a lack of price transparency with respect to forward prices for diesel fuel. Such unobservable inputs are significant to the diesel fuel derivative contract valuation methodology.
Quantitative Information About Level 3 Fair Value Measurements. The significant unobservable inputs used in the fair value measurement of the Company’s diesel fuel price derivative instruments designated as Level 3 as of September 30, 2013, are as follows:
 
Fair Value at
September 30, 2013
 
Valuation
Technique
 
Unobservable Input
 
Range
$ per gallon
Fuel price derivatives – diesel
$
(517
)
 
Option model
 
Future retail price of diesel fuel after September 30, 2013
 
$3.71 – 3.94

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

Sensitivity to Changes in Significant Unobservable Inputs. As presented in the table above, the significant unobservable inputs used in the fair value measurement of the Company’s diesel fuel price derivative instruments are the future retail price of diesel fuel from the fourth quarter of 2013 through the first quarter of 2015. Significant changes in these unobservable inputs in isolation would result in a significant change in the fair value measurement.
Contingent consideration
The Company had classified its liability for contingent consideration related to its acquisition of UNIK within Level 3 of the fair value hierarchy because the fair value is determined using significant unobservable inputs, which include the projected revenues of UNIK over a four month period. These assumptions included assessing the probability of meeting certain milestones required to earn the contingent consideration.
During the second quarter of 2013, the Company determined a final payment of contingent consideration and increased the liability by $201. On June 30, 2013, the amount due was determined to be $511 and was paid on July 1, 2013.
The Company classified its liability for contingent consideration related to its acquisition of rapid! PayCard within Level 3 of the fair value hierarchy because the fair value was determined using significant unobservable inputs, which include the revenues of rapid! PayCard over a twelve month period ending on March 31, 2012. On March 31, 2012, the amount due was determined to be $8,486 and was paid on April 30, 2012.

10.
Comprehensive Income
A reconciliation of comprehensive income for the three month period ended September 30, 2013 and 2012, is as follows:
 
2013
 
2012
 
Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
 
Foreign
Currency
Items
 
Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
 
Foreign
Currency
Items
Beginning balance
$
(222
)
 
$
(7,052
)
 
$
270

 
$
28,631

Other comprehensive (loss) income
(73
)
 
7,684

 
44

 
9,006

Ending balance
$
(295
)
 
$
632

 
$
314

 
$
37,637

No amounts were reclassified from accumulated other comprehensive income in the periods presented.
A reconciliation of comprehensive income for the nine month period ended September 30, 2013 and 2012, is as follows:
 
2013
 
2012
 
Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
 
Foreign
Currency
Items
 
Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
 
Foreign
Currency
Items
Beginning balance
$
197

 
$
37,182

 
$
200

 
$
30,448

Other comprehensive (loss) income
(492
)
 
(36,550
)
 
114

 
7,189

Ending balance
$
(295
)
 
$
632

 
$
314

 
$
37,637

No amounts were reclassified from accumulated other comprehensive income in the periods presented.
 
11.
Redeemable noncontrolling interest
On August 30, 2012, the Company acquired a 51 percent ownership interest in UNIK, a provider of payroll cards in Brazil. Redeemable noncontrolling interest is measured at fair value at the date of acquisition. The redeemable noncontrolling interest is reported on the Company’s condensed consolidated balance sheets as “Redeemable noncontrolling interest."
A reconciliation of redeemable noncontrolling interest for the three and nine month periods ended September 30, 2013 and September 30, 2012, is as follows:

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

 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Balance, beginning of period
$
19,650

 

 
21,662

 

Acquisition of subsidiary at fair value

 
21,904

 

 
21,904

Net loss attributable to noncontrolling interest
(60
)
 
(14
)
 
(333
)
 
(14
)
Currency translation adjustment
172

 
223

 
(1,567
)
 
223

Ending balance
$
19,762

 
22,113

 
19,762

 
22,113


12.
Stock-Based Compensation
During the first quarter of 2013, the Company awarded restricted stock units and performance-based restricted stock units to employees under the 2010 Equity and Incentive Plan. Expense associated with the performance-based restricted stock units may increase or decrease due to changes in the probability of the Company achieving pre-established performance metrics. For the nine months ended September 30, 2013, total stock-based compensation expense recognized was approximately $6,882. As of September 30, 2013, total unrecognized compensation cost related to non-vested restricted stock units, and performance-based restricted stock units was approximately $10,606 to be recognized over the remaining vesting periods of these awards.

13.
Income Taxes
On June 29, 2012, tax legislation was enacted in Australia that affected the tax deductibility of certain intangible assets. A tax charge of $31,083 was recorded in June of 2012 to reflect these tax legislation changes. The Company wrote-off an associated refund claim payable to the former shareholder of RD Card Holding Australia for $9,750, included in non-operating income. This payable was contingent on the receipt of the tax refunds generated by tax deductions associated with the amortization of the above mentioned intangible assets.
Undistributed earnings of certain foreign subsidiaries of the Company amounted to $2,507 at September 30, 2013, and $1,756 at December 31, 2012. These earnings are considered to be indefinitely reinvested, and accordingly, no U.S. federal and state income taxes have been provided thereon. Upon distribution of these earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. The Company has determined that the amount of taxes attributable to these undistributed earnings is not practicably determinable.

14.
Commitments and Contingencies
Litigation
The Company is involved in pending litigation in the usual course of business. In the opinion of management, such litigation will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
 
15.
Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The operating segments are reviewed separately as each operating segment represents a strategic business unit that generally offers different products and serves different markets.
The Company’s chief operating decision maker evaluates the operating results of the Company’s reportable segments based upon revenues and “adjusted net income,” which is defined by the Company as net income adjusted for fair value changes of derivative instruments, the amortization of purchased intangibles, the net impact of tax rate changes on the Company’s deferred tax asset and related changes in the tax-receivable agreement, deferred loan costs associated with the extinguishment of debt, certain non-cash asset impairment charges, the gains on the extinguishment of a portion of the tax

22

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

receivable agreement and adjustments attributable to noncontrolling interest. These adjustments are reflected net of the tax impact.
The Company operates in two reportable segments, Fleet Payment Solutions and Other Payment Solutions. The Fleet Payment Solutions segment provides customers with payment and transaction processing services specifically designed for the needs of vehicle fleet customers. This segment also provides information management services to those fleet customers. The Other Payment Solutions segment provides customers with a payment processing solution for their corporate purchasing and transaction monitoring needs. Revenue in this segment is derived from the Company’s corporate purchase cards, virtual and prepaid card products. The corporate purchase card products are used by businesses to facilitate purchases of products and to utilize the Company’s information management capabilities.
Financing interest expense through the Company’s corporate debt, including the term loan and bond issuance, and net realized and unrealized losses on derivative instruments are allocated to the Fleet Payment Solutions segment in the computation of segment results for internal evaluation purposes. Total assets are not allocated to the segments.
The following table presents the Company’s reportable segment results on an adjusted net income basis for the three months ended September 30, 2013 and 2012:
 
Total
Revenues
 
Operating
Interest
Expense
 
Depreciation
and
Amortization
 
Provision for
Income Taxes
 
Adjusted Net
Income
Three months ended September 30, 2013
 
 
 
 
 
 
 
 
 
Fleet payment solutions
$
136,874

 
$
427

 
$
5,767

 
$
21,726

 
35,119

Other payment solutions
54,651

 
549

 
342

 
7,577

 
15,303

Total
$
191,525

 
$
976

 
$
6,109

 
$
29,303

 
50,422

Three months ended September 30, 2012
 
 
 
 
 
 
 
 
 
Fleet payment solutions
$
117,877

 
$
838

 
$
5,856

 
$
21,874

 
$
33,641

Other payment solutions
43,090

 
404

 
441

 
5,589

 
8,394

Total
$
160,967

 
$
1,242

 
$
6,297

 
$
27,463

 
$
42,035

The following table presents the Company’s reportable segment results on an adjusted net income basis for the nine months ended September 30, 2013 and 2012:
 
Total
 Revenues 
 
 Operating 
Interest
Expense
 
Depreciation
and
 Amortization 
 
Provision for
Income Taxes
 
 Adjusted Net 
Income
Nine months ended September 30, 2013
 
 
 
 
 
 
 
 
 
Fleet payment solutions
$
393,953

 
$
1,392

 
$
17,358

 
$
58,474

 
99,950

Other payment solutions
141,227

 
1,813

 
1,346

 
17,128

 
29,840

Total
$
535,180

 
$
3,205

 
$
18,704

 
$
75,602

 
129,790

Nine months ended September 30, 2012
 
 
 
 
 
 
 
 
 
Fleet payment solutions
$
341,709

 
$
2,685

 
$
17,699

 
$
56,027

 
$
94,169

Other payment solutions
112,444

 
744

 
1,241

 
13,607

 
22,512

Total
$
454,153

 
$
3,429

 
$
18,940

 
$
69,634

 
$
116,681


23

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

 The following table reconciles adjusted net income to net income:
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Adjusted net income WEX Inc.
$
50,422

 
$
42,035

 
$
129,790

 
$
116,681

Unrealized (loss) gains on fuel price derivatives
(2,733
)
 
(12,849
)
 
1,234

 
(1,841
)
Amortization of acquired intangible assets
(8,051
)
 
(5,411
)
 
(24,564
)
 
(15,481
)
Goodwill impairment

 
(16,171
)
 

 
(16,171
)
Deferred loan costs associated with the extinguishment of debt

 

 
(1,004
)
 

Non-cash adjustments related to tax receivable agreement
150

 

 
150

 

Change in tax refund due to former shareholders of RD Card Holding Australia

 

 

 
9,750

Other adjustments related to Fleet One acquisition
658

 

 
658

 

ANI adjustments attributable to noncontrolling interest
313

 
77

 
971

 
77

Tax impact
3,079

 
6,617

 
7,505

 
(25,146
)
Net earnings attributable to WEX Inc.
$
43,838

 
$
14,298

 
$
114,740

 
$
67,869

The tax impact of the foregoing adjustments is the difference between the Company’s U.S. GAAP tax provision and a pro forma tax provision based upon the Company’s adjusted net income before taxes. The methodology utilized for calculating the Company’s adjusted net income tax provision is the same methodology utilized in calculating the Company’s U.S. GAAP tax provision.

24

Table of Contents


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operati