WEX Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with the three months ended March 31, 2023. Amounts are in U.S. dollars.
Business context
WEX provides payment processing, account servicing and related services across Mobility, Corporate Payments and Benefits. Its activities include funding customer receivables and providing custodial and deposit services for health savings accounts (HSAs).
Financial performance and liquidity
- Revenue: $652.7 million, up 6.7% from $612.0 million. GAAP operating income was $164.5 million, up from $154.3 million.
- Profit: Net income was $65.8 million, down from $68.0 million; diluted EPS was $1.55 versus $1.56. Adjusted net income, a non-GAAP measure, was $146.7 million versus $145.8 million; adjusted diluted EPS was $3.46 versus $3.31.
- Segments: Revenue was $339.0 million for Mobility (down 1%), $122.5 million for Corporate Payments (up 17%), and $191.2 million for Benefits (up 16%). Segment adjusted operating income was $131.0 million, $64.6 million and $79.4 million, respectively. Adjusted segment margins were 38.6%, 52.7% and 41.5%, respectively.
- Cash flow: Operating cash flow was negative $153.3 million, versus positive $27.1 million. Adjusted free cash flow, a non-GAAP measure, was negative $204.5 million versus negative $61.4 million. Management attributed the year-over-year cash-flow decline in part to working-capital movements and a $64.5 million contingent-consideration payment; it also cited short-term receivable-funding borrowings that did not occur until Q2.
- Balance sheet and funding: Cash and cash equivalents were $779.6 million, including $176.0 million of Corporate Cash; restricted cash was $1.302 billion. Net short- and long-term debt was $4.195 billion. Total deposits were $4.206 billion. Revolving-credit availability was $463.4 million, subject to covenant compliance. Restricted cash and HSA balances are not equivalent to unrestricted corporate liquidity.
- Other metrics: Total volume was $56.809 billion, up from $52.308 billion. The allowance for receivable losses was $90.1 million, down from $117.8 million at year-end 2023. Investment securities had $121.2 million of gross unrealized losses at quarter-end; the filing says these were primarily interest-rate driven and no credit-loss allowance was recorded.
Material changes and management commentary
- Corporate Payments benefited from 29% growth in purchase volume, although customer mix reduced its net interchange rate. Benefits growth reflected higher HSA balances and interest income, as well as the Ascensus acquisition. Mobility revenue declined amid lower fuel prices and lower finance-fee revenue, partly offset by servicing growth and merchant-contract rate escalators.
- Mobility’s credit-loss provision fell to $20.8 million from $44.8 million, which WEX attributed to tighter credit policies, market stabilization and lower-than-expected charge-offs. Mobility’s adjusted operating income and margin nevertheless declined year over year.
- Financing interest expense rose to $60.3 million from $52.9 million, primarily due to higher revolving-credit borrowings and variable rates. Net foreign-currency loss increased to $12.5 million from $1.4 million.
- WEX amended its credit agreement in January, repricing Term B loans as Term B-1 loans at lower contractual margins. The agreement’s borrowings had a 7.1% weighted-average effective interest rate at March 31, versus 7.3% at December 31, 2023.
- WEX repurchased approximately 353,000 shares for $73.6 million during the quarter. Its board expanded the repurchase authorization by $400 million in February; $539.8 million remained available at quarter-end.
Outlook, risks and contingencies
- WEX provided no specific earnings or revenue guidance in the supplied filing text. Management said available cash, cash generation and funding access should be adequate for cash needs over the next 12 months and the foreseeable future.
- The Federal Reserve’s Bank Term Funding Program stopped issuing new loans on March 11, 2024. WEX Bank had $760 million outstanding under the program at quarter-end, due January 2025, secured by investment securities. WEX also had access to $150.6 million of Discount Window borrowing capacity and no outstanding borrowings there.
- WEX Bank remains subject to an FDIC consent order requiring compliance-management improvements. The company said remediation steps were taken and does not expect the order to materially affect results or financial condition. WEX Bank was classified as well capitalized in its most recent FDIC examination.
- The filing identifies exposure to fuel prices and demand, credit and fraud losses, interest rates, foreign exchange, funding availability, regulatory changes, technology and cybersecurity, and acquisition execution. Management reported no material legal proceedings or reasonably possible legal or regulatory loss contingencies as of filing.
- Payzer and Ascensus acquisition purchase-price allocations remained preliminary; measurement-period adjustments could affect those allocations. The filing also notes $3.1 million of receivables-factoring losses in Q1 2024, compared with immaterial losses a year earlier.
Most important facts for investors to verify
- Whether the improvement in Corporate Payments and Benefits can offset softer Mobility revenue and exposure to fuel prices.
- Whether lower Mobility credit losses persist, and how receivable delinquency, charge-offs and fraud losses develop.
- How working-capital needs, interest costs, deposit funding and refinancing requirements affect cash generation and leverage; distinguish corporate cash from restricted and custodial balances.
- Progress on the FDIC consent order and whether the BTFP maturity and other funding sources create any liquidity or cost-of-funding pressure.
- The contribution and integration costs of Payzer and Ascensus, and any final purchase-accounting adjustments. Compare GAAP results with non-GAAP measures, which exclude specified costs and other items.