WEX Inc. — Q3 2023 Form 10-Q
Business context and period. WEX provides payment processing, corporate payment, and employee-benefits technology and services through its Mobility, Corporate Payments, and Benefits segments. This unaudited quarterly report covers the three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $651.4 million | $616.1 million | $1,884.7 million | $1,731.9 million |
| Operating income | $174.9 million | $21.3 million | $488.6 million | $314.7 million |
| Net income attributable to shareholders | $18.4 million | $(44.1) million | $181.7 million | $112.7 million |
| Diluted GAAP EPS | $0.42 | $(1.00) | $4.18 | $2.51 |
| Adjusted net income per diluted share (non-GAAP) | $4.05 | $3.51 | $10.99 | $10.09 |
Q3 GAAP operating margin was approximately 26.8% versus 3.5% in 2022; the comparison reflects a $136.5 million goodwill impairment charge in the prior-year quarter. Q3 net margin was approximately 2.8%, compared with a loss. Nine-month operating margin was approximately 25.9% versus 18.2%; net margin was approximately 9.6% versus 6.5%. Q3 results included a $70.1 million loss on extinguishment of the Convertible Notes, which contributed to a 58.6% effective tax rate.
- Revenue drivers: Q3 revenue rose 6%. Corporate Payments revenue increased 19% to $135.2 million, and Benefits revenue rose 34% to $166.1 million. Mobility revenue fell 7% to $350.1 million, primarily due to lower fuel prices and lower finance-fee revenue.
- Segment adjusted operating income (non-GAAP): Q3 was $301.3 million, up from $265.1 million. Mobility was $159.6 million (down 9%), Corporate Payments $82.9 million (up 37%), and Benefits $58.8 million (up 94%). Benefits growth reflected higher HSA balances and interest revenue, servicing fees, and account and cardholder growth.
- Cash flow: Nine-month operating cash flow was $146.0 million versus $106.6 million. Investing cash outflow was $1.571 billion, mainly reflecting increased investment in available-for-sale securities and the Ascensus acquisition. Financing cash inflow was $1.705 billion. Adjusted free cash flow, a non-GAAP measure, was $391.6 million versus $406.8 million.
- Balance sheet and funding: At September 30, cash and cash equivalents were $957.8 million, restricted cash $1.159 billion, and current investment securities $2.625 billion. Total debt, net of stated issuance costs, was approximately $3.607 billion ($957.3 million short-term and $2.650 billion long-term); deposits totaled $4.368 billion. WEX reported $170.2 million of Corporate Cash and $925.2 million of remaining revolver availability. These cash, restricted-cash, and securities balances are not all freely available for general purposes.
Material changes and unusual items
- Total revenue increased 6% in Q3 and 9% for the first nine months. Mobility payment-processing fuel spend fell 13% in Q3 as average domestic fuel prices declined 13%; payment-processing transactions were broadly stable. Mobility’s nine-month adjusted operating margin declined, reflecting lower fuel prices and higher operating interest costs, partly offset by lower credit and fraud losses.
- Credit-loss provision fell to $9.4 million in Q3 from $54.0 million, and to $77.5 million for nine months from $121.9 million. Management cited tighter credit policies and moderating over-the-road trucking losses.
- Interest expense increased: Q3 operating interest was $25.3 million versus $7.9 million, while financing interest expense was $41.6 million versus $34.4 million. The filing attributes increases principally to higher rates and operating debt balances.
- WEX repurchased all $310.0 million principal amount of its 6.5% Convertible Notes for $370.4 million, including accrued interest, in an August transaction with an affiliate of Warburg Pincus. This generated the $70.1 million extinguishment loss. The company also increased revolving credit commitments from $930 million to $1.430 billion in September.
- WEX completed the Ascensus health and benefits business acquisition on September 1 for approximately $182.3 million in total consideration; preliminary purchase accounting recorded $83.0 million of goodwill. Its contribution to Q3 revenue and pretax income was not significant.
- Available-for-sale debt securities had $206.8 million of gross unrealized losses at September 30; the company reported no expected credit losses and said it did not intend, and was not more likely than not required, to sell before recovery of amortized cost.
Outlook, risks, and contingencies
- Management said existing cash, operating cash generation, and access to funding sources should be sufficient for cash needs over the next 12 months and foreseeable future. No specific revenue, earnings, or cash-flow guidance is provided in this filing.
- After quarter-end, on October 23, WEX signed an agreement to acquire Payzer Holdings for approximately $250 million, plus up to $11 million of contingent consideration, subject to adjustments and customary closing conditions. The company expected closing before year-end.
- WEX Bank is subject to a 2022 FDIC/Utah Department of Financial Institutions consent order concerning Bank Secrecy Act/anti-money-laundering compliance, and a September 2023 FDIC order requiring compliance-management improvements. Management said it was addressing both orders and did not expect them to materially affect operations or financial results. WEX Bank was categorized as “well capitalized” in its most recent FDIC examination.
- Key disclosed risks include fuel demand and price volatility, interest rates and funding costs, credit and fraud losses, customer and partner retention, technology and cybersecurity failures, regulatory requirements, HSA custodial asset safeguards, leverage, foreign exchange, acquisitions, and litigation. Management reported no material legal proceedings and estimated reasonably possible legal or regulatory losses as not material.
Important facts for investors to verify
- How much of reported revenue and Benefits profitability depends on HSA balances, interest rates, and the cost of deposits, and how those economics may change.
- Whether credit and fraud losses remain lower as fuel conditions and trucking demand evolve, and whether Mobility margins recover from the year-to-date decline.
- Debt maturities, variable-rate exposure, funding costs, and available liquidity after the Convertible Notes repurchase, Ascensus acquisition, and planned Payzer acquisition.
- Progress, remediation milestones, and any additional requirements or effects from the FDIC and state banking regulator consent orders.
- The final Ascensus purchase-price allocation and Payzer transaction terms, financing, closing, and expected contribution; the Ascensus allocation was preliminary and Payzer was a subsequent event.
- Reconcile non-GAAP adjusted net income and adjusted free cash flow to GAAP results, and account for the large quarter-specific extinguishment loss and prior-year impairment charge when comparing periods.