WEX Inc. 10-Q Summary
Reporting period: Three months ended March 31, 2023; unaudited. WEX provides payment-processing, corporate-payments and employee-benefits services through Mobility, Corporate Payments and Benefits. The filing renamed its reportable segments during the quarter; their composition did not change. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $612.0 million | $517.5 million |
| Operating income | $154.3 million | $122.3 million |
| Net income attributable to shareholders | $68.0 million | $122.8 million |
| Diluted GAAP EPS | $1.56 | $2.71 |
| Adjusted net income, non-GAAP | $145.8 million | $131.1 million |
| Adjusted diluted EPS, non-GAAP | $3.31 | $2.88 |
| Operating cash flow | $27.1 million | $(168.7) million |
| Adjusted free cash flow, non-GAAP | $(61.4) million | $(77.7) million |
- Revenue rose 18%; operating income rose 26%. GAAP operating margin was approximately 25.2%, versus 23.6%.
- GAAP shareholder net income and EPS fell, while adjusted net income and adjusted EPS increased. The prior-year comparison included a $34.2 million gain related to acquiring the remaining PO Holding non-controlling interest and a $49.8 million unrealized gain on financial instruments; Q1 2023 recorded a $14.5 million unrealized loss.
- Total volume across the company increased 17%, to $52.3 billion from $44.8 billion.
Segments and material changes
| Segment | Revenue | Segment adjusted operating income | Key drivers |
|---|---|---|---|
| Mobility | $342.3 million; up 7% | $138.8 million; down 13% | Payment-processing revenue benefited from higher interchange rates and North American fleet volume growth. Higher credit and fraud losses, operating interest and lower factoring revenue weighed on results. |
| Corporate Payments | $104.8 million; up 36% | $49.2 million; up 74% | Purchase volume rose 58%, including nearly doubled travel-related volume. Travel/product mix reduced the net interchange rate to 0.48% from 0.55%. |
| Benefits | $164.9 million; up 36% | $64.5 million; up 82% | Growth reflected more SaaS accounts and purchase volume, higher custodial program fees and increased interest revenue on HSA deposits. |
Segment adjusted operating income is a non-GAAP measure and excludes specified costs; it is not directly comparable to GAAP operating income. Total segment adjusted operating income was $252.5 million, up from $223.9 million.
Cash, debt and liquidity
- At March 31, 2023, cash and cash equivalents were $921.7 million; restricted cash was $958.7 million. Corporate Cash, as defined under the credit agreement, was $149.2 million.
- Current investment securities were $2.48 billion, up from $1.40 billion at year-end. WEX reported $124.2 million of gross unrealized losses on current debt securities; it said these were not credit-related and that it did not intend, nor expect to be required, to sell before recovery.
- Gross debt was $2.96 billion, versus $2.77 billion at December 31, 2022; debt net of issuance costs was $2.92 billion. Total deposits were $4.45 billion, including $2.57 billion of HSA deposits.
- Revolver borrowings were $122.4 million, with $776.3 million of remaining availability, subject to covenant compliance. WEX also reported $100 million of federal funds borrowings and $43.4 million of participation debt. The company said it was in compliance with debt covenants.
- Operating cash flow improved year over year, primarily reflecting more favorable working-capital effects than in Q1 2022. Investing cash outflow was $1.06 billion, primarily from $1.1 billion of purchases of available-for-sale securities funded in connection with HSA deposits. Financing cash inflow was $1.04 billion, mainly reflecting deposit growth.
- Management believes available cash, operating cash generation and funding sources will cover cash needs for the next 12 months and the foreseeable future. Adjusted free cash flow is a non-GAAP measure; it remained negative.
Outlook, risks and unusual items
- The filing provides no numerical company-wide revenue, earnings or cash-flow guidance. Management said it expects the current Corporate Payments product mix to remain consistent through the rest of 2023.
- Mobility’s provision for credit losses rose to $44.8 million from $23.2 million. Management cited weaker over-the-road shipping demand, slower payments from small customers and expected higher U.S. fleet charge-offs amid macroeconomic factors. The Mobility loss metric rose to 31.6 basis points of fuel expenditures from 15.0 basis points.
- Higher interest rates increased financing interest expense to $38.4 million from $29.7 million and raised operating interest costs. Variable-rate debt and deposit costs remain relevant sensitivities.
- WEX disclosed a new risk factor concerning bank failures and financial-institution liquidity. It reported no direct exposure to Silicon Valley Bank or Signature Bank, but said some cash balances exceed insurance limits and its investment portfolio includes securities issued by financial institutions.
- WEX Bank continued working to address a 2022 FDIC and Utah Department of Financial Institutions consent order concerning Bank Secrecy Act/anti-money-laundering compliance and related controls. The company said the matters were not expected to have a material adverse effect. WEX Bank was reported as “well capitalized.”
- In April 2023, WEX amended its credit agreement and interest-rate swaps to transition from LIBOR to SOFR. It also entered into a Benefits receivables securitization facility with an expected revolving limit of approximately $35 million; accounting impacts were still under evaluation.
- WEX repurchased approximately 525,000 shares for $100.9 million in cash during the quarter. Approximately $416.6 million remained available under the repurchase authorization as of the filing.
- The company reported no material legal proceedings or reasonably possible legal/regulatory loss contingencies. It acquired an Indian workforce and related assets for $6.0 million in January.
Important facts for investors to verify
- Whether Mobility credit and fraud losses, customer payment delays and over-the-road market weakness persist or improve.
- How interest-rate changes affect financing costs, deposit costs, HSA investment income and the value of securities and derivatives.
- The liquidity and risk profile of custodial HSA assets, including balances held at third-party depository partners and the implications of bank-sector stress.
- Progress and any operational or financial effects of the WEX Bank regulatory consent order.
- Cash conversion and the drivers of negative adjusted free cash flow, while distinguishing it from GAAP operating cash flow.
- Corporate Payments and Benefits growth sustainability, including travel-related purchase mix and the contribution of interest income.