WEX Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. WEX operates Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $616.1 | $482.8 | $1,731.9 | $1,353.0 |
| Operating income | $21.3 | $100.8 | $314.7 | $233.6 |
| Net income (loss) attributable to shareholders | $(44.1) | $48.3 | $112.7 | $11.9 |
| Diluted EPS | $(1.00) | $1.07 | $2.51 | $0.26 |
| Adjusted net income attributable to shareholders, non-GAAP | $157.8 | $111.1 | $458.2 | $297.3 |
- Q3 revenue increased 28% year over year; total volume processed rose 41% to $57.5 billion and total purchase volume rose 52% to $39.2 billion.
- Q3 revenue by segment: Fleet Solutions $378.1 million (+32%); Travel and Corporate Solutions $114.0 million (+25%); Health and Employee Benefit Solutions $124.1 million (+18%).
- Q3 segment adjusted operating income, a non-GAAP measure, was $265.1 million versus $199.8 million. Segment adjusted operating margins were 46% for Fleet, 53% for Travel and Corporate, and 24% for Health and Employee Benefits.
- Q3 operating income included a $136.5 million non-cash goodwill impairment charge. Provision for credit losses increased to $54.0 million from $14.1 million, principally reflecting higher credit and fraud losses in Fleet.
- Nine-month operating cash flow was $456.6 million, compared with cash used of $10.4 million in 2021. Investing cash outflow was $663.9 million and financing cash inflow was $753.4 million.
- At September 30, cash and cash equivalents were $759.4 million; restricted cash was $942.1 million. Gross debt was $2,847.5 million, including $310.0 million of convertible notes. Revolver borrowings were $88.2 million, with $810.8 million of remaining capacity, subject to covenant compliance.
- Total deposits were $3,635.7 million, including $2,070.0 million of HSA deposits. WEX reported total assets of $11,909.1 million and total liabilities of $10,278.1 million.
Changes and drivers
- Revenue growth reflected higher fuel prices and customer growth in Fleet, continued travel-market recovery and corporate payment volume growth, and expansion in Health and Employee Benefits. Fleet payment processing fuel dollars increased 44% in Q3, primarily due to higher fuel prices; average domestic fuel price increased 41% year over year.
- Fleet credit and fraud losses rose materially: the provision was 30.9 basis points of fuel expenditures in Q3 versus 5.9 basis points a year earlier. Management cited higher fuel prices, slower payments from some small over-the-road customers, and fraud losses.
- Travel and Corporate purchase volume increased 61%; Health and Employee Benefits U.S. SaaS accounts increased 8% to an average 18.2 million. Travel revenue comparisons also reflect a prior accounting change from gross to net presentation for one customer.
- Financing interest expense was $34.4 million in Q3. The effective rate on the company’s term loans and revolver was 5.2% at quarter-end, up from 2.2% at year-end 2021. The company reported $90.3 million of nine-month unrealized gains on financial instruments, largely related to interest-rate swaps, and $37.8 million of foreign-currency losses.
- Available-for-sale debt securities had $160.6 million of gross unrealized losses at quarter-end, which the company said were not credit-related; the related nine-month other comprehensive loss was $150.5 million, net of tax.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings, or other forward guidance. Management said current cash, operating cash generation, and funding access should cover cash needs for the next 12 months and foreseeable future.
- WEX Bank was subject to a May 2022 FDIC and Utah Department of Financial Institutions consent order requiring improvements to its Bank Secrecy Act/anti-money-laundering compliance program and related controls. The company stated that the matter was not expected to have a material adverse effect. WEX Bank was classified as “well capitalized” in its most recent FDIC examination.
- The $136.5 million goodwill impairment followed lower projected cash flows in two international Fleet reporting units, primarily in Europe, amid higher interest rates, lower market valuations, and inflationary pressure.
- Fair-value remeasurement of contingent consideration generated a $30.3 million Q3 expense and $135.1 million expense for the first nine months, as Federal Funds rate expectations increased. The contingent consideration liability was $202.4 million at quarter-end.
- WEX bought SBI’s remaining 4.53% interest in PO Holding for $234.0 million, payable in installments in 2024–2026; the liability was initially recorded at a discounted $216.6 million. The acquisition made PO Holding wholly owned.
- Management cited exposure to economic conditions, fuel prices, credit and fraud losses, interest rates, foreign exchange, technology and cybersecurity, regulation, customer and partner retention, and acquisition execution. It also noted softening over-the-road spot rates and expected the related pressure on factoring fee revenue to continue through year-end.
- European supplier contract amendments resulted in a $7 million reversal of previously accrued minimum-volume penalties recorded as revenue in the first nine months. Shortfall penalties under amended agreements were $1.6 million for the period.
- After quarter-end, WEX announced an increase in its share repurchase authorization to $650 million and repurchased $75 million of shares in October. At the filing date, $575 million remained available. The company was in compliance with its debt covenants at September 30.
Investor verification priorities
- Assess whether Fleet credit and fraud losses—especially losses tied to small over-the-road customers—are stabilizing, and how reserves compare with subsequent charge-offs.
- Separate underlying operating performance from the goodwill impairment, contingent-consideration remeasurement, foreign-exchange effects, and other adjustments in the non-GAAP measures.
- Monitor funding costs, deposit growth and composition, revolving-credit availability, debt maturities, and compliance with credit-facility covenants.
- Track the FDIC/UDFI consent-order remediation, any related compliance costs, and whether regulators modify or terminate the order.
- Verify the durability of travel recovery, fuel-price-related revenue, HSA investment income, and the announced repurchase activity and authorization.