WEX Inc. — Q2 2022 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2022. WEX provides payment, processing, and related services through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $598.2 million | $459.5 million | $1,115.8 million | $870.2 million |
| Operating income | $171.1 million | $82.3 million | $293.4 million | $132.8 million |
| Net income attributable to shareholders | $34.1 million | $(33.9) million | $156.9 million | $(36.4) million |
| Diluted EPS | $0.76 | $(0.76) | $3.47 | $(0.82) |
| Adjusted net income, non-GAAP | $169.4 million | $104.9 million | $300.4 million | $186.2 million |
| Operating cash flow | Not stated for quarter | $(138.2) million | $(122.0) million |
Q2 revenue increased 30%; operating income more than doubled. Six-month revenue rose 28%. Q2 GAAP shareholder income improved from a loss, but comparisons were affected by the prior-year change in value of redeemable non-controlling interest. In 2022, the six-month result included a $34.2 million net gain related to buying out that interest. Adjusted net income is a non-GAAP measure and should be considered alongside GAAP results.
Q2 segment revenue was $379.2 million for Fleet Solutions, $100.4 million for Travel and Corporate Solutions, and $118.6 million for Health and Employee Benefit Solutions, up 38%, 23%, and 15%, respectively. Segment adjusted operating income margins were 51%, 51%, and 24%, respectively; these are non-GAAP measures.
Cash, debt, and liquidity
- Cash and cash equivalents were $438.8 million at June 30, down from $588.9 million at year-end. Restricted cash was $815.5 million; cash plus restricted cash totaled $1.254 billion.
- Six-month operating cash use was $138.2 million, principally reflecting increased receivables associated with higher fuel prices, partly offset by growth in accounts payable and higher net income. Investing cash use was $610.7 million, including $594.3 million of purchases of available-for-sale debt securities. Financing provided $793.5 million, largely from a $797.9 million increase in deposits.
- Gross debt was $2.986 billion, compared with $2.905 billion at December 31, 2021. WEX also reported $3.475 billion of deposits, including HSA deposits; these are funding sources and liabilities, not unrestricted cash.
- Revolver borrowings were $180.4 million, with $718.4 million of remaining borrowing availability, subject to covenant compliance. WEX reported covenant compliance at quarter-end and stated it expected available resources to cover needs for the next 12 months and foreseeable future.
Material changes and unusual items
- Fleet revenue growth reflected higher fuel prices and customer growth. The average domestic fuel price rose 64% year over year in Q2; fuel payment dollars rose 70%, while fuel transactions increased 9%. WEX said higher fuel prices contributed $64.2 million to Q2 Fleet revenue.
- Fleet provision for credit losses rose to $42.4 million in Q2 from $11.5 million. WEX cited increased fraud and credit losses, higher fuel prices, and credit-loss rates moving toward historical norms. The reported credit-loss metric increased to 23.6 basis points of fuel expenditures from 8.1 basis points.
- Travel and Corporate purchase volume rose 96%, reflecting recovery in global travel and continued strength in corporate payments. Health revenue benefited from benefitexpress, account growth, and income earned on HSA deposits; comparisons were partly affected by temporary 2021 COBRA services.
- WEX acquired SBI’s remaining 4.53% interest in PO Holding for $234 million, payable in installments from 2024 through 2026. The initial recorded deferred liability was $216.6 million.
- Fair-value changes in contingent consideration generated an $88.2 million Q2 expense and a $104.8 million first-half expense. WEX attributed the increase in the liability to changes in expected Federal Funds rates. Q2 also included a $19.4 million foreign-currency loss and a $16.9 million unrealized gain on financial instruments.
- Available-for-sale debt securities had $99.9 million of gross unrealized losses at quarter-end; WEX stated these were not considered credit-related and that it did not expect to be required to sell the securities before recovery of amortized cost.
- European fuel-supplier contract amendments led to a $7 million reversal of previously accrued penalties, recorded as other revenue. A separate asset portfolio purchase, primarily card receivables, was expected to cost approximately $48 million and close in Q3, subject to conditions.
Outlook, risks, and contingencies
The filing provides no specific full-year revenue, earnings, or cash-flow guidance. Management said it planned further investment in the second half of 2022 in cross-selling, technology, product innovation including electric vehicles, and process simplification. Management also expected softer over-the-road spot rates to weigh on factoring fee revenue for the remainder of the year.
WEX Bank was subject to a May 6, 2022 FDIC and Utah Department of Financial Institutions consent order requiring strengthened Bank Secrecy Act/anti-money-laundering compliance and related controls. The company said the matters were not expected to have a material adverse effect, while noting compliance-related costs had increased. Other key risks include fuel-price and fuel-spread volatility, customer credit and fraud losses, interest rates and inflation, foreign exchange, regulatory requirements, technology and cybersecurity, travel demand, and acquisition integration. WEX reported no material legal proceedings and stated disclosure controls were effective.
Important facts for investors to verify
- Whether fuel-price-driven revenue growth persists and how fuel prices affect payment-processing rates, working capital, and credit losses.
- Subsequent credit and fraud loss trends, including the increase in Fleet loss provisions and the effect of customer delinquency.
- Progress, costs, and any regulatory developments under the WEX Bank consent order.
- Debt and funding trends, including deposit stability, interest-rate exposure, revolver availability, and the scheduled PO Holding purchase payments.
- Whether travel recovery, Health segment growth, and planned investments translate into durable operating results; also assess the effects of non-GAAP adjustments and unusual fair-value items.