WEX Inc. 2023 Second-Quarter Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2023. WEX provides payment processing and related services through Mobility, Corporate Payments, and Benefits. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial results and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $621.3 million | $598.2 million | $1,233.3 million | $1,115.8 million |
| Operating income | $159.4 million | $171.1 million | $313.7 million | $293.4 million |
| Net income attributable to shareholders | $95.3 million | $34.1 million | $163.3 million | $156.9 million |
| Diluted GAAP EPS | $2.20 | $0.76 | $3.76 | $3.47 |
| Adjusted net income attributable to shareholders | $159.3 million | $169.4 million | $305.1 million | $300.4 million |
| Adjusted diluted EPS | $3.63 | $3.71 | $6.94 | $6.59 |
Q2 revenue rose about 4%, while operating income fell about 7%. GAAP net income increased substantially year over year, in part because Q2 2022 included a large unfavorable contingent-consideration fair-value change and foreign-currency loss. Adjusted net income and adjusted diluted EPS declined in Q2. For the first half, revenue rose about 11%, operating income about 7%, and adjusted diluted EPS about 5%.
- Margins: Q2 GAAP operating margin was approximately 25.7%, versus 28.6% a year earlier; net margin was approximately 15.3%, versus 5.7%. The filing does not present these margins as reported metrics.
- Cash flow, first half: Operating cash flow was $99.5 million, compared with cash used of $321.4 million. Investing activities used $1,322.4 million, principally reflecting purchases of investment securities; financing activities provided $1,468.5 million. Adjusted free cash flow, a non-GAAP measure, was $130.9 million versus negative $134.1 million. Its calculation includes adjustments for deposits, BTFP borrowings, investment-security purchases, and capital expenditures, so it is not equivalent to GAAP operating cash flow.
- Liquidity at June 30: Cash and cash equivalents were $901.4 million, including $193.4 million of Corporate Cash; restricted cash was $1,217.6 million. Revolver availability was $892.9 million, subject to covenant compliance. Management said available cash, cash generation, and funding access should meet needs for the next 12 months and foreseeable future.
- Debt and deposits: Short-term and long-term debt, net, totaled approximately $3.22 billion, versus approximately $2.72 billion at year-end 2022. The increase in short-term debt included $500 million borrowed under the Federal Reserve Bank Term Funding Program (BTFP). Total deposits were $4.32 billion, including $2.77 billion of HSA deposits; these deposits are funding sources and related obligations, not unrestricted corporate cash. Credit-agreement borrowings had a 7.3% weighted average effective interest rate. WEX reported compliance with its debt covenants.
- Credit and investments: Provision for credit losses was $22.7 million in Q2 and $68.1 million for the first half. The June 30 allowance for credit and fraud losses was $112.0 million. Investment securities totaled $2.69 billion at fair value and had $154.4 million of gross unrealized losses; management said these were not credit-related and it did not expect to need to sell the securities before recovery of amortized cost.
Material changes and segment performance
- Mobility: Q2 revenue declined 10% to $340.2 million. Lower fuel prices reduced payment-processing revenue; payment-processing fuel dollars fell 26%, while transaction count was nearly flat. Segment adjusted operating income declined 22% to $150.3 million, and adjusted margin fell to 44.2% from 50.9%. Lower Q2 credit-loss provision partly offset higher processing, personnel, and operating-interest costs.
- Corporate Payments: Q2 revenue increased 21% to $121.9 million, driven chiefly by travel-related volume. Purchase volume rose 34%, while the net interchange rate fell to 0.46% from 0.52% amid customer and product mix changes. Segment adjusted operating income increased 30% to $66.3 million.
- Benefits: Q2 revenue increased 34% to $159.2 million, supported by higher HSA investment income, custodial program fees, and account growth. Average SaaS accounts rose 11% and average HSA custodial cash assets rose 25%. Segment adjusted operating income increased 110% to $59.3 million. Results benefited from higher interest rates earned on HSA balances.
- Consolidated financing interest expense increased to $42.4 million in Q2 from $31.8 million, reflecting higher variable interest rates. Operating interest expense also increased, principally due to higher rates on funding used for working capital.
Outlook, risks, and notable items
- The filing provides no quantified full-year revenue or earnings guidance. Management expects current Corporate Payments product mix to continue through the rest of 2023 and stated that liquidity should be sufficient for the foreseeable future.
- After quarter-end, WEX agreed to acquire Ascensus Health & Benefits for approximately $180 million, subject to adjustments, regulatory approvals, and other conditions; closing was expected before year-end 2023. The acquisition is intended to expand Benefits capabilities.
- WEX Bank remained subject to an FDIC and Utah DFI consent order requiring enhancements to its Bank Secrecy Act/anti-money-laundering compliance program and related controls. Management did not expect the matter to materially affect results, financial condition, or cash flows. The bank was categorized as well capitalized in its most recent FDIC examination.
- Key exposures identified include fuel prices and demand, credit and fraud losses, interest rates and deposit costs, economic and banking conditions, customer and partner retention, technology and cybersecurity, regulation, foreign currency, leverage, and execution of acquisitions. The filing also added risks associated with AI use and minority equity investments.
- WEX reported no material legal proceedings and no material changes to market-risk disclosures. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Mobility’s fuel-price sensitivity, over-the-road weakness, and credit-loss trends persist, and how they affect revenue and margins.
- Whether Benefits earnings growth from HSA balances and interest rates is sustainable, alongside the cost of HSA deposits and custodial obligations.
- How operating cash generation and adjusted free cash flow compare after accounting for changes in deposits, investment-security purchases, and BTFP funding.
- Debt maturities, variable-rate exposure, covenant headroom, and the availability and cost of bank and market funding.
- Progress toward satisfying the WEX Bank consent order and any related compliance, regulatory-capital, or operational developments.
- Final terms, approvals, financing, and integration outcomes for the Ascensus Health & Benefits acquisition.