WEX Inc. 2020 Form 10-K Summary
Business context and reporting period: WEX provides payment processing and financial technology services through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. This annual report covers the fiscal year ended December 31, 2020; it does not provide a standalone fourth-quarter summary. Results were materially affected by COVID-19, particularly lower travel activity, fuel prices and fleet volumes.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $1.560 billion | $1.724 billion |
| Operating income (loss) | ($91.7 million) | $385.8 million |
| Operating margin | (5.9%) | 22.4% |
| Net income (loss) attributable to shareholders | ($243.6 million); diluted EPS ($5.56) | $99.0 million; diluted EPS $2.26 |
| Adjusted net income attributable to shareholders (non-GAAP) | $268.3 million | $402.7 million |
| Cash provided by operating activities | $857.0 million | $663.2 million |
| Cash and cash equivalents | $852.0 million | $810.9 million |
| Restricted cash | $477.6 million | $170.4 million |
| Debt outstanding, net of issuance costs and discounts | $3.027 billion, including $152.7 million current | — |
Revenue fell 9% year over year. Operating results included $162.5 million of eNett/Optal legal settlement expense, a $53.4 million non-cash goodwill impairment, and a $46.4 million loss on the sale of WEX Latin America. Financing interest expense increased 17% to $157.1 million; net foreign currency loss was $25.8 million versus $0.9 million in 2019. The reported 2020 income tax benefit was $20.6 million, compared with a $61.2 million provision in 2019.
Operating cash flow increased by $193.8 million, mainly due to increased accounts receivable collections, partly offset by lower payables. Investing cash outflow was $329.1 million, including acquisition spending; financing cash outflow was $179.3 million. Restricted cash is not available for general operations, so cash and restricted cash should not be treated as interchangeable liquidity.
Segment results
| Segment | 2020 revenue | Change versus 2019 | Operating context |
|---|---|---|---|
| Fleet Solutions | $918.3 million | Down 12% | Lower fuel prices and fleet volumes reduced revenue; segment adjusted operating income was $383.5 million, down from $485.5 million. |
| Travel and Corporate Solutions | $277.8 million | Down 24% | Travel purchase volume fell 47%; corporate payments revenue grew 13%. Segment adjusted operating income was $62.1 million, down from $168.8 million. |
| Health and Employee Benefit Solutions | $363.7 million | Up 15% | Growth reflected Discovery Benefits and SaaS account expansion; purchase volume declined 8%. Segment adjusted operating income was $96.8 million, up from $80.3 million. |
Segment adjusted operating income is a non-GAAP management measure and excludes specified corporate and other items; it is not equivalent to GAAP operating income.
Material changes and significant transactions
- WEX completed the eNett and Optal acquisition on December 15, 2020, after settling related litigation. The amended purchase price was $577.5 million, subject to adjustments; total cash paid was $615.4 million. Of the purchase price, $415.0 million was provisionally allocated to the acquired businesses and $162.5 million to the legal settlement. The acquired businesses contributed immaterial revenue and pretax loss from closing through year-end.
- WEX sold its Brazilian subsidiary, WEX Latin America, on September 30, 2020, recording a $46.4 million pretax loss. The sale proceeds and write-off details are disclosed in the filing.
- In July 2020, WEX issued $310 million of 6.5% convertible notes due 2027 and sold 577,254 common shares for $90 million gross proceeds to a Warburg Pincus affiliate. The notes have an initial conversion price of $200 per share; conversion settlement may be in cash, shares or both, at WEX’s election.
- WEX recorded a $53.4 million goodwill impairment for its WEX Fleet Europe reporting unit, following reduced volumes that included COVID-19 effects. $65.8 million of goodwill remained in that reporting unit at year-end.
Liquidity, debt and capital
At year-end, WEX had $2.3 billion outstanding under its secured term loans, no revolving-credit borrowings, and $818.4 million of remaining revolving-credit capacity, subject to covenant compliance. Total debt net of unamortized costs and discounts was $3.027 billion. The 2016 Credit Agreement borrowings had a 2.3% weighted-average effective interest rate; approximately $1.4 billion of $2.3 billion variable-rate borrowings was covered by interest-rate swaps. WEX reported compliance with material debt covenants at December 31, 2020.
WEX Bank had $1.060 billion of deposits and was categorized as well capitalized by its most recent FDIC examination. The bank’s funding capacity and transfers of cash to the parent are subject to regulatory and deposit-market constraints. WEX stated that cash generation and available funding sources should meet cash needs for at least the next 12 months.
Outlook, risks and other notable matters
- Outlook: Management expected a slow, steady recovery in volumes, with customer activity potentially increasing in the second half of 2021 and more fully in the fourth quarter. It cautioned that travel-market disruption could persist and described COVID-19’s future effects as uncertain. The filing text does not provide clear quantified company-wide revenue or earnings guidance.
- Acquisition outlook: WEX expected the eNett and Optal businesses to complement travel payments and expand international reach, while noting that pandemic-related travel weakness creates uncertainty about realizing anticipated benefits.
- Subsequent events: In February 2021, WEX agreed to acquire certain HSA assets from Bell Bank for approximately $200 million initially, plus two contingent-on-closing deferred payments of $25 million each and potential future consideration tied to Federal Funds rate increases. Closing was expected in the second quarter of 2021, subject to approvals and other conditions. WEX also gave notice to redeem its $400 million 4.75% senior notes on March 15, 2021, using cash.
- Principal risks: Continued COVID-19 impacts; fuel-price and transaction-volume sensitivity; travel recovery; credit losses and fraud; competition and interchange-fee pressure; acquisition integration; cybersecurity and technology availability; regulation and WEX Bank’s dependence on brokered deposits; foreign currency exposure; and substantial leverage, interest-rate exposure and LIBOR transition.
- Contingencies and controls: The eNett/Optal litigation was dismissed with prejudice under the settlement. WEX continued cooperating with an SEC investigation related to prior financial-statement revisions involving its former Brazil subsidiary; management said the estimated reasonably possible loss contingency was not material. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Management also deemed controls effective, but excluded eNett and Optal from its year-end controls assessment under the recent-acquisition allowance.
- Other: WEX paid no common-stock dividends in 2020 and made no share repurchases under its $150 million authorization. Its $6.6 billion of unused customer credit commitments were largely cancellable or not expected to be drawn; the company said they did not represent expected future cash requirements.
Important facts for investors to verify
- Whether travel, fleet and healthcare transaction volumes recover as management anticipated, and how much of the recovery is reflected in later-period results.
- Integration progress and performance of eNett and Optal, including final purchase accounting, acquired-business profitability, and any further acquisition-related costs.
- Debt levels, covenant headroom, cash available after excluding restricted cash, revolving-credit availability, and the completion and funding of the announced note redemption and HSA asset purchase.
- Credit-loss trends, especially in travel and smaller fleet customers, and the adequacy of the expected-credit-loss allowance.
- Any developments in the SEC investigation, foreign-currency exposure, brokered-deposit rules, and the transition from LIBOR.
- How reported GAAP results compare with adjusted net income, including the recurring nature of items excluded from the company’s non-GAAP measure.