WEX Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial statements are unaudited; comparisons are with Q1 2019 unless otherwise noted. WEX provides corporate payment solutions through Fleet, Travel and Corporate, and Health and Employee Benefit Solutions.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $431.7 million | $381.9 million |
| Operating income | $74.8 million | $68.9 million |
| Operating margin | 17.3% | 18.1% |
| Net income (loss) attributable to shareholders | $(16.3) million | $16.1 million |
| Diluted earnings (loss) per share | $(0.37) | $0.37 |
| Adjusted net income attributable to shareholders (non-GAAP) | $79.7 million | $74.8 million |
| Net cash provided by operating activities | $340.2 million | $70.1 million |
Revenue grew 13.0%, while operating income rose 8.6% and operating margin narrowed. GAAP results swung to a loss, primarily reflecting larger foreign-currency and unrealized financial-instrument losses. The unrealized losses were mainly associated with interest-rate swaps; adjusted net income excludes these and other specified items and is not a GAAP measure.
- Segments: Fleet revenue was $249.8 million, up 7%; Travel and Corporate revenue was $84.4 million, up 3%; Health and Employee Benefit revenue was $97.5 million, up 45%, substantially reflecting the 2019 Discovery Benefits acquisition and platform growth.
- Segment adjusted operating income: Fleet $104.6 million (up from $93.0 million); Travel and Corporate $21.9 million (down from $34.4 million); Health and Employee Benefit $29.5 million (up from $19.8 million). This is a non-GAAP segment measure.
- Cash flow: Operating cash flow increased mainly because accounts receivable declined as customer spending and fuel prices fell, partly offset by lower accounts payable. Investing used $20.7 million, versus $596.9 million in Q1 2019, which included acquisition spending. Financing used $258.0 million.
- Balance sheet at March 31: Cash and cash equivalents were $861.2 million; restricted cash was $165.2 million. Gross debt was $2.855 billion and debt net of issuance costs was $2.820 billion. Total deposits were $1.311 billion. The filing cautions that restricted cash supports related obligations and is not generally available for corporate use.
- Unused revolving-credit capacity was $768.7 million at March 31; WEX drew $150 million on April 7, leaving reported capacity of $618.7 million. WEX Bank raised a further $315 million through certificates of deposit on April 9. Management stated it expected liquidity to fund cash needs for at least 12 months and did not expect covenant violations for at least one year. WEX reported compliance with material covenants at March 31.
Material changes and operating trends
- Provision for credit losses rose to $34.0 million from $17.8 million. The increase reflected adoption of the expected-loss standard and additional expected losses amid COVID-19-related economic deterioration. The allowance for receivables was $75.4 million at March 31, compared with $52.3 million at year-end; the filing says it equaled 3.5% of gross receivables.
- Fleet fuel spend was nearly flat year over year, while average U.S. fuel prices fell 4% to $2.57 per gallon. Fleet revenue growth included higher finance-fee revenue and contributions from major portfolios; management also cited COVID-19-related lower fuel prices and volumes.
- Travel and Corporate purchase volume fell 4% to $8.04 billion. Health and Employee Benefit average U.S. SaaS accounts rose 14% to 14.46 million.
- Net foreign-currency loss increased to $28.7 million from $3.9 million, mainly due to U.S. dollar strengthening. Net unrealized loss on financial instruments rose to $32.0 million from $11.9 million, primarily reflecting lower short-term rates and the LIBOR forward curve.
- WEX adopted the expected-credit-loss accounting standard on January 1, 2020. Adoption reduced opening retained earnings by $8.6 million, net of tax; prior-year comparatives were not restated.
Outlook, risks and unusual items
- Management expected COVID-19 to have a more significant adverse effect in Q2 and through the remainder of 2020; the full impact was uncertain. April payment-processing transactions in Fleet were down about 20% year over year, Travel purchase volume about 90%, and corporate payment volume 5%. Average U.S. fuel price was $2.04 per gallon in April.
- Management reported workforce reductions and furloughs, other cost-containment actions, and voluntary salary and retainer reductions by executives and directors. It noted lower elective-procedure-related Health spending, with an expectation that some spending could shift to the second half as restrictions eased.
- WEX had agreed to acquire eNett and Optal for approximately $1.3 billion in cash plus 2.0 million WEX shares, subject to adjustments and closing conditions. WEX asserted that COVID-19 had caused a disproportionate material adverse effect and stated it was not required to close. On May 11, 2020, the sellers filed claims disputing that position and seeking, among other relief, specific performance. WEX said it would vigorously defend; the outcome was not predictable.
- Other risks include further deterioration in customer credit and collections, fuel-price and travel-volume volatility, foreign-exchange and interest-rate movements, refinancing and covenant capacity, and dependence on receivables factoring and securitization arrangements. WEX also disclosed cooperation with an SEC investigation related to prior Brazil subsidiary financial-statement revisions; its estimated reasonably possible loss was not material at filing.
- No numerical full-year guidance is provided in the supplied filing text. WEX Bank was categorized as “well capitalized” under applicable FDIC standards at March 31.
Key facts for investors to verify
- Subsequent quarterly credit-loss provisions, receivable delinquencies, charge-offs and collections as COVID-19 effects develop.
- Actual Fleet, Travel and Corporate, and Health volume trends versus the reported April indicators, and whether any anticipated recovery occurs.
- Cash availability after restricted balances, deposit funding and revolving-credit draws; covenant headroom and refinancing needs.
- Developments, potential costs and financial exposure from the eNett/Optal purchase-agreement litigation.
- Whether foreign-exchange and swap-related fair-value volatility persists, and the effect on GAAP earnings and cash requirements.