WEX Inc. — Q2 2020 Form 10-Q
Business and period: WEX provides corporate payment solutions through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods unless noted.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $347.1 | $441.8 | $778.8 | $823.7 |
| Operating income | $28.8 | $94.7 | $103.6 | $163.7 |
| Operating margin | 8.3% | 21.4% | 13.3% | 19.9% |
| Income (loss) before taxes | $(6.4) | $44.2 | $(24.3) | $66.3 |
| Net income | $13.4 | $31.9 | $1.1 | $48.1 |
| Net income (loss) attributable to WEX Inc. | $12.7 | $31.5 | $(0.9) | $47.7 |
| Net income attributable to shareholders | $72.7 | $13.8 | $56.4 | $29.9 |
| Diluted EPS attributable to shareholders | $1.66 | $0.32 | $1.28 | $0.69 |
| Cash from operating activities | $725.9 for six months | $79.4 for six months |
- Revenue and segments: Q2 revenue fell 21% year over year. Fleet Solutions revenue declined 24% to $204.4 million; Travel and Corporate Solutions fell 40% to $54.5 million; Health and Employee Benefit Solutions rose 6% to $88.2 million. Segment adjusted operating income was $77.2 million, $11.0 million, and $25.3 million, respectively, versus $122.6 million, $40.8 million, and $21.1 million a year earlier.
- Reported earnings require context: Shareholder-attributable income includes a $59.9 million increase in the value of the redeemable non-controlling interest in Q2, recorded in the attribution to shareholders. Excluding that accounting change, WEX Inc.-attributable Q2 income was $12.7 million, while pretax results were a $6.4 million loss. First-half WEX Inc.-attributable results were a $0.9 million loss.
- Cash flow: First-half operating cash flow was $725.9 million, up from $79.4 million. Management attributed the increase primarily to lower accounts receivable as customer spending and fuel prices declined, partly offset by lower accounts payable. Investing activities used $41.6 million, versus $624.9 million in 2019, when acquisitions required substantial cash. Financing activities used $203.8 million, compared with $892.3 million provided in the prior-year period.
- Balance sheet and liquidity: At June 30, cash and cash equivalents were $1.272 billion, restricted cash $178.2 million, and total assets $7.907 billion. Gross debt was $2.811 billion (net debt carrying amounts: $2.773 billion), including $2.348 billion of term loans and $400 million of senior notes. Short- and long-term deposits totaled $1.419 billion. The revolving facility had $768.7 million of remaining borrowing capacity, subject to covenant compliance. The company reported compliance with material debt covenants and said it expected adequate funding for at least the next 12 months.
- Credit costs and taxes: Q2 provision for credit losses rose to $20.6 million from $14.8 million; first-half provision increased to $54.6 million from $32.6 million. The filing cites the new expected-loss accounting standard and COVID-19-related expected losses. The effective tax rate was unusually high—310.8% for Q2 and 104.6% for the first half—reflecting lower pretax income, earnings mix, nondeductible items, and specific tax items.
Material changes and management outlook
- COVID-19 effects: Fleet fuel transactions fell 16.8% and payment-processing transactions fell 19.5% in Q2; the average U.S. fuel price was down 28.9%. Fleet volumes had partly recovered from April lows by quarter-end and July; management expected gradual stabilization into Q3. Travel and Corporate payment volume dropped 68.5%, the most severe segment impact, and management expected ongoing adverse effects for the remainder of 2020. U.S. Health purchase volume was down 26% in Q2 but had approached prior-year levels by July; management expected the June–July trajectory to continue. SaaS accounts grew 15.1% year over year, and management anticipated continued double-digit growth.
- Management described cost reductions, including workforce reductions and furloughs, lower discretionary spending, and voluntary salary and board-retainer reductions. No formal numerical company-wide earnings or revenue guidance is provided in the filing.
- WEX adopted the expected-credit-loss standard on January 1, 2020; the transition reduced equity by $8.8 million. The June 30 reserve for credit losses was 3.0% of gross accounts receivable; a 0.5 percentage-point change would alter quarterly provision by about $10 million.
Debt, transactions, risks, and unusual items
- eNett and Optal: WEX agreed in January to acquire the businesses for approximately $1.3 billion in cash and 2.0 million shares. In May, WEX asserted that COVID-19 had caused a material adverse effect and that it was not required to close. The sellers filed separate proceedings seeking a declaration and specific performance; WEX intends to defend. A London trial of preliminary issues was scheduled to begin September 21, 2020. The outcome and potential financial impact were uncertain.
- Financing after quarter-end: On July 1, WEX issued $310 million of 6.5% convertible senior notes due 2027 and 577,254 common shares for $90 million gross proceeds. The notes are convertible at an initial $200 per share and interest may be paid in cash or added to principal. On July 29, WEX increased its revolving-credit commitments from $820 million to $870 million.
- Credit terms: A June amendment raised the maximum consolidated leverage ratio to 5.5x through September 30, 2021, with later step-downs, and added cash-netting and pricing provisions. WEX said it did not expect covenant violations for at least one year. It was in compliance at June 30.
- Other risk factors: Key exposures include the uncertain duration and consequences of the pandemic, travel and fuel-market recovery, customer defaults and credit losses, foreign-exchange volatility, variable-rate debt, covenant headroom, and the eNett/Optal litigation. WEX Bank was classified as well capitalized at June 30. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Track travel/corporate payment volumes, fleet transactions and fuel prices, and Health purchase volumes against management’s recovery expectations.
- Monitor receivable quality, credit-loss provisions, reserve assumptions, and the sensitivity disclosed for a 0.5-point reserve change.
- Review the eNett/Optal litigation, any acquisition closing obligation, and related financing or covenant consequences.
- Assess leverage, covenant headroom, cash availability, and the effect of the July convertible-note issuance, including potential dilution and interest accretion.
- Separate operating performance from the $59.9 million Q2 redeemable non-controlling-interest valuation change and other volatile foreign-currency and financial-instrument items.