WEX Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless stated otherwise. WEX operates Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $517.5 million | $410.8 million | Up 26% |
| Operating income | $122.3 million | $50.5 million | Up 142% |
| Operating margin | 23.6% | 12.3% | Up 11.3 percentage points |
| Net income | $88.8 million | $23.2 million | |
| Net income (loss) attributable to shareholders | $122.8 million | $(2.6) million | |
| Diluted EPS | $2.71 | $(0.06) | |
| Adjusted net income attributable to shareholders (non-GAAP) | $131.1 million | $81.3 million | |
| Cash used for operating activities | $161.0 million | $217.3 million | |
| Cash used for investing activities | $106.6 million | $16.4 million | |
| Cash provided by (used for) financing activities | $262.5 million | $(114.6) million |
Shareholder-attributable income and EPS include a $34.2 million after-tax gain from purchasing the remaining PO Holding non-controlling interest. Results also included a $49.8 million unrealized gain on financial instruments and a $16.6 million loss from the higher fair value of contingent consideration. Adjusted net income is a non-GAAP measure and should not be treated as a substitute for GAAP results.
Segment results
- Fleet Solutions: Revenue of $319.1 million, up 31%; segment adjusted operating income of $160.1 million, up 35%; adjusted margin was 50%, versus 48%. Revenue benefited from higher fuel prices and North American volume growth.
- Travel and Corporate Solutions: Revenue of $77.3 million, up 9%; segment adjusted operating income of $28.3 million, versus $7.0 million. Recovery in travel volumes and eNett/Optal synergies supported results.
- Health and Employee Benefit Solutions: Revenue of $121.1 million, up 26%; segment adjusted operating income of $35.5 million, up 16%; adjusted margin was 29%, versus 32%. Benefitexpress and account growth lifted revenue, while associated costs weighed on margin.
Liquidity, debt and cash flow
- At March 31, 2022, cash and cash equivalents were $577.5 million; restricted cash was $671.8 million. Restricted cash is not generally available for corporate purposes.
- Gross debt was $3.0 billion, including $180.3 million drawn on the revolving facility, $2.36 billion of term loans, $310 million of convertible notes, and securitized and participation debt. Long-term debt, net, was $2.77 billion; short-term debt, net, was $157.6 million.
- Revolver availability was $698.3 million, subject to covenant compliance. Total deposits were $2.88 billion, including $1.29 billion of HSA deposits.
- Operating cash outflow improved year over year but remained substantial, principally reflecting working-capital demands from receivables and fuel-price increases. Financing inflows included a $197.5 million increase in deposits and $60.5 million of net revolver borrowings.
- Management said available cash, operating cash generation and funding sources should be adequate for the next 12 months and foreseeable future. WEX reported compliance with its debt covenants.
Material changes and notable items
- Total company volume rose 50% to $44.8 billion and purchase volume rose 66% to $27.8 billion. Fleet fuel transactions increased 10%; U.S. average fuel price was $3.95 per gallon, up 45% year over year.
- Fleet credit-loss provision increased to $23.2 million from $4.4 million; management attributed the increase to higher fuel prices and loss rates moving toward historical norms. Fleet fuel-related credit losses were 15.0 basis points of fuel expenditures, versus 6.2 basis points.
- WEX acquired SBI’s remaining 4.53% interest in PO Holding, making WEX Health wholly owned. The $234 million purchase price is payable in installments in 2024–2026; WEX recorded a $216.6 million present-value liability.
- Investment securities had $59.8 million of gross unrealized losses at quarter-end, compared with $7.2 million at December 31, 2021. The filing states these losses were not considered credit-related and WEX did not intend, nor expect to be required, to sell the securities before recovery.
- The effective tax rate was 32.1%, including a $7.5 million discrete tax item primarily associated with an uncertain tax position. Q1 2021’s rate was negative 7.8%, primarily reflecting excess stock-compensation tax benefits.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management expects higher Fleet compliance costs to continue at least through year-end 2022.
- Key disclosed risks include fuel-price and fuel-spread volatility, economic and travel demand, customer and partner retention, credit losses, cybersecurity and service-provider disruptions, regulatory and card-network compliance, interest rates and inflation, foreign exchange, leverage, and acquisition integration and execution.
- Two subsidiaries have minimum annual fuel-purchase commitments through 2024; shortfall penalties were $1.3 million in Q1 2022. Management said current legal proceedings’ reasonably possible losses were not material.
- WEX Bank was categorized as “well capitalized” in its most recent FDIC examination. Disclosure controls were effective as of March 31, 2022, and the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much reported earnings growth reflects core operations versus the PO Holding transaction gain and mark-to-market gains, and how GAAP results reconcile to non-GAAP adjusted net income.
- Whether higher fuel prices, changing transaction volumes and credit-loss trends continue to support revenue and margins, especially in Fleet Solutions.
- Receivables, operating cash flow and funding needs as fuel prices and volumes change; also distinguish unrestricted cash from restricted cash and customer/HSA deposits.
- The future cost and cash-payment schedule for the PO Holding buyout, variable-rate borrowings, and any contingent consideration tied to Federal Funds rates.
- Whether unrealized investment-security losses recover and whether the elevated provision for credit losses persists.