WEX Inc. quarterly report, Q2 FY2021

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WEX Inc. — Q2 2021 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2021. WEX provides payment processing and related services through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions.

Financial performance and position

  • Q2 revenue: $459.5 million, up 32% from $347.1 million. Payment processing revenue rose to $213.4 million from $147.5 million; account servicing revenue rose to $133.0 million from $109.5 million.
  • Q2 earnings: Operating income was $82.3 million versus $28.8 million, equivalent to an operating margin of approximately 17.9% versus 8.3%. Consolidated net income was $10.2 million, but net loss attributable to shareholders was $33.9 million, or $0.76 per diluted share. A $43.8 million increase in the redemption value of the redeemable non-controlling interest reduced shareholder earnings.
  • First-half results: Revenue was $870.2 million versus $778.8 million; operating income was $132.8 million versus $103.6 million. Consolidated net income was $33.4 million, while shareholders recorded a net loss of $36.4 million, or $0.82 per diluted share.
  • Segments: Q2 revenue increased 34% in Fleet Solutions to $274.4 million, 50% in Travel and Corporate Solutions to $81.8 million, and 17% in Health and Employee Benefit Solutions to $103.3 million. Travel’s recovery and the eNett and Optal acquisition contributed to growth; Fleet benefited from higher fuel prices and activity.
  • Cash flow: First-half operating cash flow was negative $122.0 million, versus positive $725.9 million a year earlier, primarily because higher customer spend and fuel prices increased receivables, partly offset by higher payables. Investing cash outflow was $595.4 million, including $558.3 million for acquisitions; financing cash inflow was $398.8 million.
  • Liquidity: At June 30, cash and cash equivalents were $425.3 million and restricted cash was $576.2 million. Total current assets were $4.09 billion and current liabilities $3.52 billion; these balances include substantial operating receivables, deposits and restricted amounts.
  • Debt: Gross debt was $3.07 billion, including $2.40 billion in term loans, $265 million drawn on the revolving facility, $310 million of 2027 convertible notes and $93 million of securitized debt. Revolver capacity remaining was $613.3 million, subject to covenant compliance. WEX reported compliance with material credit covenants.
  • Non-GAAP measure: Adjusted net income attributable to shareholders was $104.9 million for Q2 and $186.2 million for the first half. These measures exclude specified items and are not substitutes for GAAP results.

Material changes and unusual items

  • Fleet Q2 payment-processing transactions increased 26%; fuel spend increased 79%, while the net payment-processing rate fell to 1.15% from 1.47%, partly due to customer mix shifting toward larger over-the-road fleets. Average U.S. fuel prices rose 47% year over year.
  • Travel and Corporate Solutions purchase volume increased 176% to $8.7 billion, reflecting eNett and Optal, stronger corporate payments and a recovery from pandemic lows. Health purchase volume rose 29%; reported SaaS account growth included temporary COBRA-related accounts under the American Rescue Plan Act.
  • Q2 included a $47.7 million non-cash expense from the increased fair value of contingent consideration related to the Bell Bank HSA custodian-rights acquisition. The $43.8 million redeemable non-controlling-interest valuation change also materially affected shareholder-attributable earnings.
  • WEX acquired HSA custodian rights from Bell Bank for $200 million upfront, acquired the remaining 25% of WEX Europe Services for $97 million, and completed the benefitexpress acquisition for approximately $275 million. Benefitexpress contributed $2.9 million in revenue from its June 1 closing through quarter-end; pretax income contribution was immaterial.
  • WEX redeemed $400 million of 4.75% senior notes in March and amended and restated its credit agreement in April, extending specified maturities to 2026 and 2028. The amendment included a maximum consolidated leverage ratio of 6.25:1 through September 30, 2021, with subsequent step-downs.
  • WEX early adopted ASU 2020-06 on January 1, 2021, changing the accounting for its convertible notes. Management estimated the adoption would reduce 2021 debt-discount amortization interest expense by approximately $5.5 million.

Outlook, risks and contingencies

  • Management reported sequential improvement in transaction volumes, revenue and earnings across segments in the first and second quarters, and said it expected to benefit as customer volumes recovered. The filing provides no specific financial guidance; management cautioned that pandemic effects and future results remained uncertain.
  • Key risks include COVID-19 and variants, travel and economic activity, fuel-price fluctuations, customer volumes, credit and fraud losses, regulation, competition, technology and cybersecurity, foreign exchange and interest rates, leverage, and successful integration of acquisitions.
  • WEX became a non-bank custodian for more than $3 billion of HSA custodial assets. Risks include compliance with Treasury requirements and reliance on a primary federally insured depository partner.
  • Fuel supplier minimum-volume penalties were $1.5 million in Q2 and $3.0 million in the first half, attributed to lower COVID-19-related volumes. Management said reasonably possible losses from legal proceedings were not material; the company was cooperating with an SEC investigation related to its former Brazil subsidiary.
  • Management stated that available cash-generating capacity and funding sources were expected to meet cash needs for at least the next 12 months. This assessment depends in part on access to borrowing, deposits, receivables factoring and securitization arrangements.

Most important facts for investors to verify

  • Whether the operating recovery, particularly in travel and fleet activity, continued after Q2 and how much growth reflects acquisitions, fuel prices or underlying volume.
  • Whether receivables growth and working-capital needs normalize, and how operating cash flow develops as transaction volumes rise.
  • Debt, covenant headroom, refinancing exposure and interest-rate sensitivity, including the effects of variable-rate borrowing and hedges.
  • The ultimate cost and accounting impact of Bell Bank contingent consideration, redeemable non-controlling interests, and acquisition purchase-price adjustments and integration.
  • Whether temporary COBRA-related account growth persists, and whether WEX meets non-bank custodian requirements while managing depository-partner concentration.