WEX Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Amounts are in U.S. dollars. The interim financial statements are unaudited.
Business context and results
WEX provides financial technology and payment services through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. Revenue and activity improved from pandemic-affected 2020 levels. Travel and Corporate Solutions continued to recover, while the company expanded its health-benefits business through acquisitions.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $482.8 million | $382.1 million | $1,353.0 million | $1,160.9 million |
| Operating income | $100.8 million | $1.8 million | $233.6 million | $105.5 million |
| Operating margin | 20.9% | 0.5% | 17.3% | 9.1% |
| Net income (loss) attributable to shareholders | $48.3 million | $(65.8) million | $11.9 million | $(9.4) million |
| Diluted EPS | $1.07 | $(1.49) | $0.26 | $(0.22) |
| Adjusted net income (non-GAAP) | $111.1 million | $70.9 million | $297.3 million | $203.5 million |
Revenue, segments, and material changes
- Q3 revenue rose 26% year over year. Payment processing revenue increased to $226.1 million, account servicing revenue to $137.7 million, and finance fee revenue to $67.8 million. Other revenue declined to $51.1 million.
- Fleet Solutions revenue increased 25% to $286.4 million in Q3. Higher fuel prices and recovering transaction volumes contributed; average U.S. fuel prices were up 45%. Fleet’s net payment processing rate fell to 1.09% from 1.35%, primarily reflecting a mix shift toward larger over-the-road fleets.
- Travel and Corporate Solutions revenue increased 42% to $91.0 million. Payment solutions purchase volume rose 172% to $12.8 billion, driven by eNett and Optal, travel recovery, and corporate payments growth. The segment reported Q3 operating income of $13.2 million; its nine-month operating result was a $12.3 million loss, with acquisition integration costs contributing to expenses.
- Health and Employee Benefit Solutions revenue increased 18% to $105.4 million in Q3. Account servicing revenue benefited from participant growth and benefitexpress; average U.S. SaaS accounts increased 16% to 16.9 million. Segment operating income fell to $0.7 million from $7.0 million, with higher processing, service, and amortization costs.
- Nine-month operating income improved, but the comparison includes the prior-year $46.4 million loss on the sale of WEX Latin America and lower credit-loss provisions in 2021. Q3 2021 also included a $3.6 million gain on sale of an equity investment. Results were affected by foreign-exchange movements and fair-value changes, including a $44.9 million nine-month expense from remeasuring contingent consideration.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was negative $10.4 million, versus positive $774.5 million in 2020. Management attributed the decline mainly to a $1.14 billion increase in receivables as customer spend and fuel prices rose, partly offset by higher accounts payable.
- Investing cash outflow was $610.7 million, including $558.2 million of acquisition payments. Financing cash inflow was $477.7 million, driven chiefly by a $558.0 million net increase in deposits.
- At September 30, cash and cash equivalents were $533.8 million and restricted cash was $628.4 million. Restricted cash is not generally available for corporate purposes. Total deposits were $1.62 billion.
- Gross debt was $3.04 billion, compared with $3.13 billion at year-end 2020. This included $213.4 million drawn on the revolving facility and $2.39 billion of term loans. The company had $665.0 million of remaining revolving capacity, subject to financial covenant compliance. Long-term debt, net, was $2.80 billion.
- The April 2021 credit agreement amendment extended revolving and Tranche A maturities to 2026 and Tranche B maturity to 2028. Borrowings under the agreement had a 2.2% weighted-average effective rate at quarter-end. WEX also had $310 million of 6.5% convertible notes due 2027.
- Nine-month financing interest expense was $98.3 million, down from $101.8 million. The company had $2.3 billion of interest-rate swaps intended to hedge the LIBOR component of variable-rate debt.
- Management stated that cash generation and available funding sources should cover cash needs for at least the next 12 months.
Outlook, commentary, and risks
- No quantified revenue, earnings, or cash-flow guidance is provided in this filing. Management reported sequential improvement in transaction volumes, revenue, and earnings in the COVID-affected segments during the first three quarters of 2021, and said recurring revenue should benefit as existing customers recover and volumes grow.
- Management said the pandemic’s full effects remained uncertain, particularly for travel, and cited vaccine and variant developments as factors outside its control. Risks also include fuel prices and European fuel spreads, customer credit losses, competition, acquisitions and integration, foreign exchange, interest rates and LIBOR transition, leverage, cybersecurity, and regulation.
- Acquisitions included HSA custodial rights from Bell Bank and benefitexpress; WEX also acquired the remaining 25% of WEX Europe Services for $97 million. Bell Bank consideration includes deferred payments and contingent payments tied to future Federal Funds rate increases. The contingent-consideration liability reached $72.1 million at quarter-end.
- On October 14, after quarter-end, WEX transferred $960 million of HSA custodial cash assets to WEX Bank for management and investment. The company was evaluating the financial-statement impact. The filing adds risks involving non-bank custodian compliance, depository-partner stability, and potential investment valuation or liquidity losses.
- WEX reported no material legal proceedings and estimated no material reasonably possible loss from legal matters, including an SEC investigation related to its former Brazil subsidiary. Fuel-volume shortfall penalties were $4.5 million for the first nine months of 2021. WEX Bank was classified as well capitalized.
- Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported. No shares were repurchased under the $150 million authorization during Q3.
Most important facts for investors to verify
- Whether operating cash flow recovers as receivables and transaction volumes grow, and how much cash is freely available after restricted balances.
- Debt, covenant headroom, refinancing needs, and sensitivity to higher rates or LIBOR replacement; confirm revolver availability remains subject to covenant compliance.
- Underlying profitability after acquisition, integration, amortization, fair-value, foreign-exchange, and non-GAAP adjustments; reconcile adjusted net income with GAAP results.
- Whether travel recovery and Fleet volume growth persist, including the effects of fuel prices, customer mix, and the lower Fleet processing rate.
- The costs, integration progress, and returns from benefitexpress and HSA custodial rights, including contingent consideration and the post-quarter transfer of custodial assets to WEX Bank.
- Credit-loss trends, regulatory compliance for custodial assets, and investment risks affecting WEX Bank and HSA cash.