WEX Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. WEX provides payment processing and related services through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $410.8 million | $431.7 million |
| Operating income | $50.5 million | $74.8 million |
| Operating margin | 12.3% | 17.3% |
| Income (loss) before taxes | $21.5 million | $(18.0) million |
| Net income (loss) | $23.2 million | $(12.3) million |
| Net loss attributable to shareholders | $(2.6) million; $(0.06) per diluted share | $(16.3) million; $(0.37) per diluted share |
| Adjusted net income attributable to shareholders (non-GAAP) | $81.3 million | $79.7 million |
| Operating cash flow | $(217.3) million | $340.2 million |
Revenue declined 4.8% year over year. The gap between consolidated net income and the shareholder-attributable loss reflects a $25.0 million increase in the recorded value of redeemable non-controlling interest. Adjusted net income is a non-GAAP measure and is not a substitute for GAAP results.
Segments and material changes
- Fleet Solutions: Revenue fell 2% to $243.8 million, while segment adjusted operating income rose to $118.3 million from $104.6 million. Lower credit-loss provision and operating interest helped results; transactions fell 3%, and the net payment processing rate declined to 1.20% from 1.35%.
- Travel and Corporate Solutions: Revenue fell 16% to $70.6 million; segment adjusted operating income fell to $7.0 million from $21.9 million. Purchase volume declined 24% to $6.1 billion, chiefly reflecting weak travel activity. Acquisition, integration, and vendor termination costs also weighed on reported operating results.
- Health and Employee Benefit Solutions: Revenue declined 1% to $96.3 million, while segment adjusted operating income increased to $30.5 million from $29.5 million. U.S. SaaS accounts grew 7% to 15.5 million; healthcare purchase volume fell 7%.
- Total segment adjusted operating income was essentially flat at $155.8 million. Consolidated operating income declined, including higher acquisition-related and other costs.
Cash, debt, and liquidity
- At March 31, cash and cash equivalents were $561.2 million; restricted cash was $412.5 million. Operating cash flow was negative primarily because customer spending and fuel prices rebounded, increasing receivables and working-capital needs.
- Gross debt was $2.91 billion, down from $3.13 billion at year-end 2020. WEX redeemed $400 million of 4.75% notes on March 15, funded with cash on hand. Borrowed federal funds increased to $214.8 million from $20.0 million at year-end.
- At quarter-end, the company reported $818.3 million of remaining revolving-credit capacity, subject to covenant compliance, and stated that available sources were expected to cover cash needs for at least 12 months. The company was in compliance with material credit-agreement covenants.
- WEX Bank was categorized as well capitalized. Six interest-rate swaps were intended to fix rates on $1.4 billion of variable-rate borrowings.
Outlook, risks, and unusual items
- The filing gives no quantified full-year revenue or earnings guidance. Management said travel-related activity remained significantly affected by COVID-19, though travel purchase volume had improved from Q4 2020. Fleet volumes were recovering, and corporate payments volumes benefited from migration to virtual payments. Discretionary healthcare spending remained affected.
- COVID-19 impacts, fuel prices, economic conditions, travel recovery, credit losses and fraud, foreign exchange, interest rates, regulation, cybersecurity, acquisitions and integration, and leverage were identified as risks. Management reported no goodwill or long-lived-asset impairment trigger in Q1, but said future impairment testing or charges could result from changed conditions.
- Q1 included $5.4 million of eNett/Optal-related restructuring charges and a $10.3 million vendor contract termination penalty within other costs. Fuel-volume shortfall penalties were $1.5 million. The company estimated reasonably possible losses from current legal proceedings were not material; it also disclosed cooperation with an SEC investigation related to its former Brazil subsidiary and historical reporting matters.
- Subsequent events: On April 1, WEX paid $200 million for certain Bell Bank HSA assets, with two later $25 million payments and potential rate-linked consideration capped at $225 million. The same day it amended and extended its credit agreement, increased revolver commitments to $930 million, and added approximately $117 million of Tranche A loans. On April 13, it acquired the remaining 25% of WEX Europe Services for approximately $97 million. On April 14, it agreed to acquire benefitexpress for approximately $275 million, subject to adjustments and closing conditions.
Important facts for investors to verify
- How much of future performance depends on travel recovery, and whether improved corporate payments and fleet volumes offset continued travel weakness.
- Whether receivables growth and working-capital swings continue to pressure operating cash flow and liquidity.
- The ongoing effects of the credit-agreement amendment, acquisitions, integration costs, and higher leverage on interest expense and covenant headroom.
- How GAAP shareholder results compare with non-GAAP adjusted net income, including the effects of acquisition costs, stock compensation, and redeemable non-controlling interest revaluation.
- Closing, financing, and financial impacts of the announced benefitexpress acquisition and the Bell Bank and WEX Europe Services transactions.