WEX Inc. — Q3 2020 Form 10-Q
Business context and reporting period. WEX provides corporate payment solutions through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. This unaudited filing covers the three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. COVID-19 materially affected activity, particularly travel and fuel-related business.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $382.1 million | $460.0 million | $1,160.9 million | $1,283.6 million |
| Operating income | $1.8 million | $118.3 million | $105.5 million | $282.0 million |
| Net income (loss) attributable to shareholders | $(65.8) million | $14.6 million | $(9.4) million | $44.6 million |
| Diluted earnings (loss) per share | $(1.49) | $0.33 | $(0.22) | $1.02 |
| Cash provided by operating activities | Not stated for quarter | Not stated for quarter | $774.5 million | $205.2 million |
- Q3 revenue fell 17% year over year; nine-month revenue fell 10%. Q3 operating income declined sharply, with a $46.4 million loss on the sale of WEX Latin America among the unusual items. Q3 GAAP operating margin was approximately 0.5%, versus 25.7% in Q3 2019.
- Q3 segment revenue: Fleet Solutions $228.7 million, down 18%; Travel and Corporate Solutions $64.3 million, down 35%; Health and Employee Benefit Solutions $89.1 million, up 7%. Segment adjusted operating income was $140.3 million, versus $202.1 million a year earlier.
- Adjusted net income attributable to shareholders, a non-GAAP measure, was $70.9 million for Q3 and $203.5 million for the first nine months, compared with $113.5 million and $288.0 million, respectively, in 2019.
- Nine-month operating cash flow rose by $569.2 million year over year, primarily because receivables declined as customer spend and fuel prices fell, partly offset by lower accounts payable. Investing cash outflow was $75.0 million, compared with $922.3 million in 2019, when major acquisitions were funded. Financing cash inflow was $42.3 million.
Liquidity, debt and balance sheet
- At September 30, 2020, cash and cash equivalents were $1.522 billion, restricted cash was $193.6 million, and current assets totaled $4.031 billion against current liabilities of $2.672 billion.
- Gross debt was $3.115 billion, compared with $2.973 billion at December 31, 2019. Net debt carrying values were $127.1 million short-term and $2.879 billion long-term. The company also had $1.292 billion in deposits.
- The secured revolving facility was increased to $870 million; reported remaining borrowing capacity was $818.4 million, subject to covenant compliance. WEX said it was compliant with material debt covenants and did not expect a covenant breach for at least one year from the financial statement date.
- WEX issued $310 million principal amount of 6.5% convertible notes due 2027 and sold common shares to Warburg Pincus in July, receiving approximately $389.2 million in gross proceeds combined. The notes have an initial conversion price of $200 per share; interest may be paid in cash or added to principal.
- WEX Bank was classified as “well capitalized” under the FDIC regulatory framework.
Material changes, outlook and risks
- COVID-19 and outlook: Fleet volumes recovered from April lows but improvement began to level off in Q3; management expected stabilization through at least year-end. Travel and Corporate Solutions remained the most affected segment, with pandemic-related disruption expected to continue at least through year-end. U.S. Health purchase volumes improved during Q3 but were flat year over year; management also expected stabilization through year-end. The filing gives no quantitative earnings or revenue guidance.
- Operating trends: Q3 Fleet fuel transactions fell 8%, payment-processing transactions fell 11%, and average U.S. fuel prices fell 20%. Travel and Corporate payment solutions purchase volume declined 59%. U.S. Health SaaS accounts increased 12%.
- Credit risk: Nine-month provision for credit losses rose to $66.9 million from $47.5 million, reflecting the new expected-loss accounting standard and COVID-related forecasts. Management estimated the reserve at 2.5% of gross receivables; a 0.5 percentage-point change would affect quarterly provision by $11.0 million.
- Divestiture: WEX sold its Brazilian subsidiary, UNIK S.A. (WEX Latin America), on September 30 and recorded a $46.4 million pretax loss. The business was not treated as discontinued operations.
- Acquisition litigation: WEX disputed its obligation to complete the proposed eNett and Optal acquisition, valued at approximately $1.3 billion in cash plus 2.0 million shares, citing a pandemic-related material adverse effect. The sellers sued. A UK court’s October 12 preliminary ruling identified B2B payments as the relevant industry for comparison; a later trial was still pending, and the outcome could not be predicted.
- Other notable items: Foreign currency losses were $32.0 million for the first nine months. COVID-related lower fuel volumes led to $2.4 million in fuel-volume commitment penalties for the nine-month period. Management reported no goodwill or long-lived asset impairment through September 30 but said estimates would be reassessed.
- Key risks include the uncertain duration and economic effects of COVID-19, travel and fuel demand, customer credit losses, foreign-exchange and interest-rate exposure, substantial indebtedness and covenant restrictions, and the eNett/Optal litigation and potential financing requirements.
Investor verification points
- Track whether travel-related purchase volume and fleet activity stabilize as management expected, and whether fuel prices or transaction volumes further pressure Fleet revenue.
- Review receivables quality, credit-loss provisions and customer payment patterns as pandemic forecasts and expected-loss estimates change.
- Monitor the eNett/Optal litigation, any acquisition obligation, related financing commitments and associated fees or borrowing needs.
- Reconcile GAAP losses with the non-GAAP adjusted net income measure, particularly the divestiture loss, foreign-currency and derivative effects, and acquisition-related adjustments.
- Assess debt maturities, interest costs, revolver availability and covenant headroom; reported capacity is conditional, not equivalent to unrestricted cash.
- Check subsequent filings for developments in the Brazil-related SEC investigation and for any changes to the stated outlook or risk assessments.