UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172023
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-32426
WEX INC.Inc.
(Exact name of registrant as specified in its charter)
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| Delaware | | 01-0526993 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
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Delaware1 Hancock St., | Portland, | 01-0526993ME | | 04101 |
(State or other jurisdiction of
incorporation or organization)
| | (I.R.S. Employer
Identification No.)
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97 Darling Avenue, South Portland, Maine | | 04106 |
| (Address of principal executive offices) | | (Zip Code) |
(207) 773-8171773–8171
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.01 par value | WEX | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically, and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-TS–T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-212b–2 of the Exchange Act.
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Large accelerated filerAccelerated Filer | ☒ | | | Accelerated filerFiler | ☐ |
Non-accelerated filerFiler | ☐ | (Do not check if a smaller reporting company) | | Smaller reporting companyReporting Company | ☐ |
| | | | Emerging growth companyGrowth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-212b–2 of the Exchange Act).
☐ Yes ☒ No
Number of shares of common stock outstanding as of October 31, 201719, 2023 was 42,909,927.42,737,339.
TABLE OF CONTENTS
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| PART I—FINANCIAL INFORMATION |
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| Item 1. | | | |
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| Item 2. | | | |
| Item 3. | | | |
| Item 4. | | | |
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| PART II—OTHER INFORMATION | |
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| Item 1. | | | |
| Item 1A. | | | |
| Item 2. | | | |
Item 6.5. | | | |
| Item 6. | | | |
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Unless otherwise indicated or required by the context, the terms “we,” “us,” “our,” “WEX,” or the “Company,” in this Quarterly Report on Form 10–Q refers to WEX Inc. and all of its subsidiaries that are consolidated under Generally Accepted Accounting Principles in the United States.
FORWARD–LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for statements that are forward-looking and are not statements of historical facts. This Quarterly Report includes forward-looking statements including, but not limited to, statements about management’s planplans and goals. Any statements in this Quarterly Report that are not statements of historical facts are forward-looking statements. When used in this Quarterly Report, the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project”“project,” “will” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. Forward-looking statements relate to our future plans, objectives, expectations and intentions and are not historical facts and accordingly involve known and unknown risks and uncertainties and other factors that may cause the actual results or performance to be materially different from future results or performance expressed or implied by these forward-looking statements. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report and in oral statements made by our authorized officers:
•the impact of fluctuations in demand for fuel and the volatility, and prices, of fuel, including fuel spreads in the Company’s international markets, and the resulting impact on the Company’s margins, revenues, and net income;
•the effects of general economic conditions, on fueling patterns as well asincluding a decline in demand for fuel, corporate payment services, travel related services, or healthcare related products and transaction processing activity;services;
the impact of foreign currency exchange rates on the Company’s operations, revenue and income;
changes in interest rates;
the impact of fluctuations in fuel prices;
the effects of the Company’s business expansion and acquisition efforts;
potential adverse changes to business or employee relationships, including those resulting from the completion of an acquisition;
competitive responses to any acquisitions;
uncertainty of the expected financial performance of the combined operations following completion of an acquisition;
the ability to successfully integrate the Company's acquisitions, including Electronic Funds Source LLC's operations and employees;
the ability to realize anticipated synergies and cost savings;
unexpected costs, charges or expenses resulting from an acquisition;
the Company's •failure to successfully operateimplement new technologies and expand ExxonMobil's European and Asian commercial fuel card programs;products;
the failure of corporate investments to result in anticipated strategic value;
the impact and size of credit losses;
the impact of changes to the Company's credit standards;
•breaches of, or other issues with, the Company’s technology systems or those of ourits third-party service providers and any resulting negative impact on ourits reputation, liabilities or relationships with customers or merchants;
the Company’s failure to maintain or renew key agreements;
failure to expand the Company’s technological capabilities and service offerings as rapidly as the Company’s competitors;
failure to successfully implement the Company's information technology strategies and capabilities in connection with its technology outsourcing and insourcing arrangements and any resulting cost associated with that failure;
•the actions of regulatory bodies, including banking and securities regulators, or possible changes in banking or financial regulations impacting the Company’s industrial bank, the Company as the corporate parent or other subsidiaries or affiliates;
•the failure to maintain or renew key customer and partner agreements and relationships, or to maintain volumes under such agreements;
•the impact and size of credit losses, including fraud losses, and other adverse effects if the Company fails to adequately assess and monitor credit risk or fraudulent use of our payment cards or systems;
•changes in interest rates, including those which we must pay for our deposits, and the rate of inflation;
•the effect of adverse financial conditions affecting the banking system;
•the failure to adequately safeguard custodial HSA assets;
•the failure of corporate investments to result in any anticipated economic or strategic value;
•the extent to which unpredictable events in the locations in which the Company or the Company’s customers operate or elsewhere may adversely affect the Company’s employees, ability to conduct business, results of operations and financial condition;
•the failure to comply with the applicable requirements of Mastercard or Visa contracts and rules;
•the failure to comply with the Treasury Regulations applicable to non-bank custodians;
•the ability to attract and retain employees;
•the ability of the Company to protect its proprietary rights;
•the ability to incorporate artificial intelligence in our business successfully and ethically;
•limitations on or compression of interchange fees;
•the effects of the Company’s business expansion and acquisition efforts;
•the failure to achieve commercial and financial benefits as a result of our strategic minority equity investments;
•the impact of changes to the Company’s credit standards;
•the impact of foreign currency exchange rates on the Company’s operations, revenue and income and other risks associated with operations outside the United States;
•the impact of the Company’s outstanding notesdebt instruments on itsthe Company’s operations;
•the impact of increased leverage on the Company'sCompany’s operations, results or borrowing capacity generally, and as a result of acquisitions specifically;
•the impact of sales or dispositions of significant amounts of the Company’s outstanding common stock into the public market, or the perception that such sales or dispositions could occur;
•the impact of regulatory capital requirements and other regulatory requirements on the operations of WEX Bank or its ability to make payments to WEX Inc.;
•the possible dilution to the Company’s stockholders caused by the issuance of additional shares of common stock or equity-linked securities;
•the incurrence of impairment charges if ourthe Company’s assessment of the fair value of certain of ourits reporting units changes;
•the uncertainties of litigation; as well as
•other risks and uncertainties identified in Item 1A of our annual reportthe Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2022, filed with the SEC on March 6, 2017February 28, 2023, and Item 1A. of Part II of the quarterly reportQuarterly Reports on Form 10-Q for the three monthsquarters ended March 31, 20172023 and June 30, 2023, filed with the SEC on May 8, 2017, both filedApril 27, 2023 and July 27, 2023, respectively, and subsequent filings with the Securities and Exchange Commission.
Our forward-looking statements and these factors do not reflect the potential future impact of any alliance, merger, acquisition, disposition or stock repurchases. The forward-looking statements speak only as of the date of the initial filing of this Quarterly Report and undue reliance should not be placed on these statements. We disclaimThe Company disclaims any obligation to update any forward-looking statements as a result of new information, future events or otherwise.
ACRONYMS AND ABBREVIATIONS
The acronyms and abbreviations identified below are used in this Quarterly Report, including the unaudited condensed consolidated financial statements and the notes thereto. The following is provided to aid the reader and provide a reference point when reviewing this Quarterly Report.
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2014Adjusted free cash flow | A non-GAAP measure that is calculated as cash flows from operating activities, adjusted for net purchases of current investment securities, capital expenditures, the change in net deposits, changes in borrowings under the BTFP and borrowed federal funds and certain other adjustments. |
| Adjusted net income or ANI | A non-GAAP measure that adjusts net income (loss) attributable to shareholders to exclude unrealized gains and losses on financial instruments, net foreign currency gains and losses, change in fair value of contingent consideration, acquisition-related intangible amortization, other acquisition and divestiture related items, stock-based compensation, other costs, debt restructuring and debt issuance cost amortization, similar adjustments attributable to our non-controlling interests and certain tax related items. |
| Amended and Restated Credit Agreement | Second amended and restated creditCredit agreement entered into on August 22, 2014,July 1, 2016 (as amended from time to time) by and among the Company and certain of its subsidiaries, as borrowers, WEX Card Holding Australia Pty Ltd., as designated borrower, and Bank of America, N.A., as administrative agent on behalf of consenting lenders |
2016 Credit Agreement | Credit agreement entered into on July 1, 2016 by and among the Company and certain of its subsidiaries, as borrowers, WEX Card Holding Australia Pty Ltd., as designated borrower, and Bank of America, N.A., as administrative agent on behalf of the lenders, as amended and restated on April 1, 2021 (and as amended from time to time thereafter). |
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| Ascensus Acquisition | The acquisition from Ascensus, LLC of certain entities, which comprised the health and benefits business of Ascensus. |
| Average number of SaaS accounts | Represents the number of active consumer-directed health, COBRA, and billing accounts on our SaaS platforms |
| B2B | Business-to-Business |
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| BTFP | The Federal Reserve Bank Term Funding Program, which provides liquidity to U.S. depository institutions |
| CODM | Chief Operating Decision Maker |
| Company | WEX Inc. and all entities included in the consolidated financial statements. |
| Convertible Notes | Convertible senior unsecured notes due on July 15, 2027 in an aggregate principal amount of $310.0 million with a 6.5 percent interest rate, issued July 1, 2020, which were repurchased by the Company and canceled by the trustee at the instruction of the Company on August 11, 2023. |
| Corporate Cash | Calculated in accordance with the terms of our consolidated leverage ratio in the Company’s Amended and Restated Credit Agreement. |
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| Discovery Benefits | Discovery Benefits, Inc., an employee benefits administrator |
| DSUs | Deferred Stock Units held by non-employee directors. |
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| FDIC | Federal Deposit Insurance Corporation |
| Federal Reserve Bank Discount Window | Monetary policy that allows WEX to borrow funds on a short-term basis to meet temporary shortages of liquidity caused by internal or external disruptions. |
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| GAAP | Generally Accepted Accounting Principles in the United States |
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| HSA | Health Savings Account |
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| LIBOR | London Interbank Offered Rate |
| NAV | Net Asset Value |
| Net interchange rate | Represents the percentage of the dollar value of each payment processing transaction that WEX records as revenue from merchants, less certain discounts given to customers and network fees. |
| Net late fee rate | Net late fee rate represents late fee revenue as a percentage of fuel purchased by fleets that have a payment processing relationship with WEX. |
| Net payment processing rate | The percentage of each payment processing $ of fuel that the Company records as revenue from merchants less certain discounts given to customers and network fees. |
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| Operating cash flow | Net cash provided by (used for) operating incomeactivities |
| Operating interest | Interest expense incurred on the operating debt obtained to provide liquidity for the Company’s short-term receivables or used for investing purposes in fixed income debt securities. |
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| Over-the-road | Typically, heavy trucks traveling long distances. |
| Payment processing $ of fuel | Total dollar value of the fuel purchased by fleets that have a payment processing relationship with WEX. |
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| Payment processing transactions | Total number of purchases made by fleets that have a payment processing relationship with the Company where the Company maintains the receivable for the total purchase. |
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| PO Holding | PO Holding, LLC, a wholly-owned subsidiary of WEX Inc. and the direct parent of WEX Health. |
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| Processing costs | Expenses related to processing transactions, servicing customers and merchants and costs of goods sold related to hardware and other product sales. |
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| Purchase volume | Purchase volume in the Corporate Payments segment represents the total dollar value of all WEX-issued transactions that use WEX corporate card products and virtual card products. Purchase volume in the Benefits segment represents the total dollar value of all transactions where interchange is earned by WEX.
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| Redeemable non-controlling interest | The portion of the U.S. Benefits business’ net assets owned by a non-controlling interest holder, SBI, prior to the March 7, 2022 acquisition of SBI’s remaining interest in PO Holding. |
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| SaaS | Software-as-a-Service |
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| SBI | SBI Investments, Inc., which is owned by State Bankshares, Inc., and was a minority interest holder in PO Holding, LLC., a subsidiary of WEX Inc. and the direct parent of WEX Health. |
| SEC | Securities and Exchange Commission |
| Segment adjusted operating income | A non-GAAP measure that adjusts operating income to exclude specified items that the Company'sCompany’s management excludes in evaluating segment performance, including unallocated corporate expenses, acquisition-related intangible amortization and other acquisition and divestiture related expenses and adjustments including the amortization of purchased intangibles, the expense associated withitems, debt restructuring costs, stock-based compensation, restructuringimpairment charges and other costs and an impairment chargecosts. |
ASU 2014-09Service fees | Accounting Standards Update No. 2014-09Costs incurred from third-party networks utilized to deliver payment solutions and other third-parties utilized in performing services directly related to generating revenue. |
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| SOFR | Secured Overnight Financing Rate |
| Topic 606 | ASC Section 606, Revenue from Contracts with Customers (Topic 606) |
ASU 2016-09Total volume | Accounting Standards Update No. 2016-09 Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment AccountingIncludes purchases on WEX-issued accounts as well as purchases issued by others, but using a WEX platform. |
ASU 2017-09 | Accounting Standards Update No. 2017-09 Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting |
Australian Securitization SubsidiaryUDFI | Southern Cross WEX 2015–1 Trust, a bankruptcy-remote subsidiary consolidated by the CompanyUtah Department of Financial Institutions |
Average expenditure per payment processing transaction | Average total dollars of spend in a funded fuel transaction |
CompanyU.S. Benefits business | (i) prior to March 31, 2021, WEX Health, Inc. and Discovery Benefits, LLC., collectively, (ii) from March 31, 2021 to June 1, 2021, WEX Health, Inc., (iii) from June 1, 2021 to April 30, 2022, WEX Health, Inc. and benefitexpress, collectively, and (iv) from April 30, 2022, WEX Health, Inc. |
| WEX | WEX Inc. and all entities included in, unless otherwise indicated or required by the unaudited condensed consolidated financial statementscontext |
EBITDAWEX Australia | A non-GAAP measure that adjusts income before income taxes to exclude interest, depreciation and amortization |
EFS | Electronic Funds Source, LLC, a provider of customized corporate payment solutions for fleet and corporate customers with a focus on the large and mid-sized over-the-road fleets. On July 1, 2016, the Company acquired WP Mustang Topco LLC, the indirect parent of Electronic Funds Source, LLC and Warburg Pincus Private Equity XI (Lexington), LLC, an affiliated entity, from investment funds affiliated with Warburg Pincus LLC |
European Fleet business | European commercial fleet card portfolio acquired from ExxonMobil |
European Securitization Subsidiary | Gorham Trade Finance B.V., a bankruptcy-remote subsidiary consolidated by the Company |
Evolution1 | EBWEX Card Holdings Corp.Australia Pty Ltd and its subsidiaries which includes Evolution1, |
| WEX Bank | An industrial bank organized under the laws of the State of Utah, and wholly owned subsidiary of WEX, Inc. |
| WEX Europe Services | WEX Europe Service Limited, a European Mobility business |
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| WEX Health | WEX Health, Inc., acquired by the Company on July 16, 2014Company’s healthcare technology and administration solutions provider/business. |
FASB | Financial Accounting Standards Board |
FDIC | Federal Deposit Insurance Corporation |
GAAP | Generally Accepted Accounting Principles in the United States |
Indenture | The Notes were issued pursuant to an indenture dated as of January 30, 2013 among the Company, the guarantors listed therein, and The Bank of New York Mellon Trust Company, N.A., as trustee |
NCI | Non-controlling interest |
NYSE | New York Stock Exchange |
Notes | $400 million notes with a 4.75% fixed rate, issued on January 30, 2013 |
Over-the-road | Typically heavy trucks traveling long distances |
Payment solutions purchase volume | Total amount paid by customers for transactions |
Payment processing transactions | Funded payment transactions where the Company maintains the receivable for total purchase |
SaaS | Software-as-a-service |
SEC | Securities and Exchange Commission |
Ticking fees | A fee incurred by a borrower to compensate the lender for maintaining a commitment of funds for the borrower for a period of time |
Total fuel transactions | Total of transaction processing and payment processing transactions of our Fleet Solutions segment |
Transaction processing transactions | Unfunded payment transactions where the Company is the processor and only has receivables for the processing fee |
WEX | WEX Inc. |
WEX Health | Evolution1 and Benaissance, collectively |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| Revenues | | | | | | | |
| Payment processing revenue | $ | 313.3 | | | $ | 309.0 | | | $ | 901.9 | | | $ | 860.8 | |
| Account servicing revenue | 161.5 | | | 138.3 | | | 475.1 | | | 415.9 | |
| Finance fee revenue | 77.1 | | | 96.7 | | | 234.2 | | | 260.6 | |
| Other revenue | 99.5 | | | 72.1 | | | 273.5 | | | 194.6 | |
| Total revenues | 651.4 | | | 616.1 | | | 1,884.7 | | | 1,731.9 | |
| Cost of services | | | | | | | |
| Processing costs | 156.4 | | | 146.3 | | | 451.7 | | | 416.3 | |
| Service fees | 18.5 | | | 16.6 | | | 54.7 | | | 47.2 | |
| Provision for credit losses | 9.4 | | | 54.0 | | | 77.5 | | | 121.9 | |
| Operating interest | 25.3 | | | 7.9 | | | 57.6 | | | 13.4 | |
| Depreciation and amortization | 25.5 | | | 27.3 | | | 75.9 | | | 79.9 | |
| Total cost of services | 235.1 | | | 252.1 | | | 717.4 | | | 678.6 | |
| General and administrative | 116.6 | | | 86.5 | | | 311.7 | | | 248.7 | |
| Sales and marketing | 82.8 | | | 80.9 | | | 241.6 | | | 235.3 | |
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| Depreciation and amortization | 42.0 | | | 38.9 | | | 125.4 | | | 118.2 | |
| Impairment charges | — | | | 136.5 | | | — | | | 136.5 | |
| Operating income | 174.9 | | | 21.3 | | | 488.6 | | | 314.7 | |
| Financing interest expense | (41.6) | | | (34.4) | | | (122.4) | | | (95.9) | |
| Change in fair value of contingent consideration | (3.2) | | | (30.3) | | | (6.2) | | | (135.1) | |
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| Loss on extinguishment of Convertible Notes | (70.1) | | | — | | | (70.1) | | | — | |
| Net foreign currency loss | (7.8) | | | (23.4) | | | (9.4) | | | (37.8) | |
| Net unrealized (loss) gain on financial instruments | (7.8) | | | 23.5 | | | (20.1) | | | 90.3 | |
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| Income (loss) before income taxes | 44.4 | | | (43.3) | | | 260.4 | | | 136.1 | |
| Income tax expense | 26.0 | | | 0.8 | | | 78.7 | | | 57.3 | |
| Net income (loss) | 18.4 | | | (44.1) | | | 181.7 | | | 78.8 | |
| Less: Net income from non-controlling interests | — | | | — | | | — | | | 0.3 | |
| Net income (loss) attributable to WEX Inc. | 18.4 | | | (44.1) | | | 181.7 | | | 78.5 | |
| Change in value of redeemable non-controlling interest | — | | | — | | | — | | | 34.2 | |
| Net income (loss) attributable to shareholders | $ | 18.4 | | | $ | (44.1) | | | $ | 181.7 | | | $ | 112.7 | |
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| Net income (loss) attributable to shareholders per share: | | | | | | | |
| Basic | $ | 0.43 | | | $ | (1.00) | | | $ | 4.23 | | | $ | 2.53 | |
| Diluted | $ | 0.42 | | | $ | (1.00) | | | $ | 4.18 | | | $ | 2.51 | |
| Weighted average common shares outstanding: | | | | | | | |
| Basic | 42.9 | | | 44.2 | | | 43.0 | | | 44.6 | |
| Diluted | 43.4 | | | 44.2 | | | 43.5 | | | 45.0 | |
See notes to the unaudited condensed consolidated financial statements.
WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(unaudited)
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| Net income (loss) | $ | 18.4 | | | $ | (44.1) | | | $ | 181.7 | | | $ | 78.8 | |
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| Other comprehensive loss, net of tax: | | | | | | | |
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| Unrealized losses on available-for-sale debt securities | (55.8) | | | (56.8) | | | (63.5) | | | (150.5) | |
| Foreign currency translation | (22.0) | | | (42.3) | | | (15.7) | | | (83.8) | |
| Other comprehensive loss, net of tax | (77.8) | | | (99.1) | | | (79.2) | | | (234.3) | |
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| Comprehensive (loss) income | (59.4) | | | (143.2) | | | 102.5 | | | (155.5) | |
| Less: Comprehensive income attributable to non-controlling interests | — | | | — | | | — | | | 0.3 | |
| Comprehensive (loss) income attributable to WEX Inc. | $ | (59.4) | | | $ | (143.2) | | | $ | 102.5 | | | $ | (155.8) | |
See notes to the unaudited condensed consolidated financial statements.
WEX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands,millions, except per share data)
(unaudited)
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| September 30,
2023 | | December 31,
2022 |
| Assets | | | |
| Cash and cash equivalents | $ | 957.8 | | | $ | 922.0 | |
| Restricted cash | 1,159.1 | | | 937.8 | |
| Accounts receivable, net | 4,053.5 | | | 3,275.7 | |
| Investment securities | 2,625.2 | | | 1,395.3 | |
| Securitized accounts receivable, restricted | 147.2 | | | 143.2 | |
| Prepaid expenses and other current assets | 189.0 | | | 143.3 | |
| Total current assets | 9,131.8 | | | 6,817.1 | |
| Property, equipment and capitalized software (net of accumulated depreciation of $592.6 in 2023 and $529.9 in 2022) | 228.9 | | | 202.2 | |
| Goodwill | 2,796.9 | | | 2,728.9 | |
| Other intangible assets (net of accumulated amortization of $1,302.5 in 2023 and $1,173.2 in 2022) | 1,443.4 | | | 1,473.6 | |
| Investment securities | 46.8 | | | 48.0 | |
| Deferred income taxes, net | 11.6 | | | 13.4 | |
| Other assets | 241.0 | | | 246.0 | |
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| Total assets | $ | 13,900.4 | | | $ | 11,529.2 | |
| Liabilities and Stockholders’ Equity | | | |
| Accounts payable | $ | 1,742.7 | | | $ | 1,365.8 | |
| Accrued expenses and other current liabilities | 745.1 | | | 643.9 | |
| Restricted cash payable | 1,158.4 | | | 937.1 | |
| Short-term deposits | 4,252.8 | | | 3,144.6 | |
| Short-term debt, net | 957.3 | | | 202.6 | |
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| Total current liabilities | 8,856.3 | | | 6,294.1 | |
| Long-term debt, net | 2,650.1 | | | 2,522.2 | |
| Long-term deposits | 115.5 | | | 334.2 | |
| Deferred income taxes, net | 140.5 | | | 142.2 | |
| Other liabilities | 441.7 | | | 587.1 | |
| Total liabilities | 12,204.1 | | | 9,879.7 | |
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| Stockholders’ Equity | | | |
| Common stock $0.01 par value; 175.0 shares authorized; 49.9 shares issued in 2023 and 49.6 in 2022; 42.7 shares outstanding in 2023 and 43.2 in 2022 | 0.5 | | | 0.5 | |
| Additional paid-in capital | 1,018.3 | | | 928.0 | |
| Retained earnings | 1,672.2 | | | 1,490.5 | |
| Accumulated other comprehensive loss | (385.5) | | | (306.3) | |
| Treasury stock at cost; 7.1 and 6.3 shares in 2023 and 2022, respectively | (609.2) | | | (463.2) | |
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| Total stockholders’ equity | 1,696.3 | | | 1,649.5 | |
| Total liabilities and stockholders’ equity | $ | 13,900.4 | | | $ | 11,529.2 | |
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| | September 30,
2017 | | December 31,
2016 |
| Assets | | | |
| Cash and cash equivalents | $ | 251,118 |
| | $ | 190,930 |
|
| Accounts receivable (net of allowances of $32,712 in 2017 and $20,092 in 2016) | 2,595,371 |
| | 2,054,701 |
|
| Securitized accounts receivable, restricted | 150,845 |
| | 97,417 |
|
| Income taxes receivable | 12,904 |
| | 10,765 |
|
| Available-for-sale securities | 23,584 |
| | 23,525 |
|
| Property, equipment and capitalized software (net of accumulated depreciation of $264,098 in 2017 and $228,336 in 2016) | 185,350 |
| | 167,278 |
|
| Deferred income taxes, net | 8,462 |
| | 6,934 |
|
| Goodwill | 1,813,805 |
| | 1,838,441 |
|
| Other intangible assets (net of accumulated amortization of $375,004 in 2017 and $254,142 in 2016) | 1,155,631 |
| | 1,265,468 |
|
| Other assets | 344,058 |
| | 341,638 |
|
| Total assets | $ | 6,541,128 |
| | $ | 5,997,097 |
|
| Liabilities and Stockholders’ Equity | | | |
| Accounts payable | $ | 849,326 |
| | $ | 617,118 |
|
| Accrued expenses | 318,402 |
| | 331,579 |
|
| Deposits | 1,091,530 |
| | 1,118,823 |
|
| Borrowed federal funds | 28,462 |
| | — |
|
| Securitized debt | 122,475 |
| | 84,323 |
|
| Revolving line of credit facilities and term loans, net | 1,727,472 |
| | 1,599,291 |
|
| Deferred income taxes, net | 149,605 |
| | 152,906 |
|
| Notes outstanding, net | 396,085 |
| | 395,534 |
|
| Other debt | 166,264 |
| | 125,755 |
|
| Amounts due under tax receivable agreement | 38,375 |
| | 47,302 |
|
| Other liabilities | 20,178 |
| | 18,719 |
|
| Total liabilities | 4,908,174 |
| | 4,491,350 |
|
| Commitments and contingencies |
| |
|
| Stockholders’ Equity | | | |
| Common stock $0.01 par value; 175,000 shares authorized; 47,349 shares issued in 2017 and 47,173 in 2016; 42,921 shares outstanding in 2017 and 42,841 in 2016 | 473 |
| | 472 |
|
| Additional paid-in capital | 561,155 |
| | 547,627 |
|
| Non-controlling interest | 8,446 |
| | 8,558 |
|
| Retained earnings | 1,324,994 |
| | 1,244,271 |
|
| Accumulated other comprehensive loss | (89,772 | ) | | (122,839 | ) |
| Treasury stock at cost; 4,428 shares in 2017 and 2016 | (172,342 | ) | | (172,342 | ) |
| Total stockholders’ equity | 1,632,954 |
| | 1,505,747 |
|
| Total liabilities and stockholders’ equity | $ | 6,541,128 |
| | $ | 5,997,097 |
|
WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues | | | | | | | |
| Payment processing revenue | $ | 145,702 |
| | $ | 146,182 |
| | $ | 423,434 |
| | $ | 383,319 |
|
| Account servicing revenue | 71,322 |
| | 58,815 |
| | 198,538 |
| | 150,770 |
|
| Finance fee revenue | 50,879 |
| | 36,138 |
| | 136,336 |
| | 92,348 |
|
| Other revenue | 56,099 |
| | 46,621 |
| | 160,935 |
| | 101,184 |
|
| Total revenues | 324,002 |
| | 287,756 |
| | 919,243 |
| | 727,621 |
|
| Expenses | | | | | | | |
| Salary and other personnel | 92,321 |
| | 76,706 |
| | 261,717 |
| | 206,778 |
|
| Restructuring | 4,639 |
| | 2,531 |
| | 6,799 |
| | 7,626 |
|
| Service fees | 41,205 |
| | 53,415 |
| | 115,306 |
| | 136,098 |
|
| Provision for credit losses | 19,614 |
| | 9,489 |
| | 47,927 |
| | 19,849 |
|
| Technology leasing and support | 13,628 |
| | 12,517 |
| | 40,245 |
| | 34,525 |
|
| Occupancy and equipment | 6,526 |
| | 7,271 |
| | 19,352 |
| | 19,096 |
|
| Depreciation and amortization | 51,229 |
| | 46,008 |
| | 150,428 |
| | 91,381 |
|
| Operating interest expense | 7,382 |
| | 2,599 |
| | 16,694 |
| | 5,490 |
|
| Cost of hardware and equipment sold | 1,066 |
| | 859 |
| | 3,193 |
| | 2,429 |
|
| Impairment charge | — |
| | — |
| | 16,175 |
| | — |
|
| Other expenses | 22,669 |
| | 21,793 |
| | 69,351 |
| | 57,018 |
|
| Total operating expenses | 260,279 |
| | 233,188 |
| | 747,187 |
| | 580,290 |
|
| Operating income | 63,723 |
| | 54,568 |
| | 172,056 |
| | 147,331 |
|
| Financing interest expense | (25,754 | ) | | (35,064 | ) | | (81,449 | ) | | (87,040 | ) |
| Net foreign currency gain | 14,611 |
| | 5,932 |
| | 33,578 |
| | 17,233 |
|
| Net unrealized loss on interest rate swap agreements | (150 | ) | | — |
| | (849 | ) | | — |
|
| Net realized and unrealized gain on fuel price derivatives | — |
| | — |
| | — |
| | 711 |
|
| Non-cash adjustments related to tax receivable agreement | — |
| | (168 | ) | | — |
| | (168 | ) |
| Income before income taxes | 52,430 |
| | 25,268 |
| | 123,336 |
| | 78,067 |
|
| Income taxes | 18,570 |
| | 6,065 |
| | 43,760 |
| | 23,730 |
|
| Net income | 33,860 |
| | 19,203 |
| | 79,576 |
| | 54,337 |
|
| Less: Net loss from non-controlling interest | (111 | ) | | (493 | ) | | (886 | ) | | (1,013 | ) |
| Net earnings attributable to shareholders | $ | 33,971 |
| | $ | 19,696 |
| | $ | 80,462 |
| | $ | 55,350 |
|
| | | | | | | | |
| Net earnings attributable to WEX Inc. per share: | | | | | | | |
| Basic | $ | 0.79 |
| | $ | 0.46 |
| | $ | 1.87 |
| | $ | 1.38 |
|
| Diluted | $ | 0.79 |
| | $ | 0.46 |
| | $ | 1.87 |
| | $ | 1.38 |
|
| Weighted average common shares outstanding: | | | | | | | |
| Basic | 43,014 |
| | 42,788 |
| | 42,963 |
| | 40,126 |
|
| Diluted | 43,101 |
| | 42,871 |
| | 43,092 |
| | 40,199 |
|
See notes to unaudited condensed consolidated financial statements.
WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net income | $ | 33,860 |
| | $ | 19,203 |
| | $ | 79,576 |
| | $ | 54,337 |
|
| Changes in available-for-sale securities, net of tax (benefit) expense of $(10) and $(37) for the three months ended September 30, 2017 and 2016 and $53 and $123 for the nine months ended September 30, 2017 and 2016, respectively | (12 | ) | | (62 | ) | | 97 |
| | 209 |
|
| Foreign currency translation | 11,042 |
| | 1,549 |
| | 33,744 |
| | 709 |
|
| Comprehensive income | 44,890 |
|
| 20,690 |
| | 113,417 |
| | 55,255 |
|
| Less: Comprehensive gain (loss) attributable to non-controlling interest | 122 |
| | (438 | ) | | (112 | ) | | (823 | ) |
| Comprehensive income attributable to WEX Inc. | $ | 44,768 |
| | $ | 21,128 |
| | $ | 113,529 |
| | $ | 56,078 |
|
See notes to unaudited condensed consolidated financial statements.
WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)millions)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock Issued | | Additional
Paid-in
Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | | | Total Stockholders’
Equity |
| Shares | | Amount | | | | |
| Balance at January 1, 2023 | 49.6 | | | $ | 0.5 | | | $ | 928.0 | | | $ | 1,490.5 | | | $ | (306.3) | | | $ | (463.2) | | | | | $ | 1,649.5 | |
| Stock issued under share-based compensation plans | 0.1 | | | — | | | 6.3 | | | — | | | — | | | — | | | | | 6.3 | |
| Share repurchases for tax withholdings | — | | | — | | | (8.8) | | | — | | | — | | | — | | | | | (8.8) | |
| Stock-based compensation expense | — | | | — | | | 25.3 | | | — | | | — | | | — | | | | | 25.3 | |
| Unrealized gain on available-for-sale debt securities | — | | | — | | | — | | | — | | | 22.2 | | | — | | | | | 22.2 | |
| Purchase of shares of treasury stock | — | | | — | | | — | | | — | | | — | | | (92.8) | | | | | (92.8) | |
| Foreign currency translation | — | | | — | | | — | | | — | | | 0.8 | | | — | | | | | 0.8 | |
| Net income | — | | | — | | | — | | | 68.0 | | | — | | | — | | | | | 68.0 | |
| Balance at March 31, 2023 | 49.7 | | | $ | 0.5 | | | $ | 950.8 | | | $ | 1,558.5 | | | $ | (283.3) | | | $ | (556.0) | | | | | $ | 1,670.5 | |
| Stock issued under share-based compensation plans | 0.1 | | | — | | | 1.2 | | | — | | | — | | | — | | | | | 1.2 | |
| Share repurchases for tax withholdings | — | | | — | | | (6.6) | | | — | | | — | | | — | | | | | (6.6) | |
| Purchase of shares of treasury stock | — | | | — | | | — | | | — | | | — | | | (3.2) | | | | | (3.2) | |
| Stock-based compensation expense | — | | | — | | | 35.9 | | | — | | | — | | | — | | | | | 35.9 | |
| Unrealized loss on available-for-sale debt securities | — | | | — | | | — | | | — | | | (29.9) | | | — | | | | | (29.9) | |
| Foreign currency translation | — | | | — | | | — | | | — | | | 5.5 | | | — | | | | | 5.5 | |
| Net income | — | | | — | | | — | | | 95.3 | | | — | | | — | | | | | 95.3 | |
| Balance at June 30, 2023 | 49.8 | | | $ | 0.5 | | | $ | 981.3 | | | $ | 1,653.8 | | | $ | (307.7) | | | $ | (559.2) | | | | | $ | 1,768.7 | |
| Stock issued under share-based compensation plans | 0.1 | | | — | | | 8.1 | | | — | | | — | | | — | | | | | 8.1 | |
| Share repurchases for tax withholdings | — | | | — | | | (1.6) | | | — | | | — | | | — | | | | | (1.6) | |
| Purchase of shares of treasury stock | — | | | — | | | — | | | — | | | — | | | (50.0) | | | | | (50.0) | |
| Stock-based compensation expense | — | | | — | | | 30.5 | | | — | | | — | | | — | | | | | 30.5 | |
| Unrealized loss on available-for-sale debt securities | — | | | — | | | — | | | — | | | (55.8) | | | — | | | | | (55.8) | |
| Foreign currency translation | — | | | — | | | — | | | — | | | (22.0) | | | — | | | | | (22.0) | |
| Net income | — | | | — | | | — | | | 18.4 | | | — | | | — | | | | | 18.4 | |
| Balance at September 30, 2023 | 49.9 | | | $ | 0.5 | | | $ | 1,018.3 | | | $ | 1,672.2 | | | $ | (385.5) | | | $ | (609.2) | | | | | $ | 1,696.3 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | | | | | | | |
| | Shares | | Amount | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Retained
Earnings | | Non-Controlling Interest | | Total Stockholders' Equity |
| Balance at January 1, 2016 | 38,746 |
| | $ | 431 |
| | $ | 174,972 |
| | $ | (103,451 | ) | | $ | (172,342 | ) | | $ | 1,183,634 |
| | $ | 12,437 |
| | $ | 1,095,681 |
|
| Stock issued upon exercise of stock options | 21 |
| | — |
| | 283 |
| | — |
| | — |
| | — |
| | — |
| | 283 |
|
| Tax expense from stock option and restricted stock units | — |
| | — |
| | (300 | ) | | — |
| | — |
| | — |
| | — |
| | (300 | ) |
| Stock issued upon vesting of restricted and deferred stock units | 61 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Stock-based compensation, net of share repurchases for tax withholdings | — |
| | — |
| | 12,142 |
| | — |
| | — |
| | — |
| | — |
| | 12,142 |
|
| Changes in available-for-sale securities, net of tax expense of $123 | — |
| | — |
| | — |
| | 209 |
| | — |
| | — |
| | — |
| | 209 |
|
| Stock issued for July 1, 2016 purchase of EFS | 4,012 |
| | 40 |
| | 354,913 |
| | — |
| | — |
| | — |
| | — |
| | 354,953 |
|
| Foreign currency translation | — |
| | — |
| | — |
| | 709 |
| | — |
| | — |
| | 190 |
| | 899 |
|
| Net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 55,350 |
| | (1,013 | ) | | 54,337 |
|
| Balance at September 30, 2016 | 42,840 |
|
| $ | 472 |
|
| $ | 542,010 |
|
| $ | (102,533 | ) | | $ | (172,342 | ) | | $ | 1,238,984 |
| | $ | 11,614 |
| | $ | 1,518,205 |
|
| Balance at January 1, 2017 | 42,841 |
| | $ | 472 |
| | $ | 547,627 |
| | $ | (122,839 | ) | | $ | (172,342 | ) | | $ | 1,244,271 |
| | $ | 8,558 |
| | $ | 1,505,747 |
|
Cumulative-effect adjustment1 | — |
| | — |
| | — |
| | — |
| | — |
| | 261 |
| | — |
| | 261 |
|
| Stock issued upon exercise of stock options | 11 |
| | — |
| | 595 |
| | — |
| | — |
| | — |
| | — |
| | 595 |
|
| Stock issued upon vesting of restricted and deferred stock units | 69 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Stock-based compensation, net of share repurchases for tax withholdings | — |
| | — |
| | 12,934 |
| | — |
| | — |
| | — |
| | — |
| | 12,934 |
|
| Changes in available-for-sale securities, net of tax expense of $53 | — |
| | — |
| | — |
| | 97 |
| | — |
| | — |
| | — |
| | 97 |
|
| Foreign currency translation | — |
| | — |
| | — |
| | 32,970 |
| | — |
| | — |
| | 774 |
| | 33,744 |
|
| Net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 80,462 |
| | (886 | ) | | 79,576 |
|
| Balance at September 30, 2017 | 42,921 |
| | $ | 473 |
| | $ | 561,155 |
| | $ | (89,772 | ) | | $ | (172,342 | ) | | $ | 1,324,994 |
| | $ | 8,446 |
| | $ | 1,632,954 |
|
1Impact of modified retrospective transition as part of the Company's ASU 2016-09 adoption to recognize previously disallowed excess tax benefits that increased a net operating loss.CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
(in millions)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock Issued | | Additional
Paid-in
Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | | | Total Stockholders’
Equity |
| | Shares | | Amount | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Balance at January 1, 2022 | 49.3 | | | $ | 0.5 | | | $ | 844.1 | | | $ | 1,289.1 | | | $ | (122.5) | | | $ | (172.3) | | | | | $ | 1,838.8 | |
| Stock issued under share-based compensation plans | 0.2 | | | — | | | 0.8 | | | — | | | — | | | — | | | | | 0.8 | |
| Share repurchases for tax withholdings | — | | | — | | | (12.2) | | | — | | | — | | | — | | | | | (12.2) | |
| Stock-based compensation expense | — | | | — | | | 23.7 | | | — | | | — | | | — | | | | | 23.7 | |
| Unrealized loss on available-for-sale debt securities | — | | | — | | | — | | | — | | | (51.7) | | | — | | | | | (51.7) | |
| Change in value of redeemable non-controlling interest, net of $3.5 million of tax expense | — | | | — | | | — | | | 34.2 | | | — | | | — | | | | | 34.2 | |
| Foreign currency translation | — | | | — | | | — | | | — | | | 4.3 | | | — | | | | | 4.3 | |
| Net income | — | | | — | | | — | | | 88.5 | | | — | | | — | | | | | 88.5 | |
| Balance at March 31, 2022 | 49.4 | | | $ | 0.5 | | | $ | 856.3 | | | $ | 1,411.9 | | | $ | (169.9) | | | $ | (172.3) | | | | | $ | 1,926.5 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Stock issued under share-based compensation plans | 0.1 | | | — | | | 2.3 | | | — | | | — | | | — | | | | | 2.3 | |
| Share repurchases for tax withholdings | — | | | — | | | (3.1) | | | — | | | — | | | — | | | | | (3.1) | |
| Purchase of shares of treasury stock | — | | | — | | | — | | | — | | | — | | | (80.6) | | | | | (80.6) | |
| Stock-based compensation expense | — | | | — | | | 24.9 | | | — | | | — | | | — | | | | | 24.9 | |
| Unrealized loss on available-for-sale debt securities | — | | | — | | | — | | | — | | | (42.1) | | | — | | | | | (42.1) | |
| Foreign currency translation | — | | | — | | | — | | | — | | | (45.7) | | | — | | | | | (45.7) | |
| Net income | — | | | — | | | — | | | 34.1 | | | — | | | — | | | | | 34.1 | |
| Balance at June 30, 2022 | 49.5 | | | $ | 0.5 | | | $ | 880.5 | | | $ | 1,446.0 | | | $ | (257.7) | | | $ | (252.9) | | | | | $ | 1,816.4 | |
| Stock issued under share-based compensation plans | — | | | — | | | 0.7 | | | — | | | — | | | — | | | | | 0.7 | |
| Share repurchases for tax withholdings | — | | | — | | | (1.9) | | | — | | | — | | | — | | | | | (1.9) | |
| Purchase of shares of treasury stock | — | | | — | | | — | | | — | | | — | | | (69.0) | | | | | (69.0) | |
| Stock-based compensation expense | — | | | — | | | 28.2 | | | — | | | — | | | — | | | | | 28.2 | |
| Unrealized loss on available-for-sale debt securities | — | | | — | | | — | | | — | | | (56.8) | | | — | | | | | (56.8) | |
| Foreign currency translation | — | | | — | | | — | | | — | | | (42.3) | | | — | | | | | (42.3) | |
| Net loss | — | | | — | | | — | | | (44.1) | | | — | | | — | | | | | (44.1) | |
| Balance at September 30, 2022 | 49.5 | | | $ | 0.5 | | | $ | 907.5 | | | $ | 1,401.8 | | | $ | (356.8) | | | $ | (322.0) | | | | | $ | 1,631.1 | |
| | | | | | | | | | | | | | | |
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See notes to the unaudited condensed consolidated financial statements.
WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)millions)
(unaudited) | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2023 | | 2022 |
| Cash flows from operating activities | | | |
| Net income | $ | 181.7 | | | $ | 78.8 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Change in fair value of contingent consideration | 6.2 | | | 135.1 | |
| Stock-based compensation | 91.7 | | | 76.8 | |
| Depreciation and amortization | 201.3 | | | 198.1 | |
| | | |
| | | |
| | | |
| Deferred tax benefit | (0.4) | | | (54.1) | |
| Provision for credit losses | 77.5 | | | 121.9 | |
| Impairment charges | — | | | 136.5 | |
| | | |
| Loss on extinguishment of Convertible Notes | 70.1 | | | — | |
| Other non-cash adjustments | 43.7 | | | (41.6) | |
| Changes in operating assets and liabilities, net of effects of business acquisitions: | | | |
| Accounts receivable and securitized accounts receivable | (842.0) | | | (1,147.8) | |
| Prepaid expenses and other current and other long-term assets | (27.7) | | | (11.2) | |
| Accounts payable | 387.4 | | | 568.4 | |
| Accrued expenses and other current and long-term liabilities | (12.6) | | | 34.9 | |
| Income taxes | (30.9) | | | 10.8 | |
| | | |
| | | |
| Net cash provided by operating activities | 146.0 | | | 106.6 | |
| | | |
| Cash flows from investing activities | | | |
| Purchases of property, equipment and capitalized software | (101.7) | | | (75.5) | |
| Purchase of other investments | (5.0) | | | — | |
| | | |
| | | |
| | | |
| Purchases of available-for-sale debt securities | (1,448.6) | | | (633.0) | |
| Sales and maturities of available-for-sale debt securities | 144.1 | | | 48.0 | |
| Acquisition of intangible assets | (4.5) | | | (3.3) | |
| Acquisitions, net of cash and restricted cash acquired | (155.7) | | | — | |
| Net cash used for investing activities | (1,571.4) | | | (663.9) | |
| | | |
| Cash flows from financing activities | | | |
| | | |
| Purchase of treasury shares | (152.6) | | | (149.6) | |
| | | |
| Net change in deposits | 889.9 | | | 960.6 | |
| | | |
| Net change in restricted cash payable | 213.1 | | | 350.1 | |
| Borrowings on revolving credit facility | 2,479.7 | | | 1,825.4 | |
| Repayments on revolving credit facility | (2,008.1) | | | (1,857.0) | |
| | | |
| Repayments on term loans | (47.5) | | | (47.5) | |
| | | |
| | | |
| Repurchase of Convertible Notes | (368.9) | | | — | |
| Borrowings on BTFP | 750.0 | | | — | |
| Repayments on BTFP | (250.0) | | | — | |
| Net change in borrowed federal funds | 260.1 | | | — | |
| | | |
| Net borrowings on other debt | (4.8) | | | 34.9 | |
| Payments of deferred and contingent consideration | (52.2) | | | — | |
| | | |
| Other financing activities | (3.4) | | | (13.3) | |
| Net cash provided by financing activities | 1,705.3 | | | 1,103.5 | |
| Effect of exchange rates on cash, cash equivalents and restricted cash | (22.8) | | | (101.5) | |
| Net change in cash, cash equivalents and restricted cash | 257.1 | | | 444.7 | |
| | | |
Cash, cash equivalents and restricted cash, beginning of period(a) | 1,859.8 | | | 1,256.8 | |
Cash, cash equivalents and restricted cash, end of period(a) | $ | 2,116.9 | | | $ | 1,701.5 | |
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| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| Cash flows from operating activities | | | |
| Net income | $ | 79,576 |
| | $ | 54,337 |
|
| Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | | |
| Net unrealized loss (gain) | 6,411 |
| | (17,402 | ) |
| Stock-based compensation | 22,354 |
| | 14,312 |
|
| Depreciation and amortization | 150,428 |
| | 91,381 |
|
| Ticking fees expensed | — |
| | 30,045 |
|
| Debt restructuring and debt issuance cost amortization | 5,935 |
| | 10,649 |
|
| Provision for deferred taxes | 29,924 |
| | 15,668 |
|
| Provision for credit losses | 47,927 |
| | 19,849 |
|
| Impairment charge | 16,175 |
| | — |
|
| Changes in operating assets and liabilities, net of effects of acquisitions: | | | |
| Accounts receivable | (595,804 | ) | | (405,616 | ) |
| Other assets | (18,713 | ) | | (44,051 | ) |
| Accounts payable | 228,284 |
| | 169,716 |
|
| Accrued expenses | (7,740 | ) | | 1,572 |
|
| Income taxes | (2,799 | ) | | (12,993 | ) |
| Other liabilities | 1,300 |
| | (416 | ) |
| Amounts due under tax receivable agreement | (8,927 | ) | | (7,924 | ) |
| Net cash used for operating activities | (45,669 | ) | | (80,873 | ) |
| Cash flows from investing activities | | | |
| Purchases of property, equipment and capitalized software | (56,095 | ) | | (45,016 | ) |
| Purchases of available-for-sale securities | (355 | ) | | (5,716 | ) |
| Maturities of available-for-sale securities | 445 |
| | 450 |
|
| Acquisitions and investment, net of cash | — |
| | (1,089,280 | ) |
| Net cash used for investing activities | (56,005 | ) | | (1,139,562 | ) |
| Cash flows from financing activities | | | |
| Excess tax benefits from equity instrument share-based payment arrangements | — |
| | 391 |
|
| Repurchase of share-based awards to satisfy tax withholdings | (9,420 | ) | | (2,170 | ) |
| Proceeds from stock option exercises | 595 |
| | 284 |
|
| Net change in deposits | (29,052 | ) | | 415,737 |
|
| Increase in borrowed federal funds | 28,462 |
| | — |
|
| Net activity on other debt | 39,554 |
| | 56,442 |
|
| Net borrowings on 2016 revolving credit facility | 143,597 |
| | 96,100 |
|
| Borrowings on 2016 term loans | — |
| | 1,643,000 |
|
| Repayments on 2016 term loans | (26,063 | ) | | (8,688 | ) |
| Net repayments on 2014 revolving credit facility | — |
| | (205,549 | ) |
| Repayments on 2014 term loan | — |
| | (458,750 | ) |
| Ticking fees paid | — |
| | (22,171 | ) |
| Debt issuance costs | (438 | ) | | (40,868 | ) |
| Net change in securitized debt | 29,874 |
| | (1,696 | ) |
| Net cash provided by financing activities | 177,109 |
| | 1,472,062 |
|
| Effect of exchange rate changes on cash and cash equivalents | (15,247 | ) | | 5,534 |
|
| Net change in cash and cash equivalents | 60,188 |
| | 257,161 |
|
| Cash and cash equivalents, beginning of period | 190,930 |
| | 279,989 |
|
| Cash and cash equivalents, end of period | $ | 251,118 |
| | $ | 537,150 |
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in millions)
(unaudited)
The following table provides supplemental disclosure of non-cash investing and financing activities:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
| Capital expenditures incurred but not paid | $ | 9.0 | | | $ | 7.4 | |
| | | |
| Maturities of available-for-sale debt securities, unsettled as of period-end | 15.0 | | | — | |
| Initial deferred liability from acquisition of remaining interest in PO Holding | — | | | 216.6 | |
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| | | |
| | | |
| | | |
(a) The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within our condensed consolidated balance sheets to amounts within our condensed consolidated statements of cash flows.
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2023 | | 2022 |
| Cash and cash equivalents at beginning of period | $ | 922.0 | | | $ | 588.9 | |
| Restricted cash at beginning of period | 937.8 | | | 667.9 | |
| Cash, cash equivalents and restricted cash at beginning of period | $ | 1,859.8 | | | $ | 1,256.8 | |
| | | |
| Cash and cash equivalents at end of period | $ | 957.8 | | | $ | 759.4 | |
| Restricted cash at end of period | 1,159.1 | | | 942.1 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 2,116.9 | | | $ | 1,701.5 | |
See notes to the unaudited condensed consolidated financial statements.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
The accompanying unaudited condensed consolidated financial statements, which include the accounts of WEX Inc. and its subsidiaries, have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q10–Q and Rule 10-0110–01 of Regulation S-X. They do not include all information and notesS–X. Accordingly, they exclude certain disclosures required by GAAP for a complete set of financial statements. However, except as disclosed herein, there have been no material changes toUnless the information disclosedcontext suggests otherwise, references in the notes to the consolidated financial statements included in the Annualthis Quarterly Report on Form 10-K of10-Q to “WEX,” the “Company,” “we” or “our” refer to WEX Inc. for the year ended December 31, 2016. These unaudited condensed consolidated financial statements should be readand its subsidiaries. All intercompany accounts and transactions have been eliminated in conjunction with the financial statements that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 6, 2017. consolidation.
In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation in accordance with GAAP, which are of a normal recurring nature, have been included. Operating results for the three and nine months ended September 30, 20172023 are not necessarily indicative of the results for any future periods or the year ending December 31, 2017.2023. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements that are included in the Company’s Annual Report on Form 10–K for the year ended December 31, 2022, filed with the SEC on February 28, 2023 (“2022 Annual Report”).
We have applied the same accounting policies in preparing these quarterly financial statements as we did in preparing our 2022 annual financial statements. The Company rounds amounts in the unaudited condensed consolidated financial statements to thousandsmillions and calculates all percentages and per-share data from underlying whole-dollar amounts. Thus, certain amounts may not foot, crossfoot or recalculate based on reported numbers due to rounding. We have included certain terms and abbreviations used throughout this Quarterly Report on Form 10-Q within “Acronyms and Abbreviations” in the front of this document.
|
| |
2. | New Accounting Standards |
Adopted DuringIn connection with a rebranding initiative, during the Nine Months Ended September 30, 2017
Effective January 1, 2017,first quarter of 2023 the Company adopted ASU 2016-09, which simplifies several aspectsrenamed its existing reportable segments. The Fleet Solutions segment was renamed to Mobility, the Travel and Corporate Solutions segment was renamed to Corporate Payments and the Health and Employee Benefits Solutions segment was renamed to Benefits. These notes to the condensed consolidated financial statements incorporate these changes. There were no changes to the composition of accounting for employee share-based payment transactions, includingour reportable segments.
Reclassifications
Beginning December 31, 2022, within the accounting for income taxes, forfeitures, statutory tax withholding requirements, and classification in the statementcondensed consolidated statements of cash flows.flows, accrued expenses are combined with other current and long-term liabilities within cash flows from operating activities and the change in restricted cash payable is presented separately. The change in restricted cash payable, which had previously been presented within cash flows from operating activities, is now reflected within cash flows from financing activities. Prior period amounts have been reclassified to conform to the adoptioncurrent period presentation, which includes the reclassification of this guidance, the Company recognized the net excess tax benefitsrestricted cash payable inflows of vested or settled awards in additional paid-in capital. This standard required prospective recognition of all the tax effects related$350.1 million from operating cash flows to share-based payments in the income statement. The impact of adoption was recorded as a cumulative effect adjustment to Retained earnings of approximately $300. Forfinancing cash flows for the nine months ended September 30, 2017,2022.
| | | | | |
| 2. | Significant Accounting Policies |
Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements as of and for the Company recognized approximately $1,600 of excess tax benefits within our income tax provision, which would have been recognized in additional paid-in-capital under previous guidance. For the threenine months ended September 30, 2017, the amount2023, are consistent with those discussed in “Note 1, Basis of excess tax benefits recognized was not material. The Company has elected to prospectively classify these excess tax benefits as cash flows from operating activities effective January 1, 2017. The Company will continue to estimate the numberPresentation and Summary of awards expected to vest, rather than electing to account for forfeitures as they occur. Adoption of this standard has not impacted the Company's minimum statutory tax withholding practices.
In May 2017, the FASB issued ASU 2017-09, which clarifies when a changeSignificant Accounting Policies” to the terms or conditions of a share-based payment award must be accounted for as a modification. Under the new guidance, an entity will not apply modification accounting to a share-based payment award if there is no change to the award’s fair value, vesting conditions and classification as an equity or liability instrument. The guidance is effective prospectively for all companies for annual periods beginning on or after December 15, 2017. The Company elected to early adopt this ASU and such adoption has not impacted the Company's consolidated financial statements and related disclosures.in our 2022 Annual Report.
Not Yet AdoptedRecent Accounting Pronouncements
There are no recent accounting pronouncements adopted during the nine months ended September 30, 2023, or not yet adopted as of September 30, 2023, that could have a material effect on our financial statements.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
In May 2014,accordance with Topic 606, revenue is recognized when, or as, performance obligations are satisfied as defined by the FASB issued ASU 2014-09 ("Topic 606"), which will supersede most existing revenue recognition guidance under GAAP. The new revenue recognition standard requires entities to recognize revenue forterms of the transfer of promised goods or services to customerscontract, in an amount that reflects the consideration to which the entityCompany expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.services provided.
The Company will adopt this standard on January 1, 2018. The guidance permits two methodsfollowing tables disaggregate the Company’s consolidated revenues, substantially all of adoption: full retrospective approach, which requires an entityrelate to restate each prior period that is reported inservices transferred to the financial statements and modified retrospective approach, which requires a cumulative adjustment to retained earnings as of the effective date, without restatement of prior period amounts. The Company will adopt the standard using the modified retrospective method.customer over time:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 |
| (In millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| Topic 606 revenues | | | | | | | |
| Payment processing revenue | $ | 176.9 | | | $ | 115.8 | | | $ | 20.6 | | | $ | 313.3 | |
| Account servicing revenue | 5.4 | | | 10.5 | | | 108.5 | | | 124.4 | |
| Other revenue | 24.7 | | | — | | | 6.9 | | | 31.6 | |
| Total Topic 606 revenues | $ | 207.0 | | | $ | 126.3 | | | $ | 136.0 | | | $ | 469.3 | |
| | | | | | | |
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| | | | | | | |
| | | | | | | |
| Non-Topic 606 revenues | 143.1 | | | 8.9 | | | 30.1 | | | 182.1 | |
| | | | | | | |
| Total revenues | $ | 350.1 | | | $ | 135.2 | | | $ | 166.1 | | | $ | 651.4 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| (In millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| Topic 606 revenues | | | | | | | |
| Payment processing revenue | $ | 188.6 | | | $ | 101.5 | | | $ | 18.9 | | | $ | 309.0 | |
| Account servicing revenue | 4.7 | | | 10.7 | | | 85.9 | | | 101.4 | |
| Other revenue | 21.3 | | | 0.1 | | | 7.5 | | | 28.9 | |
| Total Topic 606 revenues | $ | 214.6 | | | $ | 112.3 | | | $ | 112.4 | | | $ | 439.4 | |
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| Non-Topic 606 revenues | 163.5 | | | 1.6 | | | 11.7 | | | 176.8 | |
| | | | | | | |
| Total revenues | $ | 378.1 | | | $ | 114.0 | | | $ | 124.1 | | | $ | 616.1 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2023 |
| (In millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| Topic 606 revenues | | | | | | | |
| Payment processing revenue | $ | 520.6 | | | $ | 310.6 | | | $ | 70.7 | | | $ | 901.9 | |
| Account servicing revenue | 14.3 | | | 31.7 | | | 319.8 | | | 365.8 | |
| Other revenue | 69.2 | | | — | | | 20.9 | | | 90.1 | |
| Total Topic 606 revenues | $ | 604.1 | | | $ | 342.3 | | | $ | 411.4 | | | $ | 1,357.8 | |
| Non-Topic 606 revenues | 428.5 | | | 19.6 | | | 78.8 | | | 526.9 | |
| Total revenues | $ | 1,032.6 | | | $ | 361.9 | | | $ | 490.2 | | | $ | 1,884.7 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| (In millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| Topic 606 revenues | | | | | | | |
| Payment processing revenue | $ | 542.9 | | | $ | 255.2 | | | $ | 62.7 | | | $ | 860.8 | |
| Account servicing revenue | 13.6 | | | 31.9 | | | 256.1 | | | $ | 301.6 | |
| Other revenue | 63.5 | | | 0.5 | | | 23.9 | | | 87.9 | |
| Total Topic 606 revenues | $ | 620.0 | | | $ | 287.6 | | | $ | 342.8 | | | $ | 1,250.3 | |
| Non-Topic 606 revenues | 456.5 | | | 4.1 | | | 21.1 | | | 481.6 | |
| Total revenues | $ | 1,076.5 | | | $ | 291.6 | | | $ | 363.8 | | | $ | 1,731.9 | |
WEX INCINC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)(unaudited)
(unaudited)
Contract Balances
Topic 606 does not apply to rights or obligations associated with financial instruments (e.g. interest income), includingThe majority of the Company’s finance fee and interestreceivables, which are excluded from the table below, are either due from cardholders who have not been deemed our customer as it relates to interchange income, or from banking relationships and cardholders. In addition, fees associated with cardholder arrangements arerevenues earned outside of the scope of Topic 606. As a resultThe Company’s contract assets consist of further internal analysis, management now estimates approximately 25 percentupfront payments to customers under long-term contracts and are recorded upon the later of consolidated revenueswhen the Company recognizes revenue for the periodtransfer of the related goods or services or when the Company pays or promises to pay the consideration. The resulting asset is amortized against revenue as the Company satisfies its performance obligations under these arrangements. The Company’s contract liabilities consist of customer payments received before the Company has satisfied the associated performance obligations. The following table provides information about these contract balances:
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | | | | | |
| Contract balance | | Location on the condensed consolidated balance sheets | | September 30, 2023 | | December 31, 2022 |
Receivables1 | | Accounts receivable, net | | $ | 39.3 | | | $ | 53.6 | |
| Contract assets | | Prepaid expenses and other current assets | | 17.4 | | | 13.6 | |
| Contract assets | | Other assets | | 34.6 | | | 37.9 | |
| Contract liabilities | | Accrued expenses and other current liabilities | | 15.3 | | | 8.1 | |
| Contract liabilities | | Other liabilities | | 80.5 | | | 87.0 | |
| | | | | | |
1 The significant decrease in receivables is due to the sale of certain accounts receivable invoices under our Benefits securitization facility, which is described more fully within Note 11, Off-Balance Sheet Arrangements.
During the three and nine months ended September 30, 2023, the Company recognized revenue of $2.2 million and $4.8 million, respectively, related to contract liabilities existing as of December 31, 2016 are outside the scope of Topic 606.2022.
Remaining Performance Obligations
The Company’s revenue from discount and interchange, transaction processing and certainunsatisfied or partially unsatisfied performance obligations as of September 30, 2023 represent the remaining minimum monthly fees is withinon a portion of contracts across the scopelines of Topic 606. FASB and its Transition Resource Group have issued clarifications on various aspects of ASU 2014-09. Those clarifications, along with the guidance under Topic 606 support the conclusion that timing and measurement ofbusiness, deferred revenue associated with stand ready payment processing obligations and contractually obligated professional services yet to be provided by the Company. The total remaining performance obligations below are not indicative of the Company’s future revenue, as they relate to a small portion of the Company’s operations.
The following table includes revenue expected to be recognized related to remaining performance obligations at the end of the indicated reporting period.
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| (In millions) | Remaining 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter | | Total |
Minimum monthly fees1 | $ | 16.6 | | | $ | 39.7 | | | $ | 19.6 | | | $ | 7.2 | | | $ | 4.3 | | | $ | 2.8 | | | $ | 0.8 | | | $ | 91.0 | |
Other2 | 5.6 | | | 17.1 | | | 25.0 | | | 33.3 | | | 36.0 | | | 5.9 | | | — | | | 122.9 | |
| Total remaining performance obligations | $ | 22.3 | | | $ | 56.7 | | | $ | 44.5 | | | $ | 40.5 | | | $ | 40.3 | | | $ | 8.7 | | | $ | 0.8 | | | $ | 213.9 | |
1 The transaction processing services, including discount and interchange and other transaction processingprice allocated to the remaining performance obligations represents the minimum monthly fees will not be significantly impacted byon certain service contracts, which contain substantive termination penalties that require the new standard. Management estimates approximately 70 percent of consolidated revenuescounterparty to pay the Company for the period ended December 31, 2016 will remain substantially unchanged underaggregate remaining minimum monthly fees upon an early termination for convenience.
2 Substantially represents deferred revenue and contractual minimums associated with payment processing service obligations. Consideration associated with certain relationships is variable and the new standard.
Under the new guidance certain costs to obtain a contract, such as sales commissions are to be capitalized and amortized over the life of the contract, with a practical expedient available for contracts under one year in duration. Sales commissions expensed were approximately $20,000 for the year ended December 31, 2016. The Company currently anticipates that the treatment of over 90 percent of commission expenses will remain unchanged and will continue to be expensed.
The Company is currently in the process of implementing changes to its accounting policies, business processes and internal controls to support the recognition, measurement and disclosure requirements under the new standard.estimation of contract consideration is contingent upon payment processing volumes and maintaining volume shares, among others.
EFS
On July 1, 2016, the Company acquired all of the outstanding membership interests of EFS, a provider of customized payment solutions for fleet and corporate customers with a focus on the large and mid-sized over-the-road fleets. The acquisition enabled the Company to expand its customer footprint and to utilize EFS' technology to better serve the needs of all fleet customers.
In consideration for the acquisition of EFS, the Company issued 4,012 shares of its common stock valued at approximately $355,000 based on the July 1, 2016 closing price of the Company's common stock on the NYSE. This represented approximately 9.4 percent of the Company's outstanding common stock after giving effect to the issuance of the new shares in connection with this acquisition. The cash consideration for the transaction totaled approximately $1,182,000, and was funded with amounts received under the 2016 Credit Agreement described further in Note 7, Financing and Other Debt. The value of the total cash and stock consideration paid for the acquisition of EFS was approximately $1,444,000, net of $93,000 in cash acquired.
The Company obtained information to determine the fair values of certain assets acquired and liabilities assumed throughout the one year measurement period and recorded adjustments to the assets acquired and liabilities assumed, resulting in the recording of other intangible assets and goodwill as described below. Goodwill is calculated as the consideration in excess of net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized, including synergies derived from the acquisition.
The tax structure of EFS consists of limited liability companies and corporations. The Company’s tax election will allow a step-up in tax basis related to its 49.5 percent direct ownership in the parent limited liability company. The remaining 50.5 percent ownership in the parent limited liability company is held by another limited liability company, taxed as a corporation, that is part of the EFS structure and will therefore receive carry over tax basis. The difference between book and tax basis resulting from receiving carry over tax basis has been reflected in the financial statements as an investment in partnership deferred tax liability. The Company has determined that approximately $557,000 of the goodwill recognized in this business combination will be deductible for income tax purposes.
WEX INCINC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)(unaudited)
(unaudited)
| | | | | |
| 4. | Acquisitions and Other Investments |
Business Acquisition
On September 1, 2023, WEX Health completed the acquisition from Ascensus, LLC (the “Ascensus Acquisition”) of certain entities (the “Ascensus Acquired Entities”), which comprised the health and benefits business of Ascensus and are technology-enabled providers of employee health benefit accounts including HSAs, FSAs, and other benefit accounts. The Ascensus Acquisition expands WEX’s current footprint in the Benefits segment, while also enhancing and expanding Affordable Care Act compliance and verification capabilities. Pursuant to the terms of the agreement, WEX Health consummated the acquisition for total consideration of approximately $182.3 million, subject to certain working capital and other adjustments.
The following representstable below summarizes the components and finalpreliminary allocation of fair value to the assets acquired and liabilities assumed on the date of acquisition under the acquisition method of accounting. These fair values may continue to be revised during the measurement period as third-party valuations on the intangible assets are finalized, further information becomes available and additional analyses are performed, and those adjustments could have a material impact on the purchase price:price allocation.
|
| | | | | | | | | | | |
| | As Reported December 31, 2016 | | Measurement Period Adjustments | | As Reported, Final |
| Total consideration, net of cash acquired | $ | 1,444,235 |
| | $ | — |
| | $ | 1,444,235 |
|
| Less: | | | | | |
| Accounts receivable | 162,684 |
| | — |
| | 162,684 |
|
| Property and equipment | 2,387 |
| | 1 |
| | 2,388 |
|
| Customer relationships (a)(b) | 842,700 |
| | (1,300 | ) | | 841,400 |
|
| Developed technologies (a)(c) | 32,120 |
| | — |
| | 32,120 |
|
| Trademarks and trade names (a)(d) | 13,700 |
| | — |
| | 13,700 |
|
| Deferred income tax assets | 34,992 |
| | 6,352 |
| | 41,344 |
|
| Other assets | — |
| | 739 |
| | 739 |
|
| Accounts payable | (153,777 | ) | | 248 |
| | (153,529 | ) |
| Accrued expenses | (128,267 | ) | | 9,361 |
| | (118,906 | ) |
| Deferred income tax liabilities | (91,194 | ) | | 28,071 |
| | (63,123 | ) |
| Recorded goodwill (a) | $ | 728,890 |
| | $ | (43,472 | ) | | $ | 685,418 |
|
(a)$1,235,331 in goodwill | | | | | | | | |
| (In millions) | | |
| Cash consideration transferred, net of $26.7 million in cash and restricted cash acquired | | $ | 155.7 | |
| Less: | | |
| Accounts receivable | | 7.3 | |
Customer relationships(1)(5) | | 52.7 | |
Developed technology(2)(5) | | 6.6 | |
Strategic partner relationships(3)(5) | | 14.0 | |
Custodial rights(4)(5) | | 23.2 | |
| Other assets | | 3.8 | |
| Accrued expenses and other current liabilities | | (6.5) | |
| | |
| Restricted cash payable | | (25.7) | |
| Other liabilities | | (2.7) | |
| Recorded goodwill | | $ | 83.0 | |
(1) Weighted average life - 5.3 years
(2) Weighted average life - 2.2 years
(3) Weighted average life - 1.2 years
(4) Weighted average life - 4.9 years
(5) The weighted average useful life of all amortizable intangible assets recorded fromacquired in this business combination were allocatedis 4.4 years.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring the business. The goodwill recognized as a result of the acquisition is expected to our Fleet Solutions segment;be deductible for tax purposes.
Since the remaining $337,307 was allocated to our Travel and Corporate Solutions segment.
(b)Weighted average life – 8.1 years.
(c)Weighted average life – 2.0 years.
(d)Weighted average life – 7.7 years.
Atacquisition date through September 30, 2017, estimated amortization expense2023, the Ascensus Acquired Entities have not contributed significantly to the Company’s total revenues and net income before taxes. No pro forma information has been included in these financial statements, as the operations of the Ascensus Acquired Entities for the period that they were not part of the Company are not material to the Company’s revenues, net income or earnings per share.
The Company incurred and expensed costs directly related to the definite-lived intangible assets listed above for eachcompleted acquisitions of the next five fiscal years and thereafter is as follows:
|
| | | |
| Remaining 2017 | $ | 21,344 |
|
| 2018 | $ | 80,987 |
|
| 2019 | $ | 74,548 |
|
| 2020 | $ | 68,685 |
|
| 2021 | $ | 60,654 |
|
| 2022 | $ | 53,537 |
|
| Thereafter | $ | 427,408 |
|
The pro forma financial information presented below includes the effects of the EFS acquisition as if it had been consummated on January 1, 2015. These pro forma results have been calculated after applying the Company's accounting policies and adjusting results to reflect the intangible amortization and interest expense associated with the 2016 Credit Agreement used to fund the acquisition and related income tax results assuming they were applied and incurred since January 1, 2015. As a result, $11,903 and $18,497 in transaction costs, which are directly attributable to the acquisition, have been excluded from pro forma results for$4.3 million during the three and nine months ended September 30, 2016. The pro forma results of operations do not include any cost savings or other synergies that may result from2023. Acquisition-related costs are included within general and administrative expenses in the acquisition or any estimated integration costs that have been or will be incurred by the Company. Accordingly, the following pro forma information is not necessarily indicative of either the future results of operations or results that would have been achieved if the acquisition had taken place at the beginning of 2015. The operations of EFS contributed revenues of approximately $46,957 and $135,578 and net loss before taxes of approximately $8,058 and $28,070 for the three and nine months ended September 30, 2017, respectively, to the Company's unaudited condensed consolidated statementsstatement of income.operations.
WEX INCINC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)(unaudited)
(unaudited)
Asset Acquisition
TheOn January 3, 2023, the Company completed its acquisition of 100 percent of the equity of a newly formed Indian entity, created to carve out the workforce of an existing computer software design and development business. In exchange for total consideration of $6.0 million, the Company acquired an assembled workforce of approximately 180 employees and miscellaneous other assets. This assembled workforce represents additional resources to advance our technological capabilities and service offerings to our customers. Consideration of $4.5 million was payable upon the closing date, with up to $1.5 million payable within eighteen months following represents unaudited pro forma operational results as if the acquisition had occurred January 1, 2015:date, dependent on the calculation of employee attrition as defined per the share purchase agreement. This acquisition has been accounted for as an asset acquisition, resulting in the capitalization of a workforce intangible asset of $8.1 million, inclusive of a $2.1 million gross up resulting from the recognition of a deferred tax liability related to the acquisition date difference between the assigned value of the intangible asset and its tax basis. The workforce intangible asset has an estimated useful life of 4.0 years. Acquisition costs were immaterial.
|
| | | | | | |
| | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2016 |
| Total revenues | $ | 287,756 |
| $ | 799,039 |
|
| Net earnings attributable to shareholders | $ | 27,973 |
| $ | 48,584 |
|
| Net income attributable to shareholders per share: | | |
| Basic | $ | 0.65 |
| $ | 1.14 |
|
| Diluted | $ | 0.65 |
| $ | 1.13 |
|
|
| | | | |
4.5. | Accounts Receivable, Net |
Payment Terms
In general,Accounts receivable consists of amounts billed to and due from customers across a wide range of industries and other third parties. The Company often extends short-term credit to cardholders by paying the Company’s trade receivables providemerchant for payment terms of 30 days or less. Receivables not paid within the terms ofpurchase price less the customer agreement are generally subject to late fees based uponit retains and records as revenue, then subsequently collecting the outstanding customer receivable balance.
total purchase price from the cardholder. The Company also extends revolving credit to certain small fleet customers. These accounts are also subject to late fees and balances that are not paid in full are subject to interest charges based on the revolving balance.fleets. The Company had approximately $11,200$156.1 million and $3,400$157.8 million in gross receivables with revolving credit balances as of September 30, 20172023 and December 31, 2016,2022, respectively.
The allowance for accounts receivable consists of reserves for both credit and fraud losses, reflecting management’s current estimate of uncollectible balances on its accounts receivable. The following tables present changes in the accounts receivable allowances by portfolio segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 |
| (In millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| | | | | | | |
| | | | | | | |
| Balance, beginning of period | $ | 96.2 | | | $ | 14.5 | | | $ | 1.3 | | | $ | 112.0 | |
Provision for credit losses1 | 12.2 | | | (3.9) | | | 1.1 | | | 9.4 | |
Charges to other accounts2 | 6.8 | | | — | | | 0.5 | | | 7.3 | |
| Charge-offs | (32.1) | | | (0.5) | | | (0.2) | | | (32.8) | |
| Recoveries of amounts previously charged-off | 5.6 | | | — | | | — | | | 5.6 | |
| | | | | | | |
| Currency translation | (0.3) | | | (0.2) | | | — | | | (0.5) | |
| Balance, end of period | $ | 88.4 | | | $ | 9.9 | | | $ | 2.7 | | | 101.0 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| (In millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| | | | | | | |
| | | | | | | |
| Balance, beginning of period | $ | 89.2 | | | $ | 10.4 | | | $ | 1.0 | | | $ | 100.6 | |
Provision for credit losses1 | 53.0 | | | 0.7 | | | 0.3 | | | 54.0 | |
Charges to other accounts2 | 11.3 | | | — | | | — | | | 11.3 | |
| Charge-offs | (65.1) | | | (0.8) | | | (0.2) | | | (66.0) | |
| Recoveries of amounts previously charged-off | 3.6 | | | — | | | — | | | 3.6 | |
| Currency translation | (0.6) | | | (0.6) | | | — | | | (1.2) | |
| Balance, end of period | $ | 91.4 | | | $ | 9.7 | | | $ | 1.2 | | | $ | 102.3 | |
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Nine Months Ended September 30, 2023 |
| (In millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| Balance, beginning of period | $ | 94.6 | | | $ | 14.4 | | | $ | 0.8 | | | $ | 109.9 | |
Provision for credit losses1 | 78.5 | | | (2.5) | | | 1.5 | | | 77.5 | |
Charges to other accounts2 | 22.1 | | | — | | | 0.6 | | | 22.6 | |
| Charge-offs | (122.8) | | | (2.0) | | | (0.2) | | | (125.0) | |
| Recoveries of amounts previously charged-off | 16.3 | | | — | | | — | | | 16.3 | |
| | | | | | | |
| Currency translation | (0.3) | | | — | | | — | | | (0.3) | |
| Balance, end of period | $ | 88.4 | | | $ | 9.9 | | | $ | 2.7 | | | $ | 101.0 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| (In millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| Balance, beginning of period | $ | 55.8 | | | $ | 9.9 | | | $ | 0.6 | | | $ | 66.3 | |
Provision for credit losses1 | 118.7 | | | 2.1 | | | 1.1 | | | 121.9 | |
Charges to other accounts2 | 29.9 | | | 0.2 | | | (0.1) | | | 30.0 | |
| Charge-offs | (120.4) | | | (1.2) | | | (0.4) | | | (122.1) | |
| Recoveries of amounts previously charged-off | 8.8 | | | — | | | — | | | 8.8 | |
| Currency translation | (1.4) | | | (1.3) | | | — | | | (2.6) | |
| Balance, end of period | $ | 91.4 | | | $ | 9.7 | | | $ | 1.2 | | | $ | 102.3 | |
1 The provision is comprised of estimated credit losses based on the Company’s loss-rate experience and includes adjustments required for forecasted credit loss information. The provision for credit losses reported within this table also includes the provision for fraud losses.
2 Consists primarily of charges to other accounts. The Company earns revenue by assessing monthly finance fees on accounts with overdue balances. These fees are recognized as revenue at the time the fees are assessed. The finance fee is calculated using the greater of a minimum charge or a stated late fee rate multiplied by the outstanding balance that is subject to a late fee charge. On occasion, these fees are waived to maintain relationship goodwill. Charges to other accounts substantially represent the offset against the late fee revenue recognized when the Company establishes a reserve for such waived amounts.
Concentration of Credit Risk
The receivables portfolio primarily consists of a large group of homogeneous smaller balances from customers across a wide range of industries, which are collectively evaluated for impairment. No oneindividual customer constitutes more thanhad a receivable balance representing 10 percent or more of the outstanding receivables balance at September 30, 2017. One customer represented 11 percent of the outstanding receivables balance at2023 or December 31, 2016.2022. The following table presents the delinquency statusoutstanding balance of trade accounts receivable that are less than 30 and 60 days past due, shown in each case as a percentage of total trade accounts receivable:
| | | | | | | | | | | |
| Delinquency Status | September 30, 2023 | | December 31, 2022 |
| Less than 30 days past due | 98 | % | | 98 | % |
| Less than 60 days past due | 99 | % | | 99 | % |
|
| | | | | |
| | September 30, |
| Delinquency Status | 2017 | | 2016 |
| Current–29 days past due | 95 | % | | 93 | % |
| Current–59 days past due | 97 | % | | 97 | % |
| | | | | |
| 6. | Repurchases of Common Stock |
Reserves for Accounts ReceivableUnder share buyback plans, which may be authorized by our board of directors from time to time, the Company may repurchase up to specified dollar values of shares of its common stock through open market purchases, privately negotiated transactions, block trades or otherwise.
Receivables are generally written-off when they are 150 days past due or upon declarationDuring the three and nine months ended September 30, 2023, the Company repurchased approximately 0.3 million and 0.8 million shares, respectively, pursuant to a previously approved and announced repurchase program. The total repurchases were recorded as treasury stock of bankruptcy$146.0 million in our condensed consolidated balance sheet. Such cost reflects the applicable one percent excise tax imposed by the customer. The reserve for credit losses is calculated by an analytic model that also takes into account other factors, suchInflation Reduction Act of 2022 on the net value of certain stock repurchases made after December 31, 2022. During the three and nine months ended September 30, 2022, the Company repurchased approximately 0.4 million and 1.0 million shares, respectively, pursuant to a previously approved and announced repurchase program, which was collectively recorded as the actual charge-offs for the preceding reporting periods, expected charge-offs and recoveries for the subsequent reporting periods, a reviewtreasury stock of past due accounts receivable balances, changes$149.6 million in customer payment patterns, known fraudulent activity in the portfolio, as well as leading economic and market indicators.our condensed consolidated balance sheet.
The following table presents changes in reserves for accounts receivable: |
| | | | | | | |
| | Nine Months Ended September 30, |
| 2017 | | 2016 |
| Balance, beginning of year | $ | 20,092 |
| | $ | 13,832 |
|
| Provision for credit losses | 47,927 |
| | 19,849 |
|
| Charges to other accounts | 12,221 |
| | — |
|
| Charge-offs | (53,044 | ) | | (24,825 | ) |
| Recoveries of amounts previously charged-off | 5,085 |
| | 4,980 |
|
| Currency translation | 431 |
| | 151 |
|
| Balance, end of period | $ | 32,712 |
| | $ | 13,987 |
|
WEX INCINC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)(unaudited)
(unaudited)
Basic earnings per share is computed by dividing net earningsincome attributable to shareholders by the weighted average number of shares of common stock and vested deferred stock unitsDSUs outstanding during the year. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that diluted earnings per share includes the denominator is increased forimpact of convertible securities under the “if-converted” method if the effect of such securities would be dilutive and includes the assumed exercise of dilutive options, the assumed issuance of unvested restricted stock units and deferred stock units, and unvestedRSUs, performance-based restricted stock unitsawards for which the performance condition has been met as of the date of determination and contingently issuable shares that would be issuable if the end of the reporting period was the end of the contingency period, using the treasury stock method unless the effect is anti-dilutive. The treasury stock method assumes that proceeds, including cash received from the exercise of employee stock options and the totalaverage unrecognized compensation expense for unvested share-based compensation awards, would be used to purchase the Company'sCompany’s common stock at the average market price during the period. Prior to the January 2017 adoption of ASU 2016-09, the treasury stock method also included excess tax benefits in its proceeds calculation.
The following table summarizes net earningsincome attributable to shareholders and reconciles basic and diluted shares outstanding used in the earnings per share computations:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions) | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | |
| | | | | | | |
| Net income (loss) attributable to shareholders | $ | 18.4 | | | $ | (44.1) | | | $ | 181.7 | | | $ | 112.7 | |
| | | | | | | |
| Weighted average common shares outstanding – Basic | 42.9 | | | 44.2 | | | 43.0 | | | 44.6 | |
Dilutive impact of share-based compensation awards1 | 0.5 | | | — | | | 0.5 | | | 0.3 | |
| | | | | | | |
Weighted average common shares outstanding – Diluted 2 | 43.4 | | | 44.2 | | | 43.5 | | | 45.0 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net earnings attributable to shareholders | $ | 33,971 |
| | $ | 19,696 |
| | $ | 80,462 |
| | $ | 55,350 |
|
| | | | | | | | |
| Weighted average common shares outstanding – Basic | 43,014 |
| | 42,788 |
| | 42,963 |
| | 40,126 |
|
| Dilutive impact of share-based compensation awards | 87 |
| | 83 |
| | 129 |
| | 73 |
|
| Weighted average common shares outstanding – Diluted | 43,101 |
| | 42,871 |
| | 43,092 |
| | 40,199 |
|
1 For both the three and nine months ended September 30, 2017 and September 30, 2016, an immaterial number2023, 0.4 million of outstanding share-based compensation awards were excluded from the computation of diluted earnings per share becauseunder the treasury stock method, as the effect of including these awardsthose shares would be anti-dilutive. During both the three and nine months ended September 30, 2022, 0.6 million of outstanding share-based compensation awards were excluded from the computation of diluted earnings per share under the treasury stock method, as the effect of including those shares would be anti-dilutive. Additionally, 0.3 million incremental shares, which would otherwise have been dilutive but for the Company’s net loss position, are excluded from the table above for the three months ended September 30, 2022 as the effect of including those shares would be anti-dilutive.
2 Under the “if-converted” method, shares of the Company’s common stock associated with the assumed conversion of the Convertible Notes were excluded from diluted shares for the three and nine months ended September 30, 2023 and 2022 as the effect of including such shares would have been anti-dilutive. During August 2023, the Company repurchased all of the Company’s outstanding Convertible Notes. For further information regarding the Convertible Notes and their repurchase and cancellation, see Note 10, Financing and Other Debt.
|
| | | | |
6.8. | Derivative Instruments |
The Company is exposed to certain market risks relating to its ongoing business operations. From time to time, the Company enters into derivative instrument arrangements to manage various risks including interest rate risk, foreign exchange risk and commodity price risk. None of these derivative instruments qualify for hedge accounting treatment.
Interest Rate Swap Agreementsrate swap contracts
In November 2016, theThe Company has entered into three forward-fixed interest rate swap agreements to manage the interest rate risk associated with the Company's outstanding variable-interest rate borrowings. Under these swap agreements, the Company receives variable interest of 1-month LIBOR and pays fixed rates between 0.896% to 1.125%, reducing the variability of the future interest payments associated with a portion of the Company's borrowings.
The terms of the interest rate swap agreements are as follows:
|
| | | | | |
| | Tranche A | | Tranche B | | Tranche C |
| Notional amount at inception | $400,000 | | $150,000 | | $250,000 |
| Amortization | 5% annually | | N/A | | N/A |
| Maturity date | December 31, 2020 | | December 31, 2020 | | December 31, 2018 |
| Fixed interest rate | 1.108% | | 1.125% | | 0.896% |
See Note 9, Fair Value for more information regarding the valuation of the Company's interest rate swaps.
Foreign Currency Exchange Program
The Company utilizes a limited foreign currency exchange hedging program, entering into short-term foreign currency swaps to convert the foreign currency exposures of certain foreign currency denominated intercompany loans and investments to
WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
the base currency. The Company will continue to monitor its foreign currency exposure for discrete items and may, from time to time, hedge certain foreign currency transactions.
The following table summarizes the contracts related to foreign currency swaps, which settle in the base currency at various dates within 5 days after quarter-end:
|
| | | | | | | |
| | Aggregate Notional Amount |
| | September 30, |
| | 2017 | | 2016 |
| Australian dollar | A$ | 10,000 |
| | A$ | 10,000 |
|
The amount of gains and losses associated with these foreign currency swaps were not material for the three and nine months ended September 30, 2017 and September 30, 2016.
Fuel Derivatives Program
In prior years, the Company entered into put and call option contracts related to the Company’s commodity price risk. These put and call option contracts, or fuel price derivative instruments, were designed to reduce the volatility of the Company’s cash flows associated with its fuel price-related earnings exposure in North America. During the fourth quarter of 2014, the Company suspended purchases under its fuel derivatives program due to unusually low prices in the commodities market. During the first quarter of 2016, the Company held fuel price sensitive derivative instruments to hedge approximately 20 percent of its anticipated U.S. fuel-price related earnings exposure based on assumptions at time of purchase and all of these positions were settled as of March 31, 2016. The Company is no longer hedged for changes in fuel prices. Management will continue to monitor the fuel price market and evaluate its alternatives as it relates to this hedging program.
Consolidated Derivative Instruments
The following table presents information on the location and fair value of asset derivatives recorded in the unaudited condensed consolidated balance sheets:
|
| | | | | | | | | | |
| Derivatives Not Designated as Hedging Instruments | | Balance Sheet Location | | September 30, 2017 | | December 31, 2016 |
| Interest rate swaps | | Other assets | | $ | 12,059 |
| | $ | 12,908 |
|
Given that the Company's commodity contracts and interest rate swap agreements are not designated as hedging instruments, changes in the fair value of these instruments, which represent unrealized gains and losses, are recognized in the unaudited condensed consolidated statements of income. The following table presents information on the amounts of derivative gains and losses and the locations in the unaudited condensed consolidated statements of income:
|
| | | | | | | | | | | | | | | | | | |
| Derivatives Not Designated as Hedging Instruments | | Location of Gain (Loss) on Derivatives Recognized in Income | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Commodity contracts | | Net realized and unrealized gain on fuel price derivatives | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 711 |
|
| Interest rate swap agreements - unrealized portion | | Net unrealized loss on interest rate swap agreements | | $ | (150 | ) | | $ | — |
| | $ | (849 | ) | | $ | — |
|
| Interest rate swap agreements - realized portion | | Financing interest income (expense) | | $ | 377 |
| | $ | — |
| | $ | (243 | ) | | $ | — |
|
|
| |
7. | Financing and Other Debt |
2016 Credit Agreement
On July 1, 2016, the Company entered into the 2016 Credit Agreement, which replaced the 2014 Credit Agreement. The 2016 Credit Agreement provides for term loan facilities and a secured revolving credit facility, with a sublimit for letters of credit and swingline loans. Under this agreement, $925,000 matures on July 1, 2021 and $1,200,000 matures on July 1, 2023. Prior to maturity, amounts under the credit facility will be reduced by mandatory payments. Additional loans may be made available under
WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
the 2016 Credit Agreement upon request of the Company subject to specified terms and conditions, including receipt of lender commitments. Proceeds from the 2016 Credit Agreement may be used for working capital purposes, acquisitions, payment of dividends and other restricted payments, refinancing of indebtedness and other general corporate purposes.
As of September 30, 2017, the Company had $149,423 of borrowings against its $470,000 secured revolving credit facility, or approximately $320,000 of availability under the 2016 Credit Agreement, subject to the covenants as described below. The outstanding amortizing term loans under the 2016 Credit Agreement totaled $1,611,563 at September 30, 2017. As of September 30, 2017 and December 31, 2016, amounts outstanding under the 2016 Credit Agreement bore a weighted average effective interest rate of 3.9 percent and 4.2 percent, respectively.
As of both September 30, 2017 and December 31, 2016, the Company has posted approximately $13,000 in letters of credit as collateral for lease agreements and virtual card and fuel payment processing activity at its foreign subsidiaries.
Effective July 3, 2017, the Company repriced the secured term loans under the 2016 Credit Agreement (the "2016 First Amendment"), which reduced the applicable interest rate margin at current borrowing levels for both LIBOR borrowings and base rate borrowings for the Company's tranche A term loans and tranche B term loans. The applicable interest rate margin for the tranche A term loans will continue to be determined based on the Company's consolidated leverage ratio, with the interest rate margin initially set at 2.75% for LIBOR borrowings, and 1.75% for base rate borrowings. The applicable interest rate margin for the tranche B term loans will no longer be determined based on the Company's consolidated leverage ratio and will instead be set at 2.75% for LIBOR borrowings, and 1.75% for base rate borrowings. The consolidated leverage ratio as defined in the 2016 Credit Agreement (i.e. consolidated funded indebtedness less up to $350,000 in permitted securitization transactions of the Company and its subsidiaries to consolidated EBITDA) was also modified for purposes of calculating the interest rate margin for tranche A term loans and revolving loans and determining compliance with the financial covenant by allowing the Company to exclude up to $75 million of certain corporate cash balances for purposes of determining consolidated funded indebtedness.
After giving effect to the terms of the 2016 First Amendment, amounts outstanding under the 2016 Credit Agreement were repriced to bear interest at a rate equal to, at the Company’s option, (a) the Eurocurrency Rate, as defined in the 2016 Credit Agreement, plus a margin of between 1.75% to 3.25% (2.75% at September 30, 2017) with respect to the revolving credit facility, between 1.75% to 2.75% (2.25% at September 30, 2017) with respect to the tranche A term loan facility, which represents a reduction of 50 basis points and 2.75% with respect to the tranche B term loan facility, which represents a reduction of 75 basis points (with the Eurocurrency Rate subject to a 0.0% floor), in each case, based on the consolidated leverage ratio or (b) the highest of (i) the Federal Funds Rate plus 0.50%, (ii) the prime rate announced by Bank of America, and (iii) the Eurocurrency Rate plus 1.00%, in each case plus a margin of 0.75% to 2.25% (1.75% at September 30, 2017) with respect to the revolving credit facility, 0.75% to 1.75% (1.25% at September 30, 2017) with respect to the tranche A term loan facility and 1.75% with respect to the tranche B term loan facility, with the margin determined in the case of the revolving credit facility and the tranche A term loan facility based on the consolidated leverage ratio. In November 2016, the Company entered into three interest rate swap agreements to manage the interest rate risk associated with its outstanding variable-interest rate borrowings. Such contracts are intended to economically hedge the reference rate component of future interest payments associated with outstanding borrowings under the 2016Company’s Amended and Restated Credit Agreement.
On April 26, 2023, the Company’s existing interest rate swap contracts were amended primarily to change the floating rate index from the one-month USD LIBOR to the one-month Term SOFR. In conjunction with the amendments to the floating rate index, the fixed interest rates payable by WEX under the contracts were also adjusted. There were no changes to notional amounts or maturity dates as a result of these amendments.
A summary of the Company’s amended interest rate swap contracts with a collective notional amount of $1.1 billion outstanding as of September 30, 2023 is as follows:
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contract Inception | | Contract End | | Fixed Interest Rates Payable by WEX (prior to amendment)1 | | Fixed Interest Rates Payable by WEX
(post amendment) | | Notional Amount (in millions) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| March 2020 | | December 2023 | | 1.862% | | 1.789%2 | | $ | 200.0 | | |
| May 2021 | | May 2024 | | 0.435% | | 0.459%3 | | $ | 150.0 | | |
| May 2021 | | May 2024 | | 0.440% | | 0.367%2 | | $ | 150.0 | | |
| May 2021 | | May 2025 | | 0.678% | | 0.648%2 | | $ | 300.0 | | |
| May 2021 | | May 2026 | | 0.909% | | 0.836%2 | | $ | 150.0 | | |
| May 2021 | | May 2026 | | 0.910% | | 0.883%2 | | $ | 150.0 | | |
1 Counterparties paid floating rate equal to the one-month USD LIBOR.2 Counterparties pay floating rate equal to the one-month USD-SOFR CME Term.
3 Counterparty pays floating rate equal to the one-month USD-SOFR CME Term, plus a spread of 0.114 percent.
The following table presents information on the location and amounts of interest rate swap gains and losses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Derivatives Not Designated as Hedging Instruments | Location of (Loss) Gain Recognized in the Condensed Consolidated Statement of Operations | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | | | |
| Interest rate swap contracts – unrealized portion | | Net unrealized gain (loss) on financial instruments | | $ | (6.9) | | | $ | 24.6 | | | $ | (19.4) | | | $ | 93.5 | |
Interest rate swap contracts –
realized portion | | Financing interest expense | | $ | 12.3 | | | $ | 3.7 | | | $ | 36.0 | | | $ | (5.2) | |
| | | | | | | | | | |
Derivative instruments and their related gains and losses are reported within cash flows from operating activities within the condensed consolidated statements of cash flows. See Note 6,13, Financial Instruments − Fair Value and Concentrations of Credit Risk, for more information regarding the valuation of the Company’s derivatives.
WEX Bank’s regulatory status enables it to raise capital to fund the Company’s working capital requirements by issuing deposits, subject to FDIC rules governing minimum financial ratios. See Note 19, Supplementary Regulatory Capital Disclosure, for further information concerning these FDIC requirements.
WEX Bank accepts its deposits through certain customers as required collateral for credit that has been extended (“customer deposits”) and contractual arrangements for brokered and non-brokered certificate of deposit and money market deposit products. Additionally, WEX Bank holds deposits for the benefit of WEX Inc.’s HSA customers subject to the terms of a deposit agreement.
Customer deposits are generally non-interest bearing, certificates of deposit are issued at fixed rates, money market deposits are issued at both fixed and variable interest rates based on the Federal Funds rate and HSA deposits are issued at rates as defined within the consumer account agreements.
The following table presents the composition of deposits, which are classified as short-term or long-term based on their contractual maturities:
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
| | | | | | | | | | | |
| (In millions) | September 30, 2023 | | December 31, 2022 |
| Customer deposits | $ | 227.6 | | | $ | 146.7 | |
Contractual deposits with maturities within 1 year1,2 | 1,037.3 | | | 770.7 | |
Interest-bearing money market deposits1 | 217.9 | | | 157.2 | |
HSA deposits3 | 2,770.0 | | | 2,070.0 | |
| Short-term contractual deposits | $ | 4,252.8 | | | $ | 3,144.6 | |
Contractual deposits with maturities greater than 1 year and less than 5 years1,2 | 115.5 | | | 334.2 | |
| Total deposits | $ | 4,368.3 | | | $ | 3,478.8 | |
| | | |
| Weighted average cost of HSA deposits outstanding | 0.11 | % | | 0.04 | % |
| Weighted average cost of funds on contractual deposits outstanding | 4.34 | % | | 1.48 | % |
| Weighted average cost of interest-bearing money market deposits outstanding | 5.47 | % | | 4.45 | % |
| | | |
1 As of September 30, 2023 and December 31, 2022, all certificates of deposit and money market deposits were in denominations of $250,000 or less, corresponding to FDIC deposit insurance limits.
2 Includes certificates of deposit and certain money market deposits, which have a fixed maturity and substantially fixed interest rates.
3 HSA deposits are recorded within short-term deposits on the condensed consolidated balance sheets as the funds can be withdrawn by the account holders at any time.
| | | | | |
| 10. | Financing and Other Debt |
The following tables summarize the Company’s total outstanding debt as of September 30, 2023 and December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2023 | | As of December 31, 2022 |
| (In millions) | Balance Outstanding | | Interest Rate | | Balance Outstanding | | Interest Rate |
| Short term debt: | | | | | | | |
| Securitized debt | $ | 99.9 | | | 5.80 | % | | $ | 110.6 | | | 3.83 | % |
| Participation debt | 41.5 | | | 7.72 | % | | 39.0 | | | 6.64 | % |
| Borrowed federal funds | 760.0 | | | 5.43 | % | | — | | | — | % |
| Current portion of long-term debt (net of $7.5 million in unamortized debt issuance costs/discounts) | 55.9 | | | ** | | 53.1 | | | ** |
| Total short term debt, net | $ | 957.3 | | | | | $ | 202.6 | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
** Provided for the total Amended and Restated Credit Agreement borrowings below.
| | | | | | | | | | | |
| Balance Outstanding at: |
| (In millions) | September 30, 2023 | | December 31, 2022 |
| Long-term debt: | | | |
| Amended and Restated Credit Agreement: | | | |
Tranche A Term Loans due April 20261 | $ | 856.1 | | | $ | 892.8 | |
Tranche B Term Loans due April 20282 | 1,406.0 | | | 1,416.8 | |
Borrowings on Revolving Credit Facility due April 20261 | 471.6 | | | — | |
Total borrowings under the Amended and Restated Credit Agreement3 | 2,733.7 | | | 2,309.6 | |
| 6.5% Convertible Notes due July 2027 | — | | | 310.0 | |
Total long-term debt4 | 2,733.7 | | | 2,619.6 | |
| Less total unamortized debt issuance costs/discounts | (27.7) | | | (44.3) | |
| Less current portion of long-term debt (net of $7.5 million in unamortized debt issuance costs/discounts) | (55.9) | | | (53.1) | |
| Long-term debt, net | $ | 2,650.1 | | | $ | 2,522.2 | |
1 Bears interest at variable rates, at the Company’s option, plus an applicable margin determined based on the Company’s consolidated leverage ratio. Outstanding borrowings under the Revolving Credit Facility are classified as long-term given they can be rolled forward with interest rate resets through maturity.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2 Bears interest at variable rates, at the Company’s option, plus an applicable margin, which is fixed at 1.25 percent for base rate borrowings and 2.25 percent with respect to Term SOFR borrowings.
3 As of September 30, 2023 and December 31, 2022, amounts outstanding under the Amended and Restated Credit Agreement bore a weighted average effective interest rate of 7.3 percent and 6.4 percent, respectively. The Company maintains interest rate swap contracts to manage the interest rate risk associated with its outstanding variable-interest rate borrowings. See Note 8, Derivative Instruments for further discussion.
In addition,4 See Note 13, Financial Instruments − Fair Value and Concentrations of Credit Risk for information regarding the fair value of the Company’s debt.
| | | | | | | | | | | |
| (In millions) | September 30, 2023 | | December 31, 2022 |
| Supplemental information under Amended and Restated Credit Agreement: | | | |
Letters of credit1 | $ | 33.2 | | | $ | 31.1 | |
Remaining borrowing capacity on Revolving Credit Facility2 | $ | 925.2 | | | $ | 898.9 | |
1 Primarily collateralizing Corporate Payments processing activity.
2 September 30, 2023 balance is reflective of the increased commitments resulting from the Third Amendment to Amended and Restated Credit Agreement entered into September 26, 2023. Borrowing capacity is contingent on maintaining compliance with the financial covenants as defined in the Company’s Amended and Restated Credit Agreement. The Company has agreed to paypays a quarterly commitment fee at a rate per annum ranging from 0.30%0.25 percent to 0.50% (0.45% at September 30, 2017) based on the consolidated leverage ratio0.50 percent of the daily unused portion of the 2016Revolving Credit Agreement. TheFacility (which was 0.25 percent at September 30, 2023 and 0.30 percent at December 31, 2022) determined based on the Company’s consolidated leverage ratio.
Amended and Restated Credit Agreement
As part of the Amended and Restated Credit Agreement, we have senior secured tranche A term loans (the “Tranche A Term Loans”), senior secured tranche B term loan facility was issued withloans (the “Tranche B Term Loans”) and revolving credit commitments. On September 26, 2023, the Company entered into the Third Amendment to Amended and Restated Credit Agreement, which increased the revolving credit commitments from an original issue discountaggregate amount of 1.00%.
As the debt repricings$930.0 million to $1,430.0 million under the 2016 First AmendmentCompany’s secured revolving credit facility (the “Revolving Credit Facility”). No other substantive changes were not considered substantially different,made to the Company applied modification accountingAmended and no gain or loss was recognized as a result of the debt modification. Amounts paidRestated Credit Agreement as part of this repricing were not material.amendment.
On October 30, 2017,April 24, 2023, the Company’s Amended and Restated Credit Agreement was amended solely for the purpose of replacing the current reference rate with the USD LIBOR successor rate, SOFR (including an applicable credit spread adjustment). On August 10, 2023, the Amended and Restated Credit Agreement was further amended solely to modify the definition of Operating Indebtedness (as defined in the Amended and Restated Credit Agreement) to include any indebtedness incurred by certain subsidiaries of the Company added $100,000pursuant to the BTFP. Under the Amended and Restated Credit Agreement, Operating Indebtedness is excluded from our Consolidated Funded Indebtedness, which is used to calculate the Company’s Consolidated Leverage Ratio (all capitalized terms in this sentence are as defined in the Amended and Restated Credit Agreement). No other substantive changes were made to the Amended and Restated Credit Agreement as part of capacity underthese amendments.
Convertible Notes
On August 11, 2023 (the “Repurchase Date”), the Company entered into a privately negotiated repurchase agreement with the holder of our secured revolving credit facility. SeeConvertible Notes, WP Bronco Holdings, LLC (the “Seller”), an affiliate of funds managed by Warburg Pincus LLC (a related party), to repurchase all of the outstanding $310.0 million aggregate principal amount of the Company’s Convertible Notes at 119 percent of par for a total purchase price of $370.4 million, inclusive of accrued and unpaid interest from and including July 15, 2023, to, but excluding, the Repurchase Date. At the time of repurchase, the net carrying amount of the Convertible Notes was $298.8 million, resulting in a loss on extinguishment of $70.1 million, which has been recorded within nonoperating expense on the condensed consolidated statement of operations for the three and nine months ended September 30, 2023. Upon repurchase, the obligations of the Company to the Seller of the Notes were satisfied in full and the Convertible Notes were canceled by the trustee at the instruction of the Company.
As of December 31, 2022, unamortized debt issuance costs and debt discount were $12.7 million. The Convertible Notes had an effective interest rate of 7.5 percent at December 31, 2022 and through the Repurchase Date. The following table sets forth total interest expense recognized for the Convertible Notes:
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In millions) | 2023 | | 2022 | | 2023 | | 2022 |
| Interest on 6.5 percent coupon | $ | 2.3 | | | $ | 5.0 | | | $ | 12.4 | | | $ | 15.1 | |
| Amortization of debt discount and debt issuance costs | 0.3 | | | 0.6 | | | 1.5 | | | 1.7 | |
| $ | 2.6 | | | $ | 5.6 | | | $ | 13.9 | | | $ | 16.8 | |
For additional information regarding the Company’s Convertible Notes, see Part II - Item 8 - Note 16, Subsequent Event, for further discussion.
Financing and Other Debt, Covenants
As more fully described in the Company'sour Annual Report on Form 10-K for the year ended December 31, 2016, the 2016 Credit Agreement and the Indenture contain covenants that limit the Company's and its subsidiaries' ability to (i) incur additional debt, (ii) pay dividends or make other distributions on, redeem or repurchase capital stock, or make investments or other restricted payments, (iii) enter into transactions with affiliates, (iv) dispose of assets or issue stock of restricted subsidiaries or regulated subsidiaries, (v) create liens on assets, or (vi) effect a consolidation or merger or sell all, or substantially all, of the Company’s2022.
WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
assets. As ofThrough September 30, 2017,2023, the Company was in compliance with all material covenants of its 2016 Credit Agreement and the Indenture.
Borrowed Federal Funds
WEX Bank borrows from lines of credit on a federal funds rate basisparty to supplement the financing of its accounts receivable. The Company's federal funds available lines of credit were $246,500 and $250,000, with approximately $28,500 and $0 outstanding as of September 30, 2017 and December 31, 2016, respectively.
Other Debt
WEX Brazil Debt
WEX Brazil hadtwo securitized debt of approximately $11,743 and $30,755 as of September 30, 2017 and December 31, 2016, respectively. This was comprised of credit facilities and loan arrangements related to its accounts receivable, with various maturity dates. The interest rate was 21.4 percent and 19.7 percent as of September 30, 2017 and December 31, 2016, respectively. This debt is recorded in Other debt on the Company’s unaudited condensed consolidated balance sheets for the periods presented.
Participation Debt
WEX Bank maintains agreements with third-party banksMUFG Bank, Ltd., which expire in April 2024, unless otherwise agreed to fund customer balances that exceed WEX Bank's lending limit to an individual customer. Duringin writing by the nine months ended September 30, 2017, the Company increased the funding capacity by $90,000 to $185,000. Associated borrowings carry a variable interest rate of 1 month to 3 month LIBOR plus a margin of 225 basis points. The balance of the debt was approximately $154,521 and $95,000 at September 30, 2017 and December 31, 2016, respectively, and was secured by an interest in the underlying customer receivables. The balance will fluctuate on a daily basis based on customer funding needs. The balance will mature in amounts of $85,000 and $50,000 on May 30, 2018 and December 31, 2021, respectively, with the remaining $19,521 maturing on demand. This debt is recorded in Other debt on the Company’s unaudited condensed consolidated balance sheets for the periods presented.
WEX Brazil Securitization Facility
During the second quarter of 2017, WEX Brazil entered into a securitized debt agreement to sell certain unsecured receivables associated with our salary payment card product to an investment fund managed by an unrelated third-party financial institution.parties. Under the terms of the agreement, the investment fund's purchase price incorporates a discount relative to the face value of the transferred receivables. Additionally, the investment fund compensates WEX Brazil for continuing to service these receivables through their duration, which on average is less than six months.
This securitization arrangement does not meet the derecognition conditions and accordingly WEX Brazil continues to report the transferred receivables in our unaudited condensed consolidated balance sheet with no change in the basis of accounting. Additionally, we recognize the cash proceeds received from the investment fund and record offsetting securitized debt in our unaudited condensed consolidated balance sheet.
During the third quarter of 2017, WEX Brazil transferred approximately $31,200 of receivables to the investment fund for cash proceeds of approximately $27,700. This $3,500 discount is recognized as operating interest in the Company's unaudited condensed consolidated statements of income using the effective interest method over the weighted average term of the salary advances. The Company received approximately $2,000 of servicing fee income upon the sale of these receivables, which is recognized as other revenue in our unaudited condensed consolidated statements of income on a straight-line basis over the anticipated loan servicing period. As of September 30, 2017, the Company recognized approximately $20,000 of both transferred receivables and securitized debt on our unaudited condensed consolidated balance sheet.
Australian Securitization Facility
During the second quarter of 2017, the Company extended an existing securitized debt agreement with the Bank of Tokyo-Mitsubishi UFJ, Ltd through April 2018. Under the terms of the agreement,agreements, each month on a revolving basis, the Company sells certain of its Australian and European receivables to bankruptcy-remote subsidiaries consolidated by the Company's Australian Securitization Subsidiary. The Australian Securitization Subsidiary,Company, which in turn usesuse the receivables as collateral to issue asset-backed commercial paper ("securitized debt") for approximately 85 percent of the securitized receivables. The amountdebt. Amounts collected on the securitized receivables isare restricted to pay the securitized debt and isare not available for general corporate purposes.
WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
The Company pays a variable interest rate on the outstanding balance of the securitized debt based on the Australian Bank Bill Ratevariable interest rates plus an applicable margin. The
During the third quarter of 2023, the Company entered into a new securitized debt facility with Australia and New Zealand Banking Group Limited (“ANZ”). During October 2023, the Company terminated its existing Australian securitized debt agreement with MUFG Bank, Ltd. and the new facility with ANZ became effective. Under the new facility, the Company will continue to pay interest on the outstanding balance of the securitized debt based on a variable interest rate was 2.70plus an applicable margin.
Participation Debt
From time to time, WEX Bank enters into participation agreements with third-party banks to fund customers’ balances that exceed WEX Bank’s lending limit to individual customers. Associated unsecured borrowings generally carry a variable interest rate set according to an applicable reference rate plus a margin, which ranged from 2.25 percent and 2.65to 2.50 percent as of September 30, 20172023 and December 31, 2016, respectively. The Company2022. As of September 30, 2023, the Company’s participation agreements allow for total borrowings of up to $60.0 million and expire at various points up to May 2024, unless otherwise agreed to in writing by the parties.
Borrowed Federal Funds
WEX Bank borrows from short-term uncommitted federal funds lines to supplement the financing of the Company’s accounts receivable. WEX Bank had $83,100 and $78,600$260.0 million in outstanding borrowings under these federal funds lines of securitized debt under this facilitycredit as of September 30, 20172023 and no borrowings as of December 31, 2016, respectively.
European Securitization Facility2022.
On April 7, 2016,March 12, 2023, the Federal Reserve Board announced the BTFP, which provides liquidity to U.S. depository institutions. Under the BTFP, WEX Bank is able to refinance outstanding obligations without penalty. During the third quarter of 2023, the Company entered intorefinanced certain outstanding borrowings through the repayment and subsequent borrowing of $250.0 million. As of September 30, 2023, WEX Bank had $500.0 million in outstanding borrowings under the BTFP, $250.0 million due in June of 2024 with an interest rate of 5.39 percent and $250.0 million due in July of 2024 with an interest rate of 5.36 percent. At September 30, 2023, debt securities with a five year securitized debt agreement withpar value of $800.3 million and fair value of $688.3 million were pledged as collateral.
As of September 30, 2023, WEX Bank pledged $249.1 million of fleet customer receivables held by WEX Bank to the Federal Reserve Bank of Tokyo-Mitsubishi UFJ, Ltd. Under the terms of the agreement, the Company sells certain of its receivables from selected European countries to its European Securitization Subsidiary. The European Securitization Subsidiary, in turn, uses the receivables as collateral to issue securitized debt. The amount collectedfor potential borrowings through the Federal Reserve Bank Discount Window. Amounts that can be borrowed are based on the securitized receivables is restricted to pay the securitized debtamount of collateral pledged and is not available for general corporate purposes. The amounts of receivables to be securitized under this agreement will be determined by management on a monthly basis. The interest rate was 0.42 percent and 0.95 percent$202.3 million as of September 30, 2017 and December 31, 2016, respectively. The Company2023. WEX Bank had $18,800 and $5,700no borrowings outstanding on this line of securitized debt under this facilitycredit through the Federal Reserve Bank Discount Window as of September 30, 20172023 and December 31, 2016, respectively.2022.
Debt Issuance Costs
The following table presents the Company's net debt issuance costs related to its revolving line-of-credit facilities, term loans and notes outstanding:
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Revolving line of credit facility and term loans | $ | 33,514 |
| | $ | 38,334 |
|
Notes outstanding 1 | $ | 3,915 |
| | $ | 4,466 |
|
1 See Note 9, Fair Value for more information regarding the Company's Notes outstanding.
|
| | | | |
8.11. | Off-Balance Sheet Arrangements |
WEX Europe Services and WEX Bank Accounts Receivable Factoring
During the first quarter of 2017, WEX Europe Services ("WES") entered into aand WEX Bank are each party to separate accounts receivable factoring arrangementarrangements with an unrelated third-party financial institution (the "Purchasing Bank")institutions to sell certain of itstheir accounts receivable balances. Each subsidiary continues to service these receivables post-transfer with no participating interest. The Company obtained true-sale opinions from independent attorneys, stating that each respective factoring agreement provides legal isolation upon bankruptcy or receivership under local law. As such, transfers under these arrangements are treated as a sale and are accounted for as a reduction in order to accelerate the collectiontrade accounts receivable because effective control of the Company'sreceivables is transferred to the buyers. Proceeds received, which are recorded net of applicable costs or negotiated discount rates, are recorded in operating activities in the condensed consolidated statements of cash flows. Losses on factoring were $3.0 million and reduce internal costs, thereby improving liquidity.$7.4 million for the three and nine months ended September 30, 2023. For the three and nine months ended September 30, 2022, losses on factoring were immaterial. Losses on factoring are recorded within cost of services in the condensed consolidated statements of operations.
The WEX Europe Services agreement automatically renews each January 1 unless either party gives not less than 90 days written notice of their intention to withdraw. Under this arrangement, the Purchasing Bank establishes a credit limit for each customer account. The factored receivablesagreement, accounts receivable are sold without recourse to the extent that the customer balances are maintained at or below the credit limit established credit limit. Forby the buyer. The Company maintains the risk of default on any customer receivable balances in excess of the Purchasing Bank'sbuyer’s credit limit, the Company maintains the riskwhich were immaterial as of default. We obtained a true sale opinion from an independent attorney, which states that the factoring agreement creates a sale of receivables under local law for amounts transferred both below and above the established credit limits. Additionally, there are no indications of the Company's continuing involvement in the factored receivables. As a result, the Purchasing Bank is deemed the purchaser of these receivables and is entitled to enforce payment of these amounts from the debtor.
This factoring arrangement is accounted for as a sale and accordingly the Company records the receivables sold as a reduction of accounts receivable and proceeds as cash provided by operating activities.September 30, 2023. The Company sold approximately $170,000$139.6 million and $394,000$422.9 million of receivables under this arrangementaccounts receivable during the three and nine months ended September 30, 2017, respectively. Proceeds received2023, respectively, and sold $149.6 million and $454.2 million of accounts receivable during the three and nine months ended September 30, 2022, respectively, under this arrangement.
The WEX Bank agreement extends through August 1, 2024, after which the agreement can be renewed for successive one-year periods assuming WEX Bank provides advance written notice that is accepted by the purchaser. The Company sold $4.0 billion and $9.1 billion of trade accounts receivable during the three and nine months ended September 30, 2023 and $2.3 billion and $4.6 billion during the three and nine months ended September 30, 2022, respectively, under this arrangement.
Benefits Securitization
In April 2023, WEX Health, through a wholly-owned special purpose entity (“SPE”), entered into a receivable securitization facility with an unrelated financial institution. Under the facility, WEX Health sells eligible trade accounts receivables to the SPE, which is a bankruptcy-remote subsidiary. The receivables, once sold to the SPE, are recorded netno longer available to satisfy creditors of applicable expenses,the Company or its subsidiaries in the event of bankruptcy.
In turn, the SPE sells undivided ownership interests in certain of these receivables to the financial institution in exchange for cash equal to the gross receivables transferred. The receivables sold are fully guaranteed by the SPE, which also pledges any unsold receivables as collateral for such obligation.
While WEX Health continues to service the receivables sold to the financial institution under the facility, WEX does not retain effective control of the transferred receivables, derecognizes the assets and accounts for these transfers as sales. The revolving limit of the facility is $35.0 million, with an initial term through April 2026, which can be extended for an additional period of up to three years. The SPE can voluntarily terminate the facility at any time, subject to 30 days’ notice. The SPE pays interest and commissions. This resulted in a loss on factoring of $1,150 and $2,600the amount funded by the financial institution based on variable interest rates, which was immaterial for the three and nine months ended September 30, 2017, respectively, which was recorded in Other expenses in2023 and reflected within operating interest on the unaudited condensed consolidated statementstatements of income. As of September 30, 2017, the Company had associated factoring receivables of approximately $54,000, of which approximately $3,600 wereoperations.
The third-party financial institution has a first priority security interest in excessall assets of the established credit limit. Charge-backs on balances in excessSPE, and the SPE has not granted a security interest to any other parties. In addition, WEX Inc. has provided a performance guarantee to the third-party financial institution with respect to WEX Health’s obligations as originator and servicer under the facility.
The Company sold approximately $43.9 million and $126.1 million of receivables under the credit limit duringsecuritization facility for the three and nine months ended September 30, 2017 were insignificant.
2023, respectively.
WEX INCINC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)(unaudited)
(unaudited)
Non-Bank Custodial HSA Cash Assets
Brazil Accounts Receivable Factoring
During the first quarterAs a non-bank custodian, we contract with depository partners to hold custodial cash assets on behalf of 2017, WEX Brazil entered into a factoring agreement to sell certain unsecured receivables associated with our salary payment card product, without recourse, to an unrelated third-party financial institution. Under the termsindividual account holders. As of the agreement, the Company retains no rights or interest and has no obligations with respect to the receivables. As such, the factoring under this arrangement is accounted for as a sale. The Company sold $16,300 of receivables during the nine months ended September 30, 2017. This resulted2023 and December 31, 2022, we were custodian to approximately $3.8 billion and $3.45 billion in a loss on factoring of $800 for the nine months endedHSA cash assets, respectively. Of these custodial balances, $1.0 billion and $1.4 billion at September 30, 2017, which was2023 and December 31, 2022, respectively, were deposited with or managed by certain third-party partners and not recorded in Other expenses in the unauditedon our condensed consolidated statementbalance sheets. Such third-party depository partners are regularly monitored by management for stability. The remaining balances of income. There were no sales under this factoring arrangement during the three months ended$2.8 billion and $2.1 billion in HSA assets as of September 30, 2017; a recently executed securitization agreement has replaced this factoring arrangement as Brazil's primary funding mechanism.2023 and December 31, 2022, respectively, are deposited with and managed by WEX Bank and are therefore reflected on our condensed consolidated balance sheets. See Note 7, Financing and Other Debt,9, Deposits, for morefurther information about HSA deposits recorded on this securitization arrangement. The receivables sold under this agreement were recorded as a reduction of accounts receivable and proceeds as cash provided by operating activities.our condensed consolidated balance sheets.
|
| | | | |
9.12. | Fair ValueInvestment Securities |
The Company holds mortgage-backed securities, fixed-income securities, derivatives (see Note 6, Derivative Instruments)Company’s amortized cost and certain other financial instruments that are carried at fair value. The Company determines fair value based upon quoted prices when available or through the use of alternative approaches, such as model pricing, when market quotes are not readily accessible or available. Various factors are considered in determining theestimated fair value of the Company’s obligations, including: closing exchange or over-the-counter market price quotations; time valueinvestment securities as of September 30, 2023 and volatility factors underlying optionsDecember 31, 2022 are presented below. Accrued interest on investment securities of $26.7 million and derivatives; price activity for equivalent instruments;$9.3 million, respectively, as of September 30, 2023 and the Company’s own credit standing.
These valuation techniques may be based upon observableDecember 31, 2022, is excluded from total investment securities and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active;recorded within prepaid expenses and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Instruments whose significant value drivers are unobservable.
Assets and liabilities measured at fair value are classified in their entirety basedother current assets on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. We did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during either of the three or nine months ended September 30, 2017 or September 30, 2016.condensed consolidated balance sheets.
The following table presents the Company’s assets that are measured at fair value and the related hierarchy levels: | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Amortized Cost | | Total
Unrealized
Gains | | Total
Unrealized
Losses | | Fair Value1 |
| As of September 30, 2023 | | | | | | | |
| Current: | | | | | | | |
| | | | | | | |
| Debt securities: | | | | | | | |
| U.S. treasury notes | $ | 390.9 | | | — | | | 45.3 | | | 345.6 | |
| Corporate debt securities | 969.6 | | | — | | | 71.0 | | | 898.6 | |
| Municipal bonds | 70.8 | | | — | | | 8.8 | | | 62.0 | |
| Asset-backed securities | 538.0 | | | 1.7 | | | 6.7 | | | 533.0 | |
| Mortgage-backed securities | 859.6 | | | — | | | 73.6 | | | 786.0 | |
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| Total | $ | 2,828.9 | | | $ | 1.7 | | | $ | 205.4 | | | $ | 2,625.2 | |
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| Non-current: | | | | | | | |
| | | | | | | |
Debt securities3 | $ | 15.1 | | | $ | — | | | $ | 1.4 | | | $ | 13.7 | |
| | | | | | | |
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| Mutual fund | 28.8 | | | — | | | 4.7 | | | 24.1 | |
| Pooled investment fund | 9.0 | | | — | | | — | | | 9.0 | |
| Total | $ | 52.9 | | | $ | — | | | $ | 6.1 | | | $ | 46.8 | |
Total investment securities2 | $ | 2,881.8 | | | $ | 1.7 | | | $ | 211.5 | | | $ | 2,672.0 | |
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| (In millions) | Amortized Cost | | Total
Unrealized
Gains | | Total
Unrealized
Losses | | Fair Value1 |
| As of December 31, 2022 | | | | | | | |
| Current: | | | | | | | |
| Debt securities: | | | | | | | |
| U.S. treasury notes | $ | 405.7 | | | $ | — | | | $ | 41.7 | | | $ | 364.1 | |
| Corporate debt securities | 547.2 | | | 0.2 | | | 49.5 | | | 497.8 | |
| Municipal bonds | 53.0 | | | — | | | 8.0 | | | 45.0 | |
| Asset-backed securities | 199.8 | | | — | | | 9.1 | | | 190.7 | |
| Mortgage-backed securities | 330.4 | | | — | | | 32.7 | | | 297.7 | |
| Total | $ | 1,536.1 | | | $ | 0.2 | | | $ | 141.1 | | | $ | 1,395.3 | |
| | | | | | | |
| Non-current: | | | | | | | |
| | | | | | | |
| | | | | | | |
Debt securities3 | $ | 15.2 | | | $ | 0.1 | | | $ | 0.7 | | | $ | 14.5 | |
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| Mutual fund | 28.4 | | | — | | | 3.9 | | | 24.5 | |
| Pooled investment fund | 9.0 | | | — | | | — | | | 9.0 | |
| Total | $ | 52.6 | | | $ | 0.1 | | | $ | 4.7 | | | $ | 48.0 | |
Total investment securities2 | $ | 1,588.7 | | | $ | 0.3 | | | $ | 145.8 | | | $ | 1,443.3 | |
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| | Fair Value Hierarchy | September 30, 2017 | | December 31, 2016 |
| Assets | | | | |
| Municipal bonds | 2 | $ | 534 |
| | $ | 682 |
|
| Asset-backed securities | 2 | 395 |
| | 648 |
|
| Mortgage-backed securities | 2 | 450 |
| | 490 |
|
| Fixed-income mutual fund | 1 | 22,205 |
| | 21,705 |
|
| Available-for-sale securities | | $ | 23,584 |
| | $ | 23,525 |
|
Executive deferred compensation plan trust (a) | 1 | $ | 6,517 |
| | $ | 5,673 |
|
Interest rate swaps (a) | 2 | $ | 12,059 |
| | $ | 12,908 |
|
(a)The fair value of these instruments is recorded in Other assets.
WEX INCINC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)(unaudited)
(unaudited)
Available-For-Sale Securities
When available, the Company uses quoted market prices to determine1 The Company’s methods for measuring the fair value of available-for-sale securities; such inputsits investment securities are discussed in Note 13, Financial Instruments − Fair Value and Concentrations of Credit Risk.
2 Excludes $12.4 million and $11.1 million in equity securities as of September 30, 2023 and December 31, 2022, respectively, included in prepaid expenses and other current assets and other assets on the condensed consolidated balance sheets.
3 Substantially comprised of municipal bonds.
The following table presents estimated fair value and gross unrealized losses of debt securities in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by security category. There are no expected credit losses that have been recorded against our investment securities as of September 30, 2023 and December 31, 2022.
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| | As of September 30, 2023 | | | | |
| | Less than one year | | One year or longer | | Total | | | | |
| (In millions) | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
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| Investment-grade rated debt securities: | | | | | | | | | | | | | | | | | | | |
| U.S. treasury notes | $ | — | | | $ | — | | | $ | 345.6 | | | $ | 45.3 | | | $ | 345.6 | | | $ | 45.3 | | | | | | | | | |
| Corporate debt securities | 420.0 | | | 23.6 | | | 471.2 | | | 47.4 | | | 891.2 | | | 71.0 | | | | | | | | | |
| Municipal bonds | 35.5 | | | 1.6 | | | 40.0 | | | 8.6 | | | 75.5 | | | 10.2 | | | | | | | | | |
| Asset-backed securities | 187.9 | | | 1.2 | | | 137.0 | | | 5.5 | | | 324.9 | | | 6.7 | | | | | | | | | |
| Mortgage-backed securities | 527.5 | | | 34.9 | | | 258.7 | | | 38.7 | | | 786.2 | | | 73.6 | | | | | | | | | |
| Total debt securities | $ | 1,170.9 | | | $ | 61.3 | | | $ | 1,252.5 | | | $ | 145.5 | | | $ | 2,423.4 | | | $ | 206.8 | | | | | | | | | |
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| As of December 31, 2022 | | | | | | | | |
| Less than one year | | One year or longer | | Total | | | | |
| Investment-grade rated debt securities: | | | | | | | | | | | | | | | | | | | |
| U.S. treasury notes | $ | 123.7 | | | $ | 12.5 | | | $ | 240.4 | | | $ | 29.2 | | | $ | 364.1 | | | $ | 41.7 | | | | | | | | | |
| Corporate debt securities | 196.9 | | | 15.1 | | | 289.9 | | | 34.4 | | | 486.8 | | | 49.5 | | | | | | | | | |
| Municipal bonds | 28.1 | | | 3.8 | | | 19.1 | | | 5.0 | | | 47.2 | | | 8.8 | | | | | | | | | |
| Asset-backed securities | 117.7 | | | 4.3 | | | 70.2 | | | 4.8 | | | 187.9 | | | 9.1 | | | | | | | | | |
| Mortgage-backed securities | 198.1 | | | 16.4 | | | 96.5 | | | 16.3 | | | 294.6 | | | 32.7 | | | | | | | | | |
| Total debt securities | $ | 664.4 | | | $ | 52.2 | | | $ | 716.1 | | | $ | 89.7 | | | $ | 1,380.5 | | | $ | 141.8 | | | | | | | | | |
The above table includes 526 investment positions at September 30, 2023, where the current fair value is less than the related amortized cost. Unrealized losses on the Company’s debt securities included in the above table are not considered to be credit-related based upon an analysis that considered the extent to which the fair value is less than the amortized basis of a security, adverse conditions specifically related to the security, changes to credit rating of the instrument subsequent to Company purchase, and the strength of the underlying collateral, if any. Additionally, the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases.
The following table summarizes the contractual maturity dates of the Company’s debt securities.
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| | September 30, 2023 | | |
| (In millions) | Amortized Cost | | Fair Value | | | | |
| | | | | | | |
| Due within one year | $ | 47.5 | | | $ | 46.6 | | | | | |
| Due after 1 year through year 5 | 640.1 | | | 588.4 | | | | | |
| Due after 5 years through year 10 | 791.2 | | | 723.7 | | | | | |
| Due after 10 years | 1,365.2 | | | 1,280.2 | | | | | |
| Total | $ | 2,844.0 | | | $ | 2,638.9 | | | | | |
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WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Changes in the fair value of the Company’s equity securities are recognized within net unrealized (loss) gain on financial instruments on the condensed consolidated statements of operations. During the three and nine months ended September 30, 2023 and 2022, unrealized gains and losses recognized on equity securities still held as of those dates were immaterial.
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| 13. | Financial Instruments − Fair Value and Concentrations of Credit Risk |
Financial Instruments Measured at Fair Value on a Recurring Basis
The following table presents the Company’s financial instruments that are measured at fair value on a recurring basis, as classified within the three-level fair value hierarchy:
| | | | | | | | | | | | | | |
(In millions) | Fair Value Hierarchy | September 30, 2023 | | December 31, 2022 |
| Assets: | | | | |
Money market mutual funds1 | 1 | $ | 9.6 | | | $ | 35.1 | |
| | | | |
| | | | |
| Investment securities, current: | | | | |
| Debt securities: | | | | |
| U.S. treasury notes | 2 | $ | 345.6 | | | $ | 364.1 | |
| Corporate debt securities | 2 | 898.6 | | | 497.8 | |
| Municipal bonds | 2 | 62.0 | | | 45.0 | |
| Asset-backed securities | 2 | 533.0 | | | 190.7 | |
| Mortgage-backed securities | 2 | 786.0 | | | 297.7 | |
| Total | | $ | 2,625.2 | | | $ | 1,395.3 | |
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| Investment securities, non-current: | | | | |
| Debt securities | 2 | $ | 13.7 | | | $ | 14.5 | |
| | | | |
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| Mutual fund | 1 | 24.1 | | | 24.5 | |
Pooled investment fund measured at NAV2 | | 9.0 | | | 9.0 | |
| Total | | $ | 46.8 | | | $ | 48.0 | |
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Executive deferred compensation plan trust3 | 1 | $ | 12.4 | | | $ | 11.1 | |
Interest rate swaps4 | 2 | $ | 62.0 | | | $ | 81.4 | |
| | | | |
| Liabilities | | | | |
| | | | |
Contingent consideration5 | 3 | $ | 183.9 | | | $ | 206.4 | |
1 The fair value is recorded in cash and cash equivalents.
2 The fair value of this security is measured at NAV as a practical expedient and has not been classified within the fair value hierarchy. The amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the condensed consolidated balance sheets.
3 The fair value is recorded as current or long-term based on the timing of the Company’s executive deferred compensation plan payment obligations. At September 30, 2023, $1.6 million and $10.8 million in fair value is recorded within prepaid expenses and other current assets and other assets, respectively. At December 31, 2022, $1.9 million and $9.2 million in fair value is recorded within prepaid expenses and other current assets and other assets, respectively.
4 The fair value is recorded as current or long-term depending on the timing of expected discounted cash flows. At September 30, 2023, $39.0 million and $23.0 million in fair value is recorded in prepaid expenses and other current assets and other assets, respectively. At December 31, 2022, $45.3 million and $36.1 million in fair value is recorded within prepaid expenses and other current assets and other assets, respectively.
5 The fair value is recorded as current or long-term based on the timing of expected payments. At September 30, 2023, $63.5 million and $120.4 million in fair value is recorded within accrued expenses and other current liabilities and other liabilities, respectively. At December 31, 2022, $28.7 million and $177.7 million in fair value is recorded within accrued expenses and other current liabilities and other liabilities, respectively.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Money Market Mutual Funds
A portion of the Company’s cash and cash equivalents are invested in money market mutual funds that primarily consist of short-term government securities, which are classified as Level 1 in the fair value hierarchy because they are valued using quoted market prices for identical instruments in an active market.
Debt Securities
The Company determines the fair value of the fair-value hierarchy. TheseU.S. treasury notes using quoted market prices for similar or identical instruments in a market that is not active. For corporate debt securities, primarily consist of an open-ended mutual fund which is invested in fixed-income securities and is held in order to satisfy the regulatory requirements of WEX Bank. For mortgage-backedmunicipal bonds, and asset-backed debtand mortgage-backed securities, and municipal bonds, the Company generally uses quoted prices for recent trading activity of assets with similar characteristics to the debt security or bond being valued. The securities and bonds priced using such methods are generally valued using Level 2 inputs.inputs to the fair value hierarchy.
Pooled Investment Fund
The pooled investment fund maintains individual capital accounts for each investor, which reflect each individual investor’s share of the NAV of the fund. As of September 30, 2023, the Company had no unfunded commitments with respect to the fund. Investments in the fund may be redeemed monthly with 30 days’ notice.
Mutual Fund
The Company determines the fair value of its mutual fund using quoted market prices for identical instruments in an active market; such inputs are classified as Level 1 of the fair value hierarchy.
Executive Deferred Compensation Plan Trust
The obligations related toinvestments held in the executive deferred compensation plan trust, which consist primarily of mutual funds, are classified as Level 1 in the fair value hierarchy because the fair value is determined using quoted market prices for identical instruments in active markets.
Interest Rate Swaps
The Company determines the fair value of its interest rate swaps based on the discounted cash flows of the difference between the projected fixed payments on the swaps and the implied floating payments using the current LIBORSOFR curve, which are Level 2 inputs of the fair value hierarchy.
$400 Million Notes OutstandingContingent Consideration
On January 30, 2013,
As part of the asset acquisition from Bell Bank during 2021, the Company completed a $400,000 offeringis obligated to pay additional consideration to Bell Bank contingent upon increases in an aggregate principal amount of 4.750 percent senior notes due February 1, 2023, with interest payable semiannually. the Federal Funds rate. The Notes outstanding have aCompany determined the fair value of $411,500this contingent consideration derivative liability based on discounted cash flows using the difference between the baseline Federal Funds rate in the purchase agreement with Bell Bank and $390,000future forecasted Federal Funds rates over the agreement term.The forecasted Federal Funds rates represent a Level 3 input within the fair value hierarchy. The resulting probability-weighted contingent consideration amounts were discounted using a discount rate, which was 4.51 percent as of September 30, 20172023 and 3.52 percent as of December 31, 2016, respectively. 2022. Due to significant increases in the Federal Funds rate, the fair value of the Company’s contingent consideration derivative liability at September 30, 2023 is effectively measured at the present value of the maximum remaining contingent consideration payable under the arrangement and accordingly, the fair value could not materially increase. A significant decrease in the Federal Funds rate could result in a material decrease in the derivative liability.
The Company records changes in the estimated fair value of the contingent consideration in the condensed consolidated statements of operations. Changes in the contingent consideration derivative liability are measured at fair value on a recurring basis using unobservable inputs (Level 3 in the fair value hierarchy) and are as follows for the periods indicated:
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| (In millions) | September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
| Contingent consideration - beginning of period | $ | 180.7 | | | $ | 172.1 | | | $ | 206.4 | | | $ | 67.3 | |
| | | | | | | |
Payments of contingent consideration (1) | — | | | — | | | (28.7) | | | — | |
| Change in fair value of contingent consideration | 3.2 | | | 30.3 | | | 6.2 | | | 135.1 | |
| Contingent consideration - end of period | $ | 183.9 | | | $ | 202.4 | | | $ | 183.9 | | | $ | 202.4 | |
(1) The Company has presented $27.2 million of this payment, which represents the fair value of the contingent consideration at acquisition date, within net cash provided by financing activities in the condensed consolidated statement of cash flows. The remainder has been included in net cash provided by (used for) operating activities (specifically within changes in accrued expenses and other current and long-term liabilities).
Financial Instruments Measured at Carrying Value, for which Fair Value is Disclosed
The fair value of the Company’s financial instruments, which are measured and reported at carrying value, is as follows for the periods indicated:
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| (In millions) | | September 30, 2023 | | December 31, 2022 |
| | Carrying value | | Fair value | | Carrying value | | Fair value |
| | | | | | | | |
Tranche A Term Loans1 | | $ | 856.1 | | | ** | | $ | 892.8 | | | ** |
Tranche B Term Loans1 | | 1,406.0 | | | ** | | 1,416.8 | | | ** |
Outstanding borrowings on Revolving Credit Facility1 | | 471.6 | | | ** | | — | | | — | |
Convertible Notes2 | | — | | | — | | | 310.0 | | | 330.0 | |
Contractual deposits with maturities in excess of one year3 | | 115.5 | | | ** | | 334.2 | | | 308.1 | |
** Fair value approximates carrying value.
1 The Company determines the fair value of borrowings on the Revolving Credit Facility and Tranche A Term Loans and Tranche B Term Loans based on market rates for the issuance of our debt. The Company determined the fair value of its Notes outstanding is classified as Level 2 in the fair value hierarchy.
Debt
The Company determines the fair value of the amount outstanding under its 2016 Credit Agreement based on the market rates for the issuance of the Company'sCompany’s debt, which are Level 2 inputs in the fair value hierarchy.
2 The Company determined the fair value of the Convertible Notes outstanding using our stock price and volatility, the conversion premium on the Convertible Notes and effective interest rates for similarly-rated credit issuances, all of which are Level 2 inputs in the fair value hierarchy. On August 11, 2023, the Company repurchased all of the outstanding aggregate principal amount of the Company’s Convertible Notes and the repurchased Convertible Notes were canceled by the trustee at the instruction of the Company.
3 The Company determines the fair value of its contractual deposits with maturities in excess of one year using current market interest rates for deposits of similar remaining maturities, which are Level 2 inputs in the fair value hierarchy.
Other Assets and Liabilities
The carrying value of certain of the Company’s financial instruments, other than those presented above, including cash, cash equivalents, restricted cash and restricted cash payable, short-term contractual deposits and HSA deposits, accounts receivable and securitized accounts receivable, accounts payable, accrued expenses and other current liabilities and other liabilities, approximate their respective fair values due to their short-term nature or maturities. The carrying value of certain other financial instruments, including interest-bearing money market deposits, securitized debt, participation debt, borrowed federal funds and deferred consideration associated with our acquisitions approximate their respective fair values due to stated interest rates being consistent with current market interest rates.
Concentrations of Credit Risk
The Company’s financial instruments that are exposed to concentrations of credit risk consist principally of cash and cash equivalents, restricted cash, investment securities, trade receivables and interest rate swap contracts.
Concentration of credit risk with respect to accounts receivable is limited because a large number of geographically and industry diverse customers make up our customer base. See Note 5, Accounts Receivable, Net, for further information.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The Company’s cash and cash equivalents, restricted cash and interest rate swap contracts are transacted and maintained with financial institutions with high credit standing. Cash balances at many of these institutions regularly exceed FDIC insured limits; however, management regularly monitors the financial institutions and the composition of the Company’s accounts. We have not experienced any losses in such accounts and management believes that the financial institutions at which the Company’s cash is held are stable. We attempt to limit our exposure to credit risk with our investment securities by establishing strict investment policies as to minimum investment ratings, diversification of our portfolio and setting risk tolerance levels.
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| 14. | Redeemable Non-Controlling Interest |
On March 5, 2019, the Company acquired Discovery Benefits from SBI, who obtained a 4.9 percent equity interest in PO Holding. The equity interest was puttable under the agreement, making the non-controlling interest redeemable and therefore, it was classified as temporary equity outside of stockholders’ equity. As part of both September 30, 2017WEX Inc.’s purchase of the HSA contractual rights from Bell Bank on April 1, 2021, SBI’s ownership percentage was reduced to 4.53 percent.
On March 7, 2022, WEX Inc. purchased SBI’s remaining 4.53 percent interest in PO Holding for a deferred purchase price of $234.0 million plus any interest accruing pursuant to the terms of the purchase agreement and December 31, 2016,recorded the liability at a net present value of $216.6 million. The carrying value of the redeemable non-controlling interest immediately prior to the acquisition date was $254.4 million and therefore, the $37.8 million excess carrying value as of the acquisition date was recorded within the change in value of redeemable non-controlling interest on the condensed consolidated statements of operations, offset by $3.5 million of deferred tax expense resulting from the difference between the book and tax bases of the deferred liability payable to SBI. As a result of the acquisition, the carrying value of the 2016 Credit Agreement approximated its fair value.redeemable non-controlling interest was reduced to zero and WEX Inc. owns 100 percent of PO Holding.
The Company'sCompany’s effective tax rate was 35.458.6 percent and 30.2 percent for the third quarterthree and nine months ended September 30, 2023, respectively, and (1.9) percent and 42.1 percent for the three and nine months ended September 30, 2022, respectively. Income tax expense is based on an estimated annual effective rate, which requires the Company to make its best estimate of 2017 as compared to 24.0 percent in the same period last year.annual pretax income or loss. The increase in ourCompany’s effective tax rate for the three and nine months ended September 30, 2023 was primarily due tounfavorably impacted by the absenceloss on extinguishment of several discreteConvertible Notes of $70.1 million, which was disallowed for tax benefits includingpurposes. This was partially offset for the nine months ended September 30, 2023 by a decreaserelease in valuation allowance largely attributable to foreign tax credits and net operating losses in the U.K. recorded during the thirdsecond quarter of 2016.
The Company's2023. Additionally, the Company recorded a discrete tax benefit of $2.5 million in the second quarter of 2023 thereby reversing a portion of an uncertain tax position of $7.5 million that originally adversely impacted the Company’s effective tax rate was 35.5 percent for the first nine months of 2017 as compared to 30.4 percent in the same period last year.ended September 30, 2022. The increase in ourCompany’s effective tax rate wasrates for the three and nine months ended September 30, 2022 were adversely impacted primarily dueby a discrete tax adjustment of $12.7 million relating to the absenceestablishment of a valuation allowance recorded against a portion of deferred tax benefits recorded during the first nine months of 2016. These unfavorable factors were partly offset by the $1,600 tax effect of excess tax benefits related to share-based payments recorded in the income statement in the first nine months of 2017. See Note 2, New Accounting Standards for more information.assets resulting from goodwill impairment charges.
Undistributed earnings of certain foreign subsidiaries of the Company amounted to $45,981$228.6 million and $25,824$159.9 million at September 30, 20172023 and December 31, 2016,2022, respectively. TheseThe Company continues to maintain its indefinite reinvestment assertion for its investments in foreign subsidiaries except for any historical undistributed earnings are consideredand future earnings for WEX Australia. The total amount of our foreign subsidiaries’ earnings in which the Company continues to be indefinitely reinvested, and accordingly, no U.S. federal and state income taxes have been provided thereon.assert indefinite reinvestment approximates $193.9 million at September 30, 2023. Upon distribution of these earnings, in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to foreign countries, where applicable, but would generally have no further federal income tax liability. It is not practicable to estimate the various foreign countries. The Company has determined that the amount of taxes attributable tounrecognized deferred tax liability associated with these undistributed earningsearnings; however, it is not practicably determinable.expected to be material.
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11. | Commitments and Contingencies |
Litigation
On August 11, 2016, the Company was sued in the Circuit Court of St. Charles County, Missouri, in a putative class action alleging the Company improperly sent unauthorized facsimile advertisements in violation of the Telephone Consumer Protection Act, 47 U.S.C. § 227 (the “TCPA”). The named plaintiff seeks to represent a nationwide class of recipients of unauthorized facsimile advertisements from the Company (collectively, the "Plaintiffs") and requests statutory damages for each facsimile advertisement.
WEX INCINC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)(unaudited)
(unaudited)
| | | | | |
| 16. | Commitments and Contingencies |
Litigation and Regulatory Matters
The Plaintiffs further allege thatCompany is subject to litigation, claims and regulatory matters in the opt-out noticeordinary course of business. As of the faxes did not meetdate of this filing, the criteria set forth in the TCPAcurrent estimate of a reasonably possible loss contingency from all legal or its underlying regulations. The Company removed the case to the United States District Court for the Eastern District of Missouri on September 15, 2016. On October 14, 2016, the Company filed an answer denying liability and stating the facsimile advertisement at issue was sent by FleetOne, LLC, the Company’s wholly-owned subsidiary. On May 10, 2017, the parties agreed to a settlement in principle to resolve the class claims, which was preliminarily approved by the court on October 6, 2017. The expected settlement amountregulatory proceedings is not material to the Company's unaudited condensedCompany’s consolidated financial position, results of operations, cash flows or liquidity.
The Company is involved in other pending litigation in the ordinary course of business. In the opinion of management, such litigation will not have a material adverse effect on the Company’s unaudited condensed consolidated financial position, results of operations or cash flows.
Commitments
Significant commitments and contingencies as of September 30, 20172023 are consistent with those discussed in Note 18,20, Commitments and Contingencies, to the consolidated financial statements in the Company’s Annual Report on Form 10-K10–K for the year ended December 31, 2016.2022.
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12.17. | Stock-BasedStock–Based Compensation |
The fair valueCompany regularly grants equity awards in the form of stock options, restricted stock, restricted stock units deferred stock units, performance-based restricted stock units, performance-based stock options and service-based stock options awarded during the threeother stock-based awards under its stockholder-approved Amended and nine months ended September 30, 2017 totaled $400Restated 2019 Equity and $45,741, respectively, as comparedIncentive Plan to $4,416certain employees and $30,343directors. Stock-based compensation expense was $30.5 million and $91.7 million for the three and nine months ended September 30, 2016, respectively.
Stock Options
Performance-Based Stock Options
In May 2017, the Company granted performance-based stock options with a contractual term of ten years to members of senior management. The options contain a market condition that begins operating on the third anniversary of the grant date, requiring the closing price of the Company's stock to meet or exceed certain price thresholds for twenty consecutive trading days (“Stock Price Hurdle”) in order for shares to vest. In addition, award recipients must be continually employed from the grant date until such date that the Stock Price Hurdle is satisfied in order for shares to vest. To the extent both the service condition2023, respectively, and the Stock Price Hurdle are not met by the end of a defined measurement period, these performance-based stock options will be canceled.
The grant date fair value of these performance options was estimated on the date of the grant using a Monte-Carlo simulation model used to simulate a distribution of future stock price paths based on historical volatility levels.
The table below summarizes the assumptions used to calculate the fair value:
|
| | | |
| Exercise price | $ | 99.69 |
|
| Expected stock price volatility | 31.14 | % |
| Risk-free interest rate | 2.18 | % |
| Weighted average fair value of performance options granted | $ | 28.69 |
|
These performance-based stock options are expensed on a graded basis over the derived service period of approximately three years regardless of whether the market condition is satisfied. Upon satisfaction of a Stock Price Hurdle, any unrecognized compensation expense for that specific tranche will be accelerated.
Service-Based Stock Options
On March 20, 2017, the Company approved the grant of stock options to certain officers$28.2 million and employees under the 2010 Equity Incentive Plan. Stock options granted generally become exercisable over three years (with approximately 33 percent of the total grant vesting each year on the anniversary of the grant date) and expire 10 years from the date of grant.
WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
The fair value of each option award is estimated on the grant date using a Black-Scholes-Merton option-pricing model and the following assumptions:
|
| | | |
| | March 20, 2017 |
| Weighted average expected life (in years) | 6.0 |
|
| Weighted average exercise price | $ | 104.95 |
|
| Weighted average volatility | 30.67 | % |
| Weighted average risk-free rate | 2.13 | % |
| Weighted average fair value | $ | 35.58 |
|
|
| |
13. | Impairment and Restructuring Activities |
Impairment
During the nine months ended September 30, 2017, the Company executed a vendor contract amendment based on a strategic decision to in-source certain previously outsourced technology functions. As a result of this action, the Company determined that $16,175 of prepaid services had no future benefit and were therefore written off within the Fleet Solutions segment during the nine months ended September 30, 2017.
Restructuring
In the first quarter of 2015, the Company commenced a restructuring initiative (the "2015 Restructuring Initiative") as a result of its global review of operations. The global review of operations identified certain initiatives to further streamline the business, to improve the Company's efficiency, and to globalize the Company's operations, all with an objective to improve scale and increase profitability going forward. The Company continued its efforts to improve its overall operational efficiency and began a second restructuring initiative (the "2016 Restructuring Initiative") during the second quarter of 2016. In connection with the EFS acquisition, the Company initiated a restructuring program in the third quarter of 2016 (the "Acquisition Integration Restructuring Initiative").
The restructuring expenses related to these initiatives primarily consist of employee costs and office closure costs directly associated with the respective program. The Company has determined the amount of expenses related to these initiatives is probable and reasonably estimable. As such, the Company has recorded the impact on the unaudited condensed consolidated statements of income and in Accrued expenses on the unaudited condensed consolidated balance sheets. Restructuring charges incurred to date under these initiatives were $25,689 as of September 30, 2017.
The balances under the 2015 Restructuring Initiative and the Acquisition Integration Restructuring Initiative are expected to be paid through 2018. Amounts under the 2016 Restructuring Initiative are expected to be paid through 2017. Based on current plans, which are subject to change, the amount of restructuring costs that the Company expects to incur is immaterial.
The following table presents the Company's 2015 Restructuring Initiative liability:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Balance, beginning of period | $ | 3,008 |
| | $ | 7,085 |
| | $ | 5,231 |
| | $ | 7,249 |
|
Restructuring charges1 | 431 |
| | 446 |
| | 1,964 |
| | 2,035 |
|
| Cash paid | (656 | ) | | (638 | ) | | (3,492 | ) | | (2,763 | ) |
| Liability transfer to 2016 Restructuring Initiative | — |
| | — |
| | (1,158 | ) | | — |
|
| Impact of foreign currency translation | (22 | ) | | 701 |
| | 216 |
| | 1,073 |
|
| Balance, end of period | $ | 2,761 |
| | $ | 7,594 |
| | $ | 2,761 |
| | $ | 7,594 |
|
1 Primarily consists of employee costs.
WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
The following table presents the Company’s 2016 Restructuring Initiative liability:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Balance, beginning of period | $ | 4,342 |
| | $ | 3,488 |
| | $ | 3,662 |
| | $ | — |
|
Restructuring charges1 | 88 |
| | — |
| | 307 |
| | 3,506 |
|
| Reserve release | — |
| | — |
| | (533 | ) | | — |
|
| Cash paid | (1,778 | ) | | (4 | ) | | (2,265 | ) | | (4 | ) |
| Liability transfer from 2015 Restructuring Initiative | — |
| | — |
| | 1,158 |
| | — |
|
| Impact of foreign currency translation | 35 |
| | 264 |
| | 358 |
| | 246 |
|
| Balance, end of period | $ | 2,687 |
| | $ | 3,748 |
| | $ | 2,687 |
| | $ | 3,748 |
|
1 Primarily consists of employee costs.
The following table presents the Company’s Acquisition Integration Restructuring Initiative liability:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Balance, beginning of period | $ | 1,333 |
| | $ | — |
| | $ | 1,764 |
| | $ | — |
|
Restructuring charges1 | 4,120 |
| | 2,085 |
| | 5,061 |
| | 2,085 |
|
| Cash paid | (937 | ) | | (421 | ) | | (2,416 | ) | | (421 | ) |
| Other | — |
| | — |
| | 107 |
| | — |
|
| Balance, end of period | $ | 4,516 |
| | $ | 1,664 |
| | $ | 4,516 |
| | $ | 1,664 |
|
1 Primarily consists of office closure costs.
The following table presents the Company's total restructuring liability:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Balance, beginning of period | $ | 8,683 |
| | $ | 10,573 |
| | $ | 10,657 |
| | $ | 7,249 |
|
| Restructuring charges | 4,639 |
| | 2,531 |
| | 7,332 |
| | 7,626 |
|
| Reserve release | — |
| | — |
| | (533 | ) | | — |
|
| Cash paid | (3,371 | ) | | (1,063 | ) | | (8,173 | ) | | (3,188 | ) |
| Other | — |
| | — |
| | 107 |
| | — |
|
| Impact of foreign currency translation | 13 |
| | 965 |
| | 574 |
| | 1,319 |
|
| Balance, end of period | $ | 9,964 |
| | $ | 13,006 |
| | $ | 9,964 |
| | $ | 13,006 |
|
WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
Operating segments are defined as components of an enterprise about which separate financial information is available and is evaluated regularly by the chief operating decision maker ("CODM") in deciding how to allocate resources and assess performance. The Company’s CODM is its Chief Executive Officer. The operating segments are aggregated into the three reportable segments described below.
Fleet Solutions provides customers with payment and transaction processing services specifically designed for the needs of commercial and government fleets. This segment also provides information management services to these fleet customers.
Travel and Corporate Solutions focuses on the complex payment environment of business-to-business payments, providing customers with payment processing solutions for their corporate payment and transaction monitoring needs.
Health and Employee Benefit Solutions provides healthcare payment products and SaaS consumer directed platforms, as well as payroll related benefits to customers.
During the third quarter of 2017, the Company revised its operating segment measurement from pre-tax adjusted income to adjusted operating income. The Company no longer allocates financing interest expense to our operating segments as management believes this item can obscure underlying business trends. As such, we believe adjusted operating income reflects a more enhanced measurement of segment profitability. Segment results$76.8 million for the three and nine months ended September 30, 2016 have been revised to reflect this change2022, respectively.
The Company determines its operating segments and reports segment information in accordance with how our Chief Executive Officer, the Company’s CODM, allocates resources and assesses performance. The Company has both three operating segment measurement.segments and three reportable segments, as described below.
Adjusted operating income adjusts operating income to exclude: (i) acquisition•Mobility provides payment processing, transaction processing, and divestiture related items (including acquisition-related intangible amortization); (ii) stock-based compensation; (iii) restructuring and other costs; and (iv) debt restructuring costs. In addition,information management services specifically designed for the nine months ended September 30, 2017, adjusted operating income excludes an impairment charge relatedneeds of fleets of all sizes from small businesses to federal and state government fleets and over-the-road carriers.
•Corporate Payments focuses on the insourcingcomplex payment environment of global B2B payments, enabling customers to utilize our payments solutions to integrate into their own workflows and manage their accounts payable automation and spend management functions.
•Benefits provides a SaaS platform for consumer directed healthcare benefits and a full-service benefit enrollment solution, bringing together benefits administration, certain technology functions from a third party.
compliance services and consumer-directed and benefits accounts. Additionally, WEX INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
Inc. serves as the non-bank custodian to certain HSA assets.
The following tables present the Company’s reportable segment results on an adjusted operating income basis:revenues:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 |
| (In millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| Payment processing revenue | $ | 176.9 | | | $ | 115.8 | | | $ | 20.6 | | | $ | 313.3 | |
| Account servicing revenue | 42.5 | | | 10.5 | | | 108.5 | | | 161.5 | |
| Finance fee revenue | 76.8 | | | 0.2 | | | 0.1 | | | 77.1 | |
| Other revenue | 53.9 | | | 8.7 | | | 36.9 | | | 99.5 | |
| Total revenues | $ | 350.1 | | | $ | 135.2 | | | $ | 166.1 | | | $ | 651.4 | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| Three Months Ended September 30, 2017 | | | | | | | |
| Payment processing revenue | $ | 90,270 |
| | $ | 44,177 |
| | $ | 11,255 |
| | $ | 145,702 |
|
| Account servicing revenue | 44,858 |
| | 206 |
| | 26,258 |
| | 71,322 |
|
| Finance fee revenue | 40,773 |
| | 87 |
| | 10,019 |
| | 50,879 |
|
| Other revenue | 36,177 |
| | 16,556 |
| | 3,366 |
| | 56,099 |
|
| Total revenues | $ | 212,078 |
| | $ | 61,026 |
| | $ | 50,898 |
| | $ | 324,002 |
|
| | | | | | | | |
| Depreciation and amortization | $ | 37,172 |
| | $ | 3,185 |
| | $ | 10,872 |
| | $ | 51,229 |
|
| Adjusted operating income | $ | 74,782 |
| | $ | 33,971 |
| | $ | 11,509 |
| | $ | 120,262 |
|
| | | | | | | | |
| Three Months Ended September 30, 2016 | | | | | | | |
| Payment processing revenue | $ | 83,132 |
| | $ | 52,551 |
| | $ | 10,499 |
| | $ | 146,182 |
|
| Account servicing revenue | 37,414 |
| | 242 |
| | 21,159 |
| | 58,815 |
|
| Finance fee revenue | 33,230 |
| | 115 |
| | 2,793 |
| | 36,138 |
|
| Other revenue | 30,982 |
| | 10,407 |
| | 5,232 |
| | 46,621 |
|
| Total revenues | $ | 184,758 |
| | $ | 63,315 |
| | $ | 39,683 |
| | $ | 287,756 |
|
| | | | | | | | |
| Depreciation and amortization | $ | 35,172 |
| | $ | 1,630 |
| | $ | 9,206 |
| | $ | 46,008 |
|
| Adjusted operating income | $ | 68,987 |
| | $ | 31,449 |
| | $ | 10,053 |
| | $ | 110,489 |
|
|
| | | | | | | | | | | | | | | |
| | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| Nine Months Ended September 30, 2017 | | | | | | | |
| Payment processing revenue | $ | 264,210 |
| | $ | 119,328 |
| | $ | 39,896 |
| | $ | 423,434 |
|
| Account servicing revenue | 122,238 |
| | 528 |
| | 75,772 |
| | 198,538 |
|
| Finance fee revenue | 113,754 |
| | 469 |
| | 22,113 |
| | 136,336 |
|
| Other revenue | 103,003 |
| | 43,414 |
| | 14,518 |
| | 160,935 |
|
| Total revenues | $ | 603,205 |
| | $ | 163,739 |
| | $ | 152,299 |
| | $ | 919,243 |
|
| | | | | | | | |
| Depreciation and amortization | $ | 109,610 |
| | $ | 9,445 |
| | $ | 31,373 |
| | $ | 150,428 |
|
| Adjusted operating income | $ | 214,421 |
| | $ | 84,935 |
| | $ | 41,897 |
| | $ | 341,253 |
|
| | | | | | | | |
| Nine Months Ended September 30, 2016 | | | | | | | |
| Payment processing revenue | $ | 216,133 |
| | $ | 130,372 |
| | $ | 36,814 |
| | $ | 383,319 |
|
| Account servicing revenue | 90,400 |
| | 852 |
| | 59,518 |
| | 150,770 |
|
| Finance fee revenue | 85,841 |
| | 336 |
| | 6,171 |
| | 92,348 |
|
| Other revenue | 57,417 |
| | 30,235 |
| | 13,532 |
| | 101,184 |
|
| Total revenues | $ | 449,791 |
| | $ | 161,795 |
| | $ | 116,035 |
| | $ | 727,621 |
|
| | | | | | | | |
| Depreciation and amortization | $ | 62,927 |
| | $ | 3,007 |
| | $ | 25,447 |
| | $ | 91,381 |
|
| Adjusted operating income | $ | 145,009 |
| | $ | 74,639 |
| | $ | 32,444 |
| | $ | 252,092 |
|
Our segments earn interest income both from banking relationships and from cardholders. The majority of interest income from cardholders is earned on our salary payment cards offered in Brazil.
WEX INCINC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)(unaudited)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| (In millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| Payment processing revenue | $ | 188.6 | | | $ | 101.5 | | | $ | 18.9 | | | $ | 309.0 | |
| Account servicing revenue | 41.6 | | | 10.7 | | | 85.9 | | | 138.3 | |
| Finance fee revenue | 96.5 | | | 0.2 | | | — | | | 96.7 | |
| Other revenue | 51.4 | | | 1.5 | | | 19.2 | | | 72.1 | |
| Total revenues | $ | 378.1 | | | $ | 114.0 | | | $ | 124.1 | | | $ | 616.1 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Nine Months Ended September 30, 2023 |
| (In millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| Payment processing revenue | $ | 520.6 | | | $ | 310.6 | | | $ | 70.7 | | | $ | 901.9 | |
| Account servicing revenue | 123.6 | | | 31.7 | | | 319.8 | | | 475.1 | |
| Finance fee revenue | 233.5 | | | 0.5 | | | 0.2 | | | 234.2 | |
| Other revenue | 154.9 | | | 19.1 | | | 99.5 | | | 273.5 | |
| Total revenues | $ | 1,032.6 | | | $ | 361.9 | | | $ | 490.2 | | | $ | 1,884.7 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Nine Months Ended September 30, 2022 |
| (In millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| Payment processing revenue | $ | 542.9 | | | $ | 255.2 | | | $ | 62.7 | | | $ | 860.8 | |
| Account servicing revenue | 127.9 | | | 31.9 | | | 256.1 | | | 415.9 | |
| Finance fee revenue | 260.0 | | | 0.5 | | | 0.1 | | | 260.6 | |
| Other revenue | 145.7 | | | 4.0 | | | 44.9 | | | 194.6 | |
| Total revenues | $ | 1,076.5 | | | $ | 291.6 | | | $ | 363.8 | | | $ | 1,731.9 | |
The following table presentsCODM evaluates the Company's interestfinancial performance of each segment using segment adjusted operating income, by segment:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Fleet Solutions | $ | 944 |
| | $ | 961 |
| | $ | 2,764 |
| | $ | 2,547 |
|
| Travel and Corporate Solutions | 208 |
| | 143 |
| | 569 |
| | 330 |
|
| Health and Employee Benefit Solutions | 10,899 |
| | 2,794 |
| | 23,253 |
| | 6,176 |
|
| Total interest income | $ | 12,051 |
| | $ | 3,898 |
| | $ | 26,586 |
| | $ | 9,053 |
|
The following table reconciles total segment adjusted operating income to income before income taxes:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Fleet Solutions | $ | 74,782 |
| | $ | 68,987 |
| | $ | 214,421 |
| | $ | 145,009 |
|
| Travel and Corporate Solutions | 33,971 |
| | 31,449 |
| | 84,935 |
| | 74,639 |
|
| Health and Employee Benefit Solutions | 11,509 |
| | 10,053 |
| | 41,897 |
| | 32,444 |
|
| Adjusted operating income | $ | 120,262 |
| | $ | 110,489 |
| | $ | 341,253 |
| | $ | 252,092 |
|
| Acquisition-related intangible amortization | (38,510 | ) | | (33,855 | ) | | (114,603 | ) | | (59,066 | ) |
| Other acquisition and divestiture related items | (1,006 | ) | | (13,100 | ) | | (3,380 | ) | | (19,694 | ) |
| Stock-based compensation | (8,483 | ) | | (5,199 | ) | | (22,354 | ) | | (14,312 | ) |
| Restructuring and other costs | (6,024 | ) | | (3,767 | ) | | (10,169 | ) | | (11,689 | ) |
| Impairment charge | — |
| | — |
| | (16,175 | ) | | — |
|
| Debt restructuring | (2,516 | ) | | — |
| | (2,516 | ) | | — |
|
| Operating income | $ | 63,723 |
| | $ | 54,568 |
| | $ | 172,056 |
| | $ | 147,331 |
|
| Financing interest expense | (25,754 | ) | | (35,064 | ) | | (81,449 | ) | | (87,040 | ) |
| Net foreign currency gain | 14,611 |
| | 5,932 |
| | 33,578 |
| | 17,233 |
|
| Net unrealized loss on interest rate swap agreements | (150 | ) | | — |
| | (849 | ) | | — |
|
| Net realized and unrealized gain on fuel price derivatives | — |
| | — |
| | — |
| | 711 |
|
| Non-cash adjustments related to tax receivable agreement | — |
| | (168 | ) | | — |
| | (168 | ) |
| Income before income taxes | $ | 52,430 |
| | $ | 25,268 |
| | $ | 123,336 |
| | $ | 78,067 |
|
WEX INCINC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)(unaudited)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In millions) | 2023 | | 2022 | | 2023 | | 2022 |
| Segment adjusted operating income | | | | | | | |
| Mobility | $ | 159.6 | | | $ | 174.5 | | | $ | 448.7 | | | $ | 527.6 | |
| Corporate Payments | 82.9 | | | 60.3 | | | 198.4 | | | 139.6 | |
| Benefits | 58.8 | | | 30.3 | | | 182.6 | | | 94.1 | |
| Total segment adjusted operating income | $ | 301.3 | | | $ | 265.1 | | | $ | 829.7 | | | $ | 761.3 | |
| | | | | | | |
| Reconciliation: | | | | | | | |
| Total segment adjusted operating income | $ | 301.3 | | | $ | 265.1 | | | $ | 829.7 | | | $ | 761.3 | |
| Less: | | | | | | | |
| Unallocated corporate expenses | 29.1 | | | 23.9 | | | 76.8 | | | 63.9 | |
| Acquisition-related intangible amortization | 45.2 | | | 42.5 | | | 133.6 | | | 127.7 | |
| Other acquisition and divestiture related items | 5.1 | | | 4.1 | | | 7.6 | | | 15.1 | |
| | | | | | | |
| Stock-based compensation | 31.9 | | | 27.9 | | | 94.5 | | | 78.4 | |
| Other costs | 15.1 | | | 8.9 | | | 28.6 | | | 25.0 | |
| Impairment charges | — | | | 136.5 | | | — | | | 136.5 | |
| Operating income | 174.9 | | | 21.3 | | | 488.6 | | | 314.7 | |
| Financing interest expense | (41.6) | | | (34.4) | | | (122.4) | | | (95.9) | |
| Net foreign currency loss | (7.8) | | | (23.4) | | | (9.4) | | | (37.8) | |
| | | | | | | |
| Loss on extinguishment of Convertible Notes | (70.1) | | | — | | | (70.1) | | | — | |
| Change in fair value of contingent consideration | (3.2) | | | (30.3) | | | (6.2) | | | (135.1) | |
| Net unrealized (loss) gain on financial instruments | (7.8) | | | 23.5 | | | (20.1) | | | 90.3 | |
| Income (loss) before income taxes | $ | 44.4 | | | $ | (43.3) | | | $ | 260.4 | | | $ | 136.1 | |
|
| | | | |
15.19. | Supplementary Regulatory Capital Disclosure |
The Company'sCompany’s subsidiary, WEX Bank, is subject to various regulatory capital requirements administered by the FDIC and the Utah Department of Financial Institutions. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.UDFI. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, WEX Bank must meet specific capital guidelines that involve quantitative measures of WEX Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.items. WEX Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could limit business activities and have a material effect on the Company’s business, results of operations and financial condition.
Quantitative measures established by regulation to ensure capital adequacy require WEX Bank to maintain minimum amounts and ratios as defined in the regulations. As of December 31, 2016, theThe most recent FDIC exam report categorized WEX Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events subsequent to that examination report that management believes have changed WEX Bank’s capital rating.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table presents WEX Bank’s actual and regulatory minimum capital amounts and ratios are presented in the following table:ratios:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Actual Amount | | Ratio | | Minimum for Capital Adequacy Purposes Amount | | Ratio | | Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions Amount | | Ratio |
| September 30, 2023 | | | | | | | | | | | |
| Total Capital to risk-weighted assets | $ | 740.2 | | | 14.83 | % | | $ | 399.2 | | | 8.00 | % | | $ | 499.1 | | | 10.00 | % |
| Tier 1 Capital to average assets | $ | 677.8 | | | 10.20 | % | | $ | 265.8 | | | 4.00 | % | | $ | 332.3 | | | 5.00 | % |
| Common equity to risk-weighted assets | $ | 677.8 | | | 13.58 | % | | $ | 224.6 | | | 4.50 | % | | $ | 324.4 | | | 6.50 | % |
| Tier 1 Capital to risk-weighted assets | $ | 677.8 | | | 13.58 | % | | $ | 299.4 | | | 6.00 | % | | $ | 399.2 | | | 8.00 | % |
| December 31, 2022 | | | | | | | | | | | |
| Total Capital to risk-weighted assets | $ | 595.6 | | | 15.16 | % | | $ | 314.4 | | | 8.00 | % | | $ | 393.0 | | | 10.00 | % |
| Tier 1 Capital to average assets | $ | 546.2 | | | 10.22 | % | | $ | 213.7 | | | 4.00 | % | | $ | 267.1 | | | 5.00 | % |
| Common equity to risk-weighted assets | $ | 546.2 | | | 13.90 | % | | $ | 176.8 | | | 4.50 | % | | $ | 255.4 | | | 6.50 | % |
| Tier 1 Capital to risk-weighted assets | $ | 546.2 | | | 13.90 | % | | $ | 235.8 | | | 6.00 | % | | $ | 314.4 | | | 8.00 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Actual Amount | | Ratio | | Minimum for Capital Adequacy Purposes Amount | | Ratio | | Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions Amount | | Ratio |
| September 30, 2017 | | | | | | | | | | | |
| Total Capital to risk-weighted assets | $ | 326,773 |
| | 13.12 | % | | $ | 199,249 |
| | 8.0 | % | | $ | 249,061 |
| | 10.0 | % |
| Tier 1 Capital to average assets | $ | 314,473 |
| | 12.09 | % | | $ | 104,004 |
| | 4.0 | % | | $ | 130,004 |
| | 5.0 | % |
| Common equity to risk-weighted assets | $ | 314,473 |
| | 12.63 | % | | $ | 112,078 |
| | 4.5 | % | | $ | 161,890 |
| | 6.5 | % |
| Tier 1 Capital to risk-weighted assets | $ | 314,473 |
| | 12.63 | % | | $ | 149,437 |
| | 6.0 | % | | $ | 199,250 |
| | 8.0 | % |
| December 31, 2016 | | | | | | | | | | | |
| Total Capital to risk-weighted assets | $ | 228,402 |
| | 12.59 | % | | $ | 145,182 |
| | 8.0 | % | | $ | 181,477 |
| | 10.0 | % |
| Tier 1 Capital to average assets | $ | 214,847 |
| | 11.10 | % | | $ | 77,413 |
| | 4.0 | % | | $ | 96,767 |
| | 5.0 | % |
| Common equity to risk-weighted assets | $ | 214,847 |
| | 11.84 | % | | $ | 81,665 |
| | 4.5 | % | | $ | 117,961 |
| | 6.5 | % |
| Tier 1 Capital to risk-weighted assets | $ | 214,847 |
| | 11.84 | % | | $ | 108,887 |
| | 6.0 | % | | $ | 145,183 |
| | 8.0 | % |
| | | | | |
| 20. | Subsequent Events |
| |
16. | Subsequent Event |
Effective October 18, 2017,On October 23, 2023, the Company acquired certain assets and assumed certain liabilities of AOC Solutions and one of its affiliate companies, 3Delta Systems,signed a definitive agreement to acquire Payzer Holdings, Inc. (collectively "AOC"), an industry leader in commercial payments technology, for a net purchase price of$112,500. high growth, cloud-based, field service management software provider. The acquisition was funded with cash on handis expected to advance WEX’s growth strategy of expanding its product suite and throughcreating additional cross-sell opportunities by providing a new, scalable SaaS solution for its small business customers who operate field service companies. Pursuant to the Company's 2016 Credit Agreement. In conjunction with the closingterms of the AOC acquisition, effective October 30, 2017, the Company added $100,000 of capacity to its revolving line of credit to provide additional liquidity and flexibility.
The acquisition of AOC, a longstanding technology provideragreement, total consideration for our virtual card product, will broaden the Company's capabilities, increase our pool of employees with payments platform expertise and allow the Company to evolve with the needs of its customers and partners through the use of AOC’s payments processing technology platforms. This acquisition will be accounted for under the acquisition methodis expected to be approximately $250 million, with additional contingent consideration of accounting.
up to $11 million based on certain performance metrics, subject to certain working capital and other adjustments. We expect the transaction to close before year end, subject to customary closing conditions.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations ("(“MD&A"&A”) is intended to provide information that will assist the reader with understanding our financial statements, the changes in key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting estimates affect our financial statements. The discussion also provides information about the financial results of the three segments of our business to provide a better understanding of how those segments and their results affect our financial condition and results of operations as a whole. Additionally, certain corporate costs not allocated to our operating segments are discussed herein.
Our MD&A is presented in the following sections:
•Executive Overview
Summary•Company Highlights
•Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Policies and Estimates
•Recently Adopted Accounting Standards
This discussion should be read in conjunction with our audited consolidated financial statements as of December 31, 2016,2022, the notes accompanying those financial statements and MD&A as contained in our Annual Report on Form 10-K10–K for the year ended December 31, 2022, filed with the SECSecurities and Exchange Commission on March 6, 2017February 28, 2023, and in conjunction with the unaudited condensed consolidated financial statements and notes in Part I – Item 1 of this report.
Executive Overview
WEX Inc. is the global commerce platform that simplifies the business of running a leading providerbusiness. We own and operate a B2B ecosystem that helps our customers overcome highly manual processes and reconciliations, navigate the complexity of corporate payment solutions. Weconsumer driven healthcare benefits, and solve their administrative challenges. WEX offers the marketplace a unique combination of capabilities to simplify complexity, including:
•Global commerce platform. Our technology is engineered and operated with global scale and reliability. Using our technology, our customers have expandedtrusted us to conduct hundreds of billions worth of money movements in more than 20 currencies.
•Personalized solutions, seamlessly embedded. Our solutions are shaped by customer focused innovation and deep industry expertise. Both in our direct-to-corporate and partner channels, our solutions focus on simplifying the scopebusiness of running a business by deeply embedding our solutions within our end customer workflows.
•Insights that power success. WEX provides a powerful combination of specialized expertise and rich data to assist customers in driving better decisions, moving more quickly, and in dealing with risk, putting control in the hands of our business into a multi-channel provider of corporatecustomers.
Leveraging these unique capabilities, WEX offers solutions that organizations use to drive efficiencies and manage risk. These solutions, which share and benefit from our underlying capabilities such as payment solutions. We currently operate inprocessing, data analytics, and WEX Bank, are provided across three business segments: Fleet Solutions, TravelMobility, Corporate Payments and Corporate Solutions, and Health and Employee Benefit Solutions. Our business model enables us to provide exceptional payment security and controlBenefits. Within our Mobility segment, WEX reimagines mobility across fleets of all sizes, as a spectrum of payment sectors. The Fleet Solutions segment provides customers withleader in fleet vehicle payment solutions, transaction processing, services specifically designed for the needs of commercial and government fleets. Fleet Solutions revenue is earned primarily from payment processing, account servicing and financing fees. Management estimates that WEX fleet cards are accepted at over 90 percent of fuel locations in each of the United States and Australia. The Travel andinformation management services. Our Corporate SolutionsPayments segment focuses on the complex payment environment of business-to-businessglobal B2B payments, allowing businesses to centralize purchasing, simplify complex supply chain processes, and eliminate the paper check writing associated with traditional purchase order programs. Our Benefits segment simplifies the business of administering and managing employee benefit plans, providing customerssoftware-as-a service, or "SaaS", software with embedded payment processing solutions and plan administration services for their corporate paymentconsumer directed health benefits, COBRA accounts, and transaction monitoring needs. benefit enrollment and administration. In addition, WEX Inc. is an IRS-designated non-bank custodian of Health Saving Account assets.
Company Highlights
The Healthfollowing table presents a summarized view of selected results for the three and Employee Benefit Solutionsnine months ended September 30, 2023, shown comparative to the prior year periods. Operating cash flow and adjusted cash flow information is presented on a year to-date basis, and shown comparative to the prior year to-date. The other key metric included below provides additional data underlying our financial performance. A recurring, more extensive list of key performance indicators is included by segment provides healthcare payment productswithin the Results of Operations section later in this MD&A.
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions, except per share data) | Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
| GAAP Measures: | | | | | | | |
| Total revenues | $ | 651.4 | | | $ | 616.1 | | | $ | 1,884.7 | | | $ | 1,731.9 | |
| Net income (loss) attributable to shareholders | $ | 18.4 | | | $ | (44.1) | | | $ | 181.7 | | | $ | 112.7 | |
| Net income (loss) attributable to shareholders per diluted share | $ | 0.42 | | | $ | (1.00) | | | $ | 4.18 | | | $ | 2.51 | |
Net cash provided by operating activities2 | | | | | $ | 146.0 | | | $ | 106.6 | |
| | | | | | | |
Non-GAAP Measures1 | | | | | | | |
| Adjusted net income attributable to shareholders | $ | 176.8 | | | $ | 157.8 | | | $ | 481.9 | | | $ | 458.2 | |
| Adjusted net income attributable to shareholders per diluted share | $ | 4.05 | | | $ | 3.51 | | | $ | 10.99 | | | $ | 10.09 | |
| Adjusted free cash flow | | | | | $ | 391.6 | | | $ | 406.8 | |
| | | | | | | |
| Other Key Metric: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total volume across the Company3 | $ | 61,880 | | | $ | 57,528 | | | $ | 169,479 | | | $ | 158,927 | |
1 Adjusted net income attributable to shareholders, adjusted net income attributable to shareholders per diluted share, and SaaS platform consumer-directed healthcare payments,adjusted free cash flow are supplemental non-GAAP financial measures of operating performance. Refer to the sections titled Non–GAAP Financial Measures That Supplement GAAP Measures and Liquidity and Capital Resources later in this MD&A for more information and a reconciliation of the non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP.
2 Restricted cash payable inflows of $350.1 million for the nine months ended September 30, 2022 have been reclassified from operating activities to financing activities to conform to the current period presentation. Refer to Item 1 - Note 1, Basis of Presentation for more information.
3 Total volume across the Company includes purchases on WEX-issued accounts as well as payroll related benefits to customers in Brazil.purchases issued by others using a WEX platform.
The Company’s U.S. operations include WEX Inc. and our wholly-owned subsidiaries WEX Bank, WEX FleetOne, EFS and WEX Health. Our international operations include our wholly-owned subsidiaries WEX Fuel Cards Australia, WEX Prepaid Cards Australia, WEX New Zealand, WEX Asia, WEX Europe Limited, UNIK S.A., a Brazil-based company that we refer to as "WEX Brazil," and a majority equity position in WEX Europe Services Limited and its subsidiaries.
Summary
Below are selected items from the third quarter of 2017:
Average number of vehicles serviced increased 6 percent from the third quarter of 2016 to approximately 11.0 million for the third quarter of 2017, primarily related to growth in our worldwide customer base.
Total fuel transactions processed increased 4 percent from the third quarter of 2016 to 132.0 million for the third quarter of 2017. Total payment processing transactions in our Fleet Solutions segment increased 7 percent to 110.0 million for the third quarter of 2017 as compared to the same period last year resulting primarily from organic growth and the impact of a large customer portfolio converting from an unfunded to fully funded relationship late in 2016. Transaction processing transactions decreased 9 percent to 22.0 million for the third quarter of 2017, as compared to the same period last year due to the portfolio conversion mentioned above.
Average expenditure per payment processing transaction in our Fleet Solutions segment increased 9 percent to $69.87 for the third quarter of 2017, as compared to $64.05 in the same period last year, which was primarily driven by a relative increase in fuel price per gallon. The average U.S. fuel price per gallon during the third quarter of 2017 was $2.51, a 12 percent increase as compared to the same period last year. The average Australian fuel price per gallon during the third quarter of 2017 was $3.78, a 10 percent increase as compared to the same period last year.
Credit loss expense in the Fleet Solutions segment was $19.3 million during the third quarter of 2017, as compared to $5.7 million in the same period last year. The increase in credit loss was primarily related to higher incidences of fraud as compared to the same period last year. Spend volume increased 17 percent in the third quarter of 2017, as compared to the same period last year and our credit losses were 23.5 basis points of fuel expenditures for the third quarter of 2017, as compared to 8.6 basis points of fuel expenditures in the same period last year.
Travel and Corporate Solutions purchase volume grew by approximately $1.5 billion from the third quarter of 2016 to $8.7 billion for the third quarter of 2017, an increase of 21 percent, driven by worldwide organic growth, most notably in the U.S. and Europe.
Our foreign currency exchange exposure is primarily related to the re-measurement of our cash, receivable and payable balances, including intercompany transactions that are denominated in foreign currencies. During the third quarter of 2017, the USD weakened significantly against most of the major foreign currencies in which we transact, including the Australian dollar, Euro and the British pound. These currency movements resulted in a gain of $14.6 million for the third quarter of 2017, compared to a gain of $5.9 million in the same period last year.
Financing interest expense was $25.8 million for the third quarter of 2017, as compared to $35.1 million in the same period last year due to lower relative debt restructuring costs and lower effective interest rates paid on our 2016 credit facility as a result of a July 2017 repricing.
Our effective tax rate was 35.4 percent for the third quarter of 2017 as compared to 24.0 percent in the same period last year. The increase in our effective tax rate was primarily due to the absence of several discrete tax benefits including a decrease in valuation allowance recorded during the third quarter of 2016. Future tax rates may fluctuate due to changes in the mix of earnings among different tax jurisdictions, as well as impacts that tax rate and earnings mix changes have on our net deferred tax assets.
Results of Operations
The Company no longer allocates foreign currency gains and losses, financing interest expense, and unrealized and realized gains and losses on derivative instruments tofollowing includes information that our operating segments as management believes these itemsis material to an understanding of our results of operations. Any significant changes, unusual or infrequent events or significant economic changes that materially affect our results of operations are unpredictable and can obscure underlying trends.discussed below.
Fleet Solutions
Mobility
Revenues
The following table reflects comparative operating resultsrevenue and key operating statistics within Fleet Solutions:Mobility:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Increase (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) |
| (In millions, except per gallon data) | 2023 | | 2022 | | Amount | | Percent | | 2023 | | 2022 | | Amount | | Percent |
Revenues1 | | | | | | | | | | | | | | | |
| Payment processing revenue | $ | 176.9 | | | $ | 188.6 | | | $ | (11.7) | | | (6) | % | | $ | 520.6 | | | $ | 542.9 | | | $ | (22.3) | | | (4) | % |
| Account servicing revenue | 42.5 | | | 41.6 | | | 0.9 | | | 2 | % | | 123.6 | | | 127.9 | | | (4.3) | | | (3) | % |
| Finance fee revenue | 76.8 | | | 96.5 | | | (19.7) | | | (20) | % | | 233.5 | | | 260.0 | | | (26.5) | | | (10) | % |
| Other revenue | 53.9 | | | 51.4 | | | 2.5 | | | 5 | % | | 154.9 | | | 145.7 | | | 9.2 | | | 6 | % |
| Total revenues | $ | 350.1 | | | $ | 378.1 | | | $ | (28.0) | | | (7) | % | | $ | 1,032.6 | | | $ | 1,076.5 | | | $ | (43.9) | | | (4) | % |
| | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except per transaction and per gallon data) | Three Months Ended September 30, | | Increase (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) |
| 2017 | | 2016 | | Amount | | Percent | | 2017 | | 2016 | | Amount | | Percent |
| Revenues | | | | | | | | | | | | | | | |
| Payment processing revenue | $ | 90,270 |
| | $ | 83,132 |
| | $ | 7,138 |
| | 9 | % | | $ | 264,210 |
| | $ | 216,133 |
| | $ | 48,077 |
| | 22 | % |
| Account servicing revenue | 44,858 |
| | 37,414 |
| | 7,444 |
| | 20 |
| | 122,238 |
| | 90,400 |
| | 31,838 |
| | 35 |
|
| Finance fee revenue | 40,773 |
| | 33,230 |
| | 7,543 |
| | 23 |
| | 113,754 |
| | 85,841 |
| | 27,913 |
| | 33 |
|
| Other revenue | 36,177 |
| | 30,982 |
| | 5,195 |
| | 17 |
| | 103,003 |
| | 57,417 |
| | 45,586 |
| | 79 |
|
| Total revenues | 212,078 |
| | 184,758 |
| | 27,320 |
| | 15 |
| | 603,205 |
| | 449,791 |
| | 153,414 |
| | 34 |
|
| Total operating expenses | 182,964 |
| | 162,442 |
| | 20,522 |
| | 13 |
| | 525,001 |
| | 385,741 |
| | 139,260 |
| | 36 |
|
| Operating income | $ | 29,114 |
|
| $ | 22,316 |
| | $ | 6,798 |
| | 30 | % | | $ | 78,204 |
| | $ | 64,050 |
| | $ | 14,154 |
| | 22 | % |
| | | | | | | | | | | | | | | | |
| Key operating statistics | | | | | | | | | | | | | | | |
| Payment processing revenue: | | | | | | | | | | | | | | | |
| Payment processing transactions | 110,047 |
| | 102,947 |
| | 7,100 |
| | 7 | % | | 320,946 |
| | 286,199 |
| | 34,747 |
| | 12 | % |
| Average expenditure per payment processing transaction | $ | 69.87 |
| | $ | 64.05 |
| | $ | 5.82 |
| | 9 | % | | $ | 69.07 |
| | $ | 56.48 |
| | $ | 12.59 |
| | 22 | % |
| Average price per gallon of fuel: | | | | | | | | | | | | | | | |
| Domestic – ($/gal) | $ | 2.51 |
| | $ | 2.24 |
| | $ | 0.27 |
| | 12 | % | | $ | 2.44 |
| | $ | 2.18 |
| | $ | 0.26 |
| | 12 | % |
| Australia – ($/gal) | $ | 3.78 |
| | $ | 3.45 |
| | $ | 0.33 |
| | 10 | % | | $ | 3.73 |
| | $ | 3.28 |
| | $ | 0.45 |
| | 14 | % |
| Account servicing revenue: | | | | | | | | | | | | | | | |
| Average number of vehicles serviced | 11,000 |
| | 10,337 |
| | 663 |
| | 6 | % | | 10,808 |
| | 9,832 |
| | 976 |
| | 10 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Increase (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) |
| (In millions, except per gallon data) | 2023 | | 2022 | | Amount | | Percent | | 2023 | | 2022 | | Amount | | Percent |
| Key operating statistics | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Payment processing transactions | 144.6 | | | 145.3 | | | (0.7) | | | — | % | | 424.5 | | | 421.1 | | | 3.4 | | | 1 | % |
| Payment processing $ of fuel | $ | 14,945.1 | | | $ | 17,205.4 | | | $ | (2,260.3) | | | (13) | % | | $ | 42,869.2 | | | $ | 50,235.4 | | | $ | (7,366.2) | | | (15) | % |
| Average price per gallon of fuel – Domestic – ($USD/gal) | $ | 3.97 | | | $ | 4.54 | | | $ | (0.57) | | | (13) | % | | $ | 3.83 | | | $ | 4.50 | | | $ | (0.67) | | | (15) | % |
Net payment processing rate2 | 1.18 | % | | 1.10 | % | | 0.08 | % | | 7 | % | | 1.21 | % | | 1.08 | % | | 0.13 | % | | 12 | % |
| Net late fee rate | 0.44 | % | | 0.48 | % | | (0.04) | % | | (7) | % | | 0.47 | % | | 0.43 | % | | 0.04 | % | | 10 | % |
Revenues
Payment processing1 Lower domestic fuel prices decreased revenue increased $7.1by $31.9 million for the third quarter of 2017 as compared to the same periodthree months ended September 30, 2023 and $83.5 million in the prior year resulting from higher domestic average fuel prices and increased payment processing volumes due to organic growth. These favorable impacts were partly offset by a slight decrease in our interchange rate due to higher average fuel prices and the conversion of a large customer portfolio from an unfunded to a fully funded relationship. Payment processing revenue increased $48.1 million for the first nine months of 2017 as compared to the same period in the prior year, resulting from higher domestic average fuel prices and payment processing volumes due to organic growth and the acquisition of EFS. These favorable impacts were partly offset by a slight decrease in our interchange rate due to the acquisition of EFS.
Account servicing revenue increased by $7.4 million for the third quarter of 2017 as compared to the same period in the prior year due to an increase in fees to certain customers as part of worldwide price modernization efforts over the course of the prior year. Account servicing revenue increased $31.8 million for the first nine months of 2017ended September 30, 2023 as compared to the same periods in the prior year, resultingyear.
2 Our net payment processing rate for the three and nine months ended September 30, 2023 has benefited from lower average domestic fuel prices and the EFS acquisition and increasesimpact of interest rate escalator clauses contained in fees to certain customers as part of ourvarious merchant contracts, partly offset by negative European fuel price modernization efforts over the course of the prior year.spreads.
Other
Total Mobility revenue increased by $5.2decreased $28.0 million for the third quarter of 2017 as compared to the same period in the prior year, resulting primarily from higher relative transaction processing revenue2023 and an increase in platform implementation related revenues in Australia. Other revenue increased $45.6$43.9 million for the first nine months of 2017ended September 30, 2023 as compared to the same periods in the prior year. The decreases in total Mobility revenue were primarily driven by the impact of lower average fuel prices on stable levels of payment processing transactions year resulting primarily from higher transaction processing revenue due to the acquisition of EFSover year and pricing modernization efforts.lower finance fee revenue.
Finance fee revenue is composedcomprised of the following components:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Increase (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) |
| (In millions) | 2023 | | 2022 | | Amount | | Percent | | 2023 | | 2022 | | Amount | | Percent |
| Finance income | $ | 66.4 | | | $ | 83.2 | | | $ | (16.8) | | | (20) | % | | $ | 202.8 | | | $ | 217.1 | | | $ | (14.3) | | | (7) | % |
| Factoring fee revenue | 10.4 | | | 13.3 | | | (2.9) | | | (22) | % | | 30.7 | | | 42.8 | | | (12.1) | | | (28) | % |
| Finance fee revenue | $ | 76.8 | | | $ | 96.5 | | | $ | (19.7) | | | (20) | % | | $ | 233.5 | | | $ | 260.0 | | | $ | (26.5) | | | (10) | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Three Months Ended September 30, | | Increase (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) |
| | 2017 | | 2016 | | Amount | | Percent | | 2017 | | 2016 | | Amount | | Percent |
| Late fee revenue | $ | 32,077 |
| | $ | 27,078 |
| | $ | 4,999 |
| | 18 | % | | $ | 90,253 |
| | $ | 70,569 |
| | $ | 19,684 |
| | 28 | % |
| Factoring fee revenue | 7,580 |
| | 5,204 |
| | 2,376 |
| | 46 |
| | 19,869 |
| | 13,920 |
| | 5,949 |
| | 43 |
|
| Cardholder interest income | 199 |
| | 158 |
| | 41 |
| | 26 |
| | 368 |
| | 496 |
| | (128 | ) | | (26 | ) |
| Other finance fee revenue | 917 |
| | 790 |
| | 127 |
| | 16 |
| | 3,264 |
| | 856 |
| | 2,408 |
| | 281 |
|
| Finance fee revenue | $ | 40,773 |
| | $ | 33,230 |
| | $ | 7,543 |
| | 23 | % | | $ | 113,754 |
| | $ | 85,841 |
| | $ | 27,913 |
| | 33 | % |
Late fee revenue isFinance income primarily consists of late fees charged for receivables not paid within the terms of the customer agreement based upon the outstanding customer receivable balance.balance, and to a lesser degree by finance charges earned on revolving portfolio balances. Late fee revenue is earned when a customer’s receivable balance becomes delinquent and is calculated using the greater of a minimum charge or a stated late fee rate multiplied by the outstanding balance that is subject to a late fee charge. Changes in the absolute amount of such outstanding balances can generally be attributed toto: (i) changes in fuel prices; (ii) customer specific transaction volume; and (iii) customer specific delinquencies. Late fee revenue can also be impacted byby: (i) changes in late fee ratesrates; and (ii) increases or decreases in the customer overdue balances. Late fee rates are determined and set based primarily on the risk associated with our customers, coupled with a strategic view of standard rates within our industry. Periodically, we assess the market rates associated within our industry to determine appropriate late fee rates. We consider factors such as the Company’s overall financial model and strategic plan, the cost to our business from customers failing to pay timely and the impact such late payments have on our financial results. These assessments are typically conducted at least annually but may occur more often depending on macro-economic factors.
Late fee revenue increased $5.0Finance income decreased $16.8 million for the third quarter of 20172023 as compared to the same period in the prior year. Late fee revenue increased $6.8 millionyear, primarily due to the changedecline in overdue balances, resulting from higher domestic average fuel prices and increased payment processing volumes. This benefit was partly offset bydriving down customer spend upon which late fees are earned, along with a $1.8 million decrease due to lower weighted averagedecline in the number of late fee rates. Duringinstances, reflective of tighter credit policies we have put in place. Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the third quartertime to pay, placing a customer on a payment plan or granting waivers of 2017, monthly late fee rates ranged from 0fees. There were no material concessions granted to 7.99 percent with a minimum of $75, as compared to a monthly range of 0 to 6.99 percent with a minimum of $75customers experiencing financial difficulties during the same periodthree and nine months ended September 30, 2023 and 2022.
The primary source of factoring fee revenue is calculated as a negotiated percentage fee of the prior year. The weighted average rate, net of related chargeoffs, was 4.3 percent and 4.6 percentreceivable balance that we purchase. Factoring fee revenue decreased $2.9 million for the third quarter of 20172023 and 2016, respectively.
Late fee revenue increased $19.7decreased $12.1 million for the first nine months of 2017ended September 30, 2023 as compared to the same periods in the prior year. Decreased shipping demand in the over-the-road market, led to a decline in size and volume of factored invoices during the three and nine months ended September 30, 2023 as compared to the elevated demands of the same periods in the prior year.
Operating Expenses
The following table compares line items within operating income and presents segment adjusted operating income and segment adjusted operating income margin for Mobility:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) |
| (In millions) | 2023 | | 2022 | | Amount | | Percent | | 2023 | | 2022 | | Amount | | Percent |
| Cost of services | | | | | | | | | | | | | | | |
| Processing costs | $ | 70.1 | | | $ | 68.5 | | | $ | 1.6 | | | 2 | % | | $ | 208.4 | | | $ | 193.0 | | | $ | 15.4 | | | 8 | % |
| Service fees | $ | 1.9 | | | $ | 2.1 | | | $ | (0.2) | | | (11) | % | | $ | 5.6 | | | $ | 6.4 | | | $ | (0.8) | | | (13) | % |
| Provision for credit losses | $ | 12.2 | | | $ | 53.0 | | | $ | (40.8) | | | (77) | % | | $ | 78.5 | | | $ | 118.7 | | | $ | (40.2) | | | (34) | % |
| Operating interest | $ | 21.0 | | | $ | 5.4 | | | $ | 15.6 | | | 288 | % | | $ | 47.0 | | | $ | 8.4 | | | $ | 38.6 | | | 460 | % |
| Depreciation and amortization | $ | 9.9 | | | $ | 12.0 | | | $ | (2.1) | | | (17) | % | | $ | 29.4 | | | $ | 35.7 | | | $ | (6.3) | | | (18) | % |
| | | | | | | | | | | | | | | |
| Other operating expenses | | | | | | | | | | | | | | | |
| General and administrative | $ | 39.6 | | | $ | 26.9 | | | $ | 12.7 | | | 47 | % | | $ | 100.4 | | | $ | 76.5 | | | $ | 23.9 | | | 31 | % |
| Sales and marketing | $ | 53.4 | | | $ | 52.4 | | | $ | 1.0 | | | 2 | % | | $ | 156.4 | | | $ | 154.1 | | | $ | 2.3 | | | 2 | % |
| Depreciation and amortization | $ | 17.0 | | | $ | 17.6 | | | $ | (0.6) | | | (4) | % | | $ | 51.4 | | | $ | 54.2 | | | $ | (2.8) | | | (5) | % |
| Impairment charges | $ | — | | | $ | 136.5 | | | $ | (136.5) | | | NM | | $ | — | | | $ | 136.5 | | | $ | (136.5) | | | NM |
| | | | | | | | | | | | | | | |
| Operating income | $ | 125.0 | | | $ | 3.5 | | | $ | 121.5 | | | NM | | $ | 355.5 | | | $ | 293.0 | | | $ | 62.5 | | | 21 | % |
| | | | | | | | | | | | | | | |
Segment adjusted operating income1 | $ | 159.6 | | | $ | 174.5 | | | $ | (14.9) | | | (9) | % | | $ | 448.7 | | | $ | 527.6 | | | $ | (78.9) | | | (15) | % |
Segment adjusted operating income margin2 | 45.6 | % | | 46.2 | % | | (0.6) | % | | (1) | % | | 43.5 | % | | 49.0 | % | | (5.5) | % | | (11) | % |
NM - Not meaningful
1Our CODM evaluates the financial performance of each segment using segment adjusted operating income, which excludes: (i) unallocated corporate expenses; (ii) acquisition-related intangible amortization and other acquisition and divestiture related items; (iii) stock-based compensation and (iv) other costs. See “Non-GAAP Financial Measures That Supplement GAAP Measures” later in this Item 2 for a reconciliation of operating income to total segment adjusted operating income. See also Part I – Item 1 – Note 18, Segment Information, to our condensed consolidated financial statements for more information regarding our segment determination.
2Segment adjusted operating income margin is calculated by dividing segment adjusted operating income by segment revenue. The nine months ended September 30, 2023 saw a decrease in segment adjusted operating income margin from the prior year comparable period, primarily reflecting the decline in average fuel prices and higher operating interest costs, offset by a significant decrease in credit and fraud losses. Such margin remained flat for the third quarter of 2023 compared to the prior year comparable period.
Cost of services
Provision for credit losses, which includes estimates for both credit and fraud losses, decreased by $40.8 million and $40.2 million, respectively, for the three and nine months ended September 30, 2023 as compared to the same periods in the prior year. The increasehigher credit and fraud loss rates experienced during the three and nine months ended September 30, 2022 have improved during the three and nine months ended September 30, 2023 due in late feespart to tighter credit policies put in place to reduce such losses. In addition, the elevated loss rates seen in the over-the-road trucking business for the past several quarters have moderated.
We generally measure our loss performance by calculating fuel-related losses as a percentage of total fuel expenditures on payment processing transactions. This metric for provision for credit losses was composed6.8 and 17.8 basis points of $18.2fuel expenditures for the three and nine months ended September 30, 2023, respectively. For the three and nine months ended September 30, 2022, provision for credit losses was 30.9 and 23.7 basis points of fuel expenditures, respectively.
Operating interest increased $15.6 million due tofor the change in overdue balances resulting primarily from higher domestic average fuel pricesthird quarter of 2023 and increased payment processing volumes, and $1.5$38.6 million due to rate increases. Duringfor the first nine months of 2017, monthly late fee rates ranged from 0 to 7.99 percent with a minimum of $75,ended September 30, 2023 as compared to the same periods in the prior year, primarily reflective of higher interest rates and increased operating debt balances in support of working capital needs.
Depreciation and amortization decreased $6.3 million for the nine months ended September 30, 2023 compared to the prior year comparable period due to certain assets becoming fully depreciated during 2022.
Other operating expenses
General and administrative expenses increased $12.7 million and $23.9 million for the three and nine months ended September 30, 2023, respectively, as compared with the same periods in the prior year due to a monthly rangethird quarter 2023 write-off of 0 to 6.99 percentcertain costs associated with a minimuman abandoned IT development project and increased professional services expense in support of $75increasing operating efficiencies and business growth.
Impairment charges incurred during the three and nine months ended September 30, 2022 consisted of non-cash goodwill impairment charges of $136.5 million for two of our international Mobility reporting units.
Corporate Payments
Revenues
The following table reflects comparative revenue and key operating statistics within Corporate Payments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) |
| (In millions) | 2023 | | 2022 | | Amount | | Percent | | 2023 | | 2022 | | Amount | | Percent |
Revenues1 | | | | | | | | | | | | | | | |
| Payment processing revenue | $ | 115.8 | | | $ | 101.5 | | | $ | 14.3 | | | 14 | % | | $ | 310.6 | | | $ | 255.2 | | | $ | 55.4 | | | 22 | % |
| Account servicing revenue | 10.5 | | | 10.7 | | | (0.2) | | | (2) | % | | 31.7 | | | 31.9 | | | (0.2) | | | (1) | % |
| Finance fee revenue | 0.2 | | | 0.2 | | | — | | | NM | | 0.5 | | | 0.5 | | | — | | | NM |
| Other revenue | 8.7 | | | 1.5 | | | 7.2 | | | 468 | % | | 19.1 | | | 4.0 | | | 15.1 | | | 378 | % |
| Total revenues | $ | 135.2 | | | $ | 114.0 | | | $ | 21.2 | | | 19 | % | | $ | 361.9 | | | $ | 291.6 | | | $ | 70.3 | | | 24 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Key operating statistics | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Purchase volume | $ | 27,860.1 | | | $ | 20,657.0 | | | $ | 7,203.1 | | | 35 | % | | $ | 69,396.0 | | | $ | 49,586.4 | | | $ | 19,809.6 | | | 40 | % |
Net interchange rate2 | 0.42 | % | | 0.49 | % | | (0.07) | % | | (15) | % | | 0.45 | % | | 0.51 | % | | (0.06) | % | | (12) | % |
1 The impact of foreign currency exchange rate fluctuations on Corporate Payments increased revenues by $4.7 million and $3.9 million during the three and nine months ended September 30, 2023, respectively, compared to the prior year comparable periods.
2 Changes in customer and product mix, including the significant growth in travel-related purchase volumes, has reduced our net interchange rate during the three and nine months ended September 30, 2023 compared to the same periodperiods of the prior year. The weighted average rate, net of related chargeoffs, was 4.3 percent and 4.2 percent
Total Corporate Payments revenue increased $21.2 million for the firstthird quarter of 2023 and $70.3 million for the nine months of 2017ended September 30, 2023 as compared to the same periods in the prior year. These increases were primarily driven by continued strength in global consumer travel demand. Other revenue has increased due to higher interest revenue earned on restricted cash balances, due to a rise in interest rates, and 2016, respectively.average balances coinciding with increased travel volumes.
Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time to pay, placing a customer on a payment plan or granting waivers of late fees. As of September 30, 2017 and 2016, thereThere were no material concessions granted to customers.customers during the three and nine months ended September 30, 2023 and 2022.
Operating Expenses
The primary sourcefollowing table compares line items within operating income and presents segment adjusted operating income and segment adjusted operating income margin for Corporate Payments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) |
| (In millions) | 2023 | | 2022 | | Amount | | Percent | | 2023 | | 2022 | | Amount | | Percent |
| Cost of services | | | | | | | | | | | | | | | |
| Processing costs | $ | 17.8 | | | $ | 18.7 | | | $ | (0.9) | | | (5) | % | | $ | 57.2 | | | $ | 55.2 | | | $ | 2.0 | | | 4 | % |
| Service fees | $ | 3.1 | | | $ | 3.4 | | | $ | (0.3) | | | (10) | % | | $ | 9.8 | | | $ | 10.6 | | | $ | (0.8) | | | (8) | % |
| Provision for credit losses | $ | (3.9) | | | $ | 0.7 | | | $ | (4.6) | | | NM | | $ | (2.5) | | | $ | 2.1 | | | $ | (4.6) | | | NM |
| Operating interest | $ | 2.7 | | | $ | 2.2 | | | $ | 0.5 | | | 23 | % | | $ | 6.7 | | | $ | 4.5 | | | $ | 2.2 | | | 50 | % |
| Depreciation and amortization | $ | 6.2 | | | $ | 5.6 | | | $ | 0.6 | | | 10 | % | | $ | 17.9 | | | $ | 15.4 | | | $ | 2.5 | | | 16 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) |
| (In millions) | 2023 | | 2022 | | Amount | | Percent | | 2023 | | 2022 | | Amount | | Percent |
| Other operating expenses | | | | | | | | | | | | | | | |
| General and administrative | $ | 18.1 | | | $ | 17.1 | | | $ | 1.0 | | | 6 | % | | $ | 53.1 | | | $ | 48.4 | | | $ | 4.7 | | | 10 | % |
| Sales and marketing | $ | 14.9 | | | $ | 14.6 | | | $ | 0.3 | | | 2 | % | | $ | 41.7 | | | $ | 42.7 | | | $ | (1.0) | | | (2) | % |
| Depreciation and amortization | $ | 6.7 | | | $ | 6.0 | | | $ | 0.7 | | | 12 | % | | $ | 19.8 | | | $ | 18.3 | | | $ | 1.5 | | | 8 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Operating income | $ | 69.6 | | | $ | 45.6 | | | $ | 24.0 | | | 53 | % | | $ | 158.2 | | | $ | 94.5 | | | $ | 63.7 | | | 67 | % |
| | | | | | | | | | | | | | | |
Segment adjusted operating income1 | $ | 82.9 | | | $ | 60.3 | | | $ | 22.6 | | | 37 | % | | $ | 198.4 | | | $ | 139.6 | | | $ | 58.8 | | | 42 | % |
Segment adjusted operating income margin2 | 61.3 | % | | 52.9 | % | | 8.4 | % | | 16 | % | | 54.8 | % | | 47.9 | % | | 6.9 | % | | 14 | % |
NM - Not meaningful
1Our CODM evaluates the financial performance of each segment using segment adjusted operating income, which excludes: (i) unallocated corporate expenses; (ii) acquisition-related intangible amortization and other acquisition and divestiture related items; (iii) stock-based compensation and (iv) other costs. See “Non-GAAP Financial Measures That Supplement GAAP Measures” later in this Item 2 for a reconciliation of operating income to total segment adjusted operating income. See also Part I – Item 1 – Note 18, Segment Information, to our condensed consolidated financial statements for more information regarding our segment determination.
2Segment adjusted operating income margin is calculated by dividing segment adjusted operating income by segment revenue.
As a result of owning all of our technology and issuing capabilities, our Corporate Payments segment has a highly scalable and relatively fixed cost base resulting in largely comparable expenses year to year. As a result, the significant increase in 2023 revenues has also significantly contributed to the increased operating income, segment adjusted operating income and segment adjusted operating income margin for the three and nine months ended September 30, 2023.
The decreased provision for credit losses for the three and nine months ended September 30, 2023, as a negotiated percentage feecompared to the prior year comparable periods, reflects the impact of improved expectation of future economic conditions.
Benefits
Revenues
The following table reflects comparative revenue and key operating statistics within Benefits:
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| | Three Months Ended September 30, | | Increase (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) |
| (In millions) | 2023 | | 2022 | | Amount | | Percent | | 2023 | | 2022 | | Amount | | Percent |
| Revenues | | | | | | | | | | | | | | | |
| Payment processing revenue | $ | 20.6 | | | $ | 18.9 | | | $ | 1.7 | | | 9 | % | | $ | 70.7 | | | $ | 62.7 | | | $ | 8.0 | | | 13 | % |
| Account servicing revenue | 108.5 | | | 85.9 | | | 22.6 | | | 26 | % | | 319.8 | | | 256.1 | | | 63.7 | | | 25 | % |
| Finance fee revenue | 0.1 | | | — | | | 0.1 | | | NM | | 0.2 | | | 0.1 | | | 0.1 | | | 92 | % |
| Other revenue | 36.9 | | | 19.2 | | | 17.7 | | | 93 | % | | 99.5 | | | 44.9 | | | 54.6 | | | 122 | % |
| Total revenues | $ | 166.1 | | | $ | 124.1 | | | $ | 42.0 | | | 34 | % | | $ | 490.2 | | | $ | 363.8 | | | $ | 126.4 | | | 35 | % |
| | | | | | | | | | | | | | | |
| Key operating statistics | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Purchase volume | $ | 1,501.3 | | | $ | 1,350.5 | | | $ | 150.8 | | | 11 | % | | $ | 5,145.6 | | | $ | 4,494.7 | | | $ | 650.9 | | | 14 | % |
| | | | | | | | | | | | | | | |
Average number of SaaS accounts1 | 19.9 | | | 18.2 | | | 1.7 | | | 9 | % | | 19.9 | | | 17.9 | | | 2.0 | | | 11 | % |
| Average HSA custodial cash assets | 3,908.5 | | | 3,177.7 | | | 730.8 | | | 23 | % | | 3,821.0 | | | 3,079.1 | | | 741.9 | | | 24 | % |
1 Represents the receivable balance that we purchase. A secondary sourcenumber of factoring fee revenue is a flat rate service fee toactive Consumer-Directed Health, COBRA, and billing accounts on our customers that request a non-contractual same day fundingSaaS platforms. SaaS accounts include HSA accounts for which WEX Inc. serves as the non-bank custodian under designation by the U.S. Department of the receivable balance. Factoring feeTreasury.
Total Benefits revenue increased $2.4$42.0 million for the third quarter of 20172023 and increased $5.9$126.4 million for the first nine months of 2017ended September 30, 2023 as compared to the same periods in the prior year. A rise in average balances and interest rates earned on the investment of HSA deposit balances held by WEX Bank, as reflected within other revenue, and increases in program fees earned on custodial services, as reflected within account servicing revenue, significantly contributed to the increase in total revenues in the third quarter and nine months ended September 30, 2023 compared to the prior year duecomparable periods. Increased spend volume driven by cardholder growth and increased SaaS participants also contributed to higher relative receivable balances purchased resulting from increased customer demand for our services.the increase in total revenues.
Operating Expenses
The following table compares selected expense line items within Fleet Solutions:operating income and presents segment adjusted operating income and segment adjusted operating income margin for Benefits:
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| | Three Months Ended September 30, | | Increase (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) |
| (In millions) | 2023 | | 2022 | | Amount | | Percent | | 2023 | | 2022 | | Amount | | Percent |
| Cost of services | | | | | | | | | | | | | | | |
| Processing costs | $ | 68.5 | | | $ | 59.0 | | | $ | 9.5 | | | 16 | % | | $ | 186.1 | | | $ | 168.1 | | | $ | 18.0 | | | 11 | % |
| Service fees | $ | 13.5 | | | $ | 11.0 | | | $ | 2.5 | | | 22 | % | | $ | 39.3 | | | $ | 30.2 | | | $ | 9.1 | | | 30 | % |
| Provision for credit losses | $ | 1.1 | | | $ | 0.3 | | | $ | 0.8 | | | 220 | % | | $ | 1.5 | | | $ | 1.1 | | | $ | 0.4 | | | 39 | % |
| Operating interest | $ | 1.6 | | | $ | 0.3 | | | $ | 1.3 | | | NM | | $ | 3.9 | | | $ | 0.5 | | | $ | 3.4 | | | NM |
| Depreciation and amortization | $ | 9.4 | | | $ | 9.7 | | | $ | (0.3) | | | (3) | % | | $ | 28.6 | | | $ | 28.8 | | | $ | (0.2) | | | (1) | % |
| | | | | | | | | | | | | | | |
| Other operating expenses | | | | | | | | | | | | | | | |
| General and administrative | $ | 13.1 | | | $ | 9.3 | | | $ | 3.8 | | | 40 | % | | $ | 39.5 | | | $ | 30.5 | | | $ | 9.0 | | | 30 | % |
| Sales and marketing | $ | 14.5 | | | $ | 13.8 | | | $ | 0.7 | | | 5 | % | | $ | 43.5 | | | $ | 38.5 | | | $ | 5.0 | | | 13 | % |
| Depreciation and amortization | $ | 17.9 | | | $ | 14.8 | | | $ | 3.1 | | | 21 | % | | $ | 52.0 | | | $ | 44.3 | | | $ | 7.7 | | | 17 | % |
| | | | | | | | | | | | | | | |
| Operating income | $ | 26.5 | | | $ | 5.8 | | | $ | 20.7 | | | 358 | % | | $ | 95.8 | | | $ | 21.9 | | | $ | 73.9 | | | 338 | % |
| | | | | | | | | | | | | | | |
Segment adjusted operating income1 | $ | 58.8 | | | $ | 30.3 | | | $ | 28.5 | | | 94 | % | | $ | 182.6 | | | $ | 94.1 | | | $ | 88.5 | | | 94 | % |
Segment adjusted operating income margin2 | 35.4 | % | | 24.4 | % | | 11.0 | % | | 45 | % | | 37.3 | % | | 25.9 | % | | 11.4 | % | | 44 | % |
|
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| | Three Months Ended September 30, | | Increase (Decrease) |
| (in thousands) | 2017 | | 2016 | | Amount | | Percent |
| Expenses | | | | | | | |
| Salary and other personnel | $ | 66,919 |
| | $ | 54,667 |
| | $ | 12,252 |
| | 22 | % |
| Restructuring | $ | 4,639 |
| | $ | 2,531 |
| | $ | 2,108 |
| | 83 | % |
| Service fees | $ | 19,218 |
| | $ | 32,431 |
| | $ | (13,213 | ) | | (41 | )% |
| Provision for credit losses | $ | 19,277 |
| | $ | 5,686 |
| | $ | 13,591 |
| | 239 | % |
| Technology leasing and support | $ | 9,704 |
| | $ | 7,756 |
| | $ | 1,948 |
| | 25 | % |
| Depreciation and amortization | $ | 37,172 |
| | $ | 35,172 |
| | $ | 2,000 |
| | 6 | % |
| Operating interest expense | $ | 2,294 |
| | $ | 1,066 |
| | $ | 1,228 |
| | 115 | % |
Salary1Our CODM evaluates the financial performance of each segment using segment adjusted operating income, which excludes: (i) unallocated corporate expenses; (ii) acquisition-related intangible amortization and other personnel expenses increased $12.3 million for the third quarter of 2017 as compared to the same period in the prior year. The increase is primarily due to increases in variable compensation plans and incremental headcount to support bringing certain technology functions in house from a third party provider.
Restructuring costs for the third quarter of 2017 increased $2.1 million as compared to the same period in the prior year, primarily due to office closure and employee costs associated with our EFS acquisition, which are expected to be paid through 2017. This unfavorable impact was partly offset by the wind-down of prior year initiatives related to our European Fleet business.
Service fees decreased by $13.2 million for the third quarter of 2017 as compared to the same period in the prior year, primarily due to one-time expenses associated with the acquisition of EFS as well as costs to outsource certain back office technology incurred during the three months ended September 30, 2016, partly offset by incremental expenses resulting from higher payment processing volumes during the three months ended September 30, 2017.
Provision for credit losses increased by $13.6 million for the third quarter of 2017 as compared to the same period in the prior year. The increase in credit loss was due to higher incidences of magnetic strip card skimming fraud at fuel pumps and a slight deterioration of roll rates during the third quarter of 2017, resulting from the impact of a discrete customer bankruptcy and slower paying customers in hurricane effected regions. During 2017, the Company placed portfolio limits on the number of transactions and amount of fuel purchases. In response, monthly fraud losses trended downwards as the third quarter of 2017 progressed though continue to exceed historical trends. Early in the fourth quarter of 2017, we implemented new real-time technology designed to increase detection speed. As a result of these actions, we anticipate that fraud incidents will continue to trend down slightly in terms of size and frequency in the fourth quarter of 2017 as compared to the third quarter of 2017.
We generally measure our credit loss performance by calculating fuel-related credit losses as a percentage of total fuel expenditures on the payment processing transactions. This metric for credit losses was 23.5 basis points of fuel expenditures for the third quarter of 2017, as compared to 8.6 basis points of fuel expenditures for the same period last year. We use a roll-rate methodology to calculate the amount necessary for our ending receivable reserve balance. This methodology considers total receivable balances, recent charge-off experience, recoveries on previously charged-off accounts, and the dollars that are delinquent to calculate the total reserve. In addition, management undertakes a detailed evaluation of the receivable balances to help further ensure overall reserve adequacy. The expense we recognized in the quarter is the amount necessary to bring the reserve to its required level based on accounts receivable aging and net charge-offs.
Technology leasing and support expenses increased $1.9 million for the third quarter of 2017 as compared to the same period in the prior year. This increase is primarily due to additional software licensing and maintenance expense, resulting from incremental technological investments in our business.
Depreciation and amortization increased by $2.0 million for the third quarter of 2017 as compared to the same period in the prior year, primarily due to higher amortization of EFS intangibles.
Operating interest expense increased $1.2 million for the third quarter of 2017 as compared to the same period in the prior year, primarily due to higher interest rates paid on recently issued certificates of deposit, which replaced previously held non-interest bearing deposits following the expiration of an agreement with a deposit partner during the fourth quarter of 2016. Additionally, higher fuel prices and volume increases contributed to the increase in operating interest expense.
The following table compares selected expense line items within Fleet Solutions:
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Increase (Decrease) |
| (in thousands) | 2017 | | 2016 | | Amount | | Percent |
| Expenses | | | | | | | |
| Salary and other personnel | $ | 187,849 |
| | $ | 144,295 |
| | $ | 43,554 |
| | 30 | % |
| Restructuring | $ | 6,799 |
| | $ | 7,626 |
| | $ | (827 | ) | | (11 | )% |
| Service fees | $ | 54,752 |
| | $ | 73,967 |
| | $ | (19,215 | ) | | (26 | )% |
| Provision for credit losses | $ | 46,999 |
| | $ | 15,042 |
| | $ | 31,957 |
| | 212 | % |
| Technology leasing and support | $ | 26,833 |
| | $ | 20,671 |
| | $ | 6,162 |
| | 30 | % |
| Depreciation and amortization | $ | 109,610 |
| | $ | 62,927 |
| | $ | 46,683 |
| | 74 | % |
| Operating interest expense | $ | 5,689 |
| | $ | 1,867 |
| | $ | 3,822 |
| | 205 | % |
| Impairment charge | $ | 16,175 |
| | $ | — |
| | $ | 16,175 |
| | NM |
|
All other expenses1 | $ | 70,295 |
| | $ | 59,346 |
| | $ | 10,949 |
| | 18 | % |
1 Includes all expenses located in our unaudited condensed consolidated statements of income which are not separately described above.
Salary and other personnel expenses increased $43.6 million for the first nine months of 2017 as compared to the same period in the prior year, primarily due to incremental headcount to support business growth, including resources assumed as part of the EFS acquisition and divestiture related items; (iii) stock-based compensation and (iv) other costs. See “Non-GAAP Financial Measures That Supplement GAAP Measures” later in this Item 2 for a reconciliation of operating income to a lesser extent, increases in variable compensation plans.
Restructuring costs for the first nine months of 2017 decreased $0.8 million as compared to the same period in the prior year, primarily due to the wind-down of prior year initiatives related to our European Fleet business. This favorable impact was almost entirely offset by office closure and employee costs related to a restructuring program associated with our EFS acquisition, which are expected to be paid through 2017.
Service fees decreased $19.2 million for the first nine months of 2017 as compared to the same period in the prior year, primarily due to one-time expenses associated with the acquisition of EFS as well as costs to outsource certain back office technology incurred during the first nine months of 2016, partly offset by incremental expenses resulting from higher payment processing volumes during the first nine months of 2017, due in part to the acquisition of EFS.
Provision for credit losses increased $32.0 million for the first nine months of 2017 as compared to the same period in the prior year, resulting from higher incidences of magnetic strip card skimming fraud during the first nine months of 2017, the acquisition of EFS and an increase in credit loss resulting from higher relative fuel spend as compared to the same period in the prior year.
We generally measure our credit loss performance by calculating credit losses as a percentage of total fuel expenditures on the payment processing transactions. This metric for credit losses was 19.5 basis points of fuel expenditures for the first nine months of 2017, compared to 9.3 basis points of fuel expenditures for the same period last year.
Technology leasing and support expenses increased $6.2 million for the first nine months of 2017 as compared to the same period in the prior year. This increase is primarily due to additional software licensing expense and maintenance, resulting from incremental technological investments in our Fleet Solutions business, including EFS.
Depreciation and amortization increased by $46.7 million for the first nine months of 2017 as compared to the same period in the prior year, primarily due to amortization of intangibles acquired in the EFS business combination. Refer tosegment adjusted operating income. See also Part I – Item 1 – Note 3, Business Acquisition of this report18, Segment Information, to our condensed consolidated financial statements for more information. Following the acquisition of EFS, we evaluated the estimated useful life ofinformation regarding our existing over-the-road payment processing technology. Assegment determination.
2Segment adjusted operating income margin is calculated by dividing segment adjusted operating income by segment revenue. The revenues earned on HSA assets is highly accretive to earnings and as a result, of this analysis, we accelerated amortization related to this technology during the third quarter of 2016, resulting in $11.5 million of incremental amortization during the first nine months of 2017 as compared to the same period in the prior year. This technology is fully amortized as of September 30, 2017.
Operating interest expense increased $3.8 millionsegment adjusted operating income margin for the first nine months of 2017 as compared to the same period in the prior year, primarily due to higher interest rates paid on recently issued certificates of deposit, which replaced previously held non-interest bearing deposits following the expiration of an agreement with a deposit partner during the fourth quarter of 2016. Additionally, higher fuel prices and volume increases contributed to the increase in operating interest expense.
We incurred a $16.2 million non-cash impairment charge due to a write-off related to in-sourcing certain technology functions during the nine months ended September 30, 2017.
All other expenses increased by $10.9 million for the first nine months of 2017 as compared to the same period in the prior year, primarily due to the acquisition of EFS and incremental advertising and marketing expense.
Travel and Corporate Solutions
The following table reflects comparative operating results and key operating statistics within Travel and Corporate Solutions:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) |
| (in thousands, except payment solutions purchase volume in millions) | 2017 | | 2016 | | Amount | | Percent | | 2017 | | 2016 | | Amount | | Percent |
| Revenues | | | | | | | | | | | | | | | |
| Payment processing revenue | $ | 44,177 |
| | $ | 52,551 |
| | $ | (8,374 | ) | | (16 | )% | | $ | 119,328 |
| | $ | 130,372 |
| | $ | (11,044 | ) | | (8 | )% |
| Account servicing revenue | 206 |
| | 242 |
| | (36 | ) | | (15 | ) | | 528 |
| | 852 |
| | (324 | ) | | (38 | ) |
| Finance fee revenue | 87 |
| | 115 |
| | (28 | ) | | (24 | ) | | 469 |
| | 336 |
| | 133 |
| | 40 |
|
| Other revenue | 16,556 |
| | 10,407 |
| | 6,149 |
| | 59 |
| | 43,414 |
| | 30,235 |
| | 13,179 |
| | 44 |
|
| Total revenues | 61,026 |
| | 63,315 |
| | (2,289 | ) | | (4 | ) | | 163,739 |
| | 161,795 |
| | 1,944 |
| | 1 |
|
| Total operating expenses | 29,785 |
| | 33,134 |
| | (3,349 | ) | | (10 | ) | | 87,090 |
| | 88,984 |
| | (1,894 | ) | | (2 | ) |
| Operating income | $ | 31,241 |
| | $ | 30,181 |
| | $ | 1,060 |
| | 4 | % | | $ | 76,649 |
| | $ | 72,811 |
| | $ | 3,838 |
| | 5 | % |
| | | | | | | | | | | | | | | | |
| Key operating statistics | | | | | | | | | | | | | | | |
| Payment processing revenue: | | | | | | | | | | | | | | | |
| Payment solutions purchase volume | $ | 8,663 |
| | $ | 7,139 |
| | $ | 1,524 |
| | 21 | % | | $ | 22,939 |
| | $ | 17,613 |
| | $ | 5,326 |
| | 30 | % |
Revenues
Payment processing revenue decreased $8.4 million for the third quarter of 2017 as compared to the same period of the prior year due to a decrease in our net interchange rate primarily resulting from contract renegotiations with a large travel customer which went into effect in January 2017, partly offset by an increase in corporate charge card purchase volume from our WEX travel product in all our major markets, most notably the U.S. and Europe. Payment processing revenue decreased $11.0 million for the first nine months of 2017 as compared to the same period in the prior year, primarily due to a decrease in our net interchange rate primarily resulting from contract renegotiations with a large travel customer which went into effect in January 2017. This unfavorable factor was partly offset by an increase in corporate charge card purchase volume from our WEX travel product in all our major markets, most notably the U.S. and Europe, and the acquisition of EFS.
Other revenue increased $6.1 million for the third quarter of 2017 and $13.2 million for the first nine months of 2017 as compared to the same period in the prior year, primarily due to higher international settlement fees.
Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time to pay, placing a customer on a payment plan or granting waivers of late fees. As of September 30, 2017 and 2016, customer balances with such concessions totaled $8.5 million and $17.4 million, respectively. For the three and nine months ended September 30, 2017, customer balances with such concessions resulted in approximately $0.42023 increased significantly from the prior year comparable periods.
Cost of services
Processing costs increased by $9.5 million and $1.7$18.0 million, in waived late fees, respectively. For bothrespectively, for the three and nine months ended September 30, 2016, customer balances with such concessions resulted2023 due to an increase in approximately $0.5 million in waived late fees.
Operating Expenses
The following table compares selected expense line items within Travel and Corporate Solutions:
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) |
| (in thousands) | 2017 | | 2016 | | Amount | | Percent |
| Expenses | | | | | | | |
| Salary and other personnel | $ | 6,350 |
| | $ | 6,027 |
| | $ | 323 |
| | 5 | % |
| Service fees | $ | 15,115 |
| | $ | 15,751 |
| | $ | (636 | ) | | (4 | )% |
| Provision for credit losses | $ | (575 | ) | | $ | 3,552 |
| | $ | (4,127 | ) | | (116 | )% |
| Technology leasing and support & occupancy and equipment | $ | 2,640 |
| | $ | 4,197 |
| | $ | (1,557 | ) | | (37 | )% |
| Depreciation and amortization | $ | 3,185 |
| | $ | 1,630 |
| | $ | 1,555 |
| | 95 | % |
| Operating interest expense | $ | 2,377 |
| | $ | 840 |
| | $ | 1,537 |
| | 183 | % |
Salaryprofessional services, card issuance and other personnel expensescosts in support of volume increases.
Service fees increase for the third quarter of 2017 was generally consistentthree and nine months ended September 30, 2023 were primarily driven by increased fees incurred on higher HSA deposits, as compared with the same period in the prior year.
Service fees decreased $0.6Other operating expenses
General and administrative expenses increased $3.8 million and $9.0 million for the third quarter of 2017three and nine months ended September 30, 2023, respectively, as compared towith the same period in the prior year, as incremental expenses resulting from higher relative purchase volumes were partly offset by lower fees paid as a result of our MasterCard contract renewal executed during the third quarter of 2016.
Provision for credit losses decreased $4.1 million for the third quarter of 2017 as compared to the same period in the prior year. The third quarter of 2016 was negatively impacted by two discrete credit losses, including the bankruptcy of one of our online travel agency customers. We recovered a portion of this prior year provision for credit loss during the third quarter of 2017.
Technology leasing and support & occupancy and equipment expense collectively decreased $1.6 million for the third quarter of 2017 as compared to the same periodperiods in the prior year primarily due to lower ongoing technology costs following a vendor renegotiation.increased professional services expense in support of increasing operating efficiencies and business growth.
Expansion of the sales and marketing team drove the $5.0 million increase in sales and marketing expense for the nine months ended September 30, 2023, as compared to the prior year period.
Depreciation and amortization increased $1.6$3.1 million and $7.7 million, for the third quarter of 2017three and nine months ended September 30, 2023, respectively, as compared to the same period in the prior year periods, primarily due to higher relative amortization on HSA contractual rights coupled to a smaller degree by increased amortization as a result of EFS intangibles.the Ascensus Acquisition.
Operating interest expense increased $1.5 million for
Unallocated corporate expenses
Unallocated corporate expenses represent the third quarterportion of 2017 as comparedexpenses relating to the same period in the prior year, due primarilygeneral corporate functions, including acquisition and divestiture expenses, certain finance, legal, information technology, human resources, administrative and executive expenses, and other expenses not directly attributable to higher deposit interest rates. Following the expiration of an agreement with a deposit partner during the fourth quarter of 2016, we issued certificates of deposit to replace previously held non-interest bearing deposits.reportable segment.
The following table compares selected expense line items within Traveloperating income for unallocated corporate expenses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) |
| (In millions) | 2023 | | 2022 | | Amount | | Percent | | 2023 | | 2022 | | Amount | | Percent |
| Other operating expenses | | | | | | | | | | | | | | | |
| General and administrative | $ | 45.8 | | | $ | 33.2 | | | $ | 12.6 | | | 38 | % | | $ | 118.7 | | | $ | 93.3 | | | $ | 25.4 | | | 27 | % |
| Depreciation and amortization | $ | 0.4 | | | $ | 0.4 | | | $ | — | | | NM | | $ | 2.2 | | | $ | 1.5 | | | $ | 0.7 | | | NM |
NM - Not meaningfulGeneral and Corporate Solutions:
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Increase (Decrease) |
| (in thousands) | 2017 | | 2016 | | Amount | | Percent |
| Expenses | | | | | | | |
| Salary and other personnel | $ | 18,858 |
| | $ | 16,627 |
| | $ | 2,231 |
| | 13 | % |
| Service fees | $ | 40,781 |
| | $ | 48,090 |
| | $ | (7,309 | ) | | (15 | )% |
| Provision for credit losses | $ | (732 | ) | | $ | 4,488 |
| | $ | (5,220 | ) | | (116 | )% |
| Technology leasing and support & occupancy and equipment | $ | 10,229 |
| | $ | 11,534 |
| | $ | (1,305 | ) | | (11 | )% |
| Depreciation and amortization | $ | 9,445 |
| | $ | 3,007 |
| | $ | 6,438 |
| | 214 | % |
| Operating interest expense | $ | 6,016 |
| | $ | 2,003 |
| | $ | 4,013 |
| | 200 | % |
Salary and other personneladministrative expenses increased $2.2 million for the first nine months of 2017 as compared to the same period in the prior year, primarily due to the acquisition of EFS.
Service fees decreased $7.3 million for the first nine months of 2017 as compared to the same period in the prior year, primarily due to lower fees paid as a result of our MasterCard contract renewal executed during the third quarter of 2016, partly offset by incremental expenses resulting from higher relative purchase volumes.
Provision for credit losses decreased $5.2 million for the firstand nine months of 2017 as compared to the same period in the prior year. The first nine months of 2016 were negatively impacted by two discrete credit losses, including the bankruptcy of one of our online travel agency customers. We recovered a portion of this prior year provision for credit loss during 2017.
Technology leasing and support & occupancy and equipment expense decreased $1.3 million during the first nine months of 2017 as compared to the same period in the prior year primarily due to lower ongoing technology costs following a vendor renegotiation.
Depreciation and amortization increased $6.4 million for the first nine months of 2017 as compared to the same period in the prior year, due to amortization of intangibles acquired in the EFS business combination.
Operating interest expense increased $4.0 million for the first nine months of 2017 as compared to the same period in the prior year, due to higher deposit interest rates. Following the expiration of an agreement with a deposit partner during the fourth quarter of 2016, we issued certificates of deposit to replace previously held non-interest bearing deposits.
Health and Employee Benefit Solutions
The following table reflects comparative operating results and key operating statistics within Health and Employee Benefit Solutions:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) |
| (in thousands, except purchase volume in millions) | 2017 | | 2016 | | Amount | | Percent | | 2017 | | 2016 | | Amount | | Percent |
| Revenues | | | | | | | | | | | | | | | |
| Payment processing revenue | $ | 11,255 |
| | $ | 10,499 |
| | $ | 756 |
| | 7 | % | | $ | 39,896 |
| | $ | 36,814 |
| | $ | 3,082 |
| | 8 | % |
| Account servicing revenue | 26,258 |
| | 21,159 |
| | 5,099 |
| | 24 |
| | 75,772 |
| | 59,518 |
| | 16,254 |
| | 27 |
|
| Finance fee revenue | 10,019 |
| | 2,793 |
| | 7,226 |
| | 259 |
| | 22,113 |
| | 6,171 |
| | 15,942 |
| | 258 |
|
| Other revenue | 3,366 |
| | 5,232 |
| | (1,866 | ) | | (36 | ) | | 14,518 |
| | 13,532 |
| | 986 |
| | 7 |
|
| Total revenues | 50,898 |
| | 39,683 |
| | 11,215 |
| | 28 |
| | 152,299 |
| | 116,035 |
| | 36,264 |
| | 31 |
|
| Total operating expenses | 47,530 |
| | 37,612 |
| | 9,918 |
| | 26 |
| | 135,096 |
| | 105,565 |
| | 29,531 |
| | 28 |
|
| Operating income | $ | 3,368 |
| | $ | 2,071 |
| | $ | 1,297 |
| | 63 | % | | $ | 17,203 |
| | $ | 10,470 |
| | $ | 6,733 |
| | 64 | % |
| | | | | | | | | | | | | | | | |
| Purchase volume | $ | 956 |
| | $ | 876 |
| | $ | 80 |
| | 9 | % | | $ | 3,430 |
| | $ | 3,020 |
| | $ | 410 |
| | 14 | % |
Revenues
Payment processing revenue increased $0.8 million for the third quarter of 2017 and $3.1 million for the first nine months of 2017 as compared to the same periods in the prior year, resulting primarily from an increase in purchase volume due to customer signings, partly offset by a slight decrease in the interchange rate due to mix of spend.
Account servicing revenue increased $5.1 million for the third quarter of 2017 and $16.3 million for the first nine months of 2017ended September 30, 2023 as compared to the same periods in the prior year, primarily due to WEX Health customer signingsincreased headcount and existing customer growth, which resulted in a higher number of participants using our SaaS healthcare technology platform.
Finance fee revenue increased $7.2 million for the third quarter of 2017 and $15.9 million for the first nine months of 2017 as compared to the same periods in the prior year, primarily due to growth in cardholder interest earned on our paycard product in Brazil resulting from extended payment terms selected by our customers in 2017 andrelated compensation expense, including stock compensation, coupled with an increase in costs incurred in connection with the dollar amount per average salary advance.Ascensus Acquisition.
Concessions to certain customers experiencing financial difficulties may be granted
Non-operating income and are limited to extending the time to pay, placing a customer on a payment plan or granting waivers of late fees. As of September 30, 2017 and 2016, there were no material concessions granted to customers.
Other revenue decreased $1.9 million for the third quarter of 2017 as compared to the same period in the prior year, resulting primarily from lower onboarding and other miscellaneous fees recognized during the third quarter of 2016. Other revenue increased $1.0 million for the first nine months of 2017 as compared to the same period in the prior year, resulting primarily from higher ancillary WEX Health fees as result of a growing customer base.
Operating Expensesexpense
The following table compares selectedreflects comparative results for certain amounts excluded from operating income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) |
| (In millions) | 2023 | | 2022 | | Amount | | Percent | | 2023 | | 2022 | | Amount | | Percent |
| Financing interest expense | $ | (41.6) | | | $ | (34.4) | | | $ | 7.2 | | | 21 | % | | $ | (122.4) | | | $ | (95.9) | | | $ | 26.5 | | | 28 | % |
| Change in fair value of contingent consideration | $ | (3.2) | | | $ | (30.3) | | | $ | (27.1) | | | (89) | % | | $ | (6.2) | | | $ | (135.1) | | | $ | (128.9) | | | (95) | % |
| | | | | | | | | | | | | | | |
| Loss on extinguishment of Convertible Notes | $ | (70.1) | | | $ | — | | | $ | 70.1 | | | NM | | $ | (70.1) | | | $ | — | | | $ | 70.1 | | | NM |
| Net foreign currency loss | $ | (7.8) | | | $ | (23.4) | | | $ | (15.6) | | | 67 | % | | $ | (9.4) | | | $ | (37.8) | | | $ | (28.4) | | | (75) | % |
| Net unrealized (loss) gain on financial instruments | $ | (7.8) | | | $ | 23.5 | | | $ | (31.3) | | | (133) | % | | $ | (20.1) | | | $ | 90.3 | | | $ | (110.4) | | | (122) | % |
| Income tax provision | $ | 26.0 | | | $ | 0.8 | | | $ | 25.2 | | | NM | | $ | 78.7 | | | $ | 57.3 | | | $ | 21.4 | | | 37 | % |
| Net income from non-controlling interests | $ | — | | | $ | — | | | $ | — | | | — | % | | $ | — | | | $ | 0.3 | | | $ | (0.3) | | | (100) | % |
| Change in value of redeemable non-controlling interest | $ | — | | | $ | — | | | $ | — | | | — | % | | $ | — | | | $ | 34.2 | | | $ | (34.2) | | | 100 | % |
NM - Not meaningful
Financing interest expense line items within Health and Employee Benefit Solutions:
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) |
| (in thousands) | 2017 | | 2016 | | Amount | | Percent |
| Expenses | | | | | | | |
| Salary and other personnel | $ | 19,052 |
| | $ | 16,012 |
| | $ | 3,040 |
| | 19 | % |
| Service fees | $ | 6,871 |
| | $ | 5,233 |
| | $ | 1,638 |
| | 31 | % |
| Depreciation and amortization | $ | 10,872 |
| | $ | 9,206 |
| | $ | 1,666 |
| | 18 | % |
| Operating interest | $ | 2,710 |
| | $ | 693 |
| | $ | 2,017 |
| | 291 | % |
| All other expenses | $ | 8,025 |
| | $ | 6,468 |
| | $ | 1,557 |
| | 24 | % |
Salary and other personnel expenses increased $3.0 million for the third quarter of 2017 as compared to the same period in the prior year, primarily due to higher average WEX Health and WEX Brazil headcount and related employee benefit costs in support of significant business growth.
Service fees increased $1.6 million for the third quarter of 2017 as compared to the same period in the prior year, primarily due to costs incurred as a result of the increase in participants usinghigher net variable interest rates on our SaaS healthcare offerings.term loans, inclusive of amounts economically hedged via interest rate swap agreements.
Depreciation and amortization increased $1.7 million for the third quarter of 2017 as comparedDue to the same periodrising rate environment since we completed the acquisition of certain contractual rights from Bell Bank, the Company’s contingent consideration derivative liability is effectively reflected at the maximum contingent consideration payable under the purchase agreement. As a result, absent a significant decline in the prior year, resulting from higher depreciation expense primarily on capitalized software development costsFederal Funds futures curve, changes in the fair value of contingent consideration in 2023 and incremental amortization of acquired intangibles.
Operating interest for the third quarter of 2017 increased $2.0 million as comparedbeyond are expected to generally be limited to present value adjustments due to the same period in the prior year, resulting from an increase in customer receivable balances due to business growth and higher relative interest paid. In the third quarterpassage of 2017, WEX Brazil entered into a securitization arrangement with an unrelated third party bank which is now our primary funding source, replacing borrowings on outstanding credit facilities.time. See Part I – Item 1 – Note 7,13, Financial Instruments − Fair Value and Concentrations of Credit Risk, to our condensed consolidated financial statements for further information on the valuation of this derivative liability.
During August 2023, we repurchased all of the outstanding aggregate principal amount of the Company’s Convertible Notes at a premium resulting in a loss on extinguishment of $70.1 million. See Part I – Item 1 – Note 10, Financing and Other Debt, to our condensed consolidated financial statements for further information on the repurchase of the Convertible Notes.
Our foreign currency exchange exposure is primarily related to the remeasurement of our cash, receivable and payable balances, including intercompany transactions that are denominated in foreign currencies. The losses incurred during the third quarter and nine months ended September 30, 2023, resulted from the weakening of certain foreign currencies in which we transact, including the Euro and the Australian and Canadian dollars, relative to the U.S. dollar.
Due to substantial increases in the LIBOR forward yield curve during the three and nine months ended September 30, 2022, we recognized significant unrealized gains on our interest rate swap financial instruments during those periods. Comparatively, during 2023 forward yield curves on our interest rate swap financial instruments experienced only moderate changes.
The increase in income tax provision for the three and nine months ended September 30, 2023 as compared to the prior year comparable periods is due primarily to an increase in income (loss) before income taxes, offset in part due to the change in the Company’s effective tax rates. The Company’s effective tax rates for the three and nine months ended September 30, 2023 were 58.6 percent and 30.2 percent, respectively, compared to (1.9) percent and 42.1 percent for the three and nine months ended September 30, 2022, respectively. See Part I – Item 1 – Note 15, Income Taxes, to our condensed consolidated financial statements for more information regarding this securitization arrangement.the drivers behind our effective tax rates.
All other expenses increased $1.6 million forDuring the third quarter of 2017 as compared to the same period in the prior year, primarily due to expenses to support significant business growth and higher taxes resulting from increased gross revenues in Brazil.
The following table compares selected expense line items within Health and Employee Benefit Solutions:
|
| | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, | | Increase (Decrease) |
| (in thousands) | | 2017 | | 2016 | | Amount | | Percent |
| Expenses | | | | | | | | |
| Salary and other personnel | | $ | 55,010 |
| | $ | 45,856 |
| | $ | 9,154 |
| | 20 | % |
| Service fees | | $ | 19,772 |
| | $ | 14,041 |
| | $ | 5,731 |
| | 41 | % |
| Depreciation and amortization | | $ | 31,373 |
| | $ | 25,447 |
| | $ | 5,926 |
| | 23 | % |
| Operating interest | | $ | 4,988 |
| | $ | 1,620 |
| | $ | 3,368 |
| | 208 | % |
| All other expenses | | $ | 23,953 |
| | $ | 18,601 |
| | $ | 5,352 |
| | 29 | % |
Salary and other personnel expenses increased $9.2 million for the first nine months of 2017 as compared toended September 30, 2022, the same periodCompany purchased the remaining non-controlling interest in PO Holding from SBI, reducing the prior year, primarily due to higher average WEX Health and WEX Brazil headcount and related employee benefit costs in support of significant business growth.
Service fees increased $5.7 million for the first nine months of 2017 as compared to the same period in the prior year, primarily due to costs incurred as a resultcarrying value of the increaseredeemable non-controlling interest to zero. The transaction resulted in participants using our SaaS healthcare offerings.a $34.2 million gain, net of tax expense.
Depreciation and amortization increased $5.9 million for the first nine months of 2017 as compared to the same period in the prior year, resulting from incremental amortization of acquired intangibles and higher depreciation expense primarily on capitalized software development costs.
Operating interest increased $3.4 million for the first nine months of 2017 as compared to the same period in the prior year due to an increase in customer receivable balances due to business growth and higher relative interest paid.
All other expenses increased $5.4 million for the first nine months of 2017 as compared to the same period in the prior year, primarily due to expenses to support significant business growth and higher taxes resulting from increased gross revenues in Brazil.
Non-GAAPNon–GAAP Financial Measures That Supplement GAAP Measures
Segment Adjusted Operating Income and Adjusted Net Income
In addition to evaluating the Company’s performance on a GAAP basis, management of the Company uses segment adjusted operating income, a non-GAAP measure, to allocate resources among our operating segments. The Company's non-GAAP adjusted net incomeCompany considers this measure, which excludes unrealized gains and losses on derivatives, net foreign currency remeasurement gains, non-cash adjustments related to our tax receivable agreement, acquisition related ticking fees, acquisition relatedunallocated corporate expenses, acquisition-related intangible amortization, other acquisition and divestiture related items, debt restructuring costs, stock-based compensation, restructuringother costs and other costs,impairment charges integral in evaluating the Company’s performance.
Our management also uses adjusted net income, a non-GAAP measure, to evaluate its performance. WEX believes that adjusted net income, which similarly excludes all items discussed in the paragraph above except unallocated corporate expenses, and further excludes unrealized gains and losses on financial instruments, net foreign currency gains and losses, change in fair value of contingent consideration, debt restructuring and debt issuance cost amortization, and similarother adjustments attributedattributable to its non-controlling interestinterests and certain tax related items. In addition, for the nine months ended September 30, 2017, we have excluded an impairment charge relateditems, is also integral to the insourcing of certain technology functions from a third party.Company’s reporting and planning processes.
Although
Segment adjusted operating income and adjusted net income ismay be useful to investors as a means of evaluating our performance. However, because segment adjusted operating income and adjusted net income are non-GAAP measures, they should not calculatedbe considered as a substitute for, or superior to, operating income or net income as determined in accordance with GAAP, this non-GAAP measure is integralGAAP. Segment adjusted operating income and adjusted net income as used by WEX may not be comparable to the Company's reporting and planning processes and the chief operating decision maker of the Company uses pre-tax adjusted income to allocate resources. The Company considers this measure integral because it excludes specified items that the Company's management excludes in evaluating the Company's performance. similarly titled measures employed by other companies.
Specifically, in addition to evaluating the Company'sCompany’s performance on a GAAP basis, management evaluates the Company'sCompany’s performance on a non-GAAP basis that excludes the items specified above items because:for the reasons discussed below:
•Exclusion of the non-cash, mark-to-market adjustments on derivativefinancial instruments, including fuel price related derivatives and interest rate swap agreements and investment securities, helps management identify and assess trends in the Company'sCompany’s underlying business that might otherwise be obscured due to quarterly non-cash earnings fluctuations associated with these derivative contracts. Thefinancial instruments. Additionally, the non-cash, mark-to-market adjustments on derivativefinancial instruments are difficult to forecast accurately, making comparisons across historical and future quartersperiods difficult to evaluate.evaluate;
•Net foreign currency gains and losses primarily result from the remeasurement to functional currency of cash, accounts receivable and accounts payable balances, certain intercompany notes denominated in foreign currencies and any gain
or loss on foreign currency economic hedges relating to these items. The exclusion of these items helps management compare changes in operating results between periods that might otherwise be obscured due to currency fluctuations.fluctuations;
•The change in fair value of contingent consideration, which is related to the acquisition of certain contractual rights to serve as custodian or sub-custodian to HSAs, is dependent upon changes in future interest rate assumptions and has no significant impact on the ongoing operations of the Company. Additionally, the non-cash, mark-to-market adjustments on financial instruments are difficult to forecast accurately, making comparisons across historical and future periods difficult to evaluate;
•The Company considers certain acquisition-related costs, including certain financing costs, ticking fees, investment banking fees, warranty and indemnity insurance, certain integration-related expenses and amortization of acquired intangibles, as well as gains and losses from divestitures to be unpredictable, dependent on factors that may be outside of our control and unrelated to the continuing operations of the acquired or divested business or the Company. In addition, the size and complexity of an acquisition, which often drives the magnitude of acquisition-related costs, may not be indicative of such future costs. The Company believes that excluding acquisition-related costs and gains or losses ofon divestitures facilitates the comparison of our financial results to the Company'sCompany’s historical operating results and to other companies in our industry. In prior periods, the Company adjusted for goodwill impairments and acquisition-related asset impairments. No goodwill or acquisition-related impairments were identified during the three and nine months ended September 30, 2017 or 2016.industry;
•Stock-based compensation is different from other forms of compensation as it is a non-cash expense. For example, a cash salary generally has a fixed and unvarying cash cost. In contrast, the expense associated with an equity-based award is generally unrelated to the amount of cash ultimately received by the employee, and the cost to the Company is based on a stock-based compensation valuation methodology and underlying assumptions that may vary over time.time;
Restructuring and other•Other costs include employee termination benefits from certain identified initiatives to further streamline the business, improve the Company's efficiency, create synergies and globalize the Company's operations, all with an objective to improve scale and increase profitability going forward. We exclude these items when evaluating our continuing business performance as such items are not consistently occurring and do not reflect expected future operating expense, nor do they provide insight into the fundamentals of current or past operations of our business. This also includes non-recurring professional service costs, costs related to certain identified initiatives, including restructuring and technology initiatives, to further streamline the business, improve the Company’s efficiency, create synergies and globalize the Company’s operations, all with an objective to improve scale and efficiency and increase profitability going forward.
•Impairment charge represents acharges represent non-cash asset write-off related to our strategic decision to in-source certain technology functions. This charge doeswrite-offs, which do not reflect recurring costs that would be relevant to the Company'sCompany’s continuing operations. The Company believes that excluding thisthese nonrecurring expenseexpenses facilitates the comparison of our financial results to the Company'sCompany’s historical operating results and to other companies in its industry.industry;
•Debt restructuring and debt issuance cost amortization, are non-cash items thatwhich for the three and nine months ended September 30, 2023 includes the loss on extinguishment of Convertible Notes, are unrelated to the continuing operations of the Company. Debt restructuring costs are not consistently occurring and do not reflect expected future operating expense, nor do they provide insight into the fundamentals of current or past operations of our business. In addition, since debt issuance cost amortization is dependent upon the financing method, which can vary widely company to company, we
believe that excluding these costs helps to facilitate comparison to historical results as well as to other companies within our industry.industry;
•The adjustments attributable to non-controlling interests, including adjustments to the redemption value of a non-controlling interest, and the non-cash adjustments related to the tax receivable agreement have no significant impact on the ongoing operations of the business.business;
•The tax related items are the difference between the Company’s U.S. GAAP tax provision and a pro forma tax provision based upon the Company’s adjusted net income before taxes as well as the impact from certain discrete tax items. The methodology utilized for calculating the Company’s adjusted net income attributable to shareholders tax provision is the same methodology utilized in calculating the Company’s U.S. GAAP tax provision.provision; and
•The Company does not allocate certain corporate expenses to our operating segments, as these items are centrally controlled and are not directly attributable to any reportable segment.
The following tables reconcile net income (loss) attributable to shareholders to adjusted net income attributable to shareholders and related per share data:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | | | |
| (In millions except per diluted share data) | 2023 | | 2022 | | | | | | | | |
| Net income (loss) attributable to shareholders | $ | 18.4 | | | $ | 0.42 | | | $ | (44.1) | | | $ | (1.00) | | | | | | | | | |
| Unrealized loss (gain) on financial instruments | 7.8 | | | 0.18 | | | (23.5) | | | (0.53) | | | | | | | | | |
| Net foreign currency loss | 7.8 | | | 0.18 | | | 23.4 | | | 0.53 | | | | | | | | | |
| Change in fair value of contingent consideration | 3.2 | | | 0.07 | | | 30.3 | | | 0.69 | | | | | | | | | |
| Acquisition-related intangible amortization | 45.2 | | | 1.04 | | | 42.5 | | | 0.96 | | | | | | | | | |
| Other acquisition and divestiture related items | 5.1 | | | 0.12 | | | 4.1 | | | 0.09 | | | | | | | | | |
| Stock-based compensation | 31.9 | | | 0.74 | | | 27.9 | | | 0.63 | | | | | | | | | |
| Other costs | 15.1 | | | 0.35 | | | 8.8 | | | 0.20 | | | | | | | | | |
| Impairment charges | — | | | — | | | 136.5 | | | 3.09 | | | | | | | | | |
| Debt restructuring and debt issuance cost amortization | 74.4 | | | 1.71 | | | 4.7 | | | 0.11 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Tax related items | (32.1) | | | (0.74) | | | (52.8) | | | (1.19) | | | | | | | | | |
Dilutive impact of stock awards1 | — | | | — | | | — | | | (0.02) | | | | | | | | | |
Dilutive impact of convertible debt2 | — | | | (0.02) | | | — | | | (0.05) | | | | | | | | | |
| Adjusted net income attributable to shareholders | $ | 176.8 | | | $ | 4.05 | | | $ | 157.8 | | | $ | 3.51 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | | | | | |
| 2023 | | 2022 | | | | | | | | |
| Net income attributable to shareholders | $ | 181.7 | | | $ | 4.18 | | | $ | 112.7 | | | $ | 2.51 | | | | | | | | | |
| Unrealized loss (gain) on financial instruments | 20.1 | | | 0.46 | | | (90.3) | | | (2.01) | | | | | | | | | |
| Net foreign currency loss | 9.4 | | | 0.22 | | | 37.8 | | | 0.84 | | | | | | | | | |
| Change in fair value of contingent consideration | 6.2 | | | 0.14 | | | 135.1 | | | 3.00 | | | | | | | | | |
| Acquisition-related intangible amortization | 133.6 | | | 3.07 | | | 127.7 | | | 2.84 | | | | | | | | | |
| Other acquisition and divestiture related items | 7.6 | | | 0.17 | | | 15.1 | | | 0.34 | | | | | | | | | |
| Stock-based compensation | 94.5 | | | 2.17 | | | 78.4 | | | 1.74 | | | | | | | | | |
| Other costs | 28.6 | | | 0.66 | | | 24.9 | | | 0.55 | | | | | | | | | |
| Impairment charges | — | | | — | | | 136.5 | | | 3.03 | | | | | | | | | |
| Debt restructuring and debt issuance cost amortization | 83.9 | | | 1.93 | | | 12.7 | | | 0.28 | | | | | | | | | |
| ANI adjustments attributable to non-controlling interests | — | | | — | | | (34.6) | | | (0.77) | | | | | | | | | |
| Tax related items | (83.7) | | | (1.92) | | | (98.0) | | | (2.18) | | | | | | | | | |
| | | | | | | | | | | | | | | |
Dilutive impact of convertible debt2 | — | | | (0.09) | | | — | | | (0.08) | | | | | | | | | |
| Adjusted net income attributable to shareholders | $ | 481.9 | | | $ | 10.99 | | | $ | 458.2 | | | $ | 10.09 | | | | | | | | | |
| | | | | | | | | | | | | | | |
1 As the Company reported a net loss for the three months ended September 30, 2022 under GAAP, the diluted weighted average shares outstanding equals the basic weighted average shares outstanding for that period. The non-GAAP adjustments described above resulted in adjusted net income attributable to shareholders (versus a loss on a GAAP basis) for the three months ended September 30, 2022. Therefore, dilutive common stock equivalents have been included in the calculation of adjusted diluted weighted average shares outstanding to arrive at adjusted per share data.
2 The dilutive impact of the Convertible Notes has been calculated under the ‘if-converted’ method for the periods through which they were outstanding. Under the ‘if-converted’ method, interest expense, net of tax, associated with our Convertible Notes of $1.8 million and $9.5 million and $3.8 million and $11.3 million was added back to adjusted net income for the three and nine months ended September 30, 2023 and 2022, respectively.For the same reasons,reported quarter-to-date and year-to-date periods of 2022 presented, approximately 1.6 million shares of the Company’s common stock associated with the assumed conversion of the Convertible Notes as of the beginning of the period was included in the calculations of adjusted net income per diluted share, as the effect of including such adjustments was dilutive. For the three and nine months ended September 30, 2023, approximately 0.7 million and 1.3 million shares of the Company’s common stock associated with the assumed conversion of the Convertible Notes (prior to repurchase and cancellation) was included in the calculation of adjusted net income per dilutive share, respectively, as the effect of including such adjustments was dilutive. The total number of shares used in calculating adjusted net income attributable to shareholders per diluted share for the three and nine months ended September 30, 2023 was 44.1 million and 44.7 million, respectively. The total number of shares used in calculating adjusted net income attributable to shareholders per diluted share for the three and nine months ended September 30, 2022 is 46.0 million and 46.5 million, respectively. For further information about the Convertible Notes and their repurchase and cancellation, see Note 10, Financing and Other Debt.
The following table reconciles operating income to total segment adjusted operating income and adjusted operating income:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In millions) | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Operating income | $ | 174.9 | | | $ | 21.3 | | | 488.6 | | | 314.7 | |
| Unallocated corporate expenses | 29.1 | | | 23.9 | | | 76.8 | | | 63.9 | |
| Acquisition-related intangible amortization | 45.2 | | | 42.5 | | | 133.6 | | | 127.7 | |
| Other acquisition and divestiture related items | 5.1 | | | 4.1 | | | 7.6 | | | 15.1 | |
| | | | | | | |
| Stock-based compensation | 31.9 | | | 27.9 | | | 94.5 | | | 78.4 | |
| Other costs | 15.1 | | | 8.9 | | | 28.6 | | | 25.0 | |
| Impairment charges | — | | | 136.5 | | | — | | | 136.5 | |
| Total segment adjusted operating income | $ | 301.3 | | | $ | 265.1 | | | $ | 829.7 | | | $ | 761.3 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Unallocated corporate expenses | (29.1) | | | (23.9) | | | $ | (76.8) | | | $ | (63.9) | |
| Adjusted operating income | $ | 272.2 | | | $ | 241.2 | | | $ | 752.9 | | | $ | 697.4 | |
Adjusted Free Cash Flow
The Company’s non-GAAP adjusted free cash flow is calculated as cash flows from operating activities, adjusted for net purchases of current investment securities, capital expenditures, the change in net deposits, changes in borrowings under the BTFP and borrowed federal funds and certain other adjustments which, for the nine months ended September 30, 2023, reflects an adjustment for contingent consideration paid to sellers in excess of acquisition-date fair value. Although non-GAAP adjusted free cash flow is not calculated in accordance with GAAP, WEX believes that adjusted free cash flow is a useful measure for investors to further evaluate our results of operations because (i) adjusted free cash flow indicates the level of cash generated by the operations of the business, which excludes consideration paid on acquisitions, after appropriate reinvestment for recurring investments in property, equipment and capitalized software that are required to operate the business; (ii) changes in net income may also be useful to investorsdeposits occur on a daily basis as one meansa regular part of evaluatingoperations; (iii) borrowings under the Company's performance.BTFP and borrowed federal funds are primarily used as a replacement for brokered deposits as part of our accounts receivable funding strategy; and (iv) purchases of current investment securities are made as a result of deposits gathered operationally. However, because adjusted net incomefree cash flow is a non-GAAP measure, it should not be considered as a substitute for, or superior to, net income, operating income or cash flows from operating activitiesflow as determined in accordance with GAAP. In addition, adjusted net incomefree cash flow as used by WEX may not be comparable to similarly titled measures employed by other companies.
The following table reconciles net earnings attributable to shareholdersGAAP operating cash flow to adjusted net income:free cash flow:
| | | | | | | | | | | | | | |
(In millions) | | Nine Months Ended September 30, |
| | | 2023 | | 2022 |
| Cash flows from operating activities, as reported | | | | $ | 146.0 | | | $ | 106.6 | |
| Adjustments to cash flows from operating activities: | | | | | | |
| Other | | | | 1.5 | | | — | |
| Adjusted for certain investing and financing activities: | | | | | | |
| Increases in net deposits | | | | 889.9 | | | 960.6 | |
| Increases in borrowings under the BTFP | | | | 500.0 | | | — | |
| Increases in borrowed federal funds | | | | 260.1 | | | — | |
| Less: Purchases of current investment securities, net of sales and maturities | | | | (1,304.2) | | | (584.8) | |
| Less: Capital expenditures | | | | (101.7) | | | (75.5) | |
| Adjusted free cash flow | | | | $ | 391.6 | | | $ | 406.8 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net earnings attributable to shareholders | $ | 33,971 |
| | $ | 19,696 |
| | $ | 80,462 |
| | $ | 55,350 |
|
| Unrealized losses on derivative instruments | 150 |
| | — |
| | 849 |
| | 5,007 |
|
| Net foreign currency remeasurement gain | (14,611 | ) | | (5,932 | ) | | (33,578 | ) | | (17,233 | ) |
| Non-cash adjustments related to tax receivable agreement | — |
| | 168 |
| | — |
| | 168 |
|
| Acquisition-related ticking fees | — |
| | — |
| | — |
| | 30,045 |
|
| Acquisition-related intangible amortization | 38,510 |
| | 33,855 |
| | 114,603 |
| | 59,066 |
|
| Other acquisition and divestiture related items | 1,006 |
| | 13,100 |
| | 3,380 |
| | 19,694 |
|
| Stock-based compensation | 8,483 |
| | 5,199 |
| | 22,354 |
| | 14,312 |
|
| Restructuring and other costs | 6,024 |
| | 3,767 |
| | 10,169 |
| | 11,689 |
|
| Impairment charge | — |
| | — |
| | 16,175 |
| | — |
|
| Debt restructuring and debt issuance cost amortization | 4,287 |
| | 9,106 |
| | 8,450 |
| | 10,649 |
|
| ANI adjustments attributable to non-controlling interest | (207 | ) | | (339 | ) | | (1,162 | ) | | (1,200 | ) |
| Tax related items | (16,130 | ) | | (25,214 | ) | | (53,131 | ) | | (53,505 | ) |
| Adjusted net income attributable to shareholders | $ | 61,483 |
| | $ | 53,406 |
| | $ | 168,571 |
| | $ | 134,042 |
|
Liquidity and Capital Resources
We fund our business operations primarily via cash on hand, cash generated from operations, the issuance of deposits, and borrowings under our Amended and Restated Credit Agreement. As of September 30, 2023, we had cash and cash equivalents of $957.8 million, including Corporate Cash of $170.2 million, along with a remaining borrowing availability of
$925.2 million under the Revolving Credit Facility provided by our Amended and Restated Credit Agreement along with access to various sources of funds, including uncommitted federal funds lines of credit from other banks.
We believe that our current cash and cash equivalents, cash generating capability,capabilities, financial condition and operations, together with our revolving credit agreement, term loans and notes outstanding, as well as otheraccess to available methods of financing (including deposits, participation loans, borrowed federal funds, and securitization facilities),funding sources will be adequatesufficient to fund our cash needs for at least the next 12 months.months and the foreseeable future. The table below summarizes our primary sources and uses of cash:
Our short-term cash requirements consist primarily of funding the working capital needs of our business, payments on maturities and withdrawals of brokered deposits and borrowed federal funds, required capital expenditures, repayments on our credit facility, interest payments on our credit facility and other operating expenses. WEX Bank can fund our short-term domestic cash requirements through the issuance of brokered deposits and borrowed federal funds. Any remaining cash needs are primarily funded through operations. | | | | | | | | |
| Sources of cash | | Uses of cash1 |
•Cash generated from operations •Borrowings and availability on our Amended and Restated Credit Agreement2 •Deposits3 •Accounts receivable securitization and factoring arrangements4 •Participation debt and borrowed federal funds5
| | •Payments on our Amended and Restated Credit Agreement •Payments on maturities and withdrawals of deposits •Payments on borrowed federal funds and other short-term borrowings •Working capital needs of the business •Capital expenditures •Purchases of shares of treasury stock •Mergers and acquisitions |
1 Our long-term cash requirements consist primarily of amounts owed on our 2016Amended and Restated Credit Agreement and Notes, amounts due to Wyndham Worldwide Corporation as part of our tax receivable agreement and various facilities lease agreements.
As of September 30, 2017, we had approximately $78.4 million in cash located outside of the United States. Undistributed earnings of certain foreign subsidiaries of the Company amounted to $46.0 million2 Under our Amended and Restated Credit Agreement, as of September 30, 2017. These earnings are considered to be indefinitely reinvested, and accordingly, no U.S. federal and state income taxes have been provided thereon. If we were to distribute such earnings in the form of dividends or otherwise,2023 the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. The Company has determined that the amounthad outstanding term loan principal borrowings of taxes attributable to these undistributed earnings is not practicably determinable. The Company’s primary tax jurisdictions are the United States, Australia and the United Kingdom.
Earnings outside of the U.S. are accompanied by certain financial risks, such as changes in foreign currency exchange rates. Changes in foreign currency exchange rates may reduce the reported value of our foreign currency denominated revenues, earnings and cash flows. We cannot predict changes in currency exchange rates, the impact of exchange rate changes, nor the degree to which we will be able to manage the related impact. The Company utilizes a limited foreign currency exchange hedging program, entering into short-term foreign currency swaps to convert the foreign currency exposures of certain foreign currency denominated intercompany loans and investments to the base currency. We will continue to monitor our foreign currency exposure for discrete items and may, from time to time, hedge certain foreign currency transactions.
The table below summarizes our cash activities:
|
| | | | | | | |
| (in thousands) | Nine Months Ended September 30, |
| Net cash (used for) provided by: | 2017 | | 2016 |
| Operating activities | $ | (45,669 | ) | | $ | (80,873 | ) |
| Investing activities | $ | (56,005 | ) | | $ | (1,139,562 | ) |
| Financing activities | $ | 177,109 |
| | $ | 1,472,062 |
|
Operating Activities
Cash used for operating activities for the nine months ended September 30, 2017 decreased $35.2$471.6 million as compared to cash used during the same period of the prior year, resulting primarily from higher net income adjusted for non-cash charges. This favorable factor was partly offset by an increase in accounts receivables, net of associated payables, due to higher fuel prices and volumes as compared to the same period last year.
Investing Activities
Cash used for investing activities for the nine months ended September 30, 2017 decreased $1,083.6 million as compared to cash used during the same period of the prior year. During the nine months ended September 30, 2016, we paid $1,089.3 million as part of the EFS acquisition. For the nine months ended September 30, 2017, cash used for investing activities consisted of $56.1 million of capital additions primarily related to the development of internal-use software as we expand globally and provide competitive products and services to our customers.
Financing Activities
Cash provided by financing activities for the nine months ended September 30, 2017 decreased $1,295.0 million as compared to cash provided during the same period of the prior year, primarily due to lower relative net borrowings under our credit agreement. Net borrowings for the nine months ended September 30, 2016 resulted primarily from the EFS acquisition. Additionally, cash balances for the nine months ended September 30, 2016 benefited from an increase in deposits.
Securitization Facilities
The Company is a party to three securitized debt agreements. Under one of these agreements, we pay a variable interest rate on the outstanding balanceRevolving Credit Facility and letters of credit of $33.2 million drawn against the securitization facility based on the Australian Bank Bill Rate plus an applicable margin. Under the second agreement, the amount collected on the securitized receivables is restricted to pay the securitized debt and is not available for general corporate purposes. The amounts of receivables to be securitized under this agreement will be determined by management on a monthly basis. Under the third agreement, the Company sells certain unsecured salary advance receivables to an investment fund managed by an unrelated third-party financial institution at a discount relative to the face value of the transferred receivables.Revolving Credit Facility. See Part I – Item 1 – Note 7,10, Financing and Other Debt, to our condensed consolidated financial statements for more information regarding these facilities.our Amended and Restated Credit Agreement.
Deposits and Borrowed Federal Funds
3 WEX Bank’s regulatory status enables it to raise capital to fund the Company’s working capital requirements by issuing deposits, subject to FDIC rules governing minimum financial ratios. Additionally, WEX Bank utilizes brokeredholds deposits for the benefit of WEX Inc.’s HSA customers subject to financethe terms of a portion of our domestic accounts receivable. WEX Bank issued certificates of deposit in various maturities ranging from one month to three years, with interest rates ranging from 0.90 percent to 2.00 percent as of September 30, 2017.agreement. As of September 30, 2017 and December 31, 2016,2023, we had approximately $741.4$4,368.3 million and $725.6 million of certificates of deposit outstanding, respectively. As of September 30, 2017, we had approximately $281.6 million of interest-bearing money market deposits with a weighted average interest rate of 1.28 percent, compared to $325.5 million of interest-bearing money market deposits at December 31, 2016, with a weighted average interest rate of 0.76 percent.
WEX Bank may issue brokered deposits without limitation on the balance outstanding. However, WEX Bank must maintain minimum financial ratios, which include risk-based asset and capital requirements, as prescribed by the FDIC. As of September 30, 2017, all brokered deposits were in denominations of $250 thousand or less, corresponding to FDIC deposit insurance
limits. Interest-bearing money market funds may be withdrawn at any time. We believe that our brokered deposits are paying competitive yields and that there continues to be consumer demand for these instruments.
We also carry non-interest bearing deposits that are required for certain customers as collateral for their credit accounts. We had $68.5 million and $67.8 million of these deposits on hand at September 30, 2017 and December 31, 2016, respectively.
WEX Bank also borrows from lines of credit on a federal funds rate basis to supplement the financing of our accounts receivable. Our federal funds lines of credit were $246.5 million and $250.0 million as of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017, we had $28.5 million of outstanding borrowings on these lines of credit. There were no outstanding balances on these lines of credit as of December 31, 2016.
2016 Credit Agreement
On July 1, 2016, we entered into the 2016 Credit Agreement in order to permit the additional financing necessary to facilitate the EFS acquisition. The 2016 Credit Agreement provides for a tranche A term loan facility in an amount equal to $455 million, a tranche B term loan facility in an amount equal to $1,200 million and a $470 million secured revolving credit facility, with a $250 million sublimit for letters of credit and a $20 million sublimit for swingline loans.
Additional loans of up to the greater of $375 million (plus the amount of certain prepayments) and an unlimited amount subject to satisfaction of a consolidated leverage ratio test of 4.00 to 1.00 may be made available under the 2016 Credit Agreement upon request of the Company subject to specified terms and conditions, including receipt of lender commitments. Effective July 3, 2017, the Company repriced the secured term loans under the 2016 Credit Agreement. The consolidated leverage ratio as defined in the credit facility (i.e. consolidated funded indebtedness to consolidated EBITDA), was also modified for purposes of calculating the interest rate margin for tranche A term loans and revolving loans and determining compliance with the financial covenant by allowing the Company to exclude up to $75 million of certain corporate cash balances for purposes of determining consolidated funded indebtedness.
Proceeds from the 2016 Credit Agreement were used to pay the cash portion of the purchase price for the EFS acquisition, repay amounts outstanding under the 2014 Credit Agreement (which was superseded by the 2016 Credit Agreement), and pay related fees, expenses and other transaction costs, as well as for working capital and other general corporate purposes.
As of September 30, 2017, we had $149.4 million of borrowings against our $470.0 million revolving credit facility, which terminates on July 1, 2021. The combined outstanding debt under our tranche A term loan facility, which matures on July 1, 2021, and our tranche B term loan facility, which matures on July 1, 2023, totaled $1,611.6 million at September 30, 2017. As of September 30, 2017, amounts outstanding under the 2016 Credit Agreement bore a weighted average effective interest rate of 3.9 percent.
Our ability to draw down available capital under our line of credit is subject to, and limited by, compliance with certain financial covenants. As of September 30, 2017, we were in compliance with all material covenants.
See Part I – Item 1 — Note 7, Financing and Other Debt and Note 16, Subsequent Event for further information regarding interest rates, voluntary prepayments rights, principal payment requirements, financial covenants and recent increases to availability under our 2016 Credit Agreement.
Other Debt
WEX Brazil Debt
WEX Brazil had debt of approximately $11.7 million and $30.8 million as of September 30, 2017 and December 31, 2016, respectively. This is composed of credit facilities held in Brazil and loan arrangements related to our accounts receivable, with various maturity dates. The average interest rate was 21.4 percent and 19.7 percent as of September 30, 2017 and December 31, 2016, respectively. This debt is recorded in Other debt on the Company’s unaudited condensed consolidated balance sheets for the periods presented.
Participation Debt
WEX Bank maintains three agreements with third-party banks to fund customer balances that exceed WEX Bank's lending limit to an individual customer. During the nine months ended September 30, 2017, the Company increased the funding capacity by $90,000 to $185,000. Associated borrowings carry a variable interest rate of 1 month to 1 year LIBOR plus a margin of 225 basis points. The balance of the debt was $154.5 million and $95.0 million at September 30, 2017 and December 31, 2016 respectively, and was secured by an interest in the underlying customer receivables. The balance will fluctuate on a daily basis
based on customer funding needs. The balance will mature in amounts of $85.0 million and $50.0 million on May 30, 2018 and December 31, 2021, respectively, with the remaining $19.5 million maturing on demand.
Derivative Instruments
The Company is exposed to certain market risks relating to its ongoing business operations. From time to time, the Company enters into derivative instrument arrangements to manage various risks including interest rate risk, foreign exchange risk and commodity price risk.
In November 2016, the Company entered into three forward-fixed interest rate swap agreements to manage the interest rate risk associated with our outstanding variable-interest rate borrowings, effective December 30, 2016. Beginning in January 2017, the Company began receiving variable interest of 1-month LIBOR and paying fixed rates between 0.896 percent to 1.125 percent under these swap agreements, reducing the variability of the future interest payments associated with $800.0 million of our borrowings. These swaps will mature on December 31, 2018 and 2020.total deposits. See Part I – Item 1 – Note 6, Derivative Instruments and Note 9, Fair Value for further information.
Our fuel price derivatives were entered into to mitigate the volatility that domestic fuel prices introduceDeposits, to our revenue streams. After the first quarter of 2016, we were no longer hedgedcondensed consolidated financial statements for changes in fuel prices. Management will continuemore information regarding our deposits.
4 The Company utilizes securitized debt agreements to monitor the fuel price market and evaluate its alternatives as it relates to this hedging program.
Regulatory Environment
The Company's subsidiary, WEX Bank, is subject to various regulatory capital requirements administered by the FDIC and the Utah Department of Financial Institutions. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could havefinance a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, WEX Bank must meet specific capital guidelines that involve quantitative measures of WEX Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. WEX Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulations to ensure capital adequacy require WEX Bank to maintain minimum amounts and ratios as defined in the regulations. As of December 31, 2016, the most recent FDIC exam report categorized WEX Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events subsequent to that examination report that management believes have changed WEX Bank’s capital rating. See Part I – Item 1 – Note 15, Supplementary Regulatory Capital Disclosure for further information.
Share Repurchases
We did not purchase any sharesportion of our common stock during eitherreceivables, lower our cost of the nine months ended September 30, 2017 or 2016.borrowing and more efficiently utilize capital. The approximate dollar valueCompany had $99.9 million of shares that were available to be purchasedsecuritized debt under our share repurchase program was $108.2 millionthese facilities as of September 30, 2017.
At the closing of the EFS transaction, the Company issued 4,011,672 shares2023. We also utilize off-balance sheet factoring and securitization arrangements to sell certain of our common stock (representing approximately 9.4 percent of our outstanding shares as of July 1, 2016)accounts receivable to funds affiliated with Warburg Pincus LLC as partial consideration forunrelated third-party financial institutions in order to accelerate the acquisition. On the same date, the Company entered into an investor rights agreement ("IRA"), which provides for transfer restrictions and customary registration rights with respect to the shares, among other things. Under the IRA, the Company is prohibited from taking any action that may cause the holders of registrable securities under the IRA, individually or in the aggregate, to own ten percent or more of the then issued and outstanding shares of its common stock. This restriction could limit our ability to make share repurchases until holders of registrable securities under the IRA dispose of a significant portion of their shares.
Dividends
The Company has not declared any dividends on its common stock since it commenced trading on the NYSE on February 16, 2005. The timing and amount of future dividends, if any, will be (i) dependent upon the Company’s results of operations, financial condition, cash requirements and other relevant factors, (ii) subject to the discretion of the Board of Directors of the Company and (iii) payable only outcollection of the Company’s surplus or current net profits in accordance with the General Corporation Law of the State of Delaware.
The Company has certain restrictionscash and reduce internal costs. Available capacity is dependent on the dividends it may pay under its revolving credit agreement, includinglevel of our trade accounts receivable eligible to be sold and the requirementfinancial institutions’ willingness to maintain pro forma compliance with a ratio of consolidated funded indebtedness to consolidated EBITDA of less than 2.50:1.00 for the most recent period of four fiscal quarters.
Off-balance Sheet Arrangements
Even though off-balance sheet arrangements are not recorded as liabilities under GAAP,purchase such arrangements may potentially impact our liquidity, capital resources and results of operations. These arrangements serve a variety of business purposes, howeverreceivables. However, the Company is not dependent on them to maintain its liquidity and capital resources. We are not aware of any circumstances that are reasonably likely to cause the off-balance sheet arrangements to have a material adverse effect on liquidity and capital resources. AsSee Part I – Item 1 – Notes 10, Financing and Other Debt and 11, Off-Balance Sheet Arrangements, to our condensed consolidated financial statements for further information about the Company’s securitized debt and off-balance sheet arrangements.
5 From time to time, WEX Bank enters into participation agreements with third-party banks to fund customers’ balances that exceed WEX Bank’s lending limit to individual customers. There was $41.5 million borrowed against these participation agreements as of September 30, 2017, we had posted letters2023. WEX Bank also borrows from uncommitted federal funds lines from time to time to supplement the financing of the Company’s accounts receivable. There were $260.0 million in outstanding borrowings under these lines of credit totaling approximately $13.0 million as collateral under the terms of our lease agreement for our corporate offices and other corporate matters.
Factoring Arrangements
Certain foreign subsidiaries use substantially non-recourse factoring arrangements with third party financial institutions to manage working capital and cash flows. Under these programs, we sell receivables to two financial institutions. Available capacity under these programs is dependent on the level of our trade accounts receivable eligible to be sold and the financial institutions' willingness to purchase such receivables. As such, these factoring arrangements can be reduced or eliminated at any time due to market conditions and changes in the credit worthiness of our customers, which would negatively impact our liquidity.September 30, 2023. See Part I – Item 1 – Note 8, Off-Balance Sheet Arrangements10, Financing and Other Debt, to our condensed consolidated financial statements for more information regarding these arrangements.facilities.
Contractual Obligations
Additional Sources of Cash Available
On March 12, 2023, the Federal Reserve Board announced the BTFP, which provides liquidity to U.S. depository institutions. This program allows bank loans for up to one year in length, collateralized by the par value of qualifying assets, including U.S. treasuries and mortgage-backed securities. Advances will be available until March 11, 2024, or longer if the program is extended. At any time under the BTFP, WEX Bank is able to refinance without penalty in order to obtain the most advantageous rate. WEX Bank has accessed $500.0 million of temporary, low-cost capital under the BTFP as of September 30, 2023, pledging securities with a par value of $800.3 million and market value of $688.3 million as collateral.
On August 11, 2023, the Company repurchased all of its outstanding Convertible Notes for a total purchase price of $370.4 million, inclusive of accrued and unpaid interest from and including July 15, 2023, to but excluding August 11, 2023. Subsequently, on September 26, 2023, the Company entered into the Third Amendment to Amended and Restated Credit Agreement, which increased the revolving credit commitments under the Company’s Revolving Credit Facility by $500.0 million. This amendment restored most of the revolver capacity used to repurchase the Convertible Notes and close the Ascensus Acquisition. See Part I – Item 1 – Note 10, Financing and Other Debt, and Note 4, Acquisitions and Other Investments, to our condensed consolidated financial statements for more information regarding the Convertible Notes repurchase, Third Amendment to Amended and Restated Credit Agreement and Ascensus Acquisition.
WEX Bank has the ability to borrow funds from the Federal Reserve Bank Discount Window. Borrowing limits fluctuate based on pledged assets, and as of September 30, 2023, the Company could borrow up to a maximum amount of $202.3 million. WEX Bank had no borrowings outstanding on this line of credit as of September 30, 2023. See Part I – Item 1 – Note 10, Financing and Other Debt, to our condensed consolidated financial statements for more information regarding this borrowing arrangement.
Cash Flows
The table below summarizes our cash activities and adjusted free cash flow: | | | | | | | | | | | |
| Nine Months Ended September 30, |
| (In millions) | 2023 | | 2022 |
| Net cash provided by (used for) | | | |
Operating activities1 | $ | 146.0 | | | $ | 106.6 | |
| Investing activities | $ | (1,571.4) | | | $ | (663.9) | |
Financing activities1 | $ | 1,705.3 | | | $ | 1,103.5 | |
| Non-GAAP financial measure: | | | |
Adjusted free cash flow2 | $ | 391.6 | | | $ | 406.8 | |
1 Restricted cash payable inflows of $350.1 million for the nine month period ended September 30, 2022 have been reclassified from operating activities to financing activities to conform to the current period presentation. Refer to Item 1, Note 1, Basis of Presentation for more information.
2 The Company’s non-GAAP adjusted free cash flow is calculated as cash flows from operating activities, adjusted for net purchases of current investment securities, capital expenditures, the change in net deposits, changes in borrowings under the BTFP and borrowed federal funds and certain other adjustments. For a reconciliation to net cash provided by operating activities, the most closely comparable GAAP measure, and the reasons why we believe this is an important financial measure, please refer to the section titled Non-GAAP Financial Measures That Supplement GAAP Measures.
Operating Activities
We anticipatefund a customer’s entire receivable in the majority of our Mobility and Corporate Payment processing transactions, while the revenue generated by these transactions is only a small percentage of that amount. Consequently, cash flows from operations are impacted significantly by increases or decreases in fuel prices and purchase volumes, driving changes in accounts receivable and accounts payable balances, which directly impact our July 2017capital resource requirements.
Cash provided by operating activities for the nine months ended September 30, 2023 increased $39.4 million as compared to the same period in the prior year. The increase in cash provided by operating activities year over year was primarily the result of higher net income adjusted for non-cash items.
Investing Activities
Investing cash flows generally consist of capital expenditures, cash used for acquisitions and the investment of custodial cash assets.
Cash used for investing activities for the nine months ended September 30, 2023 increased $907.5 million as compared to the same period in the prior year, primarily resulting from higher relative investment of HSA deposits in available-for-sale debt repricing should reducesecurities and the Ascensus Acquisition, which closed on September 1, 2023. See Part I – Item 1 – Note 4, Acquisitions and Other Investments, to our condensed consolidated financial statements for more information regarding this acquisition.
Financing Activities
Financing cash flows generally consist of the issuance and repayment of debt and deposits, changes in restricted cash payable and purchases of our common stock. Repurchases of our common stock may vary based on management’s evaluation of market and economic conditions and other factors.
Cash provided by financing activities for the nine months ended September 30, 2023 increased $601.8 million, due primarily to net borrowings under the newly available BTFP and under our Revolving Credit Facility during the nine months ended September 30, 2023, offset in part by the repurchase of our Convertible Notes.
During the nine months ended September 30, 2023, the Company repurchased approximately 0.8 million shares of our common stock subject to an authorized and outstanding share buyback plan. Cash payments for share repurchases during the nine months ended September 30, 2023 totaled $152.6 million. As of the date of this filing, there is $363.5 million worth of common stock shares that are available to be purchased pursuant to the existing repurchase authorization.
Adjusted Free Cash Flow
The definition of adjusted free cash flow, and the reasons why we believe it to be an important financial measure, can be found in the section titled Non-GAAP Financial Measures That Supplement GAAP Measures.
Adjusted free cash flow decreased $15.2 million during the nine months ended September 30, 2023 as compared to the same period in the prior year, reflecting an increase in investments of HSA deposits in available-for-sale debt securities, partially offset by borrowings under the BTFP and borrowings of federal funds.
Financial Covenants
The Amended and Restated Credit Agreement contains customary affirmative and negative covenants affecting the Company and its subsidiaries, includingcovenants limiting the Company’s ability to, among other things, incur debt (including disqualified stock), grant liens, make certain investments, pay dividends, repurchase equity interests and sell assets, subject to certain exceptions. The Amended and Restated Credit Agreement also contains customary financial maintenance covenants, including a consolidated interest coverage ratio and a consolidated leverage ratio.The indenture associated with the Convertible Notes included customary covenants, including a debt incurrence covenant that restricted the Company from incurring certain indebtedness, including disqualified stock and preferred stock issued by approximately $11 millionthe Company or its subsidiaries, subject to customary exceptions. In connection with the repurchase of our Convertible Notes, this indenture was discharged and, as such, the Company is no longer subject to the restrictions contained in the indenture governing the Convertible Notes. See Part I – Item 1 – Note 10, Financing and Other Debt, to our condensed consolidated financial statements for further information on an annualized basis relative to what was disclosedthe repurchase of the Convertible Notes. As of September 30, 2023, we were otherwise in compliance with such remaining covenants.See Part II – Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources and Part II – Item 8 – Note 16, Financing and Other Debt, in our Annual Report on Form 10-K for the year ended December 31, 2016. All other2022 for more information regarding these covenants.
Other Commitments, Contingencies and Contractual Obligations
Other than commitments arising related to the upcoming Payzer acquisition, and impacts from the third quarter repurchase of our Convertible Notes and the 2023 borrowings on the BTFP, there were no material changes to our contractual obligations are consistent with those disclosedfrom the information previously provided in Item 7 of our Annual Report on Form 10-K10–K for the year ended December 31, 2016.2022.
WEX Bank is in the process of complying with a consent order issued by the FDIC and the UDFI (the “2022 Order”) on May 6, 2022 and a consent order issued by the FDIC on September 20, 2023 (the “2023 Order”). The 2022 Order requires WEX Bank to strengthen its Bank Secrecy Act/anti-money laundering compliance program and to address related matters, including with respect to controls. The terms of the 2022 Order will remain in effect and be enforceable until they are modified, terminated, suspended or set aside by the FDIC and the UDFI, however, we believe we have taken the appropriate actions to meet the requirements of the 2022 Order.
The 2023 Order requires WEX Bank to make certain improvements, which include corrections of certain issues identified in the 2023 Order and general enhancements to WEX Bank’s compliance management program. Customer impact and any resulting harm from the violations detailed in the 2023 Order have been identified and steps have been taken to remediate any such impact and harm. The terms of the 2023 Order will remain in effect and be enforceable until they are modified, terminated, suspended or set aside by the FDIC. Neither the matters identified in the 2022 Order nor the 2023 Order are expected to have a material effect on WEX Bank’s operations or the Company’s results of operations, financial condition or cash flows.
Critical Accounting Policies and Estimates
There areWe have no material changes to theour critical accounting policies and estimates discussed in our Annual Report on Form 10-K10–K for the year ended December 31, 2016.2022.
Recently Adopted Accounting Standards
See Note 2, Significant Accounting Policies, to the condensed consolidated financial statements included in Part I, – Item 1 – Note 2, New Accounting Standards to the Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.10–Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
WeAs of September 30, 2023, we have no material changes to the market risk disclosures in our Annual Report on Form 10-K10–K for the year ended December 31, 2016.2022.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
TheOur management, with the participation of the principal executive officer and principal financial officer of WEX Inc., evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2017.2023. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2023. “Disclosure controls and procedures” are controlsand other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, is recorded, processed, summarized and reported.forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
As disclosed in our Annual Report on Form 10-K, Item 9A, for the year ended December 31, 2016, our management concluded that our internal control over financial reporting was not effective at December 31, 2016. As of this date, management identified a material weakness in internal control over financial reporting relating to the user access and program change management controls that are relevant to the preparation of the Company’s consolidated financial statements and system of internal control over financial reporting.
We are actively engaged in the implementation of a remediation plan to ensure that control deficiencies contributing to this material weakness are designed appropriately and will operate effectively, including implementing and testing enhanced controls surrounding access review and program change management. The remediation plan is intended to ensure that access to
financial applications and data is adequately restricted to appropriate personnel, and that changes affecting the financial applications and underlying account records are made by only authorized individuals. Management is working towards having these remediation efforts completed by the time we issue our December 31, 2017 Annual Report on Form 10-K. The material weakness will not be considered remediated until our controls are operational for a period of time, tested and management concludes that these controls are operating effectively.
The Company and its Board of Directors are committed to maintaining a strong internal control environment, and believe that these remediation efforts will result in significant improvements in our control environment. Notwithstanding the identified material weakness and the conclusion above that our disclosure controls and procedures were not effective as of September 30, 2017, management believes that the consolidated financial statements contained in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.
Changes in Internal Control Over Financial Reporting
During August 2017, in connection with the remediation efforts described above, the Company began the process of in-sourcing certain general IT controls and processes which cover our core businesses from a third party. Due to the pervasive nature of impacted general IT controls, we consider this in-sourcing to represent a materialThere has been no change in our internal control over financial reporting. Other than the remediation efforts on the material weakness identified above and the associated in-sourcing of general IT controls and processes, there was no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 20172023, that has materially affected, or is reasonably likely to materially affect, the Company’sour internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On August 11, 2016, the Company was sued in the Circuit Court of St. Charles County, Missouri, in a putative class action alleging the Company improperly sent unauthorized facsimile advertisements in violation of the Telephone Consumer Protection Act, 47 U.S.C. § 227 (the “TCPA”). The named plaintiff seeks to represent a nationwide class of recipients of unauthorized facsimile advertisements from the Company (collectively, the "Plaintiffs") and requests statutory damages for each facsimile advertisement. The Plaintiffs further allege that the opt-out notice of the faxes did not meet the criteria set forth in the TCPA or its underlying regulations. The Company removed the case to the United States District Court for the Eastern District of Missouri on September 15, 2016. On October 14, 2016, the Company filed an answer denying liability and stating the facsimile advertisement at issue was sent by FleetOne, LLC, Company’s wholly-owned subsidiary. On May 10, 2017, the parties agreed to a settlement in principle to resolve the class claims, which was preliminarily approved by the court on October 6, 2017. The expected settlement amount is not material to the Company's unaudited condensed consolidated financial position, results of operations, cash flows or liquidity.
From time to time, we are subject to other legal proceedings and claims in the ordinary course of business.business, including but not limited to: commercial disputes; contract disputes; employment litigation; disputes regarding our intellectual property rights; alleged infringement or misappropriation by us of intellectual property rights of others; and, matters relating to our compliance with applicable laws and regulations. As of the date of this filing, the current estimate of a reasonably possible loss contingency from allwe are not involved in any material legal proceedings isand there are no material proceedings known to be contemplated by governmental authorities. We also were not involved in any material tolegal proceedings that were terminated during the Company's consolidated financial position, results of operations or cash flows or liquidity.three months ended September 30, 2023.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K10–K for the year ended December 31, 20162022, and in Part II, "Item“Item 1A. Risk Factors"Factors” in our Quarterly ReportReports on Form 10-Q for the quarterly periodperiods ended March 31, 2017,2023 and June 30, 2023, which could materially affect our business, financial condition or future results. The risk factors disclosure in our Annual Report on Form 10-K for the year ended December 31, 2022 and in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2023 and June 30, 2023 is qualified by the information that is described in this Quarterly Report on Form 10-Q. The risks described in our Annual Report on Form 10-K10–K for the year ended December 31, 2022 and in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2023 and June 30, 2023 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On September 20, 2017, our BoardIssuer Purchases of Directors approved a $150 million share repurchase of ourEquity Securities
The following table presents the Company’s common stock expiring on September 2021. In addition to the newly authorized share repurchase program, the approximate dollar valuerepurchases during each month of shares that were available to be purchased under our 2013 repurchase program was $108.2 million as of September 30, 2017. We did not purchase shares of our common stock during the third quarter of 2017.2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Number of Shares Purchased | | Average Price Paid per Share2, 3 | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs1 |
| July 1 - July 31, 2023 | — | | | $ | — | | | — | | | $ | 413,465,103 | |
| August 1 - August 31, 2023 | 177,260 | | | $ | 189.24 | | | 177,260 | | | $ | 379,919,555 | |
| September 1 - September 30, 2023 | 83,122 | | | $ | 198.02 | | | 83,122 | | | $ | 363,459,997 | |
| Total | 260,382 | | | $ | 192.05 | | | 260,382 | | | |
1 Under an amended share buyback plan approved by our board of directors, announced on October 27, 2022, and extending through December 31, 2025, the Company is authorized to repurchase up to $650.0 million worth of common stock in the open market and through various other means.
2 Includes commissions paid on stock repurchases.
3 The Inflation Reduction Act of 2022, which was enacted into law on August 16, 2022, imposed a nondeductible one percent excise tax on the net value of certain stock repurchases made after December 31, 2022. All dollar amounts presented exclude such excise taxes, as applicable.
Item 5. Other Information.
During the three months ended September 30, 2023, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted, modified or terminated any contract, instruction or written plan for the purchase agreement foror sale of Company securities that was intended to satisfy the acquisitionaffirmative defense conditions of EFS, we were prohibited from repurchasing sharesRule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement,” as defined in Item 408 of our common stock prior to the consummation of the acquisition without the consent of the sellers.
Regulation S-K.
Item 6. Exhibits.
|
| | | | | | | | | | |
| Exhibit No. | | Description |
| 3.1 | | |
| 3.2 | | |
| 3.3 | | |
| 3.2 | | |
* | 10.1 | | |
| 10.2 | | |
| 10.1 | | First Amendment to CreditNote Repurchase Agreement, dated as of July 3, 2017, by and among WEX Inc., the subsidiaries of WEX Inc. identified therein, the lenders party thereto and Bank of America, N.A., as administrative agentAugust 11, 2023 (incorporated by reference to Exhibit No. 10.1 to our Current Report on Form 8-K filed with the SEC on July 3, 2017, File No. 001-32426)August 14, 2023) |
* | 31.110.2 | | |
| 10.3 | | |
| *† | 10.4 | | |
| *† | 10.5 | | |
| * | 31.1 | | |
| * | 31.2 | | |
| * | 32.1 | | |
| * | 32.2 | | |
| * | 101.INS | | Inline XBRL Instance Document |
| * | 101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
| * | 101.CAL | | Inline XBRL Taxonomy Calculation Linkbase Document |
| * | 101.LAB | | Inline XBRL Taxonomy Label Linkbase Document |
| * | 101.PRE | | Inline XBRL Taxonomy Presentation Linkbase Document |
| * | 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| * | 104 | | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) |
|
| | | | |
| * | These exhibits have been filed with this Quarterly Report on Form 10-Q.10–Q. |
| † | Denotes a management contract or compensatory plan or arrangement. |
| |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| WEX INC. |
| | |
| October 27, 2023 | By: | | /s/ Jagtar Narula |
| | | Jagtar Narula |
| | Chief Financial Officer |
| | (principal financial officer) |
| | | |
| | | |
| WEX INC. | | |
| | |
November 8, 2017 | By: | | /s/ Roberto Simon |
| | | Roberto Simon |
| | Chief Financial Officer |
| | (principal financial officer and principal accounting officer) |
