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 March 31,June 30, 2022
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.
(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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| 1 Hancock St., | Portland, | ME | | 04101 |
| (Address of principal executive offices) | | (Zip Code) |
(207) 773–8171
(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, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S–T during the preceding 12 months (or for such shorter period that the registrant was required to submit 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–2 of the Exchange Act.
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| Large Accelerated Filer | ☒ | | | Accelerated Filer | ☐ |
| Non-accelerated Filer | ☐ | | | Smaller Reporting Company | ☐ |
| | | | Emerging Growth 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–2 of the Exchange Act).
☐ Yes ☒ No
Number of shares of common stock outstanding as of April 27,July 22, 2022 was 44,990,271.44,174,133.
TABLE OF CONTENTS
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| PART I—FINANCIAL INFORMATION |
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| Item 1. | | | |
| 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. | | | |
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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 mean 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 plan 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”, “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 extent to which the coronavirus (COVID-19) pandemic and measures takeneffects of general economic conditions, including a decline in response thereto impact the Company’s employees, business, results of operations and financial condition in excess of current expectations, particularly with respect to demand for worldwide travel;fuel, travel related services, or healthcare related services, and payment and transaction processing activity;
•the impact of fluctuations in fuel prices and fuel spreads, in the Company’s international markets, including the resulting impact on the Company’s revenues and net income;
•the failure to maintain or renew key customer and partner agreements and relationships, or to maintain volumes under such agreements;
•breaches of, or other issues with, the Company’s technology systems or those of its third-party service providers and any resulting negative impact on its reputation, liabilities or relationships with customers or merchants;
•the actions of regulatory bodies, including banking and securities regulators, and the Company’s and its industrial bank’s responses thereto, 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 comply with the applicable requirements of MastercardMasterCard or Visa contracts and rules;
•the effectsextent to which the COVID-19 pandemic, including emergence of general economic conditions, including a declinenew variants, and measures taken in response thereto impact the Company’s employees, business, results of operations and financial condition in excess of current expectations, particularly with respect to demand for fuel, travel related services, or healthcare services,worldwide travel;
•the impact and payment and transaction processing activity;size of credit losses, including losses attributable to fraud;
•failure to expand the Company’s technological capabilities and service offerings as rapidly as the Company’s competitors;
•changes in interest rates and the rate of inflation;
•the ability to attract and retain employees;
•limitations on or compression of interchange fees;
•the impact and size of credit losses;
•the success of the Company’s recently announced Executive Leadership Team and strategic reorganization;
•the effects of the Company’s business expansion and acquisition efforts;
•the failure of corporate investments to result in anticipated strategic value;
•the failure to comply with the Treasury Regulations applicable to non-bank custodians;
•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 failure to complete or successfully integrate the Company’s acquisitions or to realize anticipated synergies and cost savings from such acquisitions;
•unexpected costs, charges, or expenses resulting from an acquired company or business;
•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;
•the impact of the future transition from LIBOR as a global benchmark to a replacement rate;
•the impact of the Company’s debt instruments on the Company’s operations;
•the impact of leverage on the Company’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 possible dilution to the Company’s stockholders caused by the issuance of additional shares of common stock or equity-linked securities, whether as result of the Company’s convertible notes or otherwise;
•the impact of the transition from LIBOR as a global benchmark to a replacement rate;
•the incurrence of impairment charges if the Company’s assessment of the fair value of certain of its reporting units changes;
•the uncertainties of litigation; as well as
•other risks and uncertainties identified in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 1, 2022.
The Company’sCompany's 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. The 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 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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| 2016 Credit Agreement | Credit agreement entered into on July 1, 2016, as amended from time to time, by and among the Company and certain of its subsidiaries, as borrowers, and Bank of America, N.A., as administrative agent on behalf of the lenders. |
| 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 | The 2016 Credit Agreement, as amended and restated on April 1, 2021. |
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| ASC | Accounting Standards Codification |
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| ASU | Accounting Standards Update |
ASU 2020-06 | Accounting Standards Update 2020-06-Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) |
Australian Securitization Subsidiary | Southern Cross WEX 2015-1 Trust, a special purpose entity consolidated by the Company |
| B2B | Business-to-businessBusiness-to-Business |
| benefitexpress | Benefit Express Services, LLC, a provider of highly configurable, cloud-based benefits administration technologies and services, and its indirect and direct parents, which were acquired as part of the benefitexpress Acquisition as defined in Note 4, Acquisitions to Itemon June 1, - Financial Statements2021 and merged into WEX Health, Inc. on April 30, 2022. |
| CODM | Chief operating decision makerOperating Decision Maker |
| Company | WEX Inc. and all entities included in the consolidated financial statementsstatements. |
| Convertible Notes | Convertible senior unsecured notes due on July 15, 2027 in an aggregate principal amount of $310$310.0 million with a 6.5 percent interest rate, issued July 1, 20202020. |
COVID-19 (or “coronavirus”) | An infectious disease caused by the SARS-CoV-2 virus.coronavirus. The World Health Organization declared the coronavirus outbreak a global pandemic on March 11, 20202020. |
| Discovery Benefits | Discovery Benefits, Inc. |
| DSUs | Deferred stock unitsStock Units held by non-employee directors. |
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| eNett | eNett International (Jersey) Limited |
| European Fleet business | (i) prior to January 1, 2022, WEX Fleet Europe and WEX Europe Services, collectivelycollectively; and (ii) from January 1, 2022, WEX Europe Services. |
European Securitization SubsidiaryEVs | Gorham Trade Finance B.V., a special purpose entity consolidated by the CompanyElectric Vehicles |
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| FDIC | Federal Deposit Insurance Corporation |
| Federal Reserve Bank Discount Window | Monetary policy that allows WEX to borrow funds on a short-term basis to meet temporary shortages of liquidity caused by internal or external disruptionsdisruptions. |
| Fuel transactions processed | Fuel transactions processed represents the total number of fuel transactions (funded and unfunded) made by fleet customerscustomers. |
| GAAP | Generally Accepted Accounting Principles in the United States |
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| HSA | Health Savings Account |
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| NAV | Net asset valueAsset Value |
| Net payment processing rate | The percentage of the dollar value of each payment processing transaction$ of fuel that the Company records as revenue from merchants less certain discounts given to customers and network feesfees. |
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| Notes | $400400.0 million senior notes with a 4.75 percent fixed rate, issued on January 30, 2013, which were redeemed in full by the Company on March 15, 20212021. |
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NYSE | New York Stock Exchange |
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| 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. |
| Optal | Optal Limited |
| Over-the-road | Typically, heavy trucks traveling long distancesdistances. |
| Payment processing $ of fuel | Total dollar value of the fuel purchased by fleets that have a payment processing relationship with WEXWEX. |
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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 purchasepurchase. |
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| PO Holding | PO Holding, LLC, a wholly-owned subsidiary of WEX Inc. and the direct parent of WEX HealthHealth. |
| PPG | Price per gallonPer Gallon of fuel |
| Processing costs | Expenses related to processing transactions, servicing customers and merchants and costs of goods sold related to hardware and other product sales. |
| Purchase volume | Total U.S. dollar value of all transactions in the Travel and Corporate Solutions and Health and Employee Benefit Solutions segments where interchange is earned by the CompanyCompany. |
| Redeemable non-controlling interest | The portion of the U.S. Health business’ net assets owned by a non-controlling interest holder, SBI, subjectprior to redemption rights held by the non-controllingMarch 7, 2022 acquisition of SBI’s remaining interest holderin PO Holding. |
SaaSRepurchase Program | Software-as-a-serviceShare buyback plan authorized by the Company’s board of directors, announced on August 26, 2021, and extending through September 30, 2025. |
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| SaaS | Software-as-a-Service |
| SBI | SBI Investments, Inc., which is owned by State Bankshares, Inc,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’s management excludes in evaluating segment performance, including unallocated corporate expenses, acquisition-related intangible amortization and other acquisition and divestiture related items, debt restructuring costs, stock-based compensation, and other costs. |
| Service fees | Costs 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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| Topic 606 | Accounting Standards CodificationASC Section 606, Revenue from Contracts with Customers |
TSRTotal volume | Includes purchases on WEX-issued accounts as well as purchases issued by others, but using the WEX platform. |
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| UDFI | Total shareholder returnUtah Department of Financial Institutions |
| U.S. Health 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. and, (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., unless otherwise indicated or required by the context |
| WEX Australia | WEX Card Holdings Australia Pty Ltd and its subsidiaries |
| WEX Europe Services | WEX Europe Service Limited, a European Fleet business |
| WEX Fleet Europe | A fleet business in Europe acquired from EG Group and merged into WEX Europe Services on January 1, 2022. |
| WEX Health | WEX Health, Inc., the Company’s healthcare technology and administration solutions provider/business. |
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| | | Three Months Ended March 31, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2022 | | 2021 | | | 2022 | | 2021 | | 2022 | | 2021 |
| Revenues | Revenues | | | | | Revenues | | | | | | | |
| Payment processing revenue | Payment processing revenue | $ | 239,478 | | | $ | 188,389 | | | Payment processing revenue | $ | 312,305 | | | $ | 213,426 | | | $ | 551,783 | | | $ | 401,815 | |
| Account servicing revenue | Account servicing revenue | 139,941 | | | 118,623 | | | Account servicing revenue | 137,638 | | | 132,997 | | | 277,579 | | | 251,620 | |
| Finance fee revenue | Finance fee revenue | 78,582 | | | 52,153 | | | Finance fee revenue | 85,310 | | | 59,499 | | | 163,892 | | | 111,652 | |
| Other revenue | Other revenue | 59,534 | | | 51,592 | | | Other revenue | 62,984 | | | 53,561 | | | 122,518 | | | 105,153 | |
| Total revenues | Total revenues | 517,535 | | | 410,757 | | | Total revenues | 598,237 | | | 459,483 | | | 1,115,772 | | | 870,240 | |
| Cost of services | Cost of services | | | Cost of services | |
| Processing costs | Processing costs | 132,507 | | | 109,762 | | | Processing costs | 137,435 | | | 116,208 | | | 269,942 | | | 225,970 | |
| Service fees | Service fees | 15,750 | | | 11,146 | | | Service fees | 14,856 | | | 13,759 | | | 30,606 | | | 24,905 | |
| Provision for credit losses | Provision for credit losses | 25,640 | | | 5,059 | | | Provision for credit losses | 42,186 | | | 12,962 | | | 67,826 | | | 18,021 | |
| Operating interest | Operating interest | 2,300 | | | 2,624 | | | Operating interest | 3,197 | | | 2,271 | | | 5,497 | | | 4,895 | |
| Depreciation and amortization | Depreciation and amortization | 26,002 | | | 29,194 | | | Depreciation and amortization | 26,633 | | | 26,451 | | | 52,635 | | | 55,645 | |
| Total cost of services | Total cost of services | 202,199 | | | 157,785 | | | Total cost of services | 224,307 | | | 171,651 | | | 426,506 | | | 329,436 | |
| General and administrative | General and administrative | 78,663 | | | 86,431 | | | General and administrative | 83,482 | | | 79,543 | | | 162,145 | | | 165,974 | |
| Sales and marketing | Sales and marketing | 73,945 | | | 78,347 | | | Sales and marketing | 80,440 | | | 85,605 | | | 154,385 | | | 163,952 | |
| | Depreciation and amortization | Depreciation and amortization | 40,454 | | | 37,653 | | | Depreciation and amortization | 38,877 | | | 40,406 | | | 79,331 | | | 78,059 | |
| | Operating income | Operating income | 122,274 | | | 50,541 | | | Operating income | 171,131 | | | 82,278 | | | 293,405 | | | 132,819 | |
| Financing interest expense | Financing interest expense | (29,689) | | | (33,284) | | | Financing interest expense | (31,820) | | | (32,473) | | | (61,509) | | | (65,757) | |
| Change in fair value of contingent consideration | Change in fair value of contingent consideration | (16,600) | | | — | | | Change in fair value of contingent consideration | (88,200) | | | (47,700) | | | (104,800) | | | (47,700) | |
| | Net foreign currency gain (loss) | 5,006 | | | (2,755) | | | |
| Net foreign currency (loss) gain | | Net foreign currency (loss) gain | (19,408) | | | 1,342 | | | (14,402) | | | (1,413) | |
| Net unrealized gain on financial instruments | Net unrealized gain on financial instruments | 49,827 | | | 7,033 | | | Net unrealized gain on financial instruments | 16,894 | | | 6,013 | | | 66,721 | | | 13,046 | |
| | Income before income taxes | Income before income taxes | 130,818 | | | 21,535 | | | Income before income taxes | 48,597 | | | 9,460 | | | 179,415 | | | 30,995 | |
| Income tax expense (benefit) | Income tax expense (benefit) | 42,032 | | | (1,670) | | | Income tax expense (benefit) | 14,468 | | | (746) | | | 56,500 | | | (2,416) | |
| Net income | Net income | 88,786 | | | 23,205 | | | Net income | 34,129 | | | 10,206 | | | 122,915 | | | 33,411 | |
| Less: Net income from non-controlling interests | Less: Net income from non-controlling interests | 268 | | | 726 | | | Less: Net income from non-controlling interests | — | | | 239 | | | 268 | | | 965 | |
| Net income attributable to WEX Inc. | Net income attributable to WEX Inc. | 88,518 | | | 22,479 | | | Net income attributable to WEX Inc. | 34,129 | | | 9,967 | | | 122,647 | | | 32,446 | |
| Change in value of redeemable non-controlling interest | Change in value of redeemable non-controlling interest | 34,245 | | | (25,044) | | | Change in value of redeemable non-controlling interest | — | | | (43,823) | | | 34,245 | | | (68,867) | |
| Net income (loss) attributable to shareholders | Net income (loss) attributable to shareholders | $ | 122,763 | | | $ | (2,565) | | | Net income (loss) attributable to shareholders | $ | 34,129 | | | $ | (33,856) | | | $ | 156,892 | | | $ | (36,421) | |
| | Net income (loss) attributable to shareholders per share: | Net income (loss) attributable to shareholders per share: | | | Net income (loss) attributable to shareholders per share: | |
| Basic | Basic | $ | 2.73 | | | $ | (0.06) | | | Basic | $ | 0.76 | | | $ | (0.76) | | | $ | 3.50 | | | $ | (0.82) | |
| Diluted | Diluted | $ | 2.71 | | | $ | (0.06) | | | Diluted | $ | 0.76 | | | $ | (0.76) | | | $ | 3.47 | | | $ | (0.82) | |
| Weighted average common shares outstanding: | Weighted average common shares outstanding: | | | Weighted average common shares outstanding: | |
| Basic | Basic | 44,912 | | | 44,343 | | | Basic | 44,790 | | | 44,788 | | | 44,851 | | | 44,566 | |
| Diluted | Diluted | 45,344 | | | 44,343 | | | Diluted | 45,077 | | | 44,788 | | | 45,211 | | | 44,566 | |
See notes to the unaudited condensed consolidated financial statements.
WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
| | | | Three Months Ended March 31, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2022 | | 2021 | | | 2022 | | 2021 | | 2022 | | 2021 |
| Net income | Net income | $ | 88,786 | | | $ | 23,205 | | | Net income | $ | 34,129 | | | $ | 10,206 | | | $ | 122,915 | | | $ | 33,411 | |
| | Other comprehensive loss, net of tax: | Other comprehensive loss, net of tax: | | | Other comprehensive loss, net of tax: | |
| | Unrealized losses on available-for-sale debt securities | Unrealized losses on available-for-sale debt securities | (51,668) | | | — | | | Unrealized losses on available-for-sale debt securities | (42,063) | | | — | | | (93,731) | | | — | |
| Foreign currency translation | Foreign currency translation | 4,306 | | | (6,877) | | | Foreign currency translation | (45,744) | | | (2,682) | | | (41,438) | | | (9,559) | |
| Other comprehensive loss, net of tax | Other comprehensive loss, net of tax | (47,362) | | | (6,877) | | | Other comprehensive loss, net of tax | (87,807) | | | (2,682) | | | (135,169) | | | (9,559) | |
| | Comprehensive income | 41,424 | | | 16,328 | | | |
| Comprehensive (loss) income | | Comprehensive (loss) income | (53,678) | | | 7,524 | | | (12,254) | | | 23,852 | |
| Less: Comprehensive income attributable to non-controlling interests | Less: Comprehensive income attributable to non-controlling interests | 268 | | | 407 | | | Less: Comprehensive income attributable to non-controlling interests | — | | | 239 | | | 268 | | | 647 | |
| Comprehensive income attributable to WEX Inc. | $ | 41,156 | | | $ | 15,921 | | | |
| Comprehensive (loss) income attributable to WEX Inc. | | Comprehensive (loss) income attributable to WEX Inc. | $ | (53,678) | | | $ | 7,285 | | | $ | (12,522) | | | $ | 23,205 | |
See notes to the unaudited condensed consolidated financial statements.
WEX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
| | | March 31,
2022 | | December 31,
2021 | | June 30,
2022 | | December 31,
2021 |
| Assets | Assets | | | | Assets | | | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 577,536 | | | $ | 588,923 | | Cash and cash equivalents | $ | 438,754 | | | $ | 588,923 | |
| Restricted cash | Restricted cash | 671,808 | | | 667,915 | | Restricted cash | 815,496 | | | 667,915 | |
| Accounts receivable (net of allowances of $76,253 in 2022 and $66,306 in 2021) | 3,863,159 | | | 2,891,242 | | |
| Accounts receivable (net of allowances of $100,607 in 2022 and $66,306 in 2021) | | Accounts receivable (net of allowances of $100,607 in 2022 and $66,306 in 2021) | 4,444,958 | | | 2,891,242 | |
| Investment securities | Investment securities | 977,757 | | | 948,677 | | Investment securities | 1,442,416 | | | 948,677 | |
| Securitized accounts receivable, restricted | Securitized accounts receivable, restricted | 160,180 | | | 125,186 | | Securitized accounts receivable, restricted | 171,415 | | | 125,186 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | 87,299 | | | 77,569 | | Prepaid expenses and other current assets | 112,995 | | | 77,569 | |
| Total current assets | Total current assets | 6,337,739 | | | 5,299,512 | | Total current assets | 7,426,034 | | | 5,299,512 | |
| Property, equipment and capitalized software (net of accumulated depreciation of $478,193 in 2022 and $458,093 in 2021) | 177,768 | | | 179,531 | | |
| Property, equipment and capitalized software (net of accumulated depreciation of $492,932 in 2022 and $458,093 in 2021) | | Property, equipment and capitalized software (net of accumulated depreciation of $492,932 in 2022 and $458,093 in 2021) | 180,954 | | | 179,531 | |
| Goodwill | Goodwill | 2,915,909 | | | 2,908,057 | | Goodwill | 2,873,369 | | | 2,908,057 | |
| Other intangible assets (net of accumulated amortization of $1,053,542 in 2022 and $1,009,601 in 2021) | 1,600,058 | | | 1,643,296 | | |
| Other intangible assets (net of accumulated amortization of $1,087,576 in 2022 and $1,009,601 in 2021) | | Other intangible assets (net of accumulated amortization of $1,087,576 in 2022 and $1,009,601 in 2021) | 1,555,005 | | | 1,643,296 | |
| Investment securities | Investment securities | 38,209 | | | 39,650 | | Investment securities | 37,253 | | | 39,650 | |
| Deferred income taxes, net | Deferred income taxes, net | 6,598 | | | 5,635 | | Deferred income taxes, net | 7,010 | | | 5,635 | |
| Other assets | Other assets | 257,111 | | | 231,147 | | Other assets | 243,296 | | | 231,147 | |
| | Total assets | Total assets | $ | 11,333,392 | | | $ | 10,306,828 | | Total assets | $ | 12,322,921 | | | $ | 10,306,828 | |
| Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | | | | Liabilities and Stockholders’ Equity | | | |
| Accounts payable | Accounts payable | $ | 1,713,744 | | | $ | 1,021,911 | | Accounts payable | $ | 1,958,545 | | | $ | 1,021,911 | |
| Accrued expenses | Accrued expenses | 434,416 | | | 476,971 | | Accrued expenses | 529,865 | | | 476,971 | |
| Restricted cash payable | Restricted cash payable | 671,808 | | | 668,014 | | Restricted cash payable | 815,520 | | | 668,014 | |
| Short-term deposits | Short-term deposits | 2,225,438 | | | 2,026,420 | | Short-term deposits | 2,885,727 | | | 2,026,420 | |
| Short-term debt, net | Short-term debt, net | 157,622 | | | 155,769 | | Short-term debt, net | 175,834 | | | 155,769 | |
| Other current liabilities | Other current liabilities | 50,417 | | | 50,614 | | Other current liabilities | 33,387 | | | 50,614 | |
| | Total current liabilities | Total current liabilities | 5,253,445 | | | 4,399,699 | | Total current liabilities | 6,398,878 | | | 4,399,699 | |
| Long-term debt, net | Long-term debt, net | 2,773,630 | | | 2,695,365 | | Long-term debt, net | 2,761,531 | | | 2,695,365 | |
| Long-term deposits | Long-term deposits | 650,257 | | | 652,214 | | Long-term deposits | 588,932 | | | 652,214 | |
| Deferred income taxes, net | Deferred income taxes, net | 212,517 | | | 192,965 | | Deferred income taxes, net | 181,448 | | | 192,965 | |
| Other liabilities | Other liabilities | 517,093 | | | 273,706 | | Other liabilities | 575,765 | | | 273,706 | |
| Total liabilities | Total liabilities | 9,406,942 | | | 8,213,949 | | Total liabilities | 10,506,554 | | | 8,213,949 | |
| Commitments and contingencies (Note 15) | 0 | | 0 | |
| Commitments and contingencies (Note 16) | | Commitments and contingencies (Note 16) | 0 | | 0 |
| Redeemable non-controlling interest | Redeemable non-controlling interest | — | | | 254,106 | | Redeemable non-controlling interest | — | | | 254,106 | |
| Stockholders’ Equity | Stockholders’ Equity | | Stockholders’ Equity | |
| Common stock $0.01 par value; 175,000 shares authorized; 49,409 shares issued in 2022 and 49,255 in 2021; 44,981 shares outstanding in 2022 and 44,827 in 2021 | 494 | | | 492 | | |
| Common stock $0.01 par value; 175,000 shares authorized; 49,482 shares issued in 2022 and 49,255 in 2021; 44,534 shares outstanding in 2022 and 44,827 in 2021 | | Common stock $0.01 par value; 175,000 shares authorized; 49,482 shares issued in 2022 and 49,255 in 2021; 44,534 shares outstanding in 2022 and 44,827 in 2021 | 495 | | | 492 | |
| Additional paid-in capital | Additional paid-in capital | 856,325 | | | 844,051 | | Additional paid-in capital | 880,518 | | | 844,051 | |
| Retained earnings | Retained earnings | 1,411,852 | | | 1,289,089 | | Retained earnings | 1,445,981 | | | 1,289,089 | |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | (169,879) | | | (122,517) | | Accumulated other comprehensive loss | (257,686) | | | (122,517) | |
| Treasury stock at cost; 4,428 shares in 2022 and 2021 | (172,342) | | | (172,342) | | |
| Treasury stock at cost; 4,948 and 4,428 shares in 2022 and 2021, respectively | | Treasury stock at cost; 4,948 and 4,428 shares in 2022 and 2021, respectively | (252,941) | | | (172,342) | |
| | Total stockholders’ equity | Total stockholders’ equity | 1,926,450 | | | 1,838,773 | | Total stockholders’ equity | 1,816,367 | | | 1,838,773 | |
| Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 11,333,392 | | | $ | 10,306,828 | | Total liabilities and stockholders’ equity | $ | 12,322,921 | | | $ | 10,306,828 | |
|
See notes to the unaudited condensed consolidated financial statements.
WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
| | | Common Stock Issued | | Additional
Paid-in
Capital | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Retained
Earnings | | Non-Controlling Interest | | Total Stockholders’
Equity | |
| | Shares | | Amount | | |
| | | | Common Stock Issued | | Additional
Paid-in
Capital | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Retained
Earnings | | Non-Controlling Interest | | Total Stockholders’
Equity |
| | | Shares | | Amount | |
| Balance at January 1, 2021 | Balance at January 1, 2021 | 48,616 | | | 485 | | | 830,729 | | | (82,935) | | | (172,342) | | | 1,288,952 | | | 13,022 | | | 1,877,911 | | Balance at January 1, 2021 | 48,616 | | | $ | 485 | | | $ | 830,729 | | | $ | (82,935) | | | $ | (172,342) | | | $ | 1,288,952 | | | $ | 13,022 | | | $ | 1,877,911 | |
| Stock issued | | Stock issued | 394 | | | 4 | | | 22,555 | | | — | | | — | | | — | | | — | | | 22,559 | |
| Share repurchases for tax withholdings | | Share repurchases for tax withholdings | — | | | — | | | (21,062) | | | — | | | — | | | — | | | — | | | (21,062) | |
| Stock-based compensation expense | | Stock-based compensation expense | — | | | — | | | 17,886 | | | — | | | — | | | — | | | — | | | 17,886 | |
| Change in value of redeemable non-controlling interest | | Change in value of redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | (25,044) | | | — | | | (25,044) | |
| Foreign currency translation | | Foreign currency translation | — | | | — | | | — | | | (6,558) | | | — | | | — | | | (319) | | | (6,877) | |
| Net income | | Net income | — | | | — | | | — | | | — | | | — | | | 22,479 | | | 374 | | | 22,853 | |
| Balance at March 31, 2021 | | Balance at March 31, 2021 | 49,010 | | | $ | 489 | | | $ | 850,108 | | | $ | (89,493) | | | $ | (172,342) | | | $ | 1,286,387 | | | $ | 13,077 | | | $ | 1,888,226 | |
| Stock issued under share-based compensation plans | Stock issued under share-based compensation plans | 394 | | | 4 | | | 22,555 | | | — | | | — | | | — | | | — | | | 22,559 | | Stock issued under share-based compensation plans | 214 | | | 2 | | | 20,479 | | | — | | | — | | | — | | | — | | | 20,481 | |
| Share repurchases for tax withholdings | Share repurchases for tax withholdings | — | | | — | | | (21,062) | | | — | | | — | | | — | | | — | | | (21,062) | | Share repurchases for tax withholdings | — | | | — | | | (884) | | | — | | | — | | | — | | | — | | | (884) | |
| Stock-based compensation expense | Stock-based compensation expense | — | | | — | | | 17,886 | | | — | | | — | | | — | | | — | | | 17,886 | | Stock-based compensation expense | — | | | — | | | 20,629 | | | — | | | — | | | — | | | — | | | 20,629 | |
| | Acquisition of non-controlling interest | | Acquisition of non-controlling interest | — | | | — | | | (81,631) | | | (2,284) | | | — | | | — | | | (13,077) | | | (96,992) | |
| Change in value of redeemable non-controlling interest | Change in value of redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | (25,044) | | | — | | | (25,044) | | Change in value of redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | (43,823) | | | — | | | (43,823) | |
| Foreign currency translation | Foreign currency translation | — | | | — | | | — | | | (6,558) | | | — | | | — | | | (319) | | | (6,877) | | Foreign currency translation | — | | | — | | | — | | | (2,682) | | | — | | | — | | | — | | | (2,682) | |
| Net income | Net income | — | | | — | | | — | | | — | | | — | | | 22,479 | | | 374 | | | 22,853 | | Net income | — | | | — | | | — | | | — | | | — | | | 9,967 | | | — | | | 9,967 | |
| Balance at March 31, 2021 | 49,010 | | | 489 | | | 850,108 | | | (89,493) | | | (172,342) | | | 1,286,387 | | | 13,077 | | | 1,888,226 | | |
| Balance at June 30, 2021 | | Balance at June 30, 2021 | 49,224 | | | 491 | | | 808,701 | | | (94,459) | | | (172,342) | | | 1,252,531 | | | — | | | 1,794,922 | |
| | Balance at January 1, 2022 | Balance at January 1, 2022 | 49,255 | | | 492 | | | 844,051 | | | (122,517) | | | (172,342) | | | 1,289,089 | | | — | | | 1,838,773 | | Balance at January 1, 2022 | 49,255 | | | 492 | | | 844,051 | | | (122,517) | | | (172,342) | | | 1,289,089 | | | — | | | 1,838,773 | |
| Stock issued under share-based compensation plans | Stock issued under share-based compensation plans | 154 | | | 2 | | | 770 | | | — | | | — | | | — | | | — | | | 772 | | Stock issued under share-based compensation plans | 154 | | | 2 | | | 770 | | | — | | | — | | | — | | | — | | | 772 | |
| Share repurchases for tax withholdings | Share repurchases for tax withholdings | — | | | — | | | (12,178) | | | — | | | — | | | — | | | — | | | (12,178) | | Share repurchases for tax withholdings | — | | | — | | | (12,178) | | | — | | | — | | | — | | | — | | | (12,178) | |
| Stock-based compensation expense | Stock-based compensation expense | — | | | — | | | 23,682 | | | — | | | — | | | — | | | — | | | 23,682 | | Stock-based compensation expense | — | | | — | | | 23,682 | | | — | | | — | | | — | | | — | | | 23,682 | |
| Unrealized loss on available-for-sale debt securities | Unrealized loss on available-for-sale debt securities | — | | | — | | | — | | | (51,668) | | | — | | | — | | | — | | | (51,668) | | Unrealized loss on available-for-sale debt securities | — | | | — | | | — | | | (51,668) | | | — | | | — | | | — | | | (51,668) | |
| Change in value of redeemable non-controlling interest, net of $3.5 million of tax expense | Change in value of redeemable non-controlling interest, net of $3.5 million of tax expense | — | | | — | | | — | | | — | | | — | | | 34,245 | | | — | | | 34,245 | | Change in value of redeemable non-controlling interest, net of $3.5 million of tax expense | — | | | — | | | — | | | — | | | — | | | 34,245 | | | — | | | 34,245 | |
| | Foreign currency translation | Foreign currency translation | — | | | — | | | — | | | 4,306 | | | — | | | — | | | — | | | 4,306 | | Foreign currency translation | — | | | — | | | — | | | 4,306 | | | — | | | — | | | — | | | 4,306 | |
| Net income | Net income | — | | | — | | | — | | | — | | | — | | | 88,518 | | | — | | | 88,518 | | Net income | — | | | — | | | — | | | — | | | — | | | 88,518 | | | — | | | 88,518 | |
| Balance at March 31, 2022 | Balance at March 31, 2022 | 49,409 | | | $ | 494 | | | $ | 856,325 | | | $ | (169,879) | | | $ | (172,342) | | | $ | 1,411,852 | | | $ | — | | | $ | 1,926,450 | | Balance at March 31, 2022 | 49,409 | | | $ | 494 | | | $ | 856,325 | | | $ | (169,879) | | | $ | (172,342) | | | $ | 1,411,852 | | | $ | — | | | $ | 1,926,450 | |
| Stock issued under share-based compensation plans | | Stock issued under share-based compensation plans | 73 | | | 1 | | | 2,324 | | | — | | | — | | | — | | | — | | | 2,325 | |
| Share repurchases for tax withholdings | | Share repurchases for tax withholdings | — | | | — | | | (3,053) | | | — | | | — | | | — | | | — | | | (3,053) | |
| Purchase of shares of treasury stock | | Purchase of shares of treasury stock | | — | | | — | | | — | | | (80,599) | | | — | | | — | | | (80,599) | |
| Stock-based compensation expense | | Stock-based compensation expense | — | | | — | | | 24,922 | | | — | | | — | | | — | | | — | | | 24,922 | |
| | Unrealized loss on available-for-sale debt securities | | Unrealized loss on available-for-sale debt securities | — | | | — | | | — | | | (42,063) | | | — | | | — | | | — | | | (42,063) | |
| Foreign currency translation | | Foreign currency translation | — | | | — | | | — | | | (45,744) | | | — | | | — | | | — | | | (45,744) | |
| Net income | | Net income | — | | | — | | | — | | | — | | | — | | | 34,129 | | | — | | | 34,129 | |
| Balance at June 30, 2022 | | Balance at June 30, 2022 | 49,482 | | | 495 | | | $ | 880,518 | | | $ | (257,686) | | | $ | (252,941) | | | $ | 1,445,981 | | | $ | — | | | $ | 1,816,367 | |
|
See notes to the unaudited condensed consolidated financial statements.
WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited) | | | | Three Months Ended March 31, | | Six Months Ended June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| Cash flows from operating activities | Cash flows from operating activities | | | | Cash flows from operating activities | | | |
| Net income | Net income | $ | 88,786 | | | $ | 23,205 | | Net income | $ | 122,915 | | | $ | 33,411 | |
| Adjustments to reconcile net income to net cash (used for) provided by operating activities: | | |
| Net unrealized gains | (54,732) | | | (4,505) | | |
| Adjustments to reconcile net income to net cash used for operating activities: | | Adjustments to reconcile net income to net cash used for operating activities: | |
| | Change in fair value of contingent consideration | Change in fair value of contingent consideration | 16,600 | | | — | | Change in fair value of contingent consideration | 104,800 | | | 47,700 | |
| Stock-based compensation | Stock-based compensation | 23,682 | | | 17,886 | | Stock-based compensation | 48,604 | | | 38,515 | |
| Depreciation and amortization | Depreciation and amortization | 66,456 | | | 66,847 | | Depreciation and amortization | 131,966 | | | 133,704 | |
| | Amortization of premiums on investment securities | Amortization of premiums on investment securities | 1,844 | | | — | | Amortization of premiums on investment securities | 3,477 | | | — | |
| Debt restructuring and debt issuance cost amortization | 3,263 | | | 4,455 | | |
| Deferred tax expense (benefit) | 14,200 | | | (2,235) | | |
| Debt issuance cost amortization and accretion expense | | Debt issuance cost amortization and accretion expense | 7,972 | | | 10,576 | |
| Deferred tax benefit | | Deferred tax benefit | (15,049) | | | (15,778) | |
| Provision for credit losses | Provision for credit losses | 25,640 | | | 5,059 | | Provision for credit losses | 67,826 | | | 18,021 | |
| | Other non-cash gains | | Other non-cash gains | (54,089) | | | (10,578) | |
| Changes in operating assets and liabilities, net of effects of acquisitions: | Changes in operating assets and liabilities, net of effects of acquisitions: | | Changes in operating assets and liabilities, net of effects of acquisitions: | |
| Accounts receivable and securitized accounts receivable | Accounts receivable and securitized accounts receivable | (1,030,533) | | | (565,374) | | Accounts receivable and securitized accounts receivable | (1,701,328) | | | (925,792) | |
| Prepaid expenses and other current and other long-term assets | Prepaid expenses and other current and other long-term assets | 26,152 | | | (11,065) | | Prepaid expenses and other current and other long-term assets | (8,961) | | | 14,158 | |
| Accounts payable | Accounts payable | 695,918 | | | 350,563 | | Accounts payable | 926,415 | | | 474,469 | |
| Accrued expenses and restricted cash payable | Accrued expenses and restricted cash payable | (39,267) | | | (100,744) | | Accrued expenses and restricted cash payable | 216,421 | | | 87,871 | |
| Income taxes | Income taxes | 24,777 | | | (3,877) | | Income taxes | 6,783 | | | (13,050) | |
| Other current and other long-term liabilities | Other current and other long-term liabilities | (23,816) | | | 2,490 | | Other current and other long-term liabilities | 4,083 | | | (15,209) | |
| | Net cash used for operating activities | Net cash used for operating activities | (161,030) | | | (217,295) | | Net cash used for operating activities | (138,165) | | | (121,982) | |
| Cash flows from investing activities | Cash flows from investing activities | | Cash flows from investing activities | |
| Purchases of property, equipment and capitalized software | Purchases of property, equipment and capitalized software | (24,163) | | | (18,280) | | Purchases of property, equipment and capitalized software | (45,601) | | | (37,040) | |
| | Purchases of equity securities | Purchases of equity securities | (72) | | | (96) | | Purchases of equity securities | (160) | | | (175) | |
| Maturities of equity securities | Maturities of equity securities | — | | | 61 | | Maturities of equity securities | — | | | 81 | |
| Purchases of available-for-sale debt securities | Purchases of available-for-sale debt securities | (97,612) | | | — | | Purchases of available-for-sale debt securities | (594,332) | | | — | |
| Sales and maturities of available-for-sale debt securities | Sales and maturities of available-for-sale debt securities | 15,284 | | | — | | Sales and maturities of available-for-sale debt securities | 29,398 | | | — | |
| Acquisitions, net of cash and restricted cash acquired | Acquisitions, net of cash and restricted cash acquired | — | | | 1,909 | | Acquisitions, net of cash and restricted cash acquired | — | | | (558,273) | |
| Net cash used for investing activities | Net cash used for investing activities | (106,563) | | | (16,406) | | Net cash used for investing activities | (610,695) | | | (595,407) | |
| Cash flows from financing activities | Cash flows from financing activities | | Cash flows from financing activities | |
| | Repurchase of share-based awards to satisfy tax withholdings | Repurchase of share-based awards to satisfy tax withholdings | (12,178) | | | (21,062) | | Repurchase of share-based awards to satisfy tax withholdings | (15,231) | | | (21,946) | |
| Purchase of treasury shares | | Purchase of treasury shares | (80,599) | | | — | |
| Proceeds from stock option exercises | Proceeds from stock option exercises | 772 | | | 22,559 | | Proceeds from stock option exercises | 3,097 | | | 43,040 | |
| Net change in deposits | Net change in deposits | 197,460 | | | 102,958 | | Net change in deposits | 797,903 | | | 451,291 | |
| | Net activity on other debt | Net activity on other debt | 29,582 | | | 194,798 | | Net activity on other debt | 50,745 | | | (20,000) | |
| Borrowings on revolving credit facility | Borrowings on revolving credit facility | 585,000 | | | — | | Borrowings on revolving credit facility | 1,273,100 | | | 719,800 | |
| Repayments on revolving credit facility | Repayments on revolving credit facility | (524,500) | | | — | | Repayments on revolving credit facility | (1,212,500) | | | (454,800) | |
| | Borrowings on term loans | | Borrowings on term loans | — | | | 112,819 | |
| Repayments on term loans | Repayments on term loans | (15,835) | | | (16,152) | | Repayments on term loans | (31,671) | | | (31,988) | |
| Redemption of Notes | Redemption of Notes | — | | | (400,000) | | Redemption of Notes | — | | | (400,000) | |
| | Debt issuance costs | | Debt issuance costs | — | | | (8,934) | |
| Net change in securitized debt | Net change in securitized debt | 2,216 | | | 2,320 | | Net change in securitized debt | 8,652 | | | 9,497 | |
| Net cash provided by (used for) financing activities | 262,517 | | | (114,579) | | |
| Net cash provided by financing activities | | Net cash provided by financing activities | 793,496 | | | 398,779 | |
| Effect of exchange rates on cash, cash equivalents and restricted cash | Effect of exchange rates on cash, cash equivalents and restricted cash | (2,418) | | | (7,723) | | Effect of exchange rates on cash, cash equivalents and restricted cash | (47,224) | | | (9,512) | |
| Net change in cash, cash equivalents and restricted cash | Net change in cash, cash equivalents and restricted cash | (7,494) | | | (356,003) | | Net change in cash, cash equivalents and restricted cash | (2,588) | | | (328,122) | |
| Cash, cash equivalents and restricted cash, beginning of period(a) | Cash, cash equivalents and restricted cash, beginning of period(a) | 1,256,838 | | | 1,329,653 | | Cash, cash equivalents and restricted cash, beginning of period(a) | 1,256,838 | | | 1,329,653 | |
Cash, cash equivalents and restricted cash, end of period(a) | Cash, cash equivalents and restricted cash, end of period(a) | $ | 1,249,344 | | | $ | 973,650 | | Cash, cash equivalents and restricted cash, end of period(a) | $ | 1,254,250 | | | $ | 1,001,531 | |
|
The following tables provides supplemental disclosure of non-cash investing and financing activities:
| | | Three Months Ended March 31, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Capital expenditures incurred but not paid | Capital expenditures incurred but not paid | $ | 3,043 | | | $ | 2,213 | | Capital expenditures incurred but not paid | $ | 7,057 | | | $ | 1,979 | |
| Deferred liability from acquisition of remaining interest in PO Holding | $ | 216,594 | | | $ | — | | |
| Initial deferred liability from acquisition of remaining interest in PO Holding | | Initial deferred liability from acquisition of remaining interest in PO Holding | 216,594 | | | — | |
| | Purchases of available-for-sale debt securities, unsettled as of period-end | | Purchases of available-for-sale debt securities, unsettled as of period-end | 25,806 | | | — | |
| Non-cash contribution from non-controlling interest | | Non-cash contribution from non-controlling interest | — | | | 12,457 | |
| Deferred cash consideration as part of asset acquisition | | Deferred cash consideration as part of asset acquisition | — | | | 47,408 | |
| Contingent consideration as part of asset acquisition | | Contingent consideration as part of asset acquisition | — | | | 27,200 | |
|
(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.
| | | | Three Months Ended March 31, | | Six Months Ended June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | $ | 588,923 | | | $ | 852,033 | | Cash and cash equivalents at beginning of period | $ | 588,923 | | | $ | 852,033 | |
| Restricted cash at beginning of period | Restricted cash at beginning of period | 667,915 | | | 477,620 | | Restricted cash at beginning of period | 667,915 | | | 477,620 | |
| Cash, cash equivalents and restricted cash at beginning of period | Cash, cash equivalents and restricted cash at beginning of period | $ | 1,256,838 | | | $ | 1,329,653 | | Cash, cash equivalents and restricted cash at beginning of period | $ | 1,256,838 | | | $ | 1,329,653 | |
| | Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 577,536 | | | $ | 561,199 | | Cash and cash equivalents at end of period | $ | 438,754 | | | $ | 425,322 | |
| Restricted cash at end of period | Restricted cash at end of period | 671,808 | | | 412,451 | | Restricted cash at end of period | 815,496 | | | 576,209 | |
| Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | $ | 1,249,344 | | | $ | 973,650 | | Cash, cash equivalents and restricted cash at end of period | $ | 1,254,250 | | | $ | 1,001,531 | |
See notes to the unaudited condensed consolidated financial statements.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10–Q and Rule 10–01 of Regulation S–X. Accordingly, they do not include all information and notesexclude certain disclosures required by GAAP for a complete set of financial statements. 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, 2021, filed with the SEC on March 1, 2022. In the opinion of management, all adjustments 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 six months ended March 31,June 30, 2022 are not necessarily indicative of the results for any future periods or the year ending December 31, 2022.
We have applied the same accounting policies in preparing these quarterly financial statements as we did in preparing our 2021 annual financial statements. The Company rounds amounts in the condensed consolidated financial statements to thousands and calculates all per-share data from underlying whole-dollar amounts. Thus, certain amounts may not foot, crossfoot or recalculate based on reported numbers due to rounding.
| | | | | |
| 2. | Recent Accounting Pronouncements |
The following table provides a brief description of (i) recent accounting pronouncements adopted during the threesix months ended March 31,June 30, 2022 and (ii) those not yet adopted, that could have a material effect on our financial statements.
| | | | | | | | | | | | | | | | | | | | |
| Standard | | Description | | Date of Adoption | | Method of adoptions and effect on financial statements or other significant matters |
Adopted During the ThreeSix Months Ended March 31,June 30, 2022 |
| ASU 2021-08, Business Combinations | | This standard requires acquirers within the scope of Subtopic 805-10, Business Combinations to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. This will generally result in an acquirer recognizing and measuring acquired contract assets and liabilities consistent with how they were recognized and measured in an acquiree’s financial statements if such financial statements were prepared in accordance with GAAP. Previously, contract assets and contract liabilities acquired were recognized at their fair value on the acquisition date. | | Effective for fiscal years beginning after December 15, 2022. | | The Company early adopted this ASU effective January 1, 2022. Adoption had no material effect on the Company’s condensed consolidated financial statements for the three and six months ended March 31,June 30, 2022. The guidelines of this ASU will be applied prospectively for business combinations in the scope of ASC 805. |
Not Adopted as of March 31,June 30, 2022 |
ASU 2020–04, Reference Rate Reform
and
ASU 2021–01, Reference Rate Reform: Scope | | These standards provide optional guidance for a limited period of time to ease the potential financial reporting burden in accounting for (or recognizing the effects of) the discontinuation of LIBOR resulting from reference rate reform. The amendments provide optional expedients and exceptions for applying GAAP to contracts and other transactions impacted by reference rate reform. If certain criteria are met, an entity will not be required to remeasure or reassess contracts impacted by reference rate reform. | | Election is optional and available through December 31, 2022. | | The Company is currently evaluating the implications of these amendments to its current efforts for reference rate reform implementation and any impact the adoption of these ASUs would have on its financial condition and results of operations. While the Company has not yet determined if and when it will adopt these standards, the adoption of such standards is not expected to have a material effect on the Company’s condensed consolidated financial statements. |
| | | | | | |
In accordance with Topic 606, revenue is recognized when, or as, performance obligations are satisfied as defined by the terms of the contract, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for goods or services provided.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following tables disaggregate the Company’s consolidated revenues:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| Topic 606 revenues | | | | | | | |
| Payment processing revenue | $ | 151,906 | | | $ | 65,075 | | | $ | 22,497 | | | $ | 239,478 | |
| Account servicing revenue | 4,343 | | | 10,758 | | | 86,740 | | | 101,841 | |
| Other revenue | 19,925 | | | 313 | | | 8,063 | | | 28,301 | |
| Total Topic 606 revenues | $ | 176,174 | | | $ | 76,146 | | | $ | 117,300 | | | $ | 369,620 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Non-Topic 606 revenues | 142,965 | | | 1,105 | | | 3,845 | | | 147,915 | |
| | | | | | | |
| Total revenues | $ | 319,139 | | | $ | 77,251 | | | $ | 121,145 | | | $ | 517,535 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| Topic 606 revenues | | | | | | | |
| Payment processing revenue | $ | 110,576 | | | $ | 57,248 | | | $ | 20,565 | | | $ | 188,389 | |
| Account servicing revenue | 4,369 | | | 10,687 | | | 67,945 | | | 83,001 | |
| Other revenue | 20,246 | | | 1,800 | | | 7,745 | | | 29,791 | |
| Total Topic 606 revenues | $ | 135,191 | | | $ | 69,735 | | | $ | 96,255 | | | $ | 301,181 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Non-Topic 606 revenues | 108,646 | | | 907 | | | 23 | | | 109,576 | |
| | | | | | | |
| Total revenues | $ | 243,837 | | | $ | 70,642 | | | $ | 96,278 | | | $ | 410,757 | |
Substantiallyrevenues, substantially all revenuesof which relate to services transferred to the customer over time.time:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| Topic 606 revenues | | | | | | | |
| Payment processing revenue | $ | 202,359 | | | $ | 88,608 | | | $ | 21,338 | | | $ | 312,305 | |
| Account servicing revenue | 4,557 | | | 10,400 | | | 83,378 | | | 98,335 | |
| Other revenue | 22,249 | | | 82 | | | 8,366 | | | 30,697 | |
| Total Topic 606 revenues | $ | 229,165 | | | $ | 99,090 | | | $ | 113,082 | | | $ | 441,337 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Non-Topic 606 revenues | 150,058 | | | 1,320 | | | 5,522 | | | 156,900 | |
| | | | | | | |
| Total revenues | $ | 379,223 | | | $ | 100,410 | | | $ | 118,604 | | | $ | 598,237 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
| (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| Topic 606 revenues | | | | | | | |
| Payment processing revenue | $ | 126,450 | | | $ | 68,282 | | | $ | 18,694 | | | $ | 213,426 | |
| Account servicing revenue | 4,336 | | | 11,222 | | | 79,482 | | | 95,040 | |
| Other revenue | 22,422 | | | 1,656 | | | 5,109 | | | 29,187 | |
| Total Topic 606 revenues | $ | 153,208 | | | $ | 81,160 | | | $ | 103,285 | | | $ | 337,653 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Non-Topic 606 revenues | 121,180 | | | 602 | | | 48 | | | 121,830 | |
| | | | | | | |
| Total revenues | $ | 274,388 | | | $ | 81,762 | | | $ | 103,333 | | | $ | 459,483 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| Topic 606 revenues | | | | | | | |
| Payment processing revenue | $ | 354,265 | | | $ | 153,683 | | | $ | 43,835 | | | $ | 551,783 | |
| Account servicing revenue | 8,902 | | | 21,158 | | | 170,118 | | | 200,178 | |
| Other revenue | 42,174 | | | 395 | | | 16,429 | | | 58,998 | |
| Total Topic 606 revenues | $ | 405,341 | | | $ | 175,236 | | | $ | 230,382 | | | $ | 810,959 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Non-Topic 606 revenues | 293,021 | | | 2,425 | | | 9,367 | | | 304,813 | |
| | | | | | | |
| Total revenues | $ | 698,362 | | | $ | 177,661 | | | $ | 239,749 | | | $ | 1,115,772 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| Topic 606 revenues | | | | | | | |
| Payment processing revenue | $ | 237,026 | | | $ | 125,530 | | | $ | 39,259 | | | $ | 401,815 | |
| Account servicing revenue | 8,705 | | | 21,909 | | | 147,427 | | | $ | 178,041 | |
| Other revenue | 42,668 | | | 3,456 | | | 12,854 | | | 58,978 | |
| Total Topic 606 revenues | $ | 288,399 | | | $ | 150,895 | | | $ | 199,540 | | | $ | 638,834 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Non-Topic 606 revenues | 229,826 | | | 1,509 | | | 71 | | | 231,406 | |
| | | | | | | |
| Total revenues | $ | 518,225 | | | $ | 152,404 | | | $ | 199,611 | | | $ | 870,240 | |
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Contract Balances
The majority of the Company’s receivables, 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 revenues earned outside of the scope of Topic 606. The Company’s contract assets consist of upfront payments to customers under long-term contracts and are recorded upon the later of when the Company recognizes revenue for the transfer 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 thousands) | (In thousands) | | (In thousands) | |
| Contract balance | Contract balance | | Location on the condensed consolidated balance sheets | | March 31, 2022 | | December 31, 2021 | Contract balance | | Location on the condensed consolidated balance sheets | | June 30, 2022 | | December 31, 2021 |
| Receivables | Receivables | | Accounts receivable, net | | $ | 49,300 | | | $ | 49,303 | | Receivables | | Accounts receivable, net | | $ | 45,856 | | | $ | 49,303 | |
| Contract assets | Contract assets | | Prepaid expenses and other current assets | | 7,319 | | | 8,975 | | Contract assets | | Prepaid expenses and other current assets | | 15,242 | | | 8,975 | |
| Contract assets | Contract assets | | Other assets | | 39,917 | | | 40,718 | | Contract assets | | Other assets | | 36,603 | | | 40,718 | |
| Contract liabilities | Contract liabilities | | Other current liabilities | | 7,274 | | | 9,123 | | Contract liabilities | | Other current liabilities | | 8,112 | | | 9,123 | |
| Contract liabilities | Contract liabilities | | Other liabilities | | 68,588 | | | 58,900 | | Contract liabilities | | Other liabilities | | 66,015 | | | 58,900 | |
|
During the three and six months ended March 31,June 30, 2022, the Company recognized revenue of $5.0$4.1 million and $9.0 million, respectively, related to contract liabilities existing as of December 31, 2021.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Remaining Performance Obligations
The Company’s unsatisfied or partially unsatisfied performance obligations as of March 31,June 30, 2022 represent the remaining minimum monthly fees on a portion of contracts across the lines of business, 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 an insignificant 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 reporting period.
| | (In thousands) | (In thousands) | Remaining 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total | (In thousands) | Remaining 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
Minimum monthly fees1 | Minimum monthly fees1 | $ | 54,972 | | | $ | 39,749 | | | $ | 17,372 | | | $ | 6,018 | | | $ | 915 | | | $ | — | | | $ | — | | | $ | 119,026 | | Minimum monthly fees1 | $ | 34,454 | | | $ | 38,888 | | | $ | 22,938 | | | $ | 9,852 | | | $ | 4,161 | | | $ | 3,065 | | | $ | 1,500 | | | $ | 114,858 | |
Professional services2 | Professional services2 | 3,970 | | | 80 | | | — | | | — | | | — | | | — | | | — | | | 4,050 | | Professional services2 | 1,675 | | | 104 | | | 3 | | | 3 | | | — | | | — | | | — | | | 1,785 | |
Other3 | Other3 | 2,524 | | | 8,689 | | | 13,858 | | | 19,104 | | | 22,985 | | | 27,185 | | | 5,929 | | | 100,274 | | Other3 | 2,033 | | | 8,541 | | | 13,675 | | | 18,886 | | | 22,709 | | | 26,838 | | | 5,929 | | | 98,611 | |
| Total remaining performance obligations | Total remaining performance obligations | $ | 61,466 | | | $ | 48,518 | | | $ | 31,230 | | | $ | 25,122 | | | $ | 23,900 | | | $ | 27,185 | | | $ | 5,929 | | | $ | 223,350 | | Total remaining performance obligations | $ | 38,162 | | | $ | 47,533 | | | $ | 36,616 | | | $ | 28,741 | | | $ | 26,870 | | | $ | 29,903 | | | $ | 7,429 | | | $ | 215,254 | |
1 The transaction price allocated to the remaining performance obligations represents the minimum monthly fees on certain service contracts, which contain substantive termination penalties that require the counterparty to pay the Company for the aggregate remaining minimum monthly fees upon an early termination for convenience.
2 Includes software development projects and other services sold subsequent to the core offerings, to which the customer is contractually obligated.
3 Represents deferred revenue and contractual minimums associated with payment processing service obligations. Consideration associated with certain relationships is variable and the measurement and estimation of contract consideration is contingent upon payment processing volumes and maintaining volume shares, among others.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2022 Transactions
Acquisition of Remaining Interest in PO Holding
On March 7, 2022, WEX Inc. and SBI entered into a share purchase agreement (the “Share Purchase Agreement”) whereby SBI sold, and WEX Inc. purchased, SBI’s remaining 4.53 percent interest in PO Holding for a purchase price of $234.0 million plus any interest accruing pursuant to the terms of the Share Purchase Agreement. The purchase price is payable in 3 installments of $76.7 million in each of March of 2024, 2025 and 2026, with a final payment of $4.0 million also payable in March 2026. Pursuant to the Share Purchase Agreement, WEX Inc. owes SBI interest on the outstanding purchase price balance from March 2024 to March 2025 at the 12-month Secured Overnight Financing Rate (“SOFR”) (as determined on March 1, 2024) plus 1.25 percent and on the outstanding balance from March 2025 to March 2026 at the 12-month SOFR rate (as determined on March 3, 2025) plus 2.25 percent, except that no interest accrues on the $4.0 million payment due in March 2026.
Using a discount rate of 3.4 percent as of the acquisition date, the Company recorded the deferred liability under this Share Purchase Agreement at its initial net present value of $216.6 million within other liabilities on the condensed consolidated balance sheet.million. The associated discount relative to the purchase price will be amortized as interest expense using the effective interest method over the repayment term.
This transaction makes PO Holding, the direct parent of WEX Health, a wholly owned subsidiary of WEX Inc. to which the Company is solely entitled to the economic benefits. See Note 13,14, Redeemable Non-Controlling Interest, for more information.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)2021 Transactions
2021 Transactions
Asset Acquisition
On April 1, 2021, WEX Inc. completed the acquisition of certain contractual rights to serve as custodian or sub-custodian to over $3 billion of HSAs from the HealthcareBank division of Bell Bank, which is owned by State Bankshares, Inc. This acquisition increased the Company’s role in its customer-directed healthcare ecosystem and aligns with its growth strategy. On the closing of the acquisition, WEX Inc. paid Bell Bank initial cash consideration of $200.0 million. Pursuant to the purchase agreement, WEX Inc. agreedThe Company is required to make an2 additional deferred cash paymentpayments to Bell Bank in association with this acquisition of $25.0 million in July 2023 and a second additional deferred cash payment of $25.0$12.5 million in January 2024. As of June 1, 2021, in connection with the acquisition by WEX Health of Cirrus Holdings, LLC further discussed below in this Note 4 and in Note 13, Redeemable Non-Controlling Interest, the second deferred payment of $25.0 million was reduced by the amount of $12.5 million (the “Payment Offset”). As a result of the Payment Offset, WEX Inc. continues to owe Bell Bank $12.5 million for the second additional deferred cash payment, which is due and payable in January 2024.
The purchase agreement also includes potential additional consideration payable to Bell Bank annually that is calculated on a quarterly basis and is contingent, and based, upon any future increases in the Federal Funds rate. The contingent payment period began on July 1, 2021 and shall extendextends until the earlier of (i) the year ending December 31, 2030, or (ii) the date when the cumulative amount paid as contingent consideration equals $225.0 million.
Given the acquisition does not meet the definition of a business, the Company accounted for this transaction as an asset acquisition, recognizing $263.4 million as a definite-lived intangible rights asset as of the acquisition date, with a weighted average life of 5.6 years. As more fully described in Note 13, Redeemable Non-Controlling Interest, as part of this acquisition WEX Inc. allocated $11.2 million of the initial cash consideration to the repurchase of SBI’s then non-controlling interest in the U.S. Health business, reducing SBI’s ownership percentage to 4.53 percent at that time. Additionally, the Company recorded an initial deferred liability of $47.4 million equal to the present value of the deferred cash payments and a derivative liability of $27.2 million related to the additional consideration contingent upon future increases in the Federal Funds rate. Refer toSee Note 12,13, Fair Value, for further information on the valuation of the derivative liability. Transaction costs related to the acquisition were immaterial and expensed as incurred.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Acquisition of Remaining Interest in WEX Europe Services
On April 13, 2021, the Company both entered into a share purchase agreement for, and consummated the acquisition of,acquired the remaining interest in WEX Europe Services, it did not own previously, which consisted of 25 percent of the issued ordinary share capital, for a purchase price of $97.0 million. As a result of the transaction, the Company now owns 100 percent of the issued ordinary share capital of WEX Europe Services, which operates part ofas our European Fleet business. This transaction further streamlines the European Fleet business in order to create revenue synergies and increases our ability to manage the associated cost structure. Given the Company had a controlling interest in WEX Europe Services prior to the transaction, the acquisition has been accounted for as an equity transaction.transaction, resulting in a reduction of additional paid-in capital by $81.6 million, a $13.1 million elimination of the 25 percent non-controlling interest in WEX Europe Services and a reduction of accumulated other comprehensive income by $2.3 million.
| | | | | |
| |
(In thousands) | |
Purchase price | $ | 96,992 | |
Reduction in: | |
Non-controlling interest1
| (13,077) | |
Accumulated other comprehensive income | (2,284) | |
Additional paid-in capital2
| (81,631) | |
| |
| |
| |
1 Reduces non-controlling interest to zero as of the acquisition date.
2 In conjunction with the acquisition, the Company incurred $0.5 million in acquisition costs, which further reduced additional paid-in capital.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
benefitexpress Acquisition
On June 1, 2021, WEX Inc.’s subsidiary, WEX Health, completed the acquisition of Cirrus Holdings, LLC, the indirect owner of Benefit Express Services, LLC, which is a provider of highly configurable, cloud-based benefits administration technologies and services doing business under the name benefitexpress (the “benefitexpress Acquisition”). The transaction expanded the Company’s role in the healthcare ecosystem, bringing benefit administration, compliance services, and consumer-directed health and lifestyle spending accounts together to form a full-service benefits marketplace. Pursuant to the terms of the definitive purchase agreement, WEX Health consummated the benefitexpress Acquisition for total consideration of approximately $275 million, subject to certain working capital and other adjustments.
To facilitate the benefitexpress Acquisition, WEX Inc., PO Holding, Bell Bank and SBI, which is owned by State Bankshares, Inc., the owner of Bell Bank, entered into a subscription agreement with respect to PO Holding (the “Subscription Agreement”). Pursuant to the Subscription Agreement, on June 1, 2021, WEX Inc. purchased approximately $262.5 million in value of shares in PO Holding and SBI (which, at the time of the transaction, held a non-controlling interest in PO Holding) acquired approximately $12.5 million in value of shares in PO Holding in exchange for SBI granting the Payment Offset to WEX Inc. with respect to the asset acquisition from Bell Bank. For a description of WEX Inc.’s subsequent acquisition of all of SBI’s shares in PO Holding, see “Acquisition of Remaining Interest in PO Holding” above.
The benefitexpress Acquisition has been accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their respective fair values on the acquisition date. The table below summarizes the preliminary allocation of such fair value to theof assets acquired and liabilities assumed on the acquisition date. 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 these adjustments could have a material impact on the purchase price allocation.assumed. During the three months ended March 31,June 30, 2022, the purchase accounting for the acquisition became final. During the three and six months ended June 30, 2022, no such measurement period adjustments were recorded. The following is a summary of the preliminaryfinal allocation of the purchase price to the assets and liabilities acquired, based on the estimated fair value at the date of acquisition:
| | | | | | | | | | | | |
| (In thousands) | | As of
March 31, June 30, 2022 | | | | |
| Cash consideration transferred, net of $15.0 million in cash and restricted cash acquired | | $ | 259,061 | | | | | |
| Less: | | | | | | |
| Accounts receivable | | 3,103 | | | | | |
| | | | | | |
| | | | | | |
Customer relationships(a)(d)(1)(4) | | 84,400 | | | | | |
Developed technologies(b)(d)(2)(4) | | 19,600 | | | | | |
Non-compete(c)(d)(3)(4) | | 2,150 | | | | | |
| | | | | | |
| Other assets | | 4,387 | | | | | |
| | | | | | |
| Accrued expenses | | (3,498) | | | | | |
| Restricted cash payable | | (14,328) | | | | | |
| | | | | | |
| | | | | | |
| Other liabilities | | (5,177) | | | | | |
| Recorded goodwill | | $ | 168,424 | | | | | |
(a)(1) Weighted average life - 9.3 years.
(b)(2) Weighted average life - 3.6 years.
(c)(3) Weighted average life - 2.5 yearsyears.
(d)(4) The weighted average life of the $106.2 million of amortizable intangible assets acquired in this business combination is 8.1 yearsyears.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring the businesses. The goodwill recognized as a result of the acquisition is expected to be deductible for tax purposes. No pro forma information has been included in these financial statements, as the operations of benefitexpress for the period that they were not part of the Company are not material to the Company’s revenues, net income and earnings per share.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
| | | | | |
| 5. | Accounts Receivable, net of Allowances |
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 merchant for the purchase price less the fees it retains and records as revenue, then subsequently collecting the total purchase price from the cardholder. The Company also extends revolving credit to certain small fleets. The Company had approximately $114.2$145.3 million and $93.7 million in gross receivables with revolving credit balances as of March 31,June 30, 2022 and December 31, 2021, 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 March 31, 2022 | | Three Months Ended June 30, 2022 |
| (In thousands) | (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total | (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| | Balance, beginning of period | Balance, beginning of period | $ | 55,758 | | | $ | 9,931 | | | $ | 617 | | | $ | 66,306 | | Balance, beginning of period | $ | 63,938 | | | $ | 11,636 | | | $ | 679 | | | $ | 76,253 | |
Provision for credit losses1 | 23,224 | | | 2,147 | | | 269 | | | 25,640 | | |
Net provision for credit losses1 | | Net provision for credit losses1 | 42,446 | | | (726) | | | 466 | | | 42,186 | |
Charges to other accounts2 | Charges to other accounts2 | 8,400 | | | — | | | (70) | | | 8,330 | | Charges to other accounts2 | 10,217 | | | 169 | | | (31) | | | 10,355 | |
| Charge-offs | Charge-offs | (25,795) | | | (261) | | | (147) | | | (26,203) | | Charge-offs | (29,500) | | | (186) | | | (127) | | | (29,813) | |
| Recoveries of amounts previously charged-off | Recoveries of amounts previously charged-off | 2,421 | | | — | | | 10 | | | 2,431 | | Recoveries of amounts previously charged-off | 2,809 | | | — | | | — | | | 2,809 | |
| Currency translation | Currency translation | (70) | | | (181) | | | — | | | (251) | | Currency translation | (686) | | | (497) | | | — | | | (1,183) | |
| Balance, end of period | Balance, end of period | $ | 63,938 | | | $ | 11,636 | | | $ | 679 | | | $ | 76,253 | | Balance, end of period | $ | 89,224 | | | $ | 10,396 | | | $ | 987 | | | $ | 100,607 | |
|
| | | Three Months Ended March 31, 2021 | | Three Months Ended June 30, 2021 |
| (In thousands) | (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total | (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| | Balance, beginning of period | Balance, beginning of period | $ | 49,267 | | | $ | 9,610 | | | $ | 270 | | | $ | 59,147 | | Balance, beginning of period | $ | 46,181 | | | $ | 8,650 | | | $ | 312 | | | $ | 55,143 | |
Provision for credit losses1 | Provision for credit losses1 | 4,364 | | | 635 | | | 60 | | | 5,059 | | Provision for credit losses1 | 11,764 | | | 1,117 | | | 81 | | | 12,962 | |
Charges to other accounts2 | Charges to other accounts2 | 4,373 | | | — | | | — | | | 4,373 | | Charges to other accounts2 | 3,848 | | | — | | | — | | | 3,848 | |
| Charge-offs | Charge-offs | (12,774) | | | (1,532) | | | (18) | | | (14,324) | | Charge-offs | (13,593) | | | (2,328) | | | (10) | | | (15,931) | |
| Recoveries of amounts previously charged-off | Recoveries of amounts previously charged-off | 1,516 | | | 6 | | | — | | | 1,522 | | Recoveries of amounts previously charged-off | 1,365 | | | 7 | | | 153 | | | 1,525 | |
| Currency translation | Currency translation | (565) | | | (69) | | | — | | | (634) | | Currency translation | 151 | | | 73 | | | — | | | 224 | |
| Balance, end of period | Balance, end of period | $ | 46,181 | | | $ | 8,650 | | | $ | 312 | | | $ | 55,143 | | Balance, end of period | $ | 49,716 | | | $ | 7,519 | | | $ | 536 | | | $ | 57,771 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| | | | | | | |
| | | | | | | |
| Balance, beginning of period | $ | 55,758 | | | $ | 9,931 | | | $ | 617 | | | $ | 66,306 | |
Provision for credit losses1 | 65,670 | | | 1,421 | | | 735 | | | 67,826 | |
Charges to other accounts2 | 18,617 | | | 169 | | | (101) | | | 18,685 | |
| Charge-offs | (55,295) | | | (447) | | | (274) | | | (56,016) | |
| Recoveries of amounts previously charged-off | 5,230 | | | — | | | 10 | | | 5,240 | |
| Currency translation | (756) | | | (678) | | | — | | | (1,434) | |
| Balance, end of period | $ | 89,224 | | | $ | 10,396 | | | $ | 987 | | | $ | 100,607 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| | | | | | | |
| | | | | | | |
| Balance, beginning of period | $ | 49,267 | | | $ | 9,610 | | | $ | 270 | | | $ | 59,147 | |
Provision for credit losses1 | 16,128 | | | 1,752 | | | 141 | | | 18,021 | |
Charges to other accounts2 | 8,221 | | | — | | | — | | | 8,221 | |
| Charge-offs | (26,367) | | | (3,860) | | | (28) | | | (30,255) | |
| Recoveries of amounts previously charged-off | 2,881 | | | 13 | | | 153 | | | 3,047 | |
| Currency translation | (414) | | | 4 | | | — | | | (410) | |
| Balance, end of period | $ | 49,716 | | | $ | 7,519 | | | $ | 536 | | | $ | 57,771 | |
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 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 across a wide range of industries, which are collectively evaluated for impairment. No oneindividual customer had a receivable balance representedrepresenting 10 percent or more of the outstanding receivables balance at March 31,June 30, 2022 or December 31, 2021. The following table presents the outstanding 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 | June 30, 2022 | | December 31, 2021 |
| Less than 30 days past due | 99 | % | | 98 | % |
| Less than 60 days past due | 99 | % | | 99 | % |
| | | | | |
| 6. | Repurchases of Common Stock |
Under a share buyback plan authorized by our board of directors and extending through September 30, 2025 (the “Repurchase Program”), the Company may repurchase up to $150.0 million in shares of its common stock through open market purchases, privately negotiated transactions, block trades or otherwise. The number of shares repurchased by the Company during 2022 pursuant to the Repurchase Program have been recorded as treasury stock and are included in the following table. There were no shares repurchased pursuant to the Repurchase Program during the six months ended June 30, 2021.
| | | | | | | | | | | | | | | | | |
| (In thousands, except for per share amounts) | Shares | | Total Cost | | Average Cost Per Share |
| Treasury stock purchased during the three months ended June 30, 2022 | 520 | | $ | 80,599 | | | $ | 155.06 | |
Through the close of trading on the latest practicable date, which the Company has determined to be July 22, 2022 for the purpose of the filing of this Quarterly Report on Form 10-Q, the Company had substantially exhausted its Repurchase Program, having repurchased 0.4 million additional shares for approximately $62.1 million of the $69.4 million that remained available to be used for share repurchases pursuant to the Repurchase Program beginning July 1, 2022.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
| | | | | | | | | | | |
| Delinquency Status | March 31, 2022 | | December 31, 2021 |
| 29 days or less past due | 99 | % | | 98 | % |
| 59 days or less past due | 99 | % | | 99 | % |
Basic earnings per share is computed by dividing net income (loss) attributable to shareholders by the weighted average number of shares of common stock and vested DSUs outstanding during the year. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the numerator is increased for tax effected interest expense associated with our Convertible Notes and the denominator is increased for the assumed issuance of common shares upon conversion of the Convertible Notes under the “if-converted” method, unless the effect is anti-dilutive. Additionally, diluted earnings per share includes the assumed exercise of dilutive options, and the assumed issuance of unvested restricted stock units, and performance-based awards 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 average unrecognized compensation expense for unvested share-based compensation awards, would be used to purchase the Company’s common stock at the average market price during the period.
The following table summarizes net income (loss) attributable to shareholders and reconciles basic and diluted shares outstanding used in the earnings per share computations:
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
(In thousands) | 2022 | | 2021 | | | | |
| | | | | | | |
| | | | | | | |
| Net income (loss) attributable to shareholders | $ | 122,763 | | | $ | (2,565) | | | | | |
| | | | | | | |
| Weighted average common shares outstanding – Basic | 44,912 | | | 44,343 | | | | | |
Dilutive impact of share-based compensation awards1 | 432 | | | — | | | | | |
| | | | | | | |
Weighted average common shares outstanding – Diluted1, 2 | $ | 45,344 | | | 44,343 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| | | | | | | |
| Net income (loss) attributable to shareholders | $ | 34,129 | | | $ | (33,856) | | | $ | 156,892 | | | $ | (36,421) | |
| | | | | | | |
| Weighted average common shares outstanding – Basic | 44,790 | | | 44,788 | | | 44,851 | | | 44,566 | |
Dilutive impact of share-based compensation awards1 | 287 | | | — | | | 360 | | | — | |
| | | | | | | |
Weighted average common shares outstanding – Diluted1, 2 | 45,077 | | | 44,788 | | | 45,211 | | | 44,566 | |
1 For the three and six months ended March 31,June 30, 2022, 0.7 million and 0.6 million, respectively, 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 these awards would be anti-dilutive. For the three and six months ended March 31,June 30, 2021, 0.9 million and 1.0 million, respectively, of outstanding share-based compensation awards were excluded from the computation of diluted earnings per share under the treasury stock method, including share-based compensation awards that would otherwise have been dilutive but for the Company’s net loss position, as the effect of including these awards would be anti-dilutive.
2 It is the Company’s current intention to settle all conversions of the Convertible Notes in shares of the Company’s common stock. Under the “if-converted” method, 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 have been excluded from diluted shares outstanding for the three and six months ended March 31,June 30, 2022 and 2021 as the effect of including such shares would be anti-dilutive. For further information regarding the Convertible Notes, see Note 9,10, Financing and Other Debt.
| | | | | |
7.8. | 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.
Interest rate swap contracts
The Company has entered into interest rate swap contracts to manage the interest rate risk associated with its outstanding variable-interest rate borrowings. Such contracts are intended to economically hedge the LIBOR component of future interest payments associated with outstanding borrowings under the Company’s Amended and Restated Credit Agreement.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
A summary of the Company’s interest rate swap contracts with a collective notional amount of $1.9 billion outstanding as of March 31,June 30, 2022 is as follows:
| | Beginning | | Contract End Date | | Fixed Interest Rates1 | | Notional Amount at inception (in thousands) | | |
| Contract Inception | | Contract Inception | | Contract End | | Fixed Interest Rates1 | | Notional Amount at inception (in thousands) | |
| December 2017 | December 2017 | | December 2022 | | 2.204% | | $ | 300,000 | | | December 2017 | | December 2022 | | 2.204% | | $ | 300,000 | | |
| March 2020 | March 2020 | | March 2023 | | 1.954% | | 150,000 | | | March 2020 | | March 2023 | | 1.954% | | 150,000 | | |
| March 2019 | March 2019 | | March 2023 | | 1.956% | | 100,000 | | | March 2019 | | March 2023 | | 1.956% | | 100,000 | | |
| March 2019 | March 2019 | | March 2023 | | 2.413% | | 200,000 | | | March 2019 | | March 2023 | | 2.413% | | 200,000 | | |
| March 2020 | March 2020 | | December 2023 | | 1.862% | | 200,000 | | | March 2020 | | December 2023 | | 1.862% | | 200,000 | | |
| May 2021 | May 2021 | | May 2024 | | 0.435% | | 150,000 | | | May 2021 | | May 2024 | | 0.435% | | 150,000 | | |
| May 2021 | May 2021 | | May 2024 | | 0.440% | | 150,000 | | | May 2021 | | May 2024 | | 0.440% | | 150,000 | | |
| May 2021 | May 2021 | | May 2025 | | 0.678% | | 300,000 | | | May 2021 | | May 2025 | | 0.678% | | 300,000 | | |
| May 2021 | May 2021 | | May 2026 | | 0.909% | | 150,000 | | | May 2021 | | May 2026 | | 0.909% | | 150,000 | | |
| May 2021 | May 2021 | | May 2026 | | 0.910% | | 150,000 | | | May 2021 | | May 2026 | | 0.910% | | 150,000 | | |
1 Fixed interest rates payable by WEX. Counterparties pay floating rate equal to the one-month USD LIBOR.
The following table presents information on the location and amounts of interest rate swap gains and losses:
| | (In thousands) | (In thousands) | | | Three Months Ended March 31, | | (In thousands) | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| Derivatives Not Designated as Hedging Instruments | Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations | | 2022 | | 2021 | | Derivatives Not Designated as Hedging Instruments | | Location of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations | | 2022 | | 2021 | | 2022 | | 2021 |
| | Interest rate swap contracts – unrealized portion | Interest rate swap contracts – unrealized portion | | Net unrealized gain (loss) on financial instruments | | $ | 51,096 | | | $ | 7,520 | | | Interest rate swap contracts – unrealized portion | | Net unrealized gain (loss) on financial instruments | | $ | 17,775 | | | $ | 5,962 | | | $ | 68,871 | | | $ | 13,481 | |
| Interest rate swap contracts – realized portion | Interest rate swap contracts – realized portion | | Financing interest expense | | $ | (5,881) | | | $ | (5,457) | | | Interest rate swap contracts – realized portion | | Financing interest expense | | $ | (3,031) | | | $ | (6,081) | | | $ | (8,912) | | | $ | (11,538) | |
|
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 12,13, Fair Value, 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 18,19, 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 through contractual arrangements for brokered and non-brokered certificate of deposit and money market deposit products. Additionally, beginning in October 2021, WEX Bank holds HSA deposits transferred from third-party depository partners. See Note 4, Acquisitions, for more information regarding WEX Inc.’s April 2021 acquisition of contractual rights to serve as custodian or sub-custodian of these deposits.
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 LIBOR or 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 thousands) | (In thousands) | March 31, 2022 | | December 31, 2021 | (In thousands) | June 30, 2022 | | December 31, 2021 |
| Customer deposits | | Customer deposits | $ | 136,866 | | | $ | 129,180 | |
Contractual deposits with maturities within 1 year1,2 | | Contractual deposits with maturities within 1 year1,2 | 364,337 | | | 566,427 | |
Interest-bearing money market deposits1 | Interest-bearing money market deposits1 | $ | 378,898 | | | $ | 370,813 | | Interest-bearing money market deposits1 | 314,017 | | | 370,813 | |
| Customer deposits | 131,322 | | | 129,180 | | |
HSA deposits2 | 1,290,002 | | | 960,000 | | |
Contractual deposits with maturities within 1 year1,3,4 | 425,216 | | | 566,427 | | |
| Short-term deposits | 2,225,438 | | | 2,026,420 | | |
Contractual deposits with maturities greater than 1 year and less than 5 years1,3,4 | 650,257 | | | 652,214 | | |
HSA deposits3 | | HSA deposits3 | 2,070,507 | | | 960,000 | |
| Short-term contractual deposits | | Short-term contractual deposits | 2,885,727 | | | 2,026,420 | |
Contractual deposits with maturities greater than 1 year and less than 5 years1,2 | | Contractual deposits with maturities greater than 1 year and less than 5 years1,2 | 588,932 | | | 652,214 | |
| Total deposits | Total deposits | $ | 2,875,695 | | | $ | 2,678,634 | | Total deposits | $ | 3,474,659 | | | $ | 2,678,634 | |
| | Weighted average cost of HSA deposits outstanding | Weighted average cost of HSA deposits outstanding | 0.03 | % | | 0.03 | % | Weighted average cost of HSA deposits outstanding | 0.04 | % | | 0.03 | % |
| Weighted average cost of funds on contractual deposits outstanding | Weighted average cost of funds on contractual deposits outstanding | 0.48 | % | | 0.48 | % | Weighted average cost of funds on contractual deposits outstanding | 0.61 | % | | 0.48 | % |
| Weighted average cost of interest-bearing money market deposits outstanding | Weighted average cost of interest-bearing money market deposits outstanding | 0.42 | % | | 0.20 | % | Weighted average cost of interest-bearing money market deposits outstanding | 1.71 | % | | 0.20 | % |
|
1 As of March 31,June 30, 2022 and December 31, 2021, all certificates of deposit and money market deposits were in denominations of $250 thousand$250,000 or less, corresponding to FDIC deposit insurance limits.
2Includes certificates of deposit and certain money market deposits, which have a fixed maturity and interest rate.
3 Deposits held associated with the HSA custodial assets. HSA deposits are recorded within short-term deposits on the condensed consolidated balance sheet as the funds can be withdrawn by the account holders on demand.
3 Original maturities range from 12 months to 5 years, with coupon interest rates ranging from 0.12 percent to 3.52 percent as of March 31, 2022. At December 31, 2021, original maturities ranged from 9 months to 5 years, with coupon interest rates ranging from 0.12 percent to 3.52 percent.
4 Includes certificates of deposit and certain money market deposits, which have a fixed maturity and interest rate.
In accordance with regulatory requirements, WEX Bank normally maintains reserves against a portion of its outstanding customer deposits by keeping balances with the Federal Reserve Bank, however, due to currently relaxed Federal Reserve requirements enacted in response to the COVID-19 pandemic, there was no required reserve at March 31,June 30, 2022 and December 31, 2021.
| | | | | |
9.10. | Financing and Other Debt |
The following table summarizes the Company’s total outstanding debt by type as of March 31,June 30, 2022 and December 31, 2021.
| | (In thousands) | (In thousands) | March 31, 2022 | | December 31, 2021 | (In thousands) | June 30, 2022 | | December 31, 2021 |
| Term loans: | Term loans: | | | | Term loans: | | | |
| Tranche A Term Loans | Tranche A Term Loans | $ | 929,511 | | | $ | 941,742 | | Tranche A Term Loans | $ | 917,281 | | | $ | 941,742 | |
| Tranche B Term Loans | Tranche B Term Loans | 1,427,580 | | | 1,431,185 | | Tranche B Term Loans | 1,423,975 | | | 1,431,185 | |
| Total term loans | Total term loans | $ | 2,357,091 | | | $ | 2,372,927 | | Total term loans | $ | 2,341,256 | | | $ | 2,372,927 | |
| | Borrowings on Revolving Credit Facility | Borrowings on Revolving Credit Facility | 180,300 | | | 119,800 | | Borrowings on Revolving Credit Facility | 180,400 | | | 119,800 | |
| Convertible Notes | Convertible Notes | 310,000 | | | 310,000 | | Convertible Notes | 310,000 | | | 310,000 | |
| Securitized debt | Securitized debt | 104,226 | | | 100,861 | | Securitized debt | 102,449 | | | 100,861 | |
| Participation debt | Participation debt | 31,083 | | | 1,500 | | Participation debt | 52,245 | | | 1,500 | |
Total gross debt1 | | Total gross debt1 | $ | 2,986,350 | | | $ | 2,905,088 | |
| Total gross debt1 | $ | 2,982,700 | | | $ | 2,905,088 | | |
|
1 See Note 12,13, Fair Value, for more information regarding the fair value of the Company’s debt.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes the Company’s total outstanding debt by balance sheet classification:
| | (In thousands) | (In thousands) | March 31, 2022 | | December 31, 2021 | (In thousands) | June 30, 2022 | | December 31, 2021 |
| Current portion of gross debt | Current portion of gross debt | $ | 167,568 | | | $ | 165,703 | | Current portion of gross debt | $ | 185,791 | | | $ | 165,703 | |
| Less: Unamortized debt issuance costs/debt discount | Less: Unamortized debt issuance costs/debt discount | (9,946) | | | (9,934) | | Less: Unamortized debt issuance costs/debt discount | (9,957) | | | (9,934) | |
| Short-term debt, net | Short-term debt, net | $ | 157,622 | | | $ | 155,769 | | Short-term debt, net | $ | 175,834 | | | $ | 155,769 | |
| | Long-term portion of gross debt | Long-term portion of gross debt | $ | 2,815,132 | | | $ | 2,739,385 | | Long-term portion of gross debt | $ | 2,800,559 | | | $ | 2,739,385 | |
| Less: Unamortized debt issuance costs/debt discount | Less: Unamortized debt issuance costs/debt discount | (41,502) | | | (44,020) | | Less: Unamortized debt issuance costs/debt discount | (39,028) | | | (44,020) | |
| Long-term debt, net | Long-term debt, net | $ | 2,773,630 | | | $ | 2,695,365 | | Long-term debt, net | $ | 2,761,531 | | | $ | 2,695,365 | |
| | Supplemental information: | Supplemental information: | | Supplemental information: | |
Letters of credit1 | Letters of credit1 | $ | 51,383 | | | $ | 51,392 | | Letters of credit1 | $ | 31,209 | | | $ | 51,392 | |
Remaining borrowing capacity on Revolving Credit Facility2 | Remaining borrowing capacity on Revolving Credit Facility2 | $ | 698,317 | | | $ | 758,808 | | Remaining borrowing capacity on Revolving Credit Facility2 | $ | 718,391 | | | $ | 758,808 | |
1 Credit support for lease agreements, virtual card and fuel payment processing activity at the Company’s foreign subsidiaries.
2 Contingent on maintaining compliance with the financial covenants as defined in the Company’s Amended and Restated Credit Agreement.
Amended and Restated Credit Agreement
On April 1, 2021, the Company amended and restated the 2016 Credit Agreement (the “Amended and Restated Credit Agreement”). As part of the Amended and Restated Credit Agreement, the lenders agreed to (i) increase commitments under the Company’s secured revolving credit facility from $870.0 million to $930.0 million (the “Revolving Credit Facility”), (ii) provide additionalwe have senior secured tranche A term loans (the “Tranche A Term Loans”) resulting in an aggregate outstanding principal amount of the Tranche A Term Loans equal to $978.4 million, (iii) re-establish the, senior secured tranche B term loans’ aggregate principal amount at $1,442.0 millionloans (the “Tranche B Term Loans”), (iv) eliminate and revolving credit commitments in an aggregate amount of $930.0 million under the 0.75 percent eurocurrency rate floor with respectCompany’s secured revolving credit facility (the “Revolving Credit Facility”). Prior to the Revolving Credit Facility, and (v) make certain other changes to the previously existing 2016 Credit Agreement, including without limitation, (a) extending the maturity, dates for the Tranche A Term Loans and Revolving Credit Facility to April 1, 2026 and the maturity date for the Tranche B Term Loans to April 1, 2028, (b) providing additional flexibilityrequire scheduled quarterly payments of $12.2 million and $3.6 million, respectively, due on the last day of each March, June, September and December. Borrowings under the Revolving Credit Facility can generally be rolled forward with respect to certain negative covenants, prepayments and other provisions of the Company’s previously existing 2016 Credit Agreement, and (c) revising the Company’s maximum consolidated leverage ratio for all future quarters. interest rate resets through maturity.
The Revolving Credit Facility and the Tranche A Term Loans bear interest at variable rates, at the Company’s option, plus an applicable margin determined based on the Company’s consolidated leverage ratio. The Tranche B Term Loans bear 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 eurocurrency rate borrowings. PriorAs of June 30, 2022 and December 31, 2021, amounts outstanding under the Amended and Restated Credit Agreement bore a weighted average effective interest rate of 3.7 percent and 2.2 percent, respectively. The Company maintains interest rate swap contracts to maturity,manage the Tranche A Term Loansinterest rate risk associated with its outstanding variable-interest rate borrowings. See Note 8, Derivative Instruments, for further discussion. In addition, the Company pays a quarterly commitment fee at a rate per annum ranging, as of June 30, 2022, from 0.25 percent to 0.50 percent of the daily unused portion of the Revolving Credit Facility (which was 0.30 percent and Tranche B Term Loans require scheduled quarterly payments of $12.2 million0.40 percent at June 30, 2022 and $3.6 million, respectively, dueDecember 31, 2021, respectively) determined based on the last day of each March, June, September and December.Company’s consolidated leverage ratio.
Debt issuance costs incurred and capitalized in conjunction with the Amended and Restated Credit Agreement are being amortized into interest expense over the term of the Amended and Restated Credit Agreement using the effective interest method.
As of March 31, 2022, amounts outstanding under the Amended and Restated Credit Agreement bore a weighted average effective interest rate of 2.6 percent. As of December 31, 2021, amounts outstanding under the Amended and Restated Credit Agreement bore a weighted average effective interest rate of 2.2 percent. The Company maintains interest rate swap contracts to manage the interest rate risk associated with its outstanding variable-interest rate borrowings. See Note 7, Derivative Instruments, for further discussion. In addition, the Company pays a quarterly commitment fee at a rate per annum ranging, as of March 31, 2022, from 0.25 percent to 0.50 percent of the daily unused portion of the Revolving Credit Facility (which was 0.40 percent at both March 31, 2022 and December 31, 2021) determined based on the Company’s consolidated leverage ratio.
Convertible Notes
Pursuant to a purchase agreement dated June 29, 2020,The Company has issued Convertible Notes in an aggregate principal amount of $310.0 million due on July 1, 2020, the Company closed on a private placement with15, 2027 to an affiliate of Warburg Pincus LLC (together with its affiliate, “Warburg Pincus”), pursuant to which the Company issued. Interest on the Convertible Notes due on July 15, 2027 in an aggregate principal amount of $310.0 million and 577,254 shares of the
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Company’s common stock for an aggregate purchase price of $389.2 million, of which $90.0 million constituted the purchase price for the shares, reflecting a purchase price of $155.91 per share.
The Convertible Notes have a seven-year term maturing July 15, 2027, unless earlier converted, repurchased or redeemed. Interest is calculated at a fixed rate of 6.5 percent per annum, payable semi-annually in arrears on January 15 and July 15 of each year. At the Company’s option, interest is either payable in cash, through accretion to the principal amount of the Convertible Notes, or a combination of cash and accretion.
The Convertible Notes may be converted at the option of the holders at any time prior to maturity, or earlier redemption or repurchase of the Convertible Notes, based upon an initial conversion price of $200 per share of common stock.stock, subject to customary adjustments as set forth in the indenture. The Company may settle conversions of Convertible Notes, at its election, in cash, shares of the Company’s common stock, or a combination thereof. The initial conversion price is subject to adjustments customary for convertible debt securities and a weighted average adjustment inBased on the event of issuances of equity and equity linked securities by the Company at prices below the then applicable conversion price for the Convertible Notes or the then marketclosing price of the Company’s common stock subject to certain exceptions, including exceptions with respect to underwritten offerings, Rule 144A offerings, private placements at discounts not exceeding a specified amount, issuances as acquisition consideration and equity compensation related issuances.of June 30, 2022, the “if-converted” value of the Convertible Notes was less than the respective principal amount.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The Company will have the right, at any time after July 1, 2023, to redeem the Convertible Notes in whole or in part if the closing price of WEX’s common stock is at least 200 percent ofexceeds certain thresholds, as defined within the conversion price of the Convertible Notes for 20 trading days (whether or not consecutive) out of any 30 consecutive trading day period prior to the time the Company delivers a redemption notice, (including at least one of the 5 trading days immediately preceding the last day of such 30 trading day period), subject to the right of holders of the Convertible Notes to convert its Convertible Notes prior to the redemption date.indenture. In the event of certain fundamental change transactions, including certain change of control transactions and delisting events involving the Company, holders of the Convertible Notes will have the right to require the Company to repurchase its Convertible Notes at 105 percent of the outstanding principal amount of the Convertible Notes, plus the present value of future interest payments through the date of maturity. No such repurchase has occurred through March 31,June 30, 2022.
The Company accounts for the Convertible Notes and its conversion feature as a single unit of account. The remaining debt discount and debt issuance costs associated with the Convertible Notes will beare amortized to interest expense using the effective interest rate method over the seven-year contractual life of the Convertible Notes. As of both March 31,June 30, 2022 and December 31, 2021, the Convertible Notes had an effective interest rate of 7.5 percent.
Based on the closing price of the Company’s common stock as of March 31, 2022, the “if-converted” value of the Convertible Notes was less than the respective principal amount.
The Convertible Notes consist of the following:
| | (In thousands) | (In thousands) | | March 31, 2022 | | December 31, 2021 | (In thousands) | | June 30, 2022 | | December 31, 2021 |
Principal1 | Principal1 | | $ | 310,000 | | | $ | 310,000 | | Principal1 | | $ | 310,000 | | | $ | 310,000 | |
| Less: Unamortized discounts | Less: Unamortized discounts | | (12,333) | | | (12,844) | | Less: Unamortized discounts | | (11,867) | | | (12,844) | |
| Less: Unamortized issuance cost | Less: Unamortized issuance cost | | (1,986) | | | (2,068) | | Less: Unamortized issuance cost | | (1,911) | | | (2,068) | |
| Net carrying amount of Convertible Notes | Net carrying amount of Convertible Notes | | $ | 295,681 | | | $ | 295,088 | | Net carrying amount of Convertible Notes | | $ | 296,222 | | | $ | 295,088 | |
|
1 Recorded within long-term debt, net on ourthe condensed consolidated balance sheets, offset by the long-term portion of unamortized discounts and issuance cost.
The following table sets forth total interest expense recognized for the Convertible Notes:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| (In thousands) | 2022 | | 2021 | | | | |
| Interest on 6.5 percent coupon | $ | 5,038 | | | $ | 5,038 | | | | | |
| Amortization of debt discount and debt issuance costs | 593 | | | 553 | | | | | |
| $ | 5,631 | | | $ | 5,591 | | | | | |
Australian Securitization Facility
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited) | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
| Interest on 6.5 percent coupon | $ | 5,038 | | | $ | 5,038 | | | $ | 10,075 | | | $ | 10,075 | |
| Amortization of debt discount and debt issuance costs | 541 | | | 501 | | | 1,134 | | | 1,054 | |
| $ | 5,579 | | | $ | 5,539 | | | $ | 11,209 | | | $ | 11,129 | |
Securitization Facilities
The Company has ais party to 2 securitized debt agreementagreements with MUFG Bank, Ltd., both through April 2023. Under the terms of the agreement,these 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,Company, which in turn usesuse the receivables as collateral to issue asset-backed commercial paper (“securitized debt”). The amountdebt, which is recorded in short-term debt, net on the condensed consolidated balance sheets. Amounts collected on the securitized receivables isare restricted to pay the securitized debt and isare not available for general corporate purposes.
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 effective interest rate on the total outstanding securitized debt balance was 0.921.42 percent and 0.91 percent as of March 31,June 30, 2022 and December 31, 2021, respectively. The Company had $72.1 million and $70.1 million of securitized debt under this facility as of March 31, 2022 and December 31, 2021, respectively, recorded in short-term debt, net.
European Securitization Facility
Under the terms of the Company’s securitized debt agreement with MUFG Bank, Ltd. through April 2023, each month on a revolving basis, the Company sells certain of its receivables from selected European countries to its European Securitization Subsidiary, which in turn, uses the receivables as collateral to issue securitized debt. The amount collected on the securitized receivables is restricted to pay the securitized debt and is not available for general corporate purposes.
The Company pays a variable interest rate on the outstanding balance of the securitized debt, based on the Sterling Overnight Index Average, plus an applicable margin. The interest rate was 1.52 percent and 0.92 percent as of March 31, 2022 and December 31, 2021, respectively. The Company had $32.1 million and $30.8 million of securitized debt under this facility as of March 31, 2022 and December 31, 2021, respectively, recorded in short-term debt, net.
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 2252.25 percent to 250 basis points2.50 percent as of March 31,June 30, 2022.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
As of March 31,June 30, 2022, the Company had outstanding participation agreements for the borrowing of up to $55.0$60.0 million through May 31, 2023 and up to $35.0$40.0 million thereafter through December 31, 2023. As of March 31,June 30, 2022 and December 31, 2021, there was $31.1$52.2 million and $1.5 million borrowed against these participation agreements, respectively,respectively. Outstanding participation debt of $20.0 million and $1.5 million was recorded within short-term debt, net on the condensed consolidated balance sheets.sheets as of June 30, 2022 and December 31, 2021, respectively, with the remaining outstanding balance of $32.2 million as of June 30, 2022 recorded within long-term debt, net. As of March 31,June 30, 2022 and December 31, 2021, the average interest rate on these agreements was 2.954.02 percent and 2.54 percent, respectively.
Borrowed Federal Funds
WEX Bank borrows from uncommitted federal funds lines to supplement the financing of the Company’s accounts receivable. There were no outstanding borrowings as of March 31,June 30, 2022 and December 31, 2021. The average interest rate on borrowed federal funds was 0.34 percent and 0.10 percent for the three months ended March 31, 2022 and 2021, respectively.
Other
As of March 31,June 30, 2022, WEX Bank pledged $395.7$440.3 million of fleet receivables held by WEX Bank to the Federal Reserve Bank as collateral for potential borrowings through the Federal Reserve Bank Discount Window. Amounts that can be borrowed are based on the amount of collateral pledged and were $245.9$311.1 million and $268.6 million as of March 31,June 30, 2022 and December 31, 2021, respectively. WEX Bank had no borrowings outstanding on this line of credit through the Federal Reserve Bank Discount Window as of March 31,June 30, 2022 and December 31, 2021.
| | | | | |
10.11. | Off–Balance Sheet Arrangements |
WEX Europe Services Accounts Receivable Factoring
and WEX Europe Services isBank are each party to aseparate accounts receivable factoring arrangementarrangements with an unrelated third-party financial institutioninstitutions to sell certain of its customertheir 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 trade accounts receivable because effective control of the receivables 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 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. AccountsUnder this agreement, accounts receivable are sold without recourse to the extent that the customer balances are maintained at or below the credit limit established by the buyer. If customer receivable
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
balances exceed the buyer’s credit limit, the Company maintains the risk of default. The Company continues to service these receivables post-transfer with no participating interest. The Company obtained a true-sale opinion from an independent attorney, which states that the factoring agreement provides legal isolation upon WEX Europe Services bankruptcy or receivership under local law and creates a sale of receivables for amounts transferred both below and above the established credit limits. As such, transfers under this arrangement are treated as sales and are accounted for as reductions in trade accounts receivable because effective control of the receivables is transferred to the buyer.
The Company sold $145.0$159.6 million and $119.0$304.6 million of accounts receivable under this arrangement during the three and six months ended March 31,June 30, 2022, respectively, and $144.7 million and $263.7 million during the three and six months ended June 30, 2021, respectively. Proceeds received, which are recorded net of applicable costs, including interestrespectively, under this arrangement. For the three and commissions, are recorded in operating activities insix months ended June 30, 2022, the condensed consolidated statements of cash flows. The losslosses on factoring recorded within cost of services in the condensed consolidated statements of operations, was immaterial forwere $0.8 million and $1.5 million, respectively. For the three and six months ended March 31, 2022June 30, 2021, the losses on factoring were $0.7 million and 2021.$1.3 million, respectively. As of March 31,June 30, 2022 and December 31, 2021, the amounts of outstanding transferred receivables in excess of the established credit limitlimits were immaterial. immaterial. Charge-backs on balances in excess of the credit limitlimits during each of the three and six months ended March 31,June 30, 2022 and 2021 were immaterial.
The WEX Bank Accounts Receivable Factoring
WEX Bank is party to a receivables purchase agreement with an unrelated third-party financial institution to sell certain of its trade accounts receivable under non-recourse transactions, which extends through August 2022, 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. WEX Bank continues to service the receivables post transfer with no participating interest. The Company obtained a true-sale opinion from an independent attorney, which states that the factoring agreement provides legal isolation upon WEX Bank bankruptcy or receivership under local law. As such, transfers under this arrangement are treated as a sale and are accounted for as a reduction in trade accounts receivable because effective control of the receivables is transferred to the buyer.
The Company sold $754.7 million$1.6 billion and $215.8 million$2.4 billion of trade accounts receivable under this arrangement during the three and six months ended March 31,June 30, 2022, respectively, and $0.4 billion and $0.6 billion during the three and six months ended June 30, 2021, respectively. Proceeds received, which are reported net of a negotiated discount rate, are recorded in operating activities in the condensed consolidated statements of cash flows.respectively, under this arrangement. The losslosses on factoring which is recorded within cost of services in the condensed consolidated statements of operations, were insignificantimmaterial for each of the three and six months ended March 31,June 30, 2022 and 2021, respectively.2021.
| | | | | |
11.12. | Investment Securities |
The Company’s investment securities consist of (i) custodial assets deposited with, managed and invested by WEX Bank through an investment manager, which are reflected within current assets on the condensed consolidated balance sheets and (ii) securities purchased and held by WEX Bank primarily to meet the requirements of the Community Reinvestment Act, which are reflected within non-current assets on the condensed consolidated balance sheets. Investment securities are reflected in the condensed consolidated balance sheets
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
at fair value and are classified as current or long-term based on management’s determination of whichwhether such securities are available for use in current operations, regardless of the securities’ stated maturity dates. Accrued interest on investment securities is recorded within prepaid expenses and other current assets on the condensed consolidated balance sheets. As of March 31,June 30, 2022 and December 31, 2021, accrued interest on investment securities was $5.3$7.4 million and $4.2 million, respectively. The cost basis of investment securities is based on the specific identification method. Purchases, sales and maturities associated with investment securities are treated as investing activities within the condensed consolidated statements of cash flows.
The Company’s amortized cost and estimated fair value of investment securities as of March 31,June 30, 2022 and December 31, 2021 are presented below:
Table of Contents | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Amortized Cost | | Total
Unrealized
Gains | | Total
Unrealized
Losses | | Fair Value1 |
| As of June 30, 2022 | | | | | | | |
| Current: | | | | | | | |
| | | | | | | |
| Debt securities: | | | | | | | |
| U.S. treasury notes | $ | 405,640 | | | — | | | 28,103 | | | 377,537 | |
| Corporate debt securities | 527,866 | | | 6 | | | 41,282 | | | 486,590 | |
| Municipal bonds | 53,013 | | | 33 | | | 4,518 | | | 48,528 | |
| Asset-backed securities | 208,634 | | | 166 | | | 7,230 | | | 201,570 | |
| Mortgage-backed securities | 346,771 | | | 184 | | | 18,764 | | | 328,191 | |
| | | | | | | |
| Total | $ | 1,541,924 | | | $ | 389 | | | $ | 99,897 | | | $ | 1,442,416 | |
| | | | | | | |
| Non-current: | | | | | | | |
| | | | | | | |
| Debt securities: | | | | | | | |
| Municipal bonds | $ | 3,081 | | | $ | — | | | $ | 360 | | | $ | 2,721 | |
| Asset-backed securities | 149 | | | 1 | | | — | | | 150 | |
| Mortgage-backed securities | 116 | | | 5 | | | — | | | 121 | |
| Mutual fund | 28,160 | | | — | | | 2,899 | | | 25,261 | |
| Pooled investment fund | 9,000 | | | — | | | — | | | 9,000 | |
| Total | $ | 40,506 | | | $ | 6 | | | $ | 3,259 | | | $ | 37,253 | |
Total investment securities2 | $ | 1,582,430 | | | $ | 395 | | | $ | 103,156 | | | $ | 1,479,669 | |
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WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited) | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Amortized Cost | | Total
Unrealized
Gains | | Total
Unrealized
Losses | | Fair Value1 |
| As of December 31, 2021 | | | | | | | |
| Current: | | | | | | | |
| Debt securities: | | | | | | | |
| U.S. treasury notes | $ | 308,058 | | | $ | 250 | | | $ | 1,113 | | | $ | 307,195 | |
| Corporate debt securities | 355,102 | | | 30 | | | 3,289 | | | 351,843 | |
| Municipal bonds | 31,273 | | | 44 | | | 149 | | | 31,168 | |
| Asset-backed securities | 120,774 | | | 24 | | | 587 | | | 120,211 | |
| Mortgage-backed securities | 139,590 | | | 11 | | | 1,341 | | | 138,260 | |
| Total | $ | 954,797 | | | $ | 359 | | | $ | 6,479 | | | $ | 948,677 | |
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| Non-current: | | | | | | | |
| | | | | | | |
| Debt securities: | | | | | | | |
| Municipal bonds | $ | 3,107 | | | $ | 1 | | | $ | — | | | $ | 3,108 | |
| Asset-backed securities | 167 | | | 1 | | | — | | | 168 | |
| Mortgage-backed securities | 121 | | | 2 | | | — | | | 123 | |
| Mutual fund | 27,999 | | | — | | | 748 | | | 27,251 | |
| Pooled investment fund | 9,000 | | | — | | | — | | | 9,000 | |
| Total | $ | 40,394 | | | $ | 4 | | | $ | 748 | | | $ | 39,650 | |
Total investment securities2 | $ | 995,191 | | | $ | 363 | | | $ | 7,227 | | | $ | 988,327 | |
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| (In thousands) | Amortized Cost | | Total
Unrealized
Gains | | Total
Unrealized
Losses | | Fair Value(a) |
| As of March 31, 2022 | | | | | | | |
| Current: | | | | | | | |
| | | | | | | |
| Debt securities: | | | | | | | |
| U.S. treasury notes | $ | 333,384 | | | — | | | 18,899 | | | 314,485 | |
| Corporate debt securities | 385,062 | | | — | | | 24,132 | | | 360,930 | |
| Municipal bonds | 31,269 | | | — | | | 2,943 | | | 28,326 | |
| Asset-backed securities | 120,777 | | | — | | | 2,397 | | | 118,380 | |
| Mortgage-backed securities | 164,847 | | | — | | | 9,211 | | | 155,636 | |
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Total(b) | $ | 1,035,339 | | | $ | — | | | $ | 57,582 | | | $ | 977,757 | |
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| Non-current: | | | | | | | |
| | | | | | | |
| Debt securities: | | | | | | | |
| Municipal bonds | $ | 3,081 | | | $ | — | | | $ | 202 | | | $ | 2,879 | |
| Asset-backed securities | 158 | | | 1 | | | — | | | 159 | |
| Mortgage-backed securities | 119 | | | — | | | 3 | | | 116 | |
| Mutual fund | 28,071 | | | — | | | 2,016 | | | 26,055 | |
| Pooled investment fund | 9,000 | | | — | | | — | | | 9,000 | |
Total (c) | $ | 40,429 | | | $ | 1 | | | $ | 2,221 | | | $ | 38,209 | |
Total investment securities(d) | $ | 1,075,768 | | | $ | 1 | | | $ | 59,803 | | | $ | 1,015,966 | |
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| (In thousands) | Amortized Cost | | Total
Unrealized
Gains | | Total
Unrealized
Losses | | Fair Value(a) |
| As of December 31, 2021 | | | | | | | |
| Current: | | | | | | | |
| Available-for-sale securities – | | | | | | | |
| Debt securities: | | | | | | | |
| U.S. treasury notes | $ | 308,058 | | | $ | 250 | | | $ | 1,113 | | | $ | 307,195 | |
| Corporate debt securities | 355,102 | | | 30 | | | 3,289 | | | 351,843 | |
| Municipal bonds | 31,273 | | | 44 | | | 149 | | | 31,168 | |
| Asset-backed securities | 120,774 | | | 24 | | | 587 | | | 120,211 | |
| Mortgage-backed securities | 139,590 | | | 11 | | | 1,341 | | | 138,260 | |
Total(b) | $ | 954,797 | | | $ | 359 | | | $ | 6,479 | | | $ | 948,677 | |
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| Non-current: | | | | | | | |
| | | | | | | |
| Debt securities: | | | | | | | |
| Municipal bonds | $ | 3,107 | | | $ | 1 | | | $ | — | | | $ | 3,108 | |
| Asset-backed securities | 167 | | | 1 | | | — | | | 168 | |
| Mortgage-backed securities | 121 | | | 2 | | | — | | | 123 | |
| Mutual fund | 27,999 | | | — | | | 748 | | | 27,251 | |
| Pooled investment fund | 9,000 | | | — | | | — | | | 9,000 | |
Total (c) | $ | 40,394 | | | $ | 4 | | | $ | 748 | | | $ | 39,650 | |
Total investment securities(d) | $ | 995,191 | | | $ | 363 | | | $ | 7,227 | | | $ | 988,327 | |
(a)1 The Company’s methods for measuring the fair value of its investment securities are discussed in Note 12,13, Fair Value.
(b)These investments are custodial assets deposited with, managed and invested by WEX Bank through an investment manager. They are classified as current on the condensed consolidated balance sheets, even though the stated maturity date may be one year or more beyond the current balance sheet date, as the Company views these securities as available for use in current operations, if needed.
(c) These investments are not deemed available for current operations and have been classified as non-current on the condensed consolidated balance sheets.
(d)2 Excludes $13.1$10.8 million and $11.3 million in equity securities as of March 31,June 30, 2022 and December 31, 2021, respectively, included in prepaid expenses and other current assets and other assets on the condensed consolidated balance sheets.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 March 31,June 30, 2022 and December 31, 2021.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
| | | | Balance at March 31, 2022 | | Balance at December 31, 2021 | | | Balance at June 30, 2022 | | Balance at December 31, 2021 | |
| | (In thousands) | (In thousands) | Fair Value | | Gross Unrealized Losses1 | | Fair Value | | Gross Unrealized Losses1 | | (In thousands) | Fair Value | | Gross Unrealized Losses1 | | Fair Value | | Gross Unrealized Losses1 | |
| | Investment-grade rated debt securities: | Investment-grade rated debt securities: | | | | | | | | | Investment-grade rated debt securities: | | | | | | | | |
| U.S. treasury notes | U.S. treasury notes | $ | 314,485 | | | $ | 18,899 | | | $ | 268,839 | | | $ | 1,113 | | | U.S. treasury notes | $ | 377,537 | | | $ | 28,103 | | | $ | 268,839 | | | $ | 1,113 | | |
| Corporate debt securities | Corporate debt securities | $ | 360,930 | | | $ | 24,132 | | | $ | 336,777 | | | $ | 3,289 | | | Corporate debt securities | $ | 483,681 | | | $ | 41,282 | | | $ | 336,777 | | | $ | 3,289 | | |
| Municipal bonds | Municipal bonds | $ | 31,205 | | | $ | 3,145 | | | $ | 24,049 | | | $ | 149 | | | Municipal bonds | $ | 42,525 | | | $ | 4,878 | | | $ | 24,049 | | | $ | 149 | | |
| Asset-backed securities | Asset-backed securities | $ | 118,539 | | | $ | 2,397 | | | $ | 101,983 | | | $ | 587 | | | Asset-backed securities | $ | 167,130 | | | $ | 7,230 | | | $ | 101,983 | | | $ | 587 | | |
| Mortgage-backed securities | Mortgage-backed securities | $ | 155,752 | | | $ | 9,214 | | | $ | 132,737 | | | $ | 1,341 | | | Mortgage-backed securities | $ | 313,916 | | | $ | 18,764 | | | $ | 132,737 | | | $ | 1,341 | | |
1 All investments above have been in a continuous unrealized loss position for less than 12 months.
The above table includes 238337 securities at March 31,June 30, 2022, 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, which may be maturity.bases.
The following table summarizes the contractual maturity dates of the Company’s debt securities.
| | | | | March 31, 2022 | | | June 30, 2022 | |
| (In thousands) | (In thousands) | Net Carrying Amount | | Fair Value | | (In thousands) | Amortized Cost | | Fair Value | |
| | Due after 1 year through year 5 | Due after 1 year through year 5 | 402,942 | | | 382,239 | | | Due after 1 year through year 5 | 486,447 | | | 456,472 | | |
| Due after 5 years through year 10 | Due after 5 years through year 10 | 398,779 | | | 371,845 | | | Due after 5 years through year 10 | 581,390 | | | 534,290 | | |
| Due after 10 years | Due after 10 years | 236,976 | | | 226,828 | | | Due after 10 years | 477,433 | | | 454,646 | | |
| Total | Total | $ | 1,038,697 | | | $ | 980,912 | | | Total | $ | 1,545,270 | | | $ | 1,445,408 | | |
|
Changes in the fair value of the Company’s equity securities are recognized within net unrealized gain (loss) on financial instruments on the condensed consolidated statements of operations for the three and six months ended March 31,June 30, 2022 and 2021. During the three and six months ended March 31,June 30, 2022, unrealized losses recognized on equity securities still held as of June 30, 2022 approximated $0.9 million and $2.2 million, respectively. During the three and six months ended June 30, 2021, unrealized gains and losses related to equity securities still held as of March 31, 2022 approximated $2.0 million. During the three months ended March 31, 2021, unrealized losses related to equity securities still held as of March 31,June 30, 2021 were immaterial.
Certain of the Company’s financial assets and liabilities are recorded 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 the fair value of the Company’s obligations, including: closing exchange or over-the-counter market price quotations; time value and volatility factors underlying options and derivatives; price activity for equivalent instruments; and the Company’s own credit standing. These valuation techniques may be based upon observable 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; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
•Level 3 – Instruments whose significant value drivers are unobservable.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
•Level 3 – Instruments whose significant value drivers are unobservable.
Assets and liabilities measured at fair value are classified in their entirety based 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.
Assets and Liabilities 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:
| (In thousands) | (In thousands) | Fair Value Hierarchy | March 31, 2022 | | December 31, 2021 | (In thousands) | Fair Value Hierarchy | June 30, 2022 | | December 31, 2021 |
| Financial Assets: | | | | |
| Assets: | | Assets: | | | |
Money market mutual funds1 | Money market mutual funds1 | 1 | $ | 5,785 | | | $ | 3,670 | | Money market mutual funds1 | 1 | $ | 28,901 | | | $ | 3,670 | |
| | | Investment securities, current: | Investment securities, current: | | Investment securities, current: | |
| Debt securities: | Debt securities: | | Debt securities: | |
| U.S. treasury notes | U.S. treasury notes | 2 | $ | 314,485 | | | $ | 307,195 | | U.S. treasury notes | 2 | $ | 377,537 | | | $ | 307,195 | |
| Corporate debt securities | Corporate debt securities | 2 | 360,930 | | | 351,843 | | Corporate debt securities | 2 | 486,590 | | | 351,843 | |
| Municipal bonds | Municipal bonds | 2 | 28,326 | | | 31,168 | | Municipal bonds | 2 | 48,528 | | | 31,168 | |
| Asset-backed securities | Asset-backed securities | 2 | 118,380 | | | 120,211 | | Asset-backed securities | 2 | 201,570 | | | 120,211 | |
| Mortgage-backed securities | Mortgage-backed securities | 2 | 155,636 | | | 138,260 | | Mortgage-backed securities | 2 | 328,191 | | | 138,260 | |
| Total | Total | | $ | 977,757 | | | $ | 948,677 | | Total | | $ | 1,442,416 | | | $ | 948,677 | |
| | Investment securities, non-current: | Investment securities, non-current: | | Investment securities, non-current: | |
| Debt securities: | Debt securities: | | Debt securities: | |
| Municipal bonds | Municipal bonds | 2 | $ | 2,879 | | | $ | 3,108 | | Municipal bonds | 2 | $ | 2,721 | | | $ | 3,108 | |
| Asset-backed securities | Asset-backed securities | 2 | 159 | | | 168 | | Asset-backed securities | 2 | 150 | | | 168 | |
| Mortgage-backed securities | Mortgage-backed securities | 2 | 116 | | | 123 | | Mortgage-backed securities | 2 | 121 | | | 123 | |
| Fixed-income mutual fund | Fixed-income mutual fund | 1 | 26,055 | | | 27,251 | | Fixed-income mutual fund | 1 | 25,261 | | | 27,251 | |
Pooled investment fund measured at NAV2 | Pooled investment fund measured at NAV2 | | 9,000 | | | 9,000 | | Pooled investment fund measured at NAV2 | | 9,000 | | | 9,000 | |
| Total | Total | | $ | 38,209 | | | $ | 39,650 | | Total | | $ | 37,253 | | | $ | 39,650 | |
| Executive deferred compensation plan trust3 | Executive deferred compensation plan trust3 | 1 | $ | 13,080 | | | $ | 11,303 | | Executive deferred compensation plan trust3 | 1 | $ | 10,827 | | | $ | 11,303 | |
Interest rate swaps4 | Interest rate swaps4 | 2 | $ | 49,779 | | | $ | 15,031 | | Interest rate swaps4 | 2 | $ | 63,920 | | | $ | 15,031 | |
| | Liabilities | Liabilities | | Liabilities | |
Interest rate swaps4 | Interest rate swaps4 | 2 | $ | 3,635 | | | $ | 19,982 | | Interest rate swaps4 | 2 | $ | — | | | $ | 19,982 | |
Contingent consideration5 | Contingent consideration5 | 3 | $ | 83,900 | | | $ | 67,300 | | Contingent consideration5 | 3 | $ | 172,100 | | | $ | 67,300 | |
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 March 31,June 30, 2022, $1.1$1.6 million and $12.0$9.2 million in fair value is recorded within prepaid expenses and other current assets and other assets, respectively. At December 31, 2021, $1.6 million and $9.7 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 March 31,June 30, 2022, $9.9$27.0 million and $39.8$37.0 million in fair value is recorded in prepaid expenses and other current assets and other assets, respectively. At March 31, 2022, $3.6 million in fair value is recorded within other current liabilities. At December 31, 2021, $0.1 million and $14.9 million in fair value is recorded within prepaid expenses and other current assets and other assets, respectively. At December 31, 2021, $17.6 million and $2.4 million in fair value is recorded within other current liabilities and other liabilities, respectively.
5 The fair value is recorded as current or long-term based on the timing of expected payments. At March 31,June 30, 2022, $3.5$14.9 million and $80.4$157.2 million in fair value is recorded within other current liabilities and other liabilities, respectively. At December 31, 2021, $67.3 million in fair value is recorded in other liabilities.
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.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Debt Securities
The Company determines the fair value of U.S. treasury notes using quoted market prices for similar or identical instruments in a market that is not active. For corporate debt securities, municipal bonds, and asset-backed and mortgage-backed securities, 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.
Pooled Investment Fund
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Fair Value | | Unfunded Commitments | | Redemption Frequency | | Redemption Notice Period |
| | | | | | | |
Pooled investment fund, as of March 31,June 30, 2022 | $ | 9,000 | | | — | | | Monthly | | 30 days |
The pooled investment fund is a Community Reinvestment Act-eligible investment fund, which seeks to provide bank investors with current income consistent with the returns available in adjustable-rate government guaranteed financial products by investing in Community Development loans guaranteed by the Small Business Administration. The fund maintains individual capital accounts for each investor, which reflect each individual investor’s share of the NAV of the fund.
Fixed Income Mutual Fund
The Company determines the fair value of its fixed income mutual fund investment 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 investments 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 LIBOR curve, which are Level 2 inputs of the fair value hierarchy.
Contingent Consideration
As part of the asset acquisition from Bell Bank discussed in Note 4, Acquisitions,during 2021, the Company is obligated to pay additional consideration to Bell Bank contingent upon increases in the Federal Funds rate. The Company determined the fair value of this 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 future 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 weighted average discount rate, which was 2.343.27 percent as of March 31,June 30, 2022 and 1.45 percent as of December 31, 2021. Significant increases or decreases in the Federal Funds rates could result in material increases or decreases, respectively, to the fair value of the Company’s contingent consideration 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) and during the threesix months ended March 31,June 30, 2022 are as follows:
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
| | | | | | | | | | | |
| (In thousands) | | | Fair Value | | |
| | |
| Contingent consideration – December 31, 2021 | | | $ | 67,300 | | |
| | | | |
| Change in estimated fair value | | | 16,600104,800 | | |
Contingent consideration – March 31,June 30, 2022 | | | $ | 83,900172,100 | | |
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Assets and Liabilities Measured at Carrying Value, for which Fair Value is Disclosed
Term Loans and Borrowings on Revolving Credit Facility
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 the Company’s debt, which are Level 2 inputs in the fair value hierarchy. As of March 31,June 30, 2022, the approximate fair value of outstanding borrowings on the Tranche A Term Loans and Tranche B Term Loans was $892.1 million and $1,370.6 million, respectively. As of December 31, 2021, the carrying value of outstanding borrowings on the Tranche A Term Loans and Tranche B Term Loans approximated fair value. As of March 31,June 30, 2022, andthe approximate fair value of the outstanding borrowings on the Revolving Credit Facility was $173.0 million while at December 31, 2021, the principal amount of the outstanding borrowings on the Revolving Credit Facility approximated fair value. See Note 10, Financing and Other Debt, for the carrying value of these liabilities as of June 30, 2022 and December 31, 2021.
Convertible Notes
The Company determines 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. As of March 31,June 30, 2022 and December 31, 2021, the fair value of our Convertible Notes approximated $355.8$314.7 million and $327.7 million, respectively. See Note 10, Financing and Other Debt, for the carrying value of this liability as of June 30, 2022 and December 31, 2021.
Contractual Deposits
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. As of June 30, 2022, the fair value of such deposits approximated $554.1 million while at December 31, 2021, the carrying value of such deposits approximated fair value. See Note 9, Deposits, for the carrying value of these liabilities as of June 30, 2022 and December 31, 2021.
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, short-term certificates of deposit,contractual deposits, accounts receivable, accounts payable, accrued expenses 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, certificates of deposit with maturity dates in excess of one year, securitized debt, participation debt, borrowed federal funds and deferred consideration associated with our acquisitions approximate their respective fair values due to theirstated interest rates being consistent with current market interest rates.
| | | | | |
13.14. | Redeemable Non-Controlling Interest |
On March 5, 2019, the Company acquired Discovery Benefits, an employee benefits administrator. The seller of Discovery Benefits, SBI, obtained a 4.9 percent equity interest in PO Holding, the then newly formed parent company of WEX Health and Discovery Benefits. As part of WEX Inc.’s purchase of the HSA contractual rights from Bell Bank on April 1, 2021, as more fully described in Note 4, Acquisitions, SBI’s ownership percentage was reduced to 4.53 percent.
The original agreement provided SBI with a put right and the Company with a call right for the equity interest, which could be exercised no earlier than seven years following the date of acquisition. Upon exercise of the put or call right, the purchase price was to be calculated based on a revenue multiple of peer companies (as described in the operating agreement for PO Holding) applied to trailing twelve month revenues of the U.S. Health business. The put option made the non-controlling
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
interest redeemable and, therefore, the non-controlling interest was classified as temporary equity outside of stockholders’ equity as of December 31, 2021.equity. Any resulting change in the value of the redeemable non-controlling interest was offset against retained earnings and impacted earnings per share.
On March 7, 2022, in complete satisfaction of any rights under the PO Holding operating agreement, WEX Inc. and SBI entered into that certainthe Share Purchase Agreement whereby SBI sold, and WEX Inc. purchased, SBI’s remaining 4.53 percent interest in PO Holding. The purchase price for the shares in PO Holding was an aggregate price of $234.0 million plus any interest accruing pursuant to the terms of the Share Purchase Agreement. The initial liability associated with the future payment of the purchase price was recorded at a net present value of $216.6 million, as more fully described in Note 4, Acquisitions.
The carrying value of the redeemable non-controlling interest immediately prior to the acquisition date was $254.4 million. 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 for the three months ended March 31, 2022.operations. This change in value of redeemable non-controlling interest was 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. TheAs a result of the acquisition, the carrying value of the redeemable non-controlling interest was reduced to zero as a result of the acquisition. As a result of this purchase,and WEX Inc. owns 100 percent of PO Holding as of March 31, 2022.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Holding.The following table presents the changes in the Company’s redeemable non-controlling interest:
| | (In thousands) | (In thousands) | 2022 | | 2021 | (In thousands) | 2022 | | 2021 |
| Balance at January 1 | Balance at January 1 | $ | 254,106 | | | $ | 117,219 | | Balance at January 1 | $ | 254,106 | | | $ | 117,219 | |
| Net income attributable to redeemable non-controlling interest | Net income attributable to redeemable non-controlling interest | 268 | | | 353 | | Net income attributable to redeemable non-controlling interest | 268 | | | 353 | |
| Change in value of redeemable non-controlling interest | Change in value of redeemable non-controlling interest | (37,780) | | | 25,044 | | Change in value of redeemable non-controlling interest | (37,780) | | | 25,044 | |
| Repurchase of non-controlling interest | Repurchase of non-controlling interest | (216,594) | | | — | | Repurchase of non-controlling interest | (216,594) | | | — | |
| Balance at March 31 | Balance at March 31 | $ | — | | | $ | 142,616 | | Balance at March 31 | $ | — | | | $ | 142,616 | |
| | Net income attributable to redeemable non-controlling interest | | Net income attributable to redeemable non-controlling interest | — | | | 232 | |
| Repurchase of non-controlling interest | | Repurchase of non-controlling interest | — | | | (11,191) | |
| Contribution from non-controlling interest | | Contribution from non-controlling interest | — | | | 12,457 | |
| Change in value of redeemable non-controlling interest | | Change in value of redeemable non-controlling interest | — | | | 43,823 | |
| Balance at June 30 | | Balance at June 30 | $ | — | | | $ | 187,937 | |
|
The Company’s effective tax rate was 32.129.8 percent and 31.5 percent for the three and six months ended June 30, 2022, respectively, and (7.9) percent and (7.8) percent for the three and six months ended March 31, 2022 andJune 30, 2021, respectively. Income tax expense is based on an estimated annual effective rate, which requires the Company to make its best estimate of annual pretax income or loss. The Company’s effective tax rate for the three months ended March 31,June 30, 2022 was adversely impacted by reduced tax benefits arising from stock-based compensation. The Company’s effective tax rate for the six months ended June 30, 2022 was adversely impacted by a discrete tax item of $7.5 million incurred during the first quarter of 2022, primarily associated with an uncertain tax position.position, in addition to the reduced tax benefits arising from stock-based compensation previously mentioned. Effective tax rates were significantly lower for the same periodperiods in the prior year primarily due to significant excess tax benefits arising from stock-based compensation in the prior year.
Undistributed earnings of certain foreign subsidiaries of the Company amounted to $146.0$150.4 million and $133.0 million at March 31,June 30, 2022 and December 31, 2021, respectively. The Company continues to maintain its indefinite reinvestment assertion for its investments in foreign subsidiaries except for any historical undistributed earnings and future earnings for WEX Australia. Upon distribution of the foreign subsidiaries’ earnings in which the Company continues to assert indefinite reinvestment, the Company would be subject to 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 unrecognized deferred tax liability; however, it is not expected to be material.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
| | | | | |
15.16. | Commitments and Contingencies |
Restructuring Activities
In connection with the acquisition of eNett and Optal, during the first quarter of 2021, the Company initiated a restructuring program within the Travel and Corporate Solutions segment. The restructuring initiative consisted of employee separation costs, which the Company determined arewere probable and reasonably estimable. As such, the Company recorded charges incurred under this initiative of $5.4 million during the threesix months ended March 31,June 30, 2021, within general and administrative expenses on the condensed consolidated statements of operations. There were no accrued charges related to this initiative as of December 31, 2021 and no further charges were incurred during the threesix months ended March 31,June 30, 2022.
Litigation and Regulatory Matters
The Company is subject to legal proceedings and claims in the ordinary course of business. As of the date of this filing, the current estimate of a reasonably possible loss contingency from all legal proceedings is not material to the Company’s consolidated financial position, results of operations, cash flows or liquidity.
Commitments
Minimum Volume Commitments
TwoDuring June 2022, the Company and its European fuel suppliers amended existing contracts, modifying both prior period and future minimum volume commitments through 2025. As a result of these amendments, the Company’s subsidiaries are requiredCompany reversed previously accrued penalties totaling approximately $7 million as other revenue within the condensed consolidated statement of operations during the three and six months ended June 30, 2022.
Other Commitments
During June 2022, the Company entered into a definitive agreement to purchase a minimum amountportfolio of fuel from supplierscertain assets, consisting primarily of card program receivables. The outstanding receivables balances to be converted will fluctuate, but based on an annual basis through 2024. Upon failingthe most recent available information, we expect to meet these minimum volume commitments, a penalty is assessedpurchase this portfolio of assets for approximately $48 million, subject to customary adjustments as defined underin the contracts. The Company incurred shortfall penaltiespurchase agreement. Closing of $1.3 millionthis transaction is contingent upon satisfaction of certain conditions and $1.5 millionis expected to occur during the three months ended March 31,third quarter of 2022, be funded with cash on hand and 2021, respectively, which are offset against revenues on the condensed consolidated statements of operations.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Other Commitmentsaccounted for as an asset acquisition.
Other significant commitments and contingencies as of March 31,June 30, 2022 are consistent with those discussed in Note 20, Commitments and Contingencies, to the consolidated financial statements in the Annual Report on Form 10–K for the year ended December 31, 2021.
| | | | | |
16.17. | Stock–Based Compensation |
The Company regularly grants equity awards in the form of stock options, restricted stock, restricted stock units and other stock-based awards under its stockholder-approved Amended and Restated 2019 Equity and Incentive Plan to certain employees and directors. The fair value of restricted stock units and performance-based restricted stock units, excluding awards that include a TSR provision, is based on the closing market price of the Company’s stock on the grant date as reported by the NYSE. The fair value of each service-based stock option award is estimated on the grant date using a Black-Scholes-Merton option-pricing model. The fair value of awards with market-based performance conditions, including those with TSR provisions, is estimated on the grant date using a Monte-Carlo simulation pricing model.
Stock-based compensation expense was $23.7$24.9 million and $17.9$48.6 million for the three and six months ended March 31,June 30, 2022, respectively, and $20.6 million and $38.5 million for the three and six months ended June 30, 2021, respectively.
| | | | | |
17.18. | Segment Information |
The Company determines its operating segments and reports segment information in accordance with how the Company’s CODM allocates resources and assesses performance. The Company’s CODM is its Chief Executive Officer. The operating segments are aggregated into the 3 reportable segments described below.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
•Fleet Solutions provides payment processing, transaction processing, and information management services specifically designed for the needs of fleets of all sizes from small businesses to federal and state government fleets and over-the-road carriers.
•Travel and Corporate Solutions focuses on the complex 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.
•Health and Employee Benefit Solutions provides a SaaS platform for consumer directed healthcare benefits and a full-service benefit enrollment solution, bringing together benefits administration, certain compliance services and consumer-directed and benefits accounts. Additionally, the Company serves as the non-bank custodian to certain HSA assets.
The following tables present the Company’s reportable segment revenues:
| | | Three Months Ended March 31, 2022 | | Three Months Ended June 30, 2022 |
| (In thousands) | (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee
Benefit Solutions | | Total | (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee
Benefit Solutions | | Total |
| Payment processing revenue | Payment processing revenue | $ | 151,906 | | | $ | 65,075 | | | $ | 22,497 | | | $ | 239,478 | | Payment processing revenue | $ | 202,359 | | | $ | 88,608 | | | $ | 21,338 | | | $ | 312,305 | |
| Account servicing revenue | Account servicing revenue | 42,443 | | | 10,758 | | | 86,740 | | | 139,941 | | Account servicing revenue | 43,860 | | | 10,400 | | | 83,378 | | | 137,638 | |
| Finance fee revenue | Finance fee revenue | 78,405 | | | 141 | | | 36 | | | 78,582 | | Finance fee revenue | 85,067 | | | 216 | | | 27 | | | 85,310 | |
| Other revenue | Other revenue | 46,385 | | | 1,277 | | | 11,872 | | | 59,534 | | Other revenue | 47,937 | | | 1,186 | | | 13,861 | | | 62,984 | |
| Total revenues | Total revenues | $ | 319,139 | | | $ | 77,251 | | | $ | 121,145 | | | $ | 517,535 | | Total revenues | $ | 379,223 | | | $ | 100,410 | | | $ | 118,604 | | | $ | 598,237 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
| (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| Payment processing revenue | $ | 126,450 | | | $ | 68,282 | | | $ | 18,694 | | | $ | 213,426 | |
| Account servicing revenue | 42,293 | | | 11,222 | | | 79,482 | | | 132,997 | |
| Finance fee revenue | 59,258 | | | 199 | | | 42 | | | 59,499 | |
| Other revenue | 46,387 | | | 2,059 | | | 5,115 | | | 53,561 | |
| Total revenues | $ | 274,388 | | | $ | 81,762 | | | $ | 103,333 | | | $ | 459,483 | |
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| | | | | | | |
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| Six Months Ended June 30, 2022 |
| (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee
Benefit Solutions | | Total |
| Payment processing revenue | $ | 354,265 | | | $ | 153,683 | | | $ | 43,835 | | | $ | 551,783 | |
| Account servicing revenue | 86,303 | | | 21,158 | | | 170,118 | | | 277,579 | |
| Finance fee revenue | 163,472 | | | 357 | | | 63 | | | 163,892 | |
| Other revenue | 94,322 | | | 2,463 | | | 25,733 | | | 122,518 | |
| Total revenues | $ | 698,362 | | | $ | 177,661 | | | $ | 239,749 | | | $ | 1,115,772 | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| Payment processing revenue | $ | 237,026 | | | $ | 125,530 | | | $ | 39,259 | | | $ | 401,815 | |
| Account servicing revenue | 82,284 | | | 21,909 | | | 147,427 | | | 251,620 | |
| Finance fee revenue | 111,098 | | | 493 | | | 61 | | | 111,652 | |
| Other revenue | 87,817 | | | 4,472 | | | 12,864 | | | 105,153 | |
| Total revenues | $ | 518,225 | | | $ | 152,404 | | | $ | 199,611 | | | $ | 870,240 | |
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WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| Payment processing revenue | $ | 110,576 | | | $ | 57,248 | | | $ | 20,565 | | | $ | 188,389 | |
| Account servicing revenue | 39,991 | | | 10,687 | | | 67,945 | | | 118,623 | |
| Finance fee revenue | 51,840 | | | 294 | | | 19 | | | 52,153 | |
| Other revenue | 41,430 | | | 2,413 | | | 7,749 | | | 51,592 | |
| Total revenues | $ | 243,837 | | | $ | 70,642 | | | $ | 96,278 | | | $ | 410,757 | |
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The CODM evaluates the financial performance of each segment using segment adjusted operating income, which excludes: (i) unallocated corporate expenses; (ii) acquisition-related intangible amortization andamortization; (iii) other acquisition and divestiture related items; (iii)(iv) debt restructuring costs; (iv)(v) stock-based compensation; and (v)(vi) other costs. Additionally, we do not allocate financing interest expense, foreign currency gains and losses, financing interest expense, change in fair value of contingent consideration and unrealized gains and losses on financial instruments to our operating segments.
The following table reconciles total segment adjusted operating income to income before income taxes:
| | | | Three Months Ended March 31, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| (In thousands) | (In thousands) | 2022 | | 2021 | | (In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
| Segment adjusted operating income | Segment adjusted operating income | | | | | Segment adjusted operating income | | | | | | | |
| Fleet Solutions | Fleet Solutions | $ | 160,101 | | | $ | 118,258 | | | Fleet Solutions | $ | 192,969 | | | $ | 137,865 | | | $ | 353,070 | | | $ | 256,123 | |
| Travel and Corporate Solutions | Travel and Corporate Solutions | 28,330 | | | 7,015 | | | Travel and Corporate Solutions | 51,016 | | | 17,157 | | | 79,346 | | | 24,172 | |
| Health and Employee Benefit Solutions | Health and Employee Benefit Solutions | 35,500 | | | 30,544 | | | Health and Employee Benefit Solutions | 28,307 | | | 29,080 | | | 63,807 | | | 59,624 | |
| Total segment adjusted operating income | Total segment adjusted operating income | $ | 223,931 | | | $ | 155,817 | | | Total segment adjusted operating income | $ | 272,292 | | | $ | 184,102 | | | $ | 496,223 | | | $ | 339,919 | |
| | Reconciliation: | Reconciliation: | | | Reconciliation: | |
| Total segment adjusted operating income | Total segment adjusted operating income | $ | 223,931 | | | $ | 155,817 | | | Total segment adjusted operating income | $ | 272,292 | | | $ | 184,102 | | | $ | 496,223 | | | $ | 339,919 | |
| Less: | Less: | | | Less: | |
| Unallocated corporate expenses | Unallocated corporate expenses | 21,011 | | | 16,209 | | | Unallocated corporate expenses | 18,986 | | | 17,174 | | | 39,997 | | | 33,383 | |
| Acquisition-related intangible amortization | Acquisition-related intangible amortization | 42,719 | | | 42,454 | | | Acquisition-related intangible amortization | 42,538 | | | 45,294 | | | 85,257 | | | 87,748 | |
| Other acquisition and divestiture related items | Other acquisition and divestiture related items | 4,540 | | | 14,796 | | | Other acquisition and divestiture related items | 6,461 | | | 10,690 | | | 11,001 | | | 25,486 | |
| Debt restructuring costs | Debt restructuring costs | (12) | | | 637 | | | Debt restructuring costs | (17) | | | 5,299 | | | (29) | | | 5,936 | |
| Stock-based compensation | Stock-based compensation | 25,220 | | | 18,943 | | | Stock-based compensation | 25,267 | | | 21,662 | | | 50,487 | | | 40,605 | |
| Other costs | Other costs | 8,179 | | | 12,237 | | | Other costs | 7,926 | | | 1,705 | | | 16,105 | | | 13,942 | |
| | Operating income | Operating income | 122,274 | | | 50,541 | | | Operating income | 171,131 | | | 82,278 | | | 293,405 | | | 132,819 | |
| Financing interest expense | Financing interest expense | (29,689) | | | (33,284) | | | Financing interest expense | (31,820) | | | (32,473) | | | (61,509) | | | (65,757) | |
| Net foreign currency gain (loss) | Net foreign currency gain (loss) | 5,006 | | | (2,755) | | | Net foreign currency gain (loss) | (19,408) | | | 1,342 | | | (14,402) | | | (1,413) | |
| | Change in fair value of contingent consideration | Change in fair value of contingent consideration | (16,600) | | | — | | | Change in fair value of contingent consideration | (88,200) | | | (47,700) | | | (104,800) | | | (47,700) | |
| Net unrealized gain on financial instruments | Net unrealized gain on financial instruments | 49,827 | | | 7,033 | | | Net unrealized gain on financial instruments | 16,894 | | | 6,013 | | | 66,721 | | | 13,046 | |
| Income before income taxes | Income before income taxes | $ | 130,818 | | | $ | 21,535 | | | Income before income taxes | $ | 48,597 | | | $ | 9,460 | | | $ | 179,415 | | | $ | 30,995 | |
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18.19. | Supplementary Regulatory Capital Disclosure |
The Company’s subsidiary, WEX Bank, is subject to various regulatory capital requirements administered by the FDIC and the Utah Department of Financial Institutions.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. 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.
WEX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 March 31,June 30, 2022, 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.
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:
|
(In thousands) |
(In thousands) | Actual Amount | | Ratio | | Minimum for Capital Adequacy Purposes Amount | | Ratio | | Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions Amount | | Ratio |
(In thousands) | Actual Amount | | Ratio | | Minimum for Capital Adequacy Purposes Amount | | Ratio | | Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions Amount | | Ratio |
| March 31, 2022 | | | | | | | | | | | | |
| June 30, 2022 | | June 30, 2022 | | | | | | | | | | | |
| Total Capital to risk-weighted assets | Total Capital to risk-weighted assets | $ | 508,665 | | | 12.35 | % | | $ | 329,551 | | | 8.00 | % | | $ | 411,939 | | | 10.00 | % | Total Capital to risk-weighted assets | $ | 588,167 | | | 12.04 | % | | $ | 390,889 | | | 8.00 | % | | $ | 488,611 | | | 10.00 | % |
| Tier 1 Capital to average assets | Tier 1 Capital to average assets | $ | 468,828 | | | 9.88 | % | | $ | 189,766 | | | 4.00 | % | | $ | 237,208 | | | 5.00 | % | Tier 1 Capital to average assets | $ | 542,839 | | | 9.83 | % | | $ | 220,839 | | | 4.00 | % | | $ | 276,048 | | | 5.00 | % |
| Common equity to risk-weighted assets | Common equity to risk-weighted assets | $ | 468,828 | | | 11.38 | % | | $ | 185,373 | | | 4.50 | % | | $ | 267,761 | | | 6.50 | % | Common equity to risk-weighted assets | $ | 542,839 | | | 11.11 | % | | $ | 219,875 | | | 4.50 | % | | $ | 317,597 | | | 6.50 | % |
| Tier 1 Capital to risk-weighted assets | Tier 1 Capital to risk-weighted assets | $ | 468,828 | | | 11.38 | % | | $ | 247,164 | | | 6.00 | % | | $ | 329,551 | | | 8.00 | % | Tier 1 Capital to risk-weighted assets | $ | 542,839 | | | 11.11 | % | | $ | 293,167 | | | 6.00 | % | | $ | 390,889 | | | 8.00 | % |
| December 31, 2021 | December 31, 2021 | | December 31, 2021 | |
| Total Capital to risk-weighted assets | Total Capital to risk-weighted assets | $ | 402,406 | | | 12.63 | % | | $ | 254,984 | | | 8.00 | % | | $ | 318,731 | | | 10.00 | % | Total Capital to risk-weighted assets | $ | 402,406 | | | 12.63 | % | | $ | 254,984 | | | 8.00 | % | | $ | 318,731 | | | 10.00 | % |
| Tier 1 Capital to average assets | Tier 1 Capital to average assets | $ | 366,121 | | | 8.75 | % | | $ | 167,317 | | | 4.00 | % | | $ | 209,147 | | | 5.00 | % | Tier 1 Capital to average assets | $ | 366,121 | | | 8.75 | % | | $ | 167,317 | | | 4.00 | % | | $ | 209,147 | | | 5.00 | % |
| Common equity to risk-weighted assets | Common equity to risk-weighted assets | $ | 366,121 | | | 11.49 | % | | $ | 143,429 | | | 4.50 | % | | $ | 207,175 | | | 6.50 | % | Common equity to risk-weighted assets | $ | 366,121 | | | 11.49 | % | | $ | 143,429 | | | 4.50 | % | | $ | 207,175 | | | 6.50 | % |
| Tier 1 Capital to risk-weighted assets | Tier 1 Capital to risk-weighted assets | $ | 366,121 | | | 11.49 | % | | $ | 191,238 | | | 6.00 | % | | $ | 254,984 | | | 8.00 | % | Tier 1 Capital to risk-weighted assets | $ | 366,121 | | | 11.49 | % | | $ | 191,238 | | | 6.00 | % | | $ | 254,984 | | | 8.00 | % |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&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 below.herein.
Our MD&A is presented in the following sections:
•Overview
•Summary
•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, 2021, the notes accompanying those financial statements and MD&A as contained in our Annual Report on Form 10–K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 1, 2022, and in conjunction with the condensed consolidated financial statements and notes in Part I – Item 1 of this report.
Overview
WEX Inc. is the global commerce platform that simplifies the business of running a business. We currently operate in three reportable segments: Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. The Fleet Solutions segment provides payment processing, transaction processing, and information management services specifically designed for the needs of fleets of all sizes from small businesses to federal and state government fleets and over-the-road carriers. The Travel and Corporate Solutions segment focuses on the complex 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. The Health and Employee Benefit Solutions segment provides a SaaS platform for consumer directed healthcare benefits and a full-service benefit enrollment solution, bringing together benefits administration, certain compliance services and consumer-directed and benefits accounts. Additionally, WEX serves as the non-bank custodian to certain HSA assets.
Summary
Recent Events
On March 7, 2022, WEX Inc. and SBI entered into a Share Purchase Agreement whereby SBI sold, and WEX Inc. purchased, SBI’s remaining 4.53 percent interest in PO Holding for a purchase price of $234.0 million plus any interest accruing pursuant to the terms of the Share Purchase Agreement. The purchase price is payable in three installments of $76.7 million in each of March of 2024, 2025 and 2026, with a final payment of $4.0 million payable in March 2026. Pursuant to the Share Purchase Agreement, WEX Inc. owes SBI interest on the outstanding purchase price balance from March 2024 to March 2025 at the 12-month SOFR rate (as determined on March 1, 2024) plus 1.25 percent and on the outstanding balance from March 2025 to March 2026 at the 12-month SOFR rate (as determined on March 3, 2025) plus 2.25 percent, except that no interest accrues on the $4.0 million payment due in March 2026. The Company recorded the deferred liability at its net present value of $216.6 million. The associated discount will be amortized to interest expense using the effective interest method over the repayment term. The carrying value of the redeemable non-controlling interest immediately prior to the acquisition date was $254.4 million, resulting in the recognition of $37.8 million within the change in value of redeemable non-controlling interest on the condensed consolidated statements of operations for the three months ended March 31, 2022. The change in value of redeemable non-controlling interest was 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. The carrying value of the redeemable non-controlling interest was reduced to zero as a result of the acquisition. This transaction makes PO Holding, the direct parent of WEX Health, a wholly owned subsidiary of WEX Inc. to which the Company is solely entitled to the economic benefits.
Summary
Key Performance Indicators
Below are key metrics from the firstsecond quarter of 2022:
| | | Increase | | Increase (Decrease) |
| | Q1 2022 | | Q1 2021 | | Amount | | Percent | | Q2 2022 | | Q2 2021 | | Amount | | Percent |
| | Total volume (in millions): | Total volume (in millions): | | Total volume (in millions): | |
| Fleet Solutions | Fleet Solutions | $ | 21,704.3 | | | $ | 13,677.4 | | | $ | 8,026.9 | | | 59 | % | Fleet Solutions | $ | 27,821.7 | | | 15,979.6 | | | 11,842.1 | | | 74 | % |
| Travel and Corporate Solutions | Travel and Corporate Solutions | 20,064.9 | | | 13,339.3 | | | 6,725.6 | | | 50 | % | Travel and Corporate Solutions | 25,834.3 | | | 16,653.0 | | | 9,181.3 | | | 55 | % |
| Health and Employee Benefit Solutions | Health and Employee Benefit Solutions | 3,063.2 | | | 2,851.9 | | | 211.3 | | | 7 | % | Health and Employee Benefit Solutions | 2,910.2 | | | 2,654.3 | | | 255.9 | | | 10 | % |
| Total volume (in millions) | Total volume (in millions) | $ | 44,832.4 | | | $ | 29,868.6 | | | $ | 14,963.8 | | | 50 | % | Total volume (in millions) | $ | 56,566.2 | | | 35,286.9 | | | 21,279.3 | | | 60 | % |
| | Total purchase volume (in millions) | Total purchase volume (in millions) | $ | 27,829.9 | | | $ | 16,768.9 | | | $ | 11,061.0 | | | 66 | % | Total purchase volume (in millions) | $ | 37,273.7 | | | 21,042.6 | | | 16,231.1 | | | 77 | % |
| | | Fleet Solutions | Fleet Solutions | | Fleet Solutions | |
| Fuel transactions processed (in millions) | 161.3 | | | 146.4 | | | 14.9 | | | 10 | % | |
| | Payment processing transactions (in millions) | Payment processing transactions (in millions) | 132.7 | | | 118.4 | | | 14.3 | | | 12 | % | Payment processing transactions (in millions) | 143.2 | | | 130.1 | | | 13.1 | | | 10 | % |
| | Average vehicles serviced (in millions) | | Average vehicles serviced (in millions) | 17.5 | | | 16.2 | | | 1.3 | | | 8 | % |
| | Average U.S. fuel price (US$ / gallon) | $ | 3.95 | | | $ | 2.72 | | | $ | 1.23 | | | 45 | % | |
| Payment processing $ of fuel (in millions) | Payment processing $ of fuel (in millions) | $ | 14,390.3 | | | $ | 9,177.0 | | | $ | 5,213.3 | | | 57 | % | Payment processing $ of fuel (in millions) | $ | 18,639.7 | | | $ | 10,995.4 | | | $ | 7,644.3 | | | 70 | % |
| | Travel and Corporate Solutions | Travel and Corporate Solutions | | Travel and Corporate Solutions | |
| Purchase volume (in millions) | Purchase volume (in millions) | $ | 11,809.4 | | | $ | 6,107.7 | | | $ | 5,701.7 | | | 93 | % | Purchase volume (in millions) | $ | 17,120.0 | | | $ | 8,736.0 | | | $ | 8,384.0 | | | 96 | % |
| | Health and Employee Benefit Solutions | Health and Employee Benefit Solutions | | Health and Employee Benefit Solutions | |
| Purchase volume (in millions) | Purchase volume (in millions) | $ | 1,630.2 | | | $ | 1,484.2 | | | $ | 146.0 | | | 10 | % | Purchase volume (in millions) | $ | 1,514.0 | | | $ | 1,311.1 | | | $ | 202.9 | | | 15 | % |
| Average number of U.S. SaaS accounts (in millions) | Average number of U.S. SaaS accounts (in millions) | 17.8 | | | 15.5 | | | 2.3 | | | 15 | % | Average number of U.S. SaaS accounts (in millions) | 17.6 | | | 16.4 | | | 1.2 | | | 7 | % |
Total volume across the Company, which includes purchases on WEX-issued accounts as well as purchases issued by others but using the WEX platform, increased 5060 percent over the firstsecond quarter of 2021 to $44.8$56.6 billion for the firstsecond quarter of 2022. Total purchase volume across the Company in the firstsecond quarter of 2022 grew 6677 percent from the same period in the prior year reflecting the strong double digit growth rates in each of our segments, as further described below.
Fleet Solutions
•Fuel transactions processed increased approximately 10 percent from the first quarter of 2021 to 161.3 million for the first quarter of 2022, substantially as a result of increased transactions processed in North America.
•Payment processing transactions, which represents the total number of purchases made by fleets that have a payment processing relationship with WEX where the Company maintains the receivable for the total purchase, arewere up approximately 1210 percent as compared to the same period last year, substantially as a result of increased transactions processed in North America.
•The average U.S. fuel price per gallon duringAverage vehicles serviced increased 8 percent for the firstsecond quarter of 2022 was $3.95, an approximate 45 percent increase from the same period last year.
•Payment processing $ of fuel, which represents the total dollar value of the fuel purchased by fleets that have a payment processing relationship with the Company, increased 5770 percent for the firstsecond quarter of 2022 from the same period last year, driven primarily by higher fuel prices.
Travel and Corporate Solutions
•Purchase volume, which represents the total dollar value of all WEX-issued transactions that use WEX corporate card products and virtual card products, was $11.8$17.1 billion for the firstsecond quarter of 2022, representing an increase of 9396 percent from the same period last year. This increase was driven primarily by volumes contributed by the acquisition of eNett and Optal,due to a continued strong recovery in domesticglobal travel and tourism andvolumes during the second quarter of 2022, along with increased volumes in our corporate payment solutions business.
Health and Employee Benefit Solutions
•Purchase volume, which represents the total U.S. dollar value of all transactions where interchange is earned by WEX, was up approximately 1015 percent as compared to the same period last year.
•Average number of U.S. SaaS accounts, which represents the number of active Consumer-Directed Health, COBRA, and billing accounts on our U.S. SaaS platforms, grew by approximately 2.31.2 million for the firstsecond quarter of 2022, a 157 percent increase from the same period in the prior year.year building off a strong open enrollment season. The average number of U.S. SaaS accounts for the second quarter of 2021 reflected approximately 1.0 million of temporary accounts added as a result of COBRA related services we performed as a result of the American Rescue Plan Act legislation.
Results of Operations
The Company does not allocate financing interest expense, change in fair value of contingent consideration, foreign currency gains and losses, unrealized and realized gains and losses on financial instruments, other non-operating gains and losses, income taxes and adjustments attributable to non-controlling interests to our operating segments, as management believes these items are unpredictable and can obscure a segment’s operating trends and results. In addition, 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 Company’s operating expenses consist of the following:
Cost of Services
•Processing costs - The Company’s processing costs consist of expenses related to processing transactions, servicing customers and merchants and cost of goods sold related to hardware and other product sales.
•Service fees - The Company incurs costs from third-party networks utilized to deliver payment solutions. Additionally, other third-parties are utilized in performing services directly related to generating revenue.
•Provision for credit losses - Changes in the reserve for credit loss are the result of changes in management’s estimate of the losses in the Company’s outstanding portfolio of receivables, including losses from fraud.
•Operating interest - The Company incurs interest expense on the operating debt obtained to provide liquidity for its short-term receivables or used for investing purposes in fixed income debt securities.
•Depreciation and amortization - The Company has identified those tangible and intangible assets directly associated with providing a service that generates revenue and records the depreciation and amortization associated with those assets under this category. Such assets include processing platforms and related infrastructure, acquired developed technology intangible assets and other similar asset types.
Other Operating Expenses
•General and administrative - General and administrative includes compensation and related expenses for executive, finance and accounting, other information technology, human resources, legal and other corporate functions. Also included are corporate facilities expenses, certain third-party professional service fees and other corporate expenses.
•Sales and marketing - The Company’s sales and marketing expenses relate primarily to compensation, benefits, sales commissions and related expenses for sales, marketing and other related activities.
•Depreciation and amortization - The depreciation and amortization associated with tangible and intangible assets that are not considered to be directly associated with providing a service that generates revenue are recorded as other operating expenses. Such assets include corporate facilities, information technology assets, and acquired intangible assets other than those included in cost of services.
Results of Operations
Fleet Solutions
Revenues
The following table reflects comparative revenue and key operating statistics within Fleet Solutions:
| | | Three Months Ended March 31, | | Increase (Decrease) | | | Three Months Ended June 30, | | Increase (Decrease) | | Six Months Ended June 30, | | Increase (Decrease) |
| (In thousands, except per gallon data) | (In thousands, except per gallon data) | 2022 | | 2021 | | Amount | | Percent | | (In thousands, except per gallon data) | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
Revenues1 | Revenues1 | | | | | | | | | Revenues1 | | | | | | | | | | | | | | | |
| Payment processing revenue | Payment processing revenue | $ | 151,906 | | | $ | 110,576 | | | $ | 41,330 | | | 37 | % | | Payment processing revenue | $ | 202,359 | | | $ | 126,450 | | | $ | 75,909 | | | 60 | % | | $ | 354,265 | | | $ | 237,026 | | | $ | 117,239 | | | 49 | % |
| Account servicing revenue | Account servicing revenue | 42,443 | | | 39,991 | | | 2,452 | | | 6 | % | | Account servicing revenue | 43,860 | | | 42,293 | | | 1,567 | | | 4 | % | | 86,303 | | | 82,284 | | | 4,019 | | | 5 | % |
| Finance fee revenue | Finance fee revenue | 78,405 | | | 51,840 | | | 26,565 | | | 51 | % | | Finance fee revenue | 85,067 | | | 59,258 | | | 25,809 | | | 44 | % | | 163,472 | | | 111,098 | | | 52,374 | | | 47 | % |
| Other revenue | Other revenue | 46,385 | | | 41,430 | | | 4,955 | | | 12 | % | | Other revenue | 47,937 | | | 46,387 | | | 1,550 | | | 3 | % | | 94,322 | | | 87,817 | | | 6,505 | | | 7 | % |
| Total revenues | Total revenues | $ | 319,139 | | | $ | 243,837 | | | $ | 75,302 | | | 31 | % | | Total revenues | $ | 379,223 | | | $ | 274,388 | | | $ | 104,835 | | | 38 | % | | $ | 698,362 | | | $ | 518,225 | | | $ | 180,137 | | | 35 | % |
| | Key operating statistics | Key operating statistics | | | Key operating statistics | |
| Payment processing revenue: | Payment processing revenue: | | | Payment processing revenue: | |
Fuel transactions processed2 | Fuel transactions processed2 | 161,289 | | | 146,400 | | | 14,889 | | | 10 | % | | Fuel transactions processed2 | 173,335 | | | 158,700 | | | 14,635 | | | 9 | % | | 334,624 | | | 305,128 | | | 29,496 | | | 10 | % |
| Payment processing transactions3 | Payment processing transactions3 | 132,663 | | | 118,389 | | | 14,274 | | | 12 | % | | Payment processing transactions3 | 143,163 | | | 130,104 | | | 13,059 | | | 10 | % | | 275,826 | | | 248,493 | | | 27,333 | | | 11 | % |
Payment processing $ of fuel4 | Payment processing $ of fuel4 | $ | 14,390,257 | | | $ | 9,176,960 | | | $ | 5,213,297 | | | 57 | % | | Payment processing $ of fuel4 | $ | 18,639,734 | | | $ | 10,995,418 | | | $ | 7,644,316 | | | 70 | % | | $ | 33,029,991 | | | $ | 20,172,378 | | | $ | 12,857,613 | | | 64 | % |
| Average price per gallon of fuel – Domestic – ($USD/gal) | Average price per gallon of fuel – Domestic – ($USD/gal) | $ | 3.95 | | | $ | 2.72 | | | $ | 1.23 | | | 45 | % | | Average price per gallon of fuel –
Domestic – ($USD/gal) | $ | 4.98 | | | $ | 3.04 | | | $ | 1.94 | | | 64 | % | | $ | 4.48 | | | $ | 2.89 | | | $ | 1.59 | | | 55 | % |
Net payment processing rate5 | Net payment processing rate5 | 1.06 | % | | 1.20 | % | | (0.14) | % | | (12) | % | | Net payment processing rate5 | 1.09 | % | | 1.15 | % | | (0.06) | % | | (5) | % | | 1.07 | % | | 1.18 | % | | (0.11) | % | | (9) | % |
Net late fee rate6 | Net late fee rate6 | 0.44 | % | | 0.45 | % | | (0.01) | % | | (2) | % | | Net late fee rate6 | 0.38 | % | | 0.41 | % | | (0.03) | % | | (7) | % | | 0.41 | % | | 0.43 | % | | (0.02) | % | | (100) | % |
1 The impact of foreign currency exchange rate fluctuations on Fleet Solutions decreased revenue by $2.1$4.8 million in the second quarter of 2022 and by $6.9 million in the first quarterhalf of 2022, as compared to the same periodperiods in the prior year. Favorable impact from domestic fuel prices resulted in an increase of $41.1increased revenue by $64.2 million in revenue for the three months ended March 31,June 30, 2022 and $105.3 million in the first half of 2022, as compared to the same periodperiods in the prior year.
2 Fuel transactions processed represents the total number of fuel transactions (funded and unfunded) made by fleets.
3 Payment processing transactions represents the total number of purchases made by fleets that have a payment processing relationship with WEX where the Company maintains the receivable for the total purchase.
4 Payment processing $ of fuel represents the total dollar value of the fuel purchased by fleets that have a payment processing relationship with WEX.
5 Net payment processing rate represents the percentage of the dollar value of each payment processing transaction$ of fuel that WEX records as revenue from merchants less certain discounts given to customers and network fees. The increase in fuel prices, offset in part by a release of minimum volume commitment penalty reserves, has resulted insubstantially contributed to a decline in our net payment processing rate for the three and six months ended March 31,June 30, 2022, as compared to the same periodperiods in the prior year.
6 Net late fee rate represents late fee revenue as a percentage of fuel purchased by fleets that have a payment processing relationship with WEX.
Total Fleet Solutions revenue increased $75.3$104.8 million for the second quarter of 2022 and $180.1 million for the first quarterhalf of 2022, as compared to the same periodperiods in the prior year. Revenues were favorably impacted by higher domesticRevenue increases primarily reflect increased fuel prices and increased volumesgrowth in North America.our existing customer base.
Finance fee revenue is comprised of the following components:
| | | Three Months Ended March 31, | | Increase (Decrease) | | | Three Months Ended June 30, | | Increase (Decrease) | | Six Months Ended June 30, | | Increase (Decrease) |
| (In thousands) | (In thousands) | 2022 | | 2021 | | Amount | | Percent | | (In thousands) | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
| Finance income | Finance income | $ | 63,110 | | | $ | 41,150 | | | $ | 21,960 | | | 53 | % | | Finance income | $ | 70,830 | | | $ | 45,235 | | | $ | 25,595 | | | 57 | % | | $ | 133,940 | | | $ | 86,385 | | | $ | 47,555 | | | 55 | % |
| Factoring fee revenue | Factoring fee revenue | 15,295 | | | 10,690 | | | 4,605 | | | 43 | % | | Factoring fee revenue | 14,236 | | | 14,023 | | | 213 | | | 2 | % | | 29,531 | | | 24,713 | | | 4,818 | | | 19 | % |
| Finance fee revenue | Finance fee revenue | $ | 78,405 | | | $ | 51,840 | | | $ | 26,565 | | | 51 | % | | Finance fee revenue | $ | 85,066 | | | $ | 59,258 | | | $ | 25,808 | | | 44 | % | | $ | 163,471 | | | $ | 111,098 | | | $ | 52,373 | | | 47 | % |
Finance 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. This 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 be attributed to: (i) changes in fuel prices; (ii) customer specific transaction volume; and (iii) customer specific delinquencies. Late fee revenue can also be impacted by: (i) changes in late fee rates; and, (ii) increases or decreases in 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 areWe typically conductedconduct an assessment of our late fee rates at least annually but may occur more often depending on macro-economic factors. In addition, we periodically assess the market rates within our industry to determine appropriate late fee rates.
Finance income increased $22.0$25.6 million for the second quarter of 2022 and $47.6 million for the first quarterhalf of 2022, as compared to the same periodperiods in the prior year primarily as a result of higher domestic fuel prices and increased volumes and instances of late fees.delinquencies. 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. There were no material concessions granted to customers experiencing financial difficulties during the three and six months ended March 31,June 30, 2022 and 2021.
The primary source of factoring fee revenue is calculated as a negotiated percentage fee of the receivable balance that we purchase. A secondary source of factoring fee revenue is a flat rate service fee to our customers that request a non-contractual same day funding of the receivable balance. Factoring fee revenue increased $4.6$4.8 million for the first quarterhalf of 2022, as compared with the same period in the prior year, due to increased shipping demand in the first quarter of 2022, leading to an increase in the size and volume of factored invoices. The softening of the spot rates, or uncontracted transactional market rates paid by a shipper to move a truckload of goods, in the over-the-road market during the second quarter of 2022 resulted in factoring fee revenue remaining consistent with the comparable period in the prior year, which we expect to continue through the remainder of the 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 Fleet Solutions:
| | | | Three Months Ended March 31, | | Increase (Decrease) | | | Three Months Ended June 30, | | Increase (Decrease) | | Six Months Ended June 30, | | Increase (Decrease) |
| (In thousands) | (In thousands) | 2022 | | 2021 | | Amount | | Percent | | (In thousands) | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
| Cost of services | Cost of services | | | | | | | | | Cost of services | | | | | | | | | | | | | | | |
| Processing costs | Processing costs | $ | 60,062 | | | $ | 52,192 | | | $ | 7,870 | | | 15 | % | | Processing costs | $ | 64,416 | | | $ | 52,698 | | | $ | 11,718 | | | 22 | % | | $ | 124,478 | | | $ | 104,890 | | | $ | 19,588 | | | 19 | % |
| Service fees | Service fees | $ | 2,156 | | | $ | 1,728 | | | $ | 428 | | | 25 | % | | Service fees | $ | 2,121 | | | $ | 1,974 | | | $ | 147 | | | 7 | % | | $ | 4,277 | | | $ | 3,702 | | | $ | 575 | | | 16 | % |
| Provision for credit losses | Provision for credit losses | $ | 23,224 | | | $ | 4,364 | | | $ | 18,860 | | | 432 | % | | Provision for credit losses | $ | 42,446 | | | $ | 11,522 | | | $ | 30,924 | | | 268 | % | | $ | 65,670 | | | $ | 15,886 | | | $ | 49,784 | | | 313 | % |
| Operating interest | Operating interest | $ | 1,461 | | | $ | 2,109 | | | $ | (648) | | | (31) | % | | Operating interest | $ | 1,527 | | | $ | 1,796 | | | $ | (269) | | | (15) | % | | $ | 2,988 | | | $ | 3,905 | | | $ | (917) | | | (23) | % |
| Depreciation and amortization | Depreciation and amortization | $ | 11,837 | | | $ | 12,715 | | | $ | (878) | | | (7) | % | | Depreciation and amortization | $ | 11,830 | | | $ | 12,410 | | | $ | (580) | | | (5) | % | | $ | 23,667 | | | $ | 25,125 | | | $ | (1,458) | | | (6) | % |
| | Other operating expenses | Other operating expenses | | | Other operating expenses | |
| General and administrative | General and administrative | $ | 23,667 | | | $ | 20,502 | | | $ | 3,165 | | | 15 | % | | General and administrative | $ | 25,929 | | | $ | 22,749 | | | $ | 3,180 | | | 14 | % | | $ | 49,596 | | | $ | 43,251 | | | $ | 6,345 | | | 15 | % |
| Sales and marketing | Sales and marketing | $ | 49,441 | | | $ | 41,025 | | | $ | 8,416 | | | 21 | % | | Sales and marketing | $ | 52,182 | | | $ | 42,130 | | | $ | 10,052 | | | 24 | % | | $ | 101,623 | | | $ | 83,155 | | | $ | 18,468 | | | 22 | % |
| Depreciation and amortization | Depreciation and amortization | $ | 18,900 | | | $ | 19,585 | | | $ | (685) | | | (3) | % | | Depreciation and amortization | $ | 17,657 | | | $ | 19,412 | | | $ | (1,755) | | | (9) | % | | $ | 36,557 | | | $ | 38,997 | | | $ | (2,440) | | | (6) | % |
| | | Operating income | Operating income | $ | 128,391 | | | $ | 89,617 | | | $ | 38,774 | | | 43 | % | | Operating income | $ | 161,115 | | | $ | 109,697 | | | $ | 51,418 | | | 47 | % | | $ | 289,506 | | | $ | 199,314 | | | $ | 90,192 | | | 45 | % |
| Segment adjusted operating income1 | Segment adjusted operating income1 | $ | 160,101 | | | $ | 118,258 | | | $ | 41,843 | | | 35 | % | | Segment adjusted operating income1 | $ | 192,969 | | | $ | 137,865 | | | $ | 55,104 | | | 40 | % | | $ | 353,070 | | | $ | 256,123 | | | $ | 96,947 | | | 38 | % |
Segment adjusted operating income margin2 | Segment adjusted operating income margin2 | 50 | % | | 48 | % | | 2 | % | | 4 | % | | Segment adjusted operating income margin2 | 51 | % | | 50 | % | | 1 | % | | 2 | % | | 51 | % | | 49 | % | | 2 | % | | 4 | % |
1 Our 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) debt restructuring costs; (iv) stock-based compensation; and (v) other costs. See “Non-GAAP Financial Measures That Supplement GAAP Measures” later in this Item 2 for a reconciliation of total segment adjusted operating income to income before income taxes. See also Part I – Item 1 – Note 17,18, Segment Information, ofto our condensed consolidated financial statements for more information regarding our segment determination.
2 Segment adjusted operating income margin is calculated by dividing segment adjusted operating income by segment revenue. The second quarter and first half of 2022 increaseincreases in segment adjusted operating income margin reflectsover the prior year comparable periods reflect revenue growth including higher fuel prices and operating leverage in the expense base.
Cost of services
Processing costs increased by $7.9$11.7 million and $19.6 million for the three and six months ended March 31,June 30, 2022, as compared with the same periodperiods in the prior year. Such increase wasincreases were primarily driven by higher compliance costs incurred in association with a consent order issued by the FDIC and UDFI, as further discussed within the Liquidity and Capital Resources section later in this MD&A, and, in part, by business support costs incurred as a result of the increased volumes experienced during the quarter ended March 31,June 30, 2022 and first half of 2022 as compared to the prior year comparable period. The Company is expecting the higher compliance costs to continue at least through the end of fiscal year 2022.periods.
Provision for credit losses increased by $18.9$30.9 million for the second quarter of 2022 and $49.8 million for the first quarterhalf of 2022 as compared to the same periodperiods in the prior year. The increaseThese increases in the provision for credit losses during the first quarterwere reflective of 2022 is reflective ofincreased fraud losses and credit losses stemming from higher PPG rates andalong with credit loss rates trending toward more historical norms. We generally measure our credit loss performance by calculating fuel-
relatedfuel-related credit losses as a percentage of total fuel expenditures on payment processing transactions. This metric for credit losses was 15.023.6 and 6.219.9 basis points of fuel expenditures for the three and six months ended March 31,June 30, 2022, respectively, as compared to 8.1 and 2021,7.2 basis points of fuel expenditures for the same periods in the prior year, respectively. Fraud losses contributed 11.0 and 8.2 basis points to the credit losses totals noted above during the three and six months ended June 30, 2022, respectively.
Service fees, operating interest and depreciationDepreciation and amortization expense for the threesix months ended March 31,June 30, 2022 decreased by $1.5 million due primarily to lower ongoing amortization over time resulting from the impact of the accelerated method of amortization on certain acquired intangible assets. The second quarter 2022 depreciation and amortization expense generally remained consistent with that of the same period in the prior year.
Service fees and operating interest for the three and six months ended June 30, 2022 were all generally consistent with those from the same periodperiods in the prior year.
Other operating expenses
General and administrative expenses increased $3.2 million for the three months ended March 31,June 30, 2022 and $6.3 million for the six months ended June 30, 2022, as compared with the same periodperiods in the prior year due to increased professional services, information technology and compensation expense in support of business growth. We expect additional investments in the second half of the year which will allow us to accelerate specific areas of strategic focus, including cross-selling efforts, additional enhancements to our technology, product innovation including EVs, and process simplification.
Sales and marketing expenses increased $8.4$10.1 million for the three months ended March 31,June 30, 2022 and $18.5 million for the six months ended June 30, 2022, as compared with the same periodperiods in the prior year. This increase wasThese increases were primarily driven by higher partner commissions due to fuel price increases and volume growth, coupled to a lesser extent with increased compensation and marketing expense in support of that growth.
Depreciation and amortization expense for the second quarter and first quarterhalf of 2022 was generally consistentdecreased by $1.8 million and $2.4 million, respectively, as compared with the same periodperiods in the prior year.year due to lower ongoing amortization over time resulting from the impact of the accelerated method of amortization on certain acquired customer relationships.
Travel and Corporate Solutions
Revenues
The following table reflects comparative revenue and key operating statistics within Travel and Corporate Solutions:
| | | | Three Months Ended March 31, | | Increase (Decrease) | | | Three Months Ended June 30, | | Increase (Decrease) | | Six Months Ended June 30, | | Increase (Decrease) |
| (In thousands) | (In thousands) | 2022 | | 2021 | | Amount | | Percent | | (In thousands) | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
Revenues1 | Revenues1 | | | | | | | | | Revenues1 | | | | | | | | | | | | | | | |
| Payment processing revenue | Payment processing revenue | $ | 65,075 | | | $ | 57,248 | | | $ | 7,827 | | | 14 | % | | Payment processing revenue | $ | 88,608 | | | $ | 68,282 | | | $ | 20,326 | | | 30 | % | | $ | 153,683 | | | $ | 125,530 | | | 28,153 | | | 22 | % |
| Account servicing revenue | Account servicing revenue | 10,758 | | | 10,687 | | | 71 | | | 1 | % | | Account servicing revenue | 10,400 | | | 11,222 | | | (822) | | | (7) | % | | 21,158 | | | 21,909 | | | (751) | | | (3) | % |
| Finance fee revenue | Finance fee revenue | 141 | | | 294 | | | (153) | | | (52) | % | | Finance fee revenue | 216 | | | 199 | | | 17 | | | 9 | % | | 357 | | | 493 | | | (136) | | | (28) | % |
| Other revenue | Other revenue | 1,277 | | | 2,413 | | | (1,136) | | | (47) | % | | Other revenue | 1,186 | | | 2,059 | | | (873) | | | (42) | % | | 2,463 | | | 4,472 | | | (2,009) | | | (45) | % |
| Total revenues | Total revenues | $ | 77,251 | | | $ | 70,642 | | | $ | 6,609 | | | 9 | % | | Total revenues | $ | 100,410 | | | $ | 81,762 | | | $ | 18,648 | | | 23 | % | | $ | 177,661 | | | $ | 152,404 | | | 25,257 | | | 17 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Key operating statistics | Key operating statistics | | | Key operating statistics | |
| Payment processing revenue: | Payment processing revenue: | | | Payment processing revenue: | |
Purchase volume2 | Purchase volume2 | $ | 11,809,450 | | | $ | 6,107,675 | | | $5,701,775 | | 93 | % | | Purchase volume2 | $ | 17,119,962 | | | $ | 8,736,019 | | | $8,383,943 | | 96 | % | | $ | 28,929,412 | | | $ | 14,843,694 | | | $ | 14,085,718 | | | 95 | % |
Net interchange rate3 | Net interchange rate3 | 0.55 | % | | 0.94 | % | | (0.39) | % | | (41) | % | | Net interchange rate3 | 0.52 | % | | 0.78 | % | | (0.26) | % | | (34) | % | | 0.53 | % | | 0.85 | % | | (0.32) | % | | (38) | % |
1 The impact of foreign currency exchange rate fluctuations on Travel and Corporate Solutions decreased revenues by an immaterial amount$3.6 million and $4.3 million during the three and six months ended March 31,June 30, 2022, respectively, compared to the prior year comparable period.periods.
2 Purchase volume represents the total dollar value of all WEX-issued transactions that use WEX corporate card products and virtual card products.
3 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.
Total Travel and Corporate Solutions revenue increased $6.6$18.6 million for the second quarter of 2022 and $25.3 million for the first quarterhalf of 2022, as compared to the same periodperiods in the prior year. The increase wasincreases were primarily driven by an increase in travel-related volumes both internationally and domestically anddomestically. The Company also experienced continued strength in the corporate payments partner channel. These revenue increases were in part offset by the impact of an accounting change in the fourth quarter of 2021, which required a shift from gross revenue presentation to net revenue presentation for one customer.
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. There were no material concessions granted to customers during the three and six months ended March 31,June 30, 2022 and 2021.
Operating Expenses
The following table compares line items within operating income (loss) and presents segment adjusted operating income and segment adjusted operating income margin for Travel and Corporate Solutions:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Increase (Decrease) | | | | |
| (In thousands) | 2022 | | 2021 | | Amount | | Percent | | | | | | | | |
| Cost of services | | | | | | | | | | | | | | | |
| Processing costs | $ | 18,700 | | | $ | 16,821 | | | $ | 1,879 | | | 11 | % | | | | | | | | |
| Service fees | $ | 3,789 | | | $ | 3,864 | | | $ | (75) | | | (2) | % | | | | | | | | |
| Provision for credit losses | $ | 2,147 | | | $ | 635 | | | $ | 1,512 | | | 238 | % | | | | | | | | |
| Operating interest | $ | 750 | | | $ | 515 | | | $ | 235 | | | 46 | % | | | | | | | | |
| Depreciation and amortization | $ | 4,536 | | | $ | 7,611 | | | $ | (3,075) | | | (40) | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Other operating expenses | | | | | | | | | | | | | | | |
| General and administrative | $ | 15,342 | | | $ | 31,567 | | | $ | (16,225) | | | (51) | % | | | | | | | | |
| Sales and marketing | $ | 13,068 | | | $ | 28,983 | | | $ | (15,915) | | | (55) | % | | | | | | | | |
| Depreciation and amortization | $ | 6,289 | | | $ | 6,466 | | | $ | (177) | | | (3) | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Operating income (loss) | $ | 12,630 | | | $ | (25,820) | | | $ | 38,450 | | | (149) | % | | | | | | | | |
| | | | | | | | | | | | | | | |
Segment adjusted operating income1 | $ | 28,330 | | | $ | 7,015 | | | $ | 21,315 | | | 304 | % | | | | | | | | |
Segment adjusted operating income margin2 | 37 | % | | 10 | % | | 27 | % | | 270 | % | | | | | | | | |
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) debt restructuring costs; (iv) stock-based compensation; and (v) other costs. See “Non-GAAP Financial Measures That Supplement GAAP Measures” later in this Item 2 for a reconciliation of total segment adjusted operating income to income before income taxes. See also Item 1 – Note 17, Segment Information, of 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 2022 increase in segment adjusted operating income margin reflects additional benefits from eNett and Optal synergies and scale from increased revenue.
Cost of services
Processing costs for the three months ended March 31, 2022 increased $1.9 million from the same period in the prior year, partly in support of the segment’s growth in revenue and partly from higher compliance costs.
Provision for credit losses increased $1.5 million for the first quarter of 2022, as compared to the same period in the prior year primarily due to volume growth.
Depreciation and amortization expense for the three months ended March 31, 2022 decreased $3.1 million as compared to the same period in the prior year, primarily due to the prior year amortization of developed technology intangible assets with a one-year life that were acquired as part of the eNett and Optal acquisition.
Service fees and operating interest for the three months ended March 31, 2022 remained relatively consistent with the comparable prior year period.
Other operating expenses
General and administrative expenses for the first quarter of 2022 decreased by $16.2 million, as compared to the same period in the prior year. The decrease was primarily due to a vendor contract termination payment during the first quarter of 2021 and decreased compensation as a result of the integration of eNett and Optal during the year ended December 31, 2021.
Sales and marketing expenses decreased for the first quarter of 2022 by $15.9 million, as compared to the same period in the prior year. This decrease was primarily due to a reduction in partner commissions as a result of the impact of an accounting change in the fourth quarter of 2021, which required a shift from gross revenue presentation to net revenue presentation for one customer.
Depreciation and amortization expense during the first quarter of 2022 remained consistent with the same period in the prior year.
Health and Employee Benefit Solutions
Revenues
The following table reflects comparative revenue and key operating statistics within Health and Employee Benefit Solutions:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Increase (Decrease) | | | | |
| (In thousands) | 2022 | | 2021 | | Amount | | Percent | | | | | | | | |
| Revenues | | | | | | | | | | | | | | | |
| Payment processing revenue | $ | 22,497 | | | $ | 20,565 | | | $ | 1,932 | | | 9 | % | | | | | | | | |
| Account servicing revenue | 86,740 | | | 67,945 | | | 18,795 | | | 28 | % | | | | | | | | |
| Finance fee revenue | 36 | | | 19 | | | 17 | | | 89 | % | | | | | | | | |
| Other revenue | 11,872 | | | 7,749 | | | 4,123 | | | 53 | % | | | | | | | | |
| Total revenues | $ | 121,145 | | | $ | 96,278 | | | $ | 24,867 | | | 26 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Key operating statistics | | | | | | | | | | | | | | | |
| Payment processing revenue: | | | | | | | | | | | | | | | |
Purchase volume1 | $ | 1,630,218 | | | $ | 1,484,226 | | | $ | 145,992 | | | 10 | % | | | | | | | | |
| Account servicing revenue: | | | | | | | | | | | | | | | |
Average number of SaaS accounts2 | 17,847 | | | 15,513 | | | 2,334 | | | 15 | % | | | | | | | | |
1 Purchase volume represents the total U.S. dollar value of all transactions where interchange is earned by WEX.
2 Average number of SaaS accounts represents the number of active Consumer-Directed Health, COBRA, and billing accounts on our SaaS platforms in the U.S.
Payment processing revenue increased $1.9 million during the first quarter of 2022 as compared to the same period in the prior year due to cardholder growth and increased cardholder spend volumes.
Account servicing revenue increased $18.8 million for the first quarter of 2022, as compared to the same period in the prior year. The increase is primarily due to increased revenues recognized as a result of the benefitexpress Acquisition along with account growth and increased participants.
Finance fee revenue was not material to Health and Employee Benefit Solutions’ operations for the three months ended March 31, 2022 and 2021.
Other revenue increased $4.1 million for the first quarter of 2022, as compared to the same period in the prior year. The increase was due primarily to interest revenues earned on the investment of HSA deposits obtained as a result of the April 2021 acquisition of contractual rights to serve as custodian to certain HSAs from Bell Bank.
Operating Expenses
The following table compares line items within operating income and presents segment adjusted operating income and segment adjusted operating income margin for Health and Employee Benefit Solutions:
| | | | Three Months Ended March 31, | | Increase (Decrease) | | | Three Months Ended June 30, | | Increase (Decrease) | | Six Months Ended June 30, | | Increase (Decrease) |
| (In thousands) | (In thousands) | 2022 | | 2021 | | Amount | | Percent | | (In thousands) | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
| Cost of services | Cost of services | | | | | | | | | Cost of services | | | | | | | | | | | | | | | |
| Processing costs | Processing costs | $ | 53,745 | | | $ | 40,749 | | | $ | 12,996 | | | 32 | % | | Processing costs | $ | 17,723 | | | $ | 18,719 | | | $ | (996) | | | (5) | % | | $ | 36,423 | | | $ | 35,540 | | | $ | 883 | | | 2 | % |
| Service fees | Service fees | $ | 9,805 | | | $ | 5,554 | | | $ | 4,251 | | | 77 | % | | Service fees | $ | 3,409 | | | $ | 3,923 | | | $ | (514) | | | (13) | % | | $ | 7,198 | | | $ | 7,787 | | | $ | (589) | | | (8) | % |
| Provision for credit losses | Provision for credit losses | $ | 269 | | | $ | 60 | | | $ | 209 | | | 348 | % | | Provision for credit losses | $ | (726) | | | $ | 1,358 | | | $ | (2,084) | | | (153) | % | | $ | 1,421 | | | $ | 1,993 | | | $ | (572) | | | (29) | % |
| Operating interest | Operating interest | $ | 89 | | | $ | — | | | $ | 89 | | | NM | | Operating interest | $ | 1,502 | | | $ | 475 | | | $ | 1,027 | | | 216 | % | | $ | 2,252 | | | $ | 990 | | | $ | 1,262 | | | 127 | % |
| Depreciation and amortization | Depreciation and amortization | $ | 9,629 | | | $ | 8,868 | | | $ | 761 | | | 9 | % | | Depreciation and amortization | $ | 5,294 | | | $ | 5,231 | | | $ | 63 | | | 1 | % | | $ | 9,830 | | | $ | 12,842 | | | $ | (3,012) | | | (23) | % |
| | Other operating expenses | Other operating expenses | | | Other operating expenses | |
| General and administrative | General and administrative | $ | 9,235 | | | $ | 7,375 | | | $ | 1,860 | | | 25 | % | | General and administrative | $ | 15,973 | | | $ | 12,191 | | | $ | 3,782 | | | 31 | % | | $ | 31,315 | | | $ | 43,758 | | | $ | (12,443) | | | (28) | % |
| Sales and marketing | Sales and marketing | $ | 11,436 | | | $ | 8,339 | | | $ | 3,097 | | | 37 | % | | Sales and marketing | $ | 14,971 | | | $ | 33,405 | | | $ | (18,434) | | | (55) | % | | $ | 28,039 | | | $ | 62,388 | | | $ | (34,349) | | | (55) | % |
| Depreciation and amortization | Depreciation and amortization | $ | 14,743 | | | $ | 11,063 | | | $ | 3,680 | | | 33 | % | | Depreciation and amortization | $ | 5,978 | | | $ | 6,149 | | | $ | (171) | | | (3) | % | | $ | 12,267 | | | $ | 12,615 | | | $ | (348) | | | (3) | % |
| | Operating income | $ | 12,194 | | | $ | 14,270 | | | $ | (2,076) | | | (15) | % | | |
| | Operating income (loss) | | Operating income (loss) | $ | 36,286 | | | $ | 311 | | | $ | 35,975 | | | NM | | $ | 48,916 | | | $ | (25,509) | | | $ | 74,425 | | | NM |
| Segment adjusted operating income1 | Segment adjusted operating income1 | $ | 35,500 | | | $ | 30,544 | | | $ | 4,956 | | | 16 | % | | Segment adjusted operating income1 | $ | 51,016 | | | $ | 17,157 | | | $ | 33,859 | | | 197 | % | | $ | 79,346 | | | $ | 24,172 | | | $ | 55,174 | | | 228 | % |
Segment adjusted operating income margin2 | Segment adjusted operating income margin2 | 29 | % | | 32 | % | | (3) | % | | (9) | % | | Segment adjusted operating income margin2 | 51 | % | | 21 | % | | 30 | % | | 143 | % | | 45 | % | | 16 | % | | 29 | % | | 181 | % |
NM - Not meaningful
1 Our 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) debt restructuring costs; (iv) stock-based compensation; and (v) other costs. See “Non-GAAP Financial Measures That Supplement GAAP Measures” later in this Item 2 for a reconciliation of total segment adjusted operating income to income before income taxes. See also Part I – Item 1 – Note 17,18, Segment Information, ofto our condensed consolidated financial statements for more information regarding our segment determination.
2 Segment adjusted operating income margin is calculated by dividing segment adjusted operating income by segment revenue. The second quarter and first half of 2022 decreaseincreases in segment adjusted operating income margin reflects the benefitexpress Acquisition in June 2021.primarily reflect accelerated travel volumes and additional benefits from eNett and Optal synergies.
Cost of services
ProcessingDespite 2022 volumes nearly doubling those of the same periods of the prior year, processing costs increased $13.0and service fees for the three and six months ended June 30, 2022 remained relatively consistent with the comparable prior year periods due to our scalable fixed cost model.
Provision for credit losses decreased $2.1 million for the firstsecond quarter of 2022, as compared to the same period in the prior year, primarily due to slight improvement in customer payment patterns and related risk profile. The provision for credit losses for the first half of 2022 remained consistent with the comparable prior year period.
Operating interest for the three and six months ended June 30, 2022 increased $1.0 million and $1.3 million, respectively, as compared to the comparable prior year periods, due to volume growth and increased rates.
Depreciation and amortization expense for the six months ended June 30, 2022 decreased $3.0 million, as compared to the same period in the prior year, primarily due to the prior year amortization of developed technology intangible assets with a one-year life that were acquired as part of the eNett and Optal acquisition. Depreciation and amortization expense for the second quarter of 2022 remained consistent with the comparable prior year period.
Other operating expenses
General and administrative expenses increased $3.8 million for the second quarter of 2022 and decreased $12.4 million for the first half of 2022, as compared to the same periods in the prior year. The second quarter increase was due to higher professional service fees. The decrease in processing costs forthe first half of 2022 was primarily due to a vendor contract termination payment during the first quarter of 2021 and decreased compensation as a result of the integration of eNett and Optal during the year ended December 31, 2021.
Sales and marketing expenses decreased for the second quarter and first half of 2022 by $18.4 million and $34.3 million, respectively, as compared to the same periods in the prior year. These decreases were primarily due to a reduction in partner commissions as a result of the impact of an accounting change in the fourth quarter of 2021, which required a shift from gross revenue presentation to net revenue presentation for one customer.
Depreciation and amortization expense during the second quarter and first half of 2022 remained consistent with the same periods in the prior year.
Health and Employee Benefit Solutions
Revenues
The following table reflects comparative revenue and key operating statistics within Health and Employee Benefit Solutions:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Increase (Decrease) | | Six Months Ended June 30, | | Increase (Decrease) |
| (In thousands) | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
| Revenues | | | | | | | | | | | | | | | |
| Payment processing revenue | $ | 21,338 | | | $ | 18,694 | | | $ | 2,644 | | | 14 | % | | $ | 43,835 | | | $ | 39,259 | | | $ | 4,576 | | | 12 | % |
| Account servicing revenue | 83,378 | | | 79,482 | | | 3,896 | | | 5 | % | | 170,118 | | | 147,427 | | | 22,691 | | | 15 | % |
| Finance fee revenue | 27 | | | 42 | | | (15) | | | (36) | % | | 63 | | | 61 | | | 2 | | | 3 | % |
| Other revenue | 13,861 | | | 5,115 | | | 8,746 | | | 171 | % | | 25,733 | | | 12,864 | | | 12,869 | | | 100 | % |
| Total revenues | $ | 118,604 | | | $ | 103,333 | | | $ | 15,271 | | | 15 | % | | $ | 239,749 | | | $ | 199,611 | | | $ | 40,138 | | | 20 | % |
| | | | | | | | | | | | | | | |
| Key operating statistics | | | | | | | | | | | | | | | |
| Payment processing revenue: | | | | | | | | | | | | | | | |
Purchase volume1 | $ | 1,514,004 | | | $ | 1,311,131 | | | $ | 202,873 | | | 15 | % | | $ | 3,144,222 | | | $ | 2,795,357 | | | $ | 348,865 | | | 12 | % |
| Account servicing revenue: | | | | | | | | | | | | | | | |
Average number of SaaS accounts2 | 17,572 | | | 16,380 | | | 1,192 | | | 7 | % | | 17,709 | | | 15,946 | | | 1,763 | | | 11 | % |
1 Purchase volume represents the total U.S. dollar value of all transactions where interchange is earned by WEX.
2 Average number of SaaS accounts represents the number of active Consumer-Directed Health, COBRA, and billing accounts on our SaaS platforms in the U.S.
Payment processing revenue increased $2.6 million during the second quarter of 2022 and $4.6 million for the first half of 2022, as compared to the same periods in the prior year, due to cardholder growth and increased cardholder spend volumes.
Account servicing revenue increased $3.9 million for the second quarter of 2022 and $22.7 million for the first half of 2022, as compared to the same periods in the prior year. The increases were primarily due to increased revenues recognized as a result of the benefitexpress Acquisition along with account growth and increased participants, offset in part by a reduction of revenue resulting from one-time COBRA related services provided as a result of the American Rescue Plan Act legislation during 2021.
Finance fee revenue was not material to Health and Employee Benefit Solutions’ operations for the three and six months ended June 30, 2022 and 2021.
Other revenue increased $8.7 million for the second quarter of 2022 and $12.9 million for the first half of 2022, as compared to the same periods in the prior year. The increases were due primarily to interest income earned on the investment of HSA deposits obtained as a result of the April 2021 acquisition of contractual rights to serve as custodian to certain HSAs from Bell Bank.
Operating Expenses
The following table compares line items within operating income and presents segment adjusted operating income and segment adjusted operating income margin for Health and Employee Benefit Solutions:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Increase (Decrease) | | Six Months Ended June 30, | | Increase (Decrease) |
| (In thousands) | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
| Cost of services | | | | | | | | | | | | | | | |
| Processing costs | $ | 55,296 | | | $ | 44,791 | | | $ | 10,505 | | | 23 | % | | $ | 109,041 | | | $ | 85,540 | | | $ | 23,501 | | | 27 | % |
| Service fees | $ | 9,326 | | | $ | 7,862 | | | $ | 1,464 | | | 19 | % | | $ | 19,131 | | | $ | 13,416 | | | $ | 5,715 | | | 43 | % |
| Provision for credit losses | $ | 466 | | | $ | 82 | | | $ | 384 | | | 468 | % | | $ | 735 | | | $ | 142 | | | $ | 593 | | | 418 | % |
| Operating interest | $ | 168 | | | $ | — | | | $ | 168 | | | NM | | $ | 257 | | | $ | — | | | $ | 257 | | | NM |
| Depreciation and amortization | $ | 9,509 | | | $ | 8,810 | | | $ | 699 | | | 8 | % | | $ | 19,138 | | | $ | 17,678 | | | $ | 1,460 | | | 8 | % |
| | | | | | | | | | | | | | | |
| Other operating expenses | | | | | | | | | | | | | | | |
| General and administrative | $ | 11,901 | | | $ | 8,824 | | | $ | 3,077 | | | 35 | % | | $ | 21,136 | | | $ | 16,199 | | | $ | 4,937 | | | 30 | % |
| Sales and marketing | $ | 13,287 | | | $ | 10,070 | | | $ | 3,217 | | | 32 | % | | $ | 24,723 | | | $ | 18,409 | | | $ | 6,314 | | | 34 | % |
| Depreciation and amortization | $ | 14,753 | | | $ | 14,328 | | | $ | 425 | | | 3 | % | | $ | 29,496 | | | $ | 25,391 | | | $ | 4,105 | | | 16 | % |
| | | | | | | | | | | | | | | |
| Operating income | $ | 3,898 | | | $ | 8,566 | | | $ | (4,668) | | | (54) | % | | $ | 16,092 | | | $ | 22,836 | | | $ | (6,744) | | | (30) | % |
| | | | | | | | | | | | | | | |
Segment adjusted operating income1 | $ | 28,307 | | | $ | 29,080 | | | $ | (773) | | | (3) | % | | $ | 63,807 | | | $ | 59,624 | | | $ | 4,183 | | | 7 | % |
Segment adjusted operating income margin2 | 24 | % | | 28 | % | | (4) | % | | (14) | % | | 27 | % | | 30 | % | | (3) | % | | (10) | % |
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) debt restructuring costs; (iv) stock-based compensation; and (v) other costs. See “Non-GAAP Financial Measures That Supplement GAAP Measures” later in this Item 2 for a reconciliation of total segment adjusted operating income to income before income taxes. 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 decreases during the second quarter and first half of 2022 in segment adjusted operating income margin primarily reflect the reduction in COBRA revenue and profit from the prior year related to services we provided as a result of the American Rescue Plan Act legislation.
Cost of services
Processing costs increased $10.5 million for the second quarter of 2022 and $23.5 million for the first half of 2022, as compared to the same periods in the prior year. The increases in processing costs primarily resulted from increased costs as a result of the benefitexpress Acquisition along with higher customer service and technology costs to support partner growth.
Service fees for the three and six months ended March 31,June 30, 2022 increased $4.3$1.5 million and $5.7 million, respectively, as compared with the same periodperiods in the prior year. This increase wasThe increases for both periods were primarily driven in part by the benefitexpress Acquisition and a growth in revenue volumes.volumes and for the first half of 2022, additionally by the benefitexpress Acquisition.
Provision for credit losses and operating interest were not material to Health and Employee Benefit Solutions’ operations for the three and six months ended March 31,June 30, 2022 and 2021.
Depreciation and amortization expense for the first half of 2022 increased $1.5 million, as compared with the comparable prior year period, due to the amortization of a developed technology intangible asset associated with the benefitexpress Acquisition. Depreciation and amortization expense for the second quarter of 2022 remained consistent with the same period in the prior year.
Other operating expenses
General and administrative expenses increased $1.9$3.1 million for the second quarter 2022 and $4.9 million for the first half of 2022 as compared to the same periods in the prior year. The increases in both the second quarter and first half of 2022 were primarily due to increased professional service fees. Increased compensation related costs have also contributed to the increase in expense for the first half of 2022 as compared to the same period in the prior year. The increase was primarily due to the benefitexpress Acquisition.
Sales and marketing expenses inincreased $3.2 million and $6.3 million during the second quarter and first quarterhalf of 2022, increased $3.1 millionrespectively, as compared to the same periodperiods in the prior year due to the generalbenefitexpress Acquisition, expansion of the sales and marketing team and costs incurred related to an in-person sales conference, which was held virtually in the benefitexpress Acquisition.prior year.
Depreciation and amortization expense increased $3.7$4.1 million for the threesix months ended March 31,June 30, 2022, as compared to the same period of the prior year, primarily due to the amortization of intangible rights obtained as a result of the April 2021 acquisition of contractual rights to serve as custodian of certain HSAs. Depreciation and amortization expense for the second quarter of 2022 remained consistent with the comparable prior year period.
Unallocated corporate expenses
Unallocated corporate expenses represent the portion of expenses relating to general 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 a reportable segment.
The following table compares line items within operating income for unallocated corporate expenses:
| | | | Three Months Ended March 31, | | Increase (Decrease) | | | Three Months Ended June 30, | | Increase (Decrease) | | Six Months Ended June 30, | | Increase (Decrease) |
| (In thousands) | (In thousands) | 2022 | | 2021 | | Amount | | Percent | | (In thousands) | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
| Other operating expenses | Other operating expenses | | | | | | | | | Other operating expenses | | | | | | | | | | | | | | | |
| General and administrative | General and administrative | $ | 30,419 | | | $ | 26,987 | | | $ | 3,432 | | | 13 | % | | General and administrative | $ | 29,679 | | | $ | 35,779 | | | $ | (6,100) | | | (17) | % | | $ | 60,098 | | | $ | 62,766 | | | $ | (2,668) | | | (4) | % |
| Depreciation and amortization | Depreciation and amortization | $ | 522 | | | $ | 539 | | | $ | (17) | | | (3) | % | | Depreciation and amortization | $ | 489 | | | $ | 517 | | | $ | (28) | | | (5) | % | | $ | 1,011 | | | $ | 1,056 | | | $ | (45) | | | (4) | % |
General and administrative expenses increased $3.4decreased $6.1 million for the second quarter of 2022 and $2.7 million for the first quarterhalf of 2022, as compared to the same periodperiods in the prior year. The increasedecreases in expense for the second quarter and first half of 2022 were due primarily to a reduction in professional fees, including legal and arrangement fees, that were incurred in connection with the amendment and restatement of our 2016 Credit Agreement during the second quarter of 2021. The decrease for the first half of 2022 was due primarily toin part offset by increased compensation-related costsstock compensation expense and to a lesser extent, fees for professional services fees incurred in connection with the Company’s Investor Day held during the first quarter of 2022.
Unallocated depreciation and amortization for the three and six months ended March 31,June 30, 2022 was comparable to the same periodperiods in the prior year.
Non-operating income and expense
The following table reflects comparative results for certain amounts excluded from operating income:
| | | | Three Months Ended March 31, | | Increase (Decrease) | | | Three Months Ended June 30, | | Increase (Decrease) | | Six Months Ended June 30, | | Increase (Decrease) |
| (In thousands) | (In thousands) | 2022 | | 2021 | | Amount | | Percent | | (In thousands) | 2022 | | 2021 | | Amount | | Percent | | 2022 | | 2021 | | Amount | | Percent |
| Financing interest expense | Financing interest expense | $ | (29,689) | | | $ | (33,284) | | | $ | (3,595) | | | (11) | % | | Financing interest expense | $ | (31,820) | | | $ | (32,473) | | | $ | (653) | | | (2) | % | | $ | (61,509) | | | $ | (65,757) | | | $ | (4,248) | | | (6) | % |
| Change in fair value of contingent consideration | Change in fair value of contingent consideration | $ | (16,600) | | | $ | — | | | $ | 16,600 | | | NM | | Change in fair value of contingent consideration | $ | (88,200) | | | $ | (47,700) | | | $ | 40,500 | | | 85 | % | | $ | (104,800) | | | $ | (47,700) | | | $ | 57,100 | | | 120 | % |
| | Net foreign currency gain (loss) | $ | 5,006 | | | $ | (2,755) | | | $ | 7,761 | | | NM | | |
| Net foreign currency (loss) gain | | Net foreign currency (loss) gain | $ | (19,408) | | | $ | 1,342 | | | $ | (20,750) | | | NM | | $ | (14,402) | | | $ | (1,413) | | | $ | (12,989) | | | NM |
| Net unrealized gain on financial instruments | Net unrealized gain on financial instruments | $ | 49,827 | | | $ | 7,033 | | | $ | 42,794 | | | 608 | % | | Net unrealized gain on financial instruments | $ | 16,894 | | | $ | 6,013 | | | $ | 10,881 | | | 181 | % | | $ | 66,721 | | | $ | 13,046 | | | $ | 53,675 | | | NM |
| Income tax provision (benefit) | Income tax provision (benefit) | $ | 42,032 | | | $ | (1,670) | | | $ | 43,702 | | | NM | | Income tax provision (benefit) | $ | 14,468 | | | $ | (746) | | | $ | 15,214 | | | NM | | $ | 56,500 | | | $ | (2,416) | | | $ | 58,916 | | | NM |
| Net income from non-controlling interests | Net income from non-controlling interests | $ | 268 | | | $ | 726 | | | $ | (458) | | | (63) | % | | Net income from non-controlling interests | $ | — | | | $ | 239 | | | $ | (239) | | | (100) | % | | $ | 268 | | | $ | 965 | | | $ | (697) | | | (72) | % |
| Change in value of redeemable non-controlling interest | Change in value of redeemable non-controlling interest | $ | 34,245 | | | $ | (25,044) | | | $ | 59,289 | | | NM | | Change in value of redeemable non-controlling interest | $ | — | | | $ | (43,823) | | | $ | 43,823 | | | (100) | % | | $ | 34,245 | | | $ | (68,867) | | | $ | 103,112 | | | NM |
NM - Not Meaningfulmeaningful
Financing interest expense decreased $3.6$4.2 million for the first quarterhalf of 2022, as compared to the same period in the prior year, primarily due to the early redemption of the Company’s $400$400.0 million senior notes with a fixed rate of 4.75%4.75 percent during March 2021.2021 and the write-off of certain deferred financing costs during 2021 in conjunction with the amendment and restatement of the Company’s 2016 Credit Agreement. These decreases were in part offset by increased expense related to the accretion of deferred payments associated with the acquisition of the remaining interest in PO Holding during March 2022.
Financing interest expense for the second quarter of 2022 remained consistent with the same period in the prior year as the write-off of deferred financing costs and accretion on the deferred payments, both as previously mentioned, substantially offset.
During the three and six months ended March 31,June 30, 2022, the Company’s contingent consideration derivative liability increased as a result of the steepening of the Federal Funds futures curve. See Part I – Item 1 – Note 12,13, Fair Value, to our condensed consolidated financial statements for further information on the valuation of this derivative liability.
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 Company incurred net foreign currency gainslosses of $5.0$19.4 million in the second quarter of 2022 and $14.4 million in the first quarterhalf of 2022. The gainslosses resulted from the strengtheningweakening of certain foreign currencies, including the Australian dollar, the Euro and the British Pound sterling, in which we transact relative to the U.S. dollar. The Company’s net foreign currency losses for the three months ended March 31, 2021 resulted from the remeasurement of assets and liabilities, and losses on intercompany transactions, resulting from the U.S. dollar strengthening relative to numerous major foreign currencies in which we transact.
The Company incurred unrealized gains on financial instruments of $49.8$16.9 million in the second quarter of 2022 and $66.7 million for the first quarterhalf of 2022 due to significant increases in the LIBOR forward yield curve, coupled with a decrease in remaining future settlements. The net unrealized gain on financial instruments for the second quarter and first quarterhalf of 2021 resulted primarily from a reductionan increase in the fair value of
new and existing interest rate swap liabilities due toswaps, primarily as a decrease in the remaining future settlements, coupled withresult of an increase in the LIBOR forward yield curve.
The Company’s effective tax rate was 32.129.8 percent and 31.5 percent for the three and six months ended March 31,June 30, 2022, respectively, as compared to (7.9) percent and (7.8) percent for the three and six months ended March 31, 2021.June 30, 2021, respectively. Income tax expense is based on an estimated annual effective rate, which requires the Company to make its best estimate of annual pretax income or loss. The Company’s effective tax rate for the three months ended March 31,June 30, 2022 was adversely impacted by reduced tax benefits arising from stock-based compensation. The Company’s effective tax rate for the six months ended June 30, 2022 was adversely impacted by a discrete tax item of $7.5 million incurred during the first quarter of 2022, primarily associated with an uncertain tax position.position, in addition to the reduced tax benefits arising from stock-based compensation previously mentioned. Effective tax rates were significantly lower for the same periodperiods in the prior year primarily due to significant excess tax benefits arising from stock-based compensation in the prior year.
Net income from non-controlling interests werewas not material to Company operations for the three and six months ended March 31,June 30, 2022 and 2021.
During the threesix months ended March 31,June 30, 2022, the Company purchased the remaining non-controlling interest in PO Holding from SBI, reducing the carrying value of the redeemable non-controlling interest to zero. The transaction resulted in a $34.2 million gain, net of tax expense. See “Summary - Recent Events” earlier in thisPart I – Item 21 – Note 4, Acquisitions, to our condensed consolidated financial statements for morefurther information.
Non–GAAP Financial Measures That Supplement GAAP Measures
In addition to evaluating the Company’s performance on a GAAP basis, the CODM of the Company uses segment adjusted operating income, a non-GAAP measure, to allocate resources among our operating segments. The Company considers this measure, which excludes unallocated corporate expenses, acquisition-related intangible amortization, other acquisition and divestiture related items, debt restructuring costs, stock-based compensation and other costs integral in evaluating the Company’s performance.
WEX believes that adjusted net income, another non-GAAP measure that 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 issuance cost amortization, other adjustments attributable to non-controlling interests, and tax related items, is also integral to the Company’s reporting and planning processes.
Segment adjusted operating income and adjusted net income may 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 be considered as a substitute for, or superior to, operating income or net income as determined in accordance with GAAP. Segment adjusted operating income and adjusted net income as used by WEX may not be comparable to similarly titled measures employed by other companies.
Specifically, in addition to evaluating the Company’s performance on a GAAP basis, management evaluates the Company’s performance on a basis that excludes the above items because:
•Exclusion of the non-cash, mark-to-market adjustments on financial instruments, including interest rate swap agreements and investment securities, helps management identify and assess trends in the Company’s underlying business that might otherwise be obscured due to quarterly non-cash earnings fluctuations associated with these financial instruments. Additionally, the non-cash, mark-to-market adjustments on financial instruments are difficult to forecast accurately, making comparisons across historical and future quarters difficult to 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 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;
•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 quarters difficult to evaluate;
•The Company considers certain acquisition-related costs, including certain financing costs, 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 on divestitures facilitates the comparison of our financial results to the Company’s historical operating results and to other companies in our 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;
•Other 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. This also includes costs related to certain identified initiatives, including 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. For the threesix months ended March 31,June 30, 2021, other costs additionally include a penalty incurred on a vendor contract termination;
•Debt restructuring and debt issuance cost amortization 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;
•The adjustments attributable to non-controlling interests, including adjustments to the redemption value of a non-controlling interest, have no significant impact on the ongoing operations of the business;
•The tax related items are the difference between the Company’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 tax provision is the same methodology utilized in calculating the Company’s GAAP tax 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 table reconciles net income (loss) attributable to shareholders to adjusted net income attributable to shareholders:
| | | Three Months Ended March 31, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| (In thousands) | (In thousands) | 2022 | | 2021 | | (In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
| Net income (loss) attributable to shareholders | Net income (loss) attributable to shareholders | $ | 122,763 | | | $ | (2,565) | | | Net income (loss) attributable to shareholders | $ | 34,129 | | | $ | (33,856) | | | $ | 156,892 | | | $ | (36,421) | |
| Unrealized gain on financial instruments | Unrealized gain on financial instruments | (49,827) | | | (7,033) | | | Unrealized gain on financial instruments | (16,894) | | | (6,013) | | | (66,721) | | | (13,046) | |
| Net foreign currency (gain) loss | (5,006) | | | 2,755 | | | |
| Net foreign currency loss (gain) | | Net foreign currency loss (gain) | 19,408 | | | (1,342) | | | 14,402 | | | 1,413 | |
| | Change in fair value of contingent consideration | Change in fair value of contingent consideration | 16,600 | | | — | | | Change in fair value of contingent consideration | 88,200 | | | 47,700 | | | 104,800 | | | 47,700 | |
| Acquisition-related intangible amortization | Acquisition-related intangible amortization | 42,719 | | | 42,454 | | | Acquisition-related intangible amortization | 42,538 | | | 45,294 | | | 85,257 | | | 87,748 | |
| Other acquisition and divestiture related items | Other acquisition and divestiture related items | 4,540 | | | 14,796 | | | Other acquisition and divestiture related items | 6,461 | | | 10,690 | | | 11,001 | | | 25,486 | |
| | Stock-based compensation | Stock-based compensation | 25,220 | | | 18,943 | | | Stock-based compensation | 25,267 | | | 21,662 | | | 50,487 | | | 40,605 | |
| Other costs | Other costs | 8,179 | | | 12,237 | | | Other costs | 7,926 | | | 1,705 | | | 16,105 | | | 13,942 | |
| | Debt restructuring and debt issuance cost amortization | Debt restructuring and debt issuance cost amortization | 3,279 | | | 5,092 | | | Debt restructuring and debt issuance cost amortization | 4,694 | | | 11,461 | | | 7,973 | | | 16,553 | |
| | ANI adjustments attributable to non-controlling interests | ANI adjustments attributable to non-controlling interests | (34,587) | | | 23,800 | | | ANI adjustments attributable to non-controlling interests | — | | | 43,206 | | | (34,587) | | | 67,006 | |
| Tax related items | Tax related items | (2,825) | | | (29,205) | | | Tax related items | (42,348) | | | (35,613) | | | (45,173) | | | (64,818) | |
| Adjusted net income attributable to shareholders | Adjusted net income attributable to shareholders | $ | 131,055 | | | $ | 81,274 | | | Adjusted net income attributable to shareholders | $ | 169,381 | | | $ | 104,894 | | | $ | 300,436 | | | $ | 186,168 | |
The following table reconciles total segment adjusted operating income to income before income taxes:
| | | | Three Months Ended March 31, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| (In thousands) | (In thousands) | 2022 | | 2021 | (In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
| Segment adjusted operating income | Segment adjusted operating income | | | | Segment adjusted operating income | | | | | | | |
| Fleet Solutions | Fleet Solutions | $ | 160,101 | | | $ | 118,258 | | Fleet Solutions | $ | 192,969 | | | $ | 137,865 | | | $ | 353,070 | | | $ | 256,123 | |
| Travel and Corporate Solutions | Travel and Corporate Solutions | 28,330 | | | 7,015 | | Travel and Corporate Solutions | 51,016 | | | 17,157 | | | 79,346 | | | 24,172 | |
| Health and Employee Benefit Solutions | Health and Employee Benefit Solutions | 35,500 | | | 30,544 | | Health and Employee Benefit Solutions | 28,307 | | | 29,080 | | | 63,807 | | | 59,624 | |
| Total segment adjusted operating income | Total segment adjusted operating income | $ | 223,931 | | | $ | 155,817 | | Total segment adjusted operating income | $ | 272,292 | | | $ | 184,102 | | | $ | 496,223 | | | $ | 339,919 | |
| | Reconciliation: | Reconciliation: | | Reconciliation: | |
| Total segment adjusted operating income | Total segment adjusted operating income | $ | 223,931 | | | $ | 155,817 | | Total segment adjusted operating income | $ | 272,292 | | | $ | 184,102 | | | $ | 496,223 | | | $ | 339,919 | |
| Less: | Less: | | Less: | |
| Unallocated corporate expenses | Unallocated corporate expenses | 21,011 | | | 16,209 | | Unallocated corporate expenses | 18,986 | | | 17,174 | | | 39,997 | | | 33,383 | |
| Acquisition-related intangible amortization | Acquisition-related intangible amortization | 42,719 | | | 42,454 | | Acquisition-related intangible amortization | 42,538 | | | 45,294 | | | 85,257 | | | 87,748 | |
| Other acquisition and divestiture related items | Other acquisition and divestiture related items | 4,540 | | | 14,796 | | Other acquisition and divestiture related items | 6,461 | | | 10,690 | | | 11,001 | | | 25,486 | |
| Debt restructuring costs | Debt restructuring costs | (12) | | | 637 | | Debt restructuring costs | (17) | | | 5,299 | | | (29) | | | 5,936 | |
| Stock-based compensation | Stock-based compensation | 25,220 | | | 18,943 | | Stock-based compensation | 25,267 | | | 21,662 | | | 50,487 | | | 40,605 | |
| Other costs | Other costs | 8,179 | | | 12,237 | | Other costs | 7,926 | | | 1,705 | | | 16,105 | | | 13,942 | |
| | Operating income | Operating income | 122,274 | | | 50,541 | | Operating income | 171,131 | | | 82,278 | | | 293,405 | | | 132,819 | |
| Financing interest expense | Financing interest expense | (29,689) | | | (33,284) | | Financing interest expense | (31,820) | | | (32,473) | | | (61,509) | | | (65,757) | |
| Net foreign currency gain (loss) | Net foreign currency gain (loss) | 5,006 | | | (2,755) | | Net foreign currency gain (loss) | (19,408) | | | 1,342 | | | (14,402) | | | (1,413) | |
| | Change in fair value of contingent consideration | Change in fair value of contingent consideration | (16,600) | | | — | | Change in fair value of contingent consideration | (88,200) | | | (47,700) | | | (104,800) | | | (47,700) | |
| Net unrealized gain on financial instruments | Net unrealized gain on financial instruments | 49,827 | | | 7,033 | | Net unrealized gain on financial instruments | 16,894 | | | 6,013 | | | 66,721 | | | 13,046 | |
| Income before income taxes | Income before income taxes | $ | 130,818 | | | $ | 21,535 | | Income before income taxes | $ | 48,597 | | | $ | 9,460 | | | $ | 179,415 | | | $ | 30,995 | |
Liquidity and Capital Resources
We fund our business operations primarily via cash on hand, cash generated from operations, the issuance of deposits, borrowings under our Amended and Restated Credit Agreement, our participation debt and our accounts receivable factoring and securitization arrangements. As of March 31,June 30, 2022, we had cash and cash equivalents of $577.5$438.8 million and remaining borrowing availability of $698.3$718.4 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.
Our Amended and Restated Credit Agreement provides for a secured revolving credit facility (the “Revolving Credit Facility”), senior secured tranche A term loans (the “Tranche A Term Loans”) and senior secured tranche B term loans (the “Tranche B Term Loans”). As of March 31,June 30, 2022, the Company had an outstanding principal amount of $929.5$917.3 million on the Tranche A Term Loans, an outstanding principal amount of $1,427.6$1,424.0 million on the Tranche B Term Loans, borrowings of $180.3$180.4 million on the Revolving Credit Facility and letters of credit of $51.4$31.2 million drawn against the Revolving Credit Facility.
As of March 31,June 30, 2022, the Company had outstanding $310.0 million in aggregate principal amount of Convertible Notes, issued in a private placement with Warburg Pincus. At the Company’s option, interest is either payable in cash, through accretion to the principal amount of the Convertible Notes, or a combination of cash and accretion. The Company has paid, and expects to continue to pay interest in cash as it comes due.
The Company is also party to two securitized debt agreements. Under these agreements, our subsidiaries sellthe Company sells certain of its Australian and European trade accounts receivable to bankruptcy-remote subsidiaries consolidated by the Company, which in turn use the receivables as collateral to issue asset-backed commercial paper.securitized debt. Amounts collected on the securitized receivables are restricted to pay the securitized debt and are not available for general corporate purposes. The Company had $104.2$102.4 million of securitized debt under these facilities as of March 31,June 30, 2022. In addition, 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 $31.1$52.2 million borrowed against these participation agreements as of March 31,June 30, 2022. WEX Bank also borrows from uncommitted federal funds lines to supplement the financing of the Company’s accounts receivable. There were no outstanding borrowings under these lines of credit as of March 31,June 30, 2022. See Part I – Item 1 – Note 9,10, Financing and Other Debt, in this reportto our condensed consolidated financial statements for more information regarding these facilities.
We utilize two off-balance sheet factoring arrangements to sell certain of our accounts receivable to unrelated third-party financial institutions in order to accelerate the collection of the Company’s cash and reduce internal costs. Under the arrangements, the factored receivables have been transferred without recourse. Available capacity is dependent on the level of our trade accounts receivable eligible to be sold and the financial institution’sinstitutions’ willingness to purchase such receivables. 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. See Part I – Item 1 – Note 10,11, Off-Balance Sheet Arrangements, in this reportto our condensed consolidated financial statements for further information about the Company’s off-balance sheet arrangements.
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. As of March 31,June 30, 2022, we had $2,875.7$3,474.7 million in deposits. See Part I – Item 1 – Note 8,9, Deposits, in this reportto our condensed consolidated financial statements for more information regarding our deposits.
We believe that our current cash and cash equivalents, cash generating capabilities, financial condition and operations, and access to available funding sources will be adequate to fund our cash needs for the next 12 months and the foreseeable future. The table below summarizes our primary sources and uses of cash:
| | | | | | | | |
| Sources of cash | | Uses of cash1 |
•Borrowings and availability on our Amended and Restated Credit Agreement •Convertible Notes •Deposits •Borrowed federal funds •Participation debt •Accounts receivable factoring and securitization arrangements | | •Payments on our Amended and Restated Credit Agreement •Payments on maturities and withdrawals of deposits •Payments on borrowed federal funds •Working capital needs of the business •Capital expenditures •Purchases of shares of treasury stock |
1 Our long-term cash requirements consist primarily of amounts owed on our Amended and Restated Credit Agreement and various facilities lease agreements.
Cash Flows
The table below summarizes our cash activities: | | | Three Months Ended March 31, | | Six Months Ended June 30, |
| (In thousands) | (In thousands) | 2022 | | 2021 | (In thousands) | 2022 | | 2021 |
| Cash flows used for operating activities | Cash flows used for operating activities | $ | (161,030) | | | $ | (217,295) | | Cash flows used for operating activities | $ | (138,165) | | | $ | (121,982) | |
| Cash flows used for investing activities | Cash flows used for investing activities | $ | (106,563) | | | $ | (16,406) | | Cash flows used for investing activities | $ | (610,695) | | | $ | (595,407) | |
| Cash flows provided by (used for) financing activities | $ | 262,517 | | | $ | (114,579) | | |
| Cash flows provided by financing activities | | Cash flows provided by financing activities | $ | 793,496 | | | $ | 398,779 | |
Operating Activities
We fund a customer’s entire receivable as partin the majority of our fleet and certain of our travel 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, driving changes in accounts receivable and accounts payable balances, which directly impact our capital resource requirements.
Cash used for operating activities for the threesix months ended March 31,June 30, 2022 decreased $56.3increased $16.2 million as compared to the same period in the prior year. The decreaseincrease in cash used for operating activities year over year iswas primarily the result of higher accounts receivable, net of the associated increases in accounts payable, resulting from a sharp rise in fuel prices during 2022. This use of cash was partly offset by the benefit of higher net income adjusted for non-cash items, offset in part by an increase in the net change in operating assets and liabilities due to increases in fuel prices.items.
Investing Activities
Investing cash flows generally consist of capital expenditures, cash used for acquisitions and the investment of eligible custodial cash assets previously held by third-party depository partners, transferred to our WEX Bank depository partner.
Cash used for investing activities for the threesix months ended March 31,June 30, 2022 increased $90.2$15.3 million as compared to the same period in the prior year, primarily resulting from the investment of $97.6$594.3 million of transferred HSA deposits in available-for-sale debt securities partiallyduring the six months ended June 30, 2022, offset substantially by maturities$558.3 million of $15.3 million.payments made for acquisitions during the six months ended June 30, 2021.
Financing Activities
Financing cash flows generally consist of the issuance and repayment of debt, and deposits and proceeds from employee exercises of stock options.
treasury shares. We believe that the repurchase of our common stock is a favorable means of returning value to our stockholders. 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 threesix months ended March 31,June 30, 2022 totaled $262.5$793.5 million, due primarily to an increase in deposits of $197.5$797.9 million and net borrowings of $60.5$60.6 million on the Revolving Credit Facility.Facility, partially offset by $80.6 million of share repurchases of our common stock. Cash used forprovided by financing activities for the threesix months ended March 31,June 30, 2021 totaled $114.6$398.8 million due primarily to thean increase in deposits of $451.3 million. The early redemption of the Company’s $400.0 million of Notes whichduring the first half of 2021 was funded by cash on-hand. This use of cash was partlysubstantially offset by federal fundadditional term loan borrowings of $194.8$80.8 million, net of quarterly repayments, and an increase in depositsnet borrowings of $103.0 million.$265.0 million against our Revolving Credit Facility.
Financial Covenants
The Amended and Restated Credit Agreement contains customary affirmative and negative covenants affecting the Company and its subsidiaries, including covenants 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 also includes customary covenants, including a debt incurrence covenant that restricts the Company from incurring certain indebtedness, including disqualified stock and preferred stock issued by the Company or its subsidiaries, subject to customary exceptions. At March 31,June 30, 2022, we were in compliance with such 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, 2021 for more information regarding these covenants.
Undistributed Earnings
Undistributed earnings of certain foreign subsidiaries of the Company amounted to an estimated $146.0$150.4 million and $133.0 million as of March 31,June 30, 2022 and December 31, 2021, respectively. The Company continues to maintain its indefinite reinvestment assertion for its investments in foreign subsidiaries except for any historical undistributed earnings and future earnings for WEX Australia. Upon distribution of the foreign subsidiaries’ earnings in which the Company continues to assert indefinite reinvestment, the Company would be subject to 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 unrecognized deferred tax liability, however, it is not expected to be material.
Other Commitments, Contingencies and Contractual Obligations
CertainDuring June 2022, the Company and its European fuel suppliers amended existing contracts, modifying both prior period and future minimum volume commitments through 2025. As a result of these amendments, the Company’s subsidiaries are requiredCompany reversed previously accrued penalties totaling approximately $7 million as other revenue within the condensed consolidated statement of operations during the three and six months ended June 30, 2022.
During June 2022, the Company entered into a definitive agreement to purchase a minimum amountportfolio of fuel from suppliers on an annual basis. If the minimum requirement is not fulfilled, they are subjectcertain assets, consisting primarily of card program receivables. The outstanding receivables balances to penaltiesbe converted will fluctuate, but based on the amountmost recent available information, we expect to purchase this portfolio of spend belowassets for approximately $48 million, subject to customary adjustments as defined in the minimum annual volume commitment. The Company incurred shortfall penaltiespurchase agreement. Closing of $1.3 millionthis transaction is contingent upon satisfaction of certain conditions and $1.5 millionis expected to occur during the three months ended March 31,third quarter of 2022, be funded with cash on hand and 2021, respectively.accounted for as an asset acquisition.
WEX Bank is working to resolve matters identified by the FDIC and the UDFI, including with respect to a consent order issued by the FDIC and the UDFI (the “Order”) on May 6, 2022. The Order requires WEX Bank to strengthen its Bank Secrecy Act/anti-money laundering (collectively “BSA”) compliance program and to address related matters, including with respect to controls. The terms of the Order will remain in effect and be enforceable until they are modified, terminated, suspended or set aside by the FDIC and the UDFI. The matters identified are not expected to have a material adverse effect on our results of operations, financial condition or cash flows.
On March 7, 2022, WEX Inc. and SBI entered into athe Share Purchase Agreement whereby SBI sold, and WEX Inc. purchased, SBI’s remaining 4.53 percent interest in PO Holding for a purchase price of $234.0 million plus any interest accruing pursuant to the terms of the Share Purchase Agreement. The purchase price is payable in three installments of $76.7 million in each of March of 2024, 2025 and 2026, with a final payment of $4.0 million payable in March 2026. Pursuant to the Share Purchase Agreement, WEX Inc. owes SBI interest on the outstanding purchase price balance from March 2024 to March 2025 at the 12-month SOFR rate (as determined on March 1, 2024) plus 1.25 percent and on the outstanding balance from March 2025 to March 2026 at the 12-month SOFR rate (as determined on March 3, 2025) plus 2.25 percent, except that no interest accrues on the $4.0 million payment due in March 2026. The carrying value of the redeemable non-controlling interest as of the acquisition date was $254.4 million and was reduced to zero as a result of the acquisition. Additionally, the Company recorded a $216.6 million deferred liability and a $34.2 million gain, net of tax expense, as a result of the transaction. For further information regarding this transaction refer to Part I - Item 1 - Note 4, Acquisitions, to the condensed consolidated financial statementsstatements.
Through the close of trading on the latest practicable date, which the Company has determined to be July 22, 2022 for the purpose of the filing of this report.Quarterly Report on Form 10-Q, the Company had substantially exhausted its Repurchase Program, having repurchased 0.4 million additional shares, for approximately $62.1 million of the $69.4 million that remained available to be used for share repurchases pursuant to the Repurchase Program beginning July 1, 2022.
There were no other material changes to our contractual obligations from the information previously provided in Item 7 of our Annual Report on Form 10–K for the year ended December 31, 2021.
Critical Accounting Policies and Estimates
We have no material changes to our critical accounting policies and estimates discussed in our Annual Report on Form 10–K for the year ended December 31, 2021.
Recently Adopted Accounting Standards
See Note 2, Recent Accounting Pronouncements, to the condensed consolidated financial statements included in Part I, Item 1 of this Form 10–Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of March 31,June 30, 2022, we have no material changes to the market risk disclosures in our Annual Report on Form 10–K for the year ended December 31, 2021.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our 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 March 31,June 30, 2022. 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 March 31,June 30, 2022. “Disclosure controls and procedures” are controls and 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. 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.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended March 31,June 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As of the date of this filing, we are not involved in any material legal proceedings. We also were not involved in any material legal proceedings that were terminated during the three months ended March 31,June 30, 2022. However, fromFrom time to time, we are subject to legal proceedings and claims in the ordinary course of 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.
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–K for the year ended December 31, 2021, 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, 2021 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–K for the year ended December 31, 2021 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 results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
We currently have authorization fromIssuer Purchases of Equity Securities
The following table presents the Company’s common stock repurchases during each month of the second quarter of 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1 | | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs1 |
| April 1 - April 30, 2022 | 3,434 | | | $ | 159.94 | | | 3,434 | | | $ | 149,450,749 | |
| May 1 - May 31, 2022 | 516,362 | | | $ | 155.03 | | | 516,362 | | | $ | 69,401,109 | |
| June 1 - June 30, 2022 | — | | | $ | — | | | — | | | $ | 69,401,109 | |
| Total | 519,796 | | | $ | 155.06 | | | 519,796 | | | |
1 Under a share buyback plan authorized by our board of directors, to repurchase up to $150 million of our common stockannounced on August 26, 2021, and extending through September 30, 2025 subject(the “Repurchase Program”), the Company may repurchase up to earlier termination$150.0 million in shares of the program by the board of directors. Share repurchases may be
madeits common stock through open market purchases, privately negotiated transactions, block trades or otherwise. Repurchases under the programRepurchase Program are subject to certain considerations, including but not limited to, market pricing and conditions, business, legal, accounting and other considerations. The repurchase programRepurchase Program does not obligate the Company to repurchase any shares. We did not purchase anyThrough the close of trading on the latest practicable date, which the Company has determined to be July 22, 2022 for the purpose of the filing of this Quarterly Report on Form 10-Q, the Company had substantially exhausted its Repurchase Program, having repurchased 0.4 million additional shares, for approximately $62.1 million of our common stock during the quarter ended March 31, 2022. The dollar value of shares$69.4 million that wereremained available to be purchased under ourused for share repurchase program was $150 million as of March 31,repurchases pursuant to the Repurchase Program beginning July 1, 2022.
Item 6. Exhibits.
| | | | | | | | | | | |
| Exhibit No. | | Description |
| 3.1 | | |
| 3.2 | | |
| 3.3 | | |
* | 10.1 | | |
* | 10.2 | | |
* | 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. |
| |
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. |
| | |
May 3,July 29, 2022 | By: | | /s/ Jagtar Narula |
| | | Jagtar Narula |
| | Chief Financial Officer |
| | (principal financial officer) |
| | | |
| July 29, 2022 | By: | | /s/ Jennifer Kimball |
| | | Jennifer Kimball |
| | Interim Chief Financial Officer and Chief Accounting Officer |
| | (principal financial officer and principal accounting officer) |
