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.
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 ofDecember 31, 2021 , the notes accompanying those financial statements and MD&A as contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSecurities and Exchange Commission onMarch 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 andEmployee 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 andEmployee 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
OnMarch 7, 2022 ,WEX Inc. and SBI entered into a Share Purchase Agreement whereby SBI sold, andWEX Inc. purchased, SBI's remaining 4.53 percent interest inPO 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 inMarch 2026 . Pursuant to the Share Purchase Agreement,WEX Inc. owes SBI interest on the outstanding purchase price balance fromMarch 2024 toMarch 2025 at the 12-month SOFR rate (as determined onMarch 1, 2024 ) plus 1.25 percent and on the outstanding balance fromMarch 2025 toMarch 2026 at the 12-month SOFR rate (as determined onMarch 3, 2025 ) plus 2.25 percent, except that no interest accrues on the$4.0 million payment due inMarch 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 endedMarch 31, 2022 . The change in value of redeemable non-controlling interest was offset by$3.5 million of deferred tax expense resulting from the difference between the book and tax bases of the deferred liability payable to SBI. The carrying value of the redeemable non-controlling interest was reduced to zero as a result of the acquisition. This transaction makesPO Holding , the direct parent ofWEX Health , a wholly owned subsidiary ofWEX Inc. to which the Company is solely entitled to the economic benefits. 35
--------------------------------------------------------------------------------
Table of Contents
Key Performance Indicators
Below are key metrics from the first quarter of 2022:
Increase Q1 2022 Q1 2021 Amount Percent Total volume (in millions): Fleet Solutions$ 21,704.3 $ 13,677.4 $ 8,026.9 59 % Travel and Corporate Solutions 20,064.9 13,339.3 6,725.6 50 % Health and Employee Benefit Solutions 3,063.2 2,851.9 211.3 7 % Total volume (in millions)$ 44,832.4 $ 29,868.6 $ 14,963.8 50 % Total purchase volume (in millions)$ 27,829.9 $ 16,768.9 $ 11,061.0 66 % Fleet Solutions Fuel transactions processed (in millions) 161.3 146.4 14.9 10 % Payment processing transactions (in millions) 132.7 118.4 14.3 12 % Average U.S. fuel price (US$ / gallon)$ 3.95 $ 2.72 $ 1.23 45 %
Payment processing $ of fuel (in millions)
57 % Travel and Corporate Solutions Purchase volume (in millions)$ 11,809.4 $ 6,107.7 $ 5,701.7 93 %
Health and
Purchase volume (in millions)$ 1,630.2 $ 1,484.2 $ 146.0 10 % Average number ofU.S. SaaS accounts (in millions) 17.8 15.5 2.3 15 % 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 50 percent over the first quarter of 2021 to$44.8 billion for the first quarter of 2022. Total purchase volume across the Company in the first quarter of 2022 grew 66 percent from the same period in the prior year reflecting 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 inNorth 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, are up approximately 12 percent as compared to the same period last year, substantially as a result of increased transactions processed inNorth America .
•The average
•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 57 percent for the first 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 billion for the first quarter of 2022, representing an increase of 93 percent from the same period last year. This increase was driven primarily by volumes contributed by the acquisition of eNett andOptal , continued recovery in domestic travel and tourism and increased volumes in our corporate payment solutions business.
Health and
•Purchase volume, which represents the total
36
--------------------------------------------------------------------------------
Table of Contents
•Average number ofU.S. SaaS accounts, which represents the number of activeConsumer-Directed Health , COBRA, and billing accounts on ourU.S. SaaS platforms, grew by approximately 2.3 million for the first quarter of 2022, a 15 percent increase from the same period in the prior year.
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. 37
--------------------------------------------------------------------------------
Table of Contents Fleet Solutions Revenues The following table reflects comparative revenue and key operating statistics within Fleet Solutions: Three Months Ended March 31, Increase (Decrease) (In thousands, except per gallon data) 2022 2021 Amount Percent Revenues1 Payment processing revenue$ 151,906 $ 110,576 $ 41,330 37 % Account servicing revenue 42,443 39,991 2,452 6 % Finance fee revenue 78,405 51,840 26,565 51 % Other revenue 46,385 41,430 4,955 12 % Total revenues$ 319,139 $ 243,837 $ 75,302 31 % Key operating statistics Payment processing revenue: Fuel transactions processed2 161,289 146,400 14,889 10 % Payment processing transactions3 132,663 118,389 14,274 12 % Payment processing $ of fuel4$ 14,390,257 $ 9,176,960 $ 5,213,297 57 % Average price per gallon of fuel - Domestic - ($USD/gal) $ 3.95$ 2.72 $ 1.23 45 % Net payment processing rate5 1.06 % 1.20 % (0.14) % (12) % Net late fee rate6 0.44 % 0.45 % (0.01) % (2) % 1 The impact of foreign currency exchange rate fluctuations on Fleet Solutions decreased revenue by$2.1 million in the first quarter of 2022 as compared to the same period in the prior year. Favorable impact from domestic fuel prices resulted in an increase of$41.1 million in revenue for the three months endedMarch 31, 2022 , as compared to the same period 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 that WEX records as revenue from merchants less certain discounts given to customers and network fees. The increase in fuel prices has resulted in a decline in our net payment processing rate for the three months endedMarch 31, 2022 , as compared to the same period 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.
Fleet Solutions revenue increased$75.3 million for the first quarter of 2022 as compared to the same period in the prior year. Revenues were favorably impacted by higher domestic fuel prices and increased volumes inNorth America .
Finance fee revenue is comprised of the following components:
Three Months Ended March 31, Increase (Decrease) (In thousands) 2022 2021 Amount Percent Finance income$ 63,110 $ 41,150 $ 21,960 53 % Factoring fee revenue 15,295 10,690 4,605 43 % Finance fee revenue$ 78,405 $ 51,840 $ 26,565 51 % 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 38
--------------------------------------------------------------------------------
Table of Contents
business from customers failing to pay timely and the impact such late payments have on our financial results. These assessments are typically conducted at least annually but may occur more often depending on macro-economic factors.
Finance income increased$22.0 million for the first quarter of 2022 as compared to the same period in the prior year primarily as a result of higher domestic fuel prices, increased volumes and instances of late fees. Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time to pay, placing a customer on a payment plan or granting waivers of late fees. There were no material concessions granted to customers experiencing financial difficulties during the three months endedMarch 31, 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$4.6 million for the first quarter of 2022, as compared with the same period in the prior year due to increased shipping demand, leading to an increase in the size and volume of factored invoices.
Operating Expenses
The following table compares line items within operating income and presents segment adjusted operating income and segment adjusted operating income margin for Fleet Solutions: Three Months Ended March 31, Increase (Decrease) (In thousands) 2022 2021 Amount Percent Cost of services Processing costs$ 60,062 $ 52,192 $ 7,870 15 % Service fees$ 2,156 $ 1,728 $ 428 25 % Provision for credit losses$ 23,224 $ 4,364 $ 18,860 432 % Operating interest$ 1,461 $ 2,109 $ (648) (31) % Depreciation and amortization$ 11,837 $ 12,715 $ (878) (7) % Other operating expenses General and administrative$ 23,667 $ 20,502 $ 3,165 15 % Sales and marketing$ 49,441 $ 41,025 $ 8,416 21 % Depreciation and amortization$ 18,900 $ 19,585 $ (685) (3) % Operating income$ 128,391 $ 89,617 $ 38,774 43 % Segment adjusted operating income1$ 160,101 $ 118,258 $ 41,843 35 % Segment adjusted operating income margin2 50 % 48 % 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 Item 1 - Note 17, Segment Information, of 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 2022 increase in segment adjusted operating income margin reflects revenue growth, higher fuel prices and operating leverage in the expense base.
Cost of services
Processing costs increased by$7.9 million for the three months endedMarch 31, 2022 , as compared with the same period in the prior year. Such increase was primarily driven by higher compliance costs and, in part, by business support costs incurred as a result of the increased volumes experienced during the quarter endedMarch 31, 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. Provision for credit losses increased by$18.9 million for the first quarter of 2022 as compared to the same period in the prior year. The increase in the provision for credit losses during the first quarter of 2022 is reflective of higher PPG rates and loss rates trending toward more historical norms. We generally measure our credit loss performance by calculating fuel- 39
--------------------------------------------------------------------------------
Table of Contents
related credit losses as a percentage of total fuel expenditures on payment
processing transactions. This metric for credit losses was 15.0 and 6.2
basis points of fuel expenditures for the three months ended
Service fees, operating interest and depreciation and amortization expense for the three months endedMarch 31, 2022 were all generally consistent with those from the same period in the prior year.
Other operating expenses
General and administrative expenses increased$3.2 million for the three months endedMarch 31, 2022 , as compared with the same period in the prior year due to increased professional services, information technology and compensation expense in support of business growth. Sales and marketing expenses increased$8.4 million for the three months endedMarch 31, 2022 , as compared with the same period in the prior year. This increase was primarily driven by higher partner commissions due to volume growth, coupled to a lesser extent with increased compensation and marketing expense in support of that growth.
Depreciation and amortization expense for the first quarter of 2022 was generally consistent with the same period in the prior year.
Travel and Corporate Solutions
Revenues
The following table reflects comparative revenue and key operating statistics within Travel and Corporate Solutions:
Three Months Ended March 31, Increase (Decrease) (In thousands) 2022 2021 Amount Percent Revenues1 Payment processing revenue$ 65,075 $ 57,248 $ 7,827 14 % Account servicing revenue 10,758 10,687 71 1 % Finance fee revenue 141 294 (153) (52) % Other revenue 1,277 2,413 (1,136) (47) % Total revenues$ 77,251 $ 70,642 $ 6,609 9 % Key operating statistics Payment processing revenue: Purchase volume2$ 11,809,450 $ 6,107,675 $5,701,775 93 % Net interchange rate3 0.55 % 0.94 % (0.39) % (41) %
1 The impact of foreign currency exchange rate fluctuations on Travel and
Corporate Solutions decreased revenues by an immaterial amount during the three
months ended
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. Travel and Corporate Solutions revenue increased$6.6 million for the first quarter of 2022, as compared to the same period in the prior year. The increase was primarily driven by an increase in travel-related volumes both internationally and domestically and continued strength in the partner channel. These revenue increases were in part offset by the impact of an accounting change in the fourth quarter of 2021, which required a shift from gross revenue presentation to net revenue presentation for one customer. Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time to pay, placing a customer on a payment plan or granting waivers of late fees. There were no material concessions granted to customers during the three months endedMarch 31, 2022 and 2021. 40
--------------------------------------------------------------------------------
Table of Contents
Operating Expenses
The following table compares line items within operating income (loss) and presents segment adjusted operating income and segment adjusted operating income margin for Travel and Corporate Solutions:
Three Months Ended March 31, Increase (Decrease) (In thousands) 2022 2021 Amount Percent Cost of services Processing costs$ 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 % 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 Item 1 - Note 17, Segment Information, of 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 2022 increase in segment adjusted operating income margin reflects additional benefits from eNett andOptal synergies and scale from increased revenue.
Cost of services
Processing costs for the three months ended
Provision for credit losses increased
Depreciation and amortization expense for the three months endedMarch 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 andOptal acquisition.
Service fees and operating interest for the three months ended
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 andOptal during the year endedDecember 31, 2021 . Sales and marketing expenses decreased for the first quarter of 2022 by$15.9 million , as compared to the same period in the prior year. This decrease was primarily due to a reduction in partner commissions as a result of the impact of an accounting change in the fourth quarter of 2021, which required a shift from gross revenue presentation to net revenue presentation for one customer. 41
--------------------------------------------------------------------------------
Table of Contents
Depreciation and amortization expense during the first quarter of 2022 remained consistent with the same period in the prior year.
Health and
Revenues
The following table reflects comparative revenue and key operating statistics
within Health and
Three Months Ended March 31, Increase (Decrease) (In thousands) 2022 2021 Amount Percent Revenues Payment processing revenue$ 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
2 Average number of SaaS accounts represents the number of active
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
Other revenue increased$4.1 million for the first quarter of 2022, as compared to the same period in the prior year. The increase was due primarily to interest revenues earned on the investment of HSA deposits obtained as a result of theApril 2021 acquisition of contractual rights to serve as custodian to certain HSAs fromBell Bank . 42
--------------------------------------------------------------------------------
Table of Contents
Operating Expenses
The following table compares line items within operating income and presents segment adjusted operating income and segment adjusted operating income margin for Health andEmployee Benefit Solutions : Three Months Ended March 31, Increase (Decrease) (In thousands) 2022 2021 Amount Percent Cost of services Processing costs$ 53,745 $ 40,749 $ 12,996 32 % Service fees$ 9,805 $ 5,554 $ 4,251 77 % Provision for credit losses $ 269$ 60 $ 209 348 % Operating interest $ 89 $ -$ 89 NM Depreciation and amortization$ 9,629 $ 8,868 $ 761 9 % Other operating expenses General and administrative$ 9,235 $ 7,375 $ 1,860 25 % Sales and marketing$ 11,436 $ 8,339 $ 3,097 37 % Depreciation and amortization$ 14,743 $ 11,063 $ 3,680 33 % Operating income$ 12,194 $ 14,270 $ (2,076) (15) % Segment adjusted operating income1$ 35,500 $ 30,544 $ 4,956 16 % Segment adjusted operating income margin2 29 % 32 % (3) % (9) % 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 Item 1 - Note 17, Segment Information, of 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 2022 decrease in segment adjusted operating income margin reflects the benefitexpress Acquisition inJune 2021 . Cost of services Processing costs increased$13.0 million for the first quarter of 2022, as compared to the same period in the prior year. The increase in processing costs for the first quarter of 2022 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 months endedMarch 31, 2022 increased$4.3 million , as compared with the same period in the prior year. This increase was driven in part by the benefitexpress Acquisition and a growth in revenue volumes. Provision for credit losses and operating interest were not material to Health andEmployee Benefit Solutions' operations for the three months endedMarch 31, 2022 and 2021.
Depreciation and amortization expense for the first quarter of 2022 remained consistent with the same period in the prior year.
Other operating expenses
General and administrative expenses increased
Sales and marketing expenses in the first quarter of 2022 increased$3.1 million as compared to the same period in the prior year due to the general expansion of the sales and marketing team and the benefitexpress Acquisition. Depreciation and amortization expense increased$3.7 million for the three months endedMarch 31, 2022 , as compared to the same period of the prior year primarily due to the amortization of intangible rights obtained as a result of theApril 2021 acquisition of contractual rights to serve as custodian of certain HSAs. 43
--------------------------------------------------------------------------------
Table of Contents
Unallocated corporate expenses
Unallocated corporate expenses represent the portion of expenses relating to general corporate functions, including acquisition and divestiture expenses, certain finance, legal, information technology, human resources, administrative and executive expenses and other expenses not directly attributable to a reportable segment. The following table compares line items within operating income for unallocated corporate expenses: Three Months Ended March 31, Increase (Decrease) (In thousands) 2022 2021 Amount Percent Other operating expenses General and administrative$ 30,419 $ 26,987 $ 3,432 13 % Depreciation and amortization$ 522 $ 539 $ (17) (3) % General and administrative expenses increased$3.4 million for the first quarter of 2022, as compared to the same period in the prior year. The increase in expense for the first quarter of 2022 was due primarily to increased compensation-related costs and, to a lesser extent, fees for professional services incurred in connection with the Company's Investor Day held during the first quarter of 2022.
Unallocated depreciation and amortization for the three months ended
Non-operating income and expense
The following table reflects comparative results for certain amounts excluded from operating income: Three Months Ended March 31, Increase (Decrease) (In thousands) 2022 2021 Amount Percent Financing interest expense$ (29,689) $ (33,284) $ (3,595) (11) % Change in fair value of contingent consideration$ (16,600) $ -$ 16,600 NM Net foreign currency gain (loss) $ 5,006$ (2,755) $ 7,761 NM Net unrealized gain on financial instruments$ 49,827 $ 7,033 $ 42,794 608 % Income tax provision (benefit)$ 42,032 $ (1,670) $ 43,702 NM Net income from non-controlling interests $ 268$ 726 $ (458) (63) % Change in value of redeemable non-controlling interest$ 34,245 $ (25,044) $ 59,289 NM NM - Not Meaningful Financing interest expense decreased$3.6 million for the first quarter of 2022, as compared to the same period in the prior year primarily due to the early redemption of the Company's$400 million senior notes with a fixed rate of 4.75% duringMarch 2021 .
During the three months ended
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 gains of$5.0 million in the first quarter of 2022. The gains resulted from the strengthening of foreign currencies relative to theU.S. dollar. The Company's net foreign currency losses for the three months endedMarch 31, 2021 resulted from the remeasurement of assets and liabilities, and losses on intercompany transactions, resulting from theU.S. dollar strengthening relative to numerous major foreign currencies in which we transact. The Company incurred unrealized gains on financial instruments of$49.8 million in the first quarter 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 first quarter of 2021 resulted primarily from a reduction in the fair value of 44
--------------------------------------------------------------------------------
Table of Contents
interest rate swap liabilities due to a decrease in the remaining future settlements, coupled with an increase in the LIBOR forward yield curve.
The Company's effective tax rate was 32.1 percent for the three months endedMarch 31, 2022 , as compared to (7.8) percent for the three months endedMarch 31, 2021 . 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 endedMarch 31, 2022 was adversely impacted by a discrete tax item of$7.5 million primarily associated with an uncertain tax position. Effective tax rates were significantly lower for the same period 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 were not material to Company
operations for the three months ended
During the three months ended
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 45
--------------------------------------------------------------------------------
Table of Contents
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 three months endedMarch 31, 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, (In thousands) 2022 2021 Net income (loss) attributable to shareholders$ 122,763 $ (2,565) Unrealized gain on financial instruments (49,827) (7,033) Net foreign currency (gain) loss (5,006) 2,755 Change in fair value of contingent consideration 16,600 - Acquisition-related intangible amortization 42,719 42,454 Other acquisition and divestiture related items 4,540 14,796 Stock-based compensation 25,220 18,943 Other costs 8,179 12,237 Debt restructuring and debt issuance cost amortization 3,279 5,092 ANI adjustments attributable to non-controlling interests (34,587) 23,800 Tax related items (2,825) (29,205) Adjusted net income attributable to shareholders $
131,055
The following table reconciles total segment adjusted operating income to income before income taxes:
46
--------------------------------------------------------------------------------
Table of Contents
Three Months Ended March 31, (In thousands) 2022 2021 Segment adjusted operating income Fleet Solutions$ 160,101 $ 118,258 Travel and Corporate Solutions 28,330 7,015 Health and Employee Benefit Solutions 35,500 30,544 Total segment adjusted operating income
Reconciliation:
Total segment adjusted operating income$ 223,931 $ 155,817 Less: Unallocated corporate expenses 21,011 16,209 Acquisition-related intangible amortization 42,719 42,454 Other acquisition and divestiture related items 4,540 14,796 Debt restructuring costs (12) 637 Stock-based compensation 25,220 18,943 Other costs 8,179 12,237 Operating income 122,274 50,541 Financing interest expense (29,689) (33,284) Net foreign currency gain (loss) 5,006 (2,755) Change in fair value of contingent consideration (16,600) - Net unrealized gain on financial instruments 49,827 7,033 Income before income taxes$ 130,818 $ 21,535
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 ofMarch 31, 2022 , we had cash and cash equivalents of$577.5 million and remaining borrowing availability of$698.3 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 ofMarch 31, 2022 , the Company had an outstanding principal amount of$929.5 million on the Tranche A Term Loans, an outstanding principal amount of$1,427.6 million on the Tranche B Term Loans, borrowings of$180.3 million on the Revolving Credit Facility and letters of credit of$51.4 million drawn against the Revolving Credit Facility. As ofMarch 31, 2022 , the Company had outstanding$310.0 million in aggregate principal amount of Convertible Notes, issued in a private placement withWarburg 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 sell 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. 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 million of securitized debt under these facilities as ofMarch 31, 2022 . In addition, from time to time,WEX Bank enters into participation agreements with third-party banks to fund customers' balances that exceedWEX Bank's lending limit to individual customers. There was$31.1 million borrowed against these participation agreements as ofMarch 31, 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 ofMarch 31, 2022 . See Part I - Item 1 - Note 9, Financing and Other Debt, in this report for more information regarding these facilities. 47
--------------------------------------------------------------------------------
Table of Contents
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's 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, Off-Balance Sheet Arrangements, in this report 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 toFDIC rules governing minimum financial ratios. As ofMarch 31, 2022 , we had$2,875.7 million in deposits. See Part I - Item 1 - Note 8, Deposits, in this report for more information regarding our deposits. We believe that our current cash and cash equivalents, cash generating capabilities, financial condition and operations, and access to available funding sources will be adequate to fund our cash needs for the next 12 months and the foreseeable future. The table below summarizes our primary sources and uses of cash: Sources of cash Uses of cash1 •Borrowings and availability on our Amended and •Payments on our Amended and Restated Credit Restated Credit Agreement Agreement •Convertible Notes •Payments on maturities and withdrawals of •Deposits deposits •Borrowed federal funds •Payments on borrowed federal funds •Participation debt •Working capital needs of the business •Accounts receivable factoring and securitization •Capital expenditures arrangements
1 Our long-term cash requirements consist primarily of amounts owed on our Amended and Restated Credit Agreement and various facilities lease agreements.
Cash Flows
The table below summarizes our cash activities:
Three Months Ended March 31, (In thousands) 2022 2021 Cash flows used for operating activities$ (161,030) $ (217,295) Cash flows used for investing activities$ (106,563) $ (16,406) Cash flows provided by (used for) financing activities$ 262,517 $ (114,579) Operating Activities We fund a customer's entire receivable as part 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 three months endedMarch 31, 2022 decreased$56.3 million as compared to the same period in the prior year. The decrease in cash used for operating activities year over year is primarily the result 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. 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 ourWEX Bank depository partner. Cash used for investing activities for the three months endedMarch 31, 2022 increased$90.2 million as compared to the same period in the prior year, primarily resulting from the investment of$97.6 million of transferred HSA deposits in available-for-sale debt securities, partially offset by maturities of$15.3 million . Financing Activities
Financing cash flows generally consist of the issuance and repayment of debt and deposits and proceeds from employee exercises of stock options.
48
--------------------------------------------------------------------------------
Table of Contents
Cash provided by financing activities for the three months endedMarch 31, 2022 totaled$262.5 million , due primarily to an increase in deposits of$197.5 million and net borrowings of$60.5 million on the Revolving Credit Facility. Cash used for financing activities for the three months endedMarch 31, 2021 totaled$114.6 million due primarily to the early redemption of the Company's$400.0 million of Notes, which was funded by cash on-hand. This use of cash was partly offset by federal fund borrowings of$194.8 million and an increase in deposits of$103.0 million .
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. AtMarch 31, 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 endedDecember 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 million and$133.0 million as ofMarch 31, 2022 andDecember 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 WEXAustralia . 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
Certain of the Company's subsidiaries are required to purchase a minimum amount of fuel from suppliers on an annual basis. If the minimum requirement is not fulfilled, they are subject to penalties based on the amount of spend below the minimum annual volume commitment. The Company incurred shortfall penalties of$1.3 million and$1.5 million during the three months endedMarch 31, 2022 and 2021, respectively. OnMarch 7, 2022 ,WEX Inc. and SBI entered into a Share Purchase Agreement whereby SBI sold, andWEX Inc. purchased, SBI's remaining 4.53 percent interest inPO 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 inMarch 2026 . Pursuant to the Share Purchase Agreement,WEX Inc. owes SBI interest on the outstanding purchase price balance fromMarch 2024 toMarch 2025 at the 12-month SOFR rate (as determined onMarch 1, 2024 ) plus 1.25 percent and on the outstanding balance fromMarch 2025 toMarch 2026 at the 12-month SOFR rate (as determined onMarch 3, 2025 ) plus 2.25 percent, except that no interest accrues on the$4.0 million payment due inMarch 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 statements of this report. 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 endedDecember 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
49
--------------------------------------------------------------------------------
Table of Contents
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.
© Edgar Online, source