WEX INC.
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, Capital Resources and Cash Flows
•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, 2019 , 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, 2019 , filed with the SEC on February 28, 2020 , and
in conjunction with the unaudited condensed consolidated financial statements
and notes in Part I - Item 1 of this report.
Overview
WEX Inc. is a leading provider of corporate payment solutions. We have expanded
the scope of our business into a multi-channel provider of corporate payment
solutions. We currently operate in three business segments: Fleet Solutions,
Travel and Corporate Solutions and Health and Employee Benefit Solutions . Our
business model enables us to provide exceptional payment security and control
across a spectrum of payment sectors. The Fleet Solutions segment provides
customers with fleet vehicle payment processing services specifically designed
for the needs of commercial and government fleets. Management estimates that WEX
fleet cards are accepted at over 90 percent of fuel locations in each of the
United States and Australia , and are widely accepted in Europe . The Travel and
Corporate Solutions segment focuses on the complex payment environment of B2B
payments, providing customers with payment processing solutions for their
corporate payment and transaction monitoring needs. The Health and Employee
Benefit Solutions segment provides healthcare payment products and SaaS platform
consumer-directed healthcare payments in the U.S. , and provided payroll-related
benefits to customers in Brazil through the date of divestiture of UNIK S.A.
Summary
Recent Events
As disclosed in our Annual Report on Form 10-K for the year ended December 31,
2019 , on January 24, 2020 , we entered into a purchase agreement to purchase
eNett and Optal for an aggregate purchase price comprised of approximately $1.3
billion in cash and 2.0 million shares of the Company's common stock and subject
to certain working capital and other adjustments as described in the purchase
agreement. The parties' obligations to consummate the acquisition are subject to
customary closing conditions, including the absence of a Material Adverse Effect
(as defined in the purchase agreement between WEX, eNett and Optal , among
others). The Company has analyzed the eNett and Optal situation closely and has
concluded that the COVID-19 pandemic and conditions arising in connection with
it have had, and continue to have, a Material Adverse Effect on the businesses,
which is disproportionate to the effect on others in the relevant industry.
Because of this Material Adverse Effect, WEX formally advised eNett and Optal on
May 4, 2020 that it is not required to close the transaction pursuant to the
terms of the purchase agreement. On May 11, 2020 , the shareholders of eNett and
Optal each initiated separate legal proceedings in the High Court of Justice of
England and Wales in the United Kingdom against the Company denying that there
has been a Material Adverse Effect and alleging that the Company has threatened
to breach its obligations under the terms of the purchase agreement. The
claimants seek a declaration that no Material Adverse Effect has occurred and
orders for specific performance of WEX's obligations under the purchase
agreement. From September 21, 2020 through September 29, 2020 , a London court
held a trial of certain preliminary issues, including, among other things, the
determination of the industry in which eNett and Optal operate and of the other
participants in such industry, in each case for purposes of interpreting the
definition of Material Adverse Effect in the purchase agreement. On October 12,
2020 , the Court handed down its judgment, which concluded, among other things,
that the Optal and eNett Groups operate in the payments industry and the B2B
payments
41--------------------------------------------------------------------------------
Table of Contents
industry and that, for the purpose of the definition of the Material Adverse Effect clause, the relevant industry is the B2B payments industry. The Court found that there was no travel payments industry, as argued for by eNett andOptal . This finding means that when determining whether eNett orOptal have been disproportionately impacted by COVID-19, a comparison will be made against other B2B payments companies. The Company believes that eNett andOptal have been and are disproportionately impacted, however, this matter is to be decided conclusively at a subsequent trial and the outcome of such proceedings cannot be predicted at this time. Refer to Part II, Item 1, Legal Proceedings for additional information. In connection with the purchase agreement for the eNett andOptal acquisition, onJanuary 24, 2020 the Company entered into a commitment letter withBank of America, N.A . andBofA Securities, Inc. for senior secured and unsecured credit facilities in the aggregate amount of up to$3.1 billion , inclusive of backstops totaling$1.7 billion that reduced to zero under the terms of the Eighth Amendment to the 2016 Credit Agreement. The commitment letter was most recently amended and restated onAugust 20, 2020 (the "Third Amended and Restated Commitment Letter") to among other things, reallocate$600.0 million of aggregate credit commitments from a senior secured bridge facility to a 364-day unsecured credit facility and to extend this portion of the commitment by six months toApril 22, 2021 . The remaining$752.0 million consists of a seven-year term loan B facility commitment that was not affected by the Third Amended and Restated Commitment Letter. OnJuly 29, 2020 , the Company entered into the Tenth Amendment to the 2016 Credit Agreement, which increased commitments under the Company's secured revolving credit facility from$820 million to$870 million . OnAugust 20, 2020 , the Company entered into the Eleventh Amendment to the 2016 Credit Agreement, which among other things, limits the borrowing conditions for a$752 million portion of the revolving credit facility in connection with the acquisition of eNett andOptal to the absence of a payment or bankruptcy event of default and the accuracy of specified representations and warranties of eNett andOptal in the purchase agreement and specified representations and warranties of the Company set forth in the Third Amended and Restated Commitment Letter untilApril 22, 2021 . Private Placement Pursuant to a purchase agreement datedJune 29, 2020 , onJuly 1, 2020 , the Company closed on a private placement withWarburg Pincus , pursuant to which the Company issued convertible senior unsecured notes due 2027 in an aggregate principal amount of$310 million and 577,254 shares of common stock, with gross proceeds of$90 million , reflecting a purchase price of$155.91 per share. The issuance of the Convertible Notes provided the Company with gross proceeds of approximately$299 million after original issue discount, and the Convertible Notes have a seven-year term. The Convertible Notes were issued pursuant to an indenture between the Company andThe Bank of New York Mellon Trust Company, N.A. The Convertible Notes bear interest at a rate of 6.5% per annum, payable semi-annually in arrears, with the first interest payment dueJanuary 15, 2021 . At WEX'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 any time at the option of holders of the Convertible Notes, based on an initial conversion price of$200 per share, subject to certain adjustments. Conversions of Convertible Notes may be settled in shares of WEX common stock, cash, or a combination thereof at WEX's election. WEX will have the right, at any time following the third anniversary of closing, to redeem the Convertible Notes in whole or in part if the closing price of WEX's common stock is at least 200% of the conversion price of the Convertible Notes for 20 out of 30 days prior to the time WEX delivers a redemption notice (including at least one of the five trading days immediately preceding the last day of such 30 day period), subject to the right of holders of the Convertible Notes to convert their Convertible Notes prior to the redemption date. In the event of certain fundamental change transactions, including certain change of control transactions and delisting events, holders of Convertible Notes will have the right to require WEX to repurchase its Convertible Notes in accordance with the terms of the Convertible Notes at a repurchase price equal to the sum of (i) 105% of then accreted principal amount of the Convertible Notes to be repurchased, plus accrued interest, and (ii) the sum of the present values of the scheduled remaining payments of interest had such notes remained outstanding through the maturity date of the Convertible Notes. The indenture includes 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, including if, after giving effect to any such proposed incurrence or issuance, and the receipt and application of the proceeds therefrom, the ratio of (x) the Company's consolidated EBITDA for the most recent four fiscal quarters for which financial statements are available, to (y) the Company's consolidated fixed charges for such period would be greater than 1.5:1.0. The indenture contains other customary terms and covenants, including customary events of default. The Convertible Notes are the Company's general senior unsecured obligations and rank equally with all of the Company's existing and future senior indebtedness. The Convertible Notes are effectively subordinated to all of the Company's secured indebtedness, including 42
--------------------------------------------------------------------------------
Table of Contents
borrowings under the Company's credit agreement, as amended, to the extent of the value of the collateral securing such indebtedness, and are structurally subordinated to all existing and future indebtedness and other liabilities of the Company's subsidiaries. The purchase agreement withWarburg Pincus contained certain customary representations, warranties and covenants with respect to each of the Company andWarburg Pincus , including preemptive rights allowingWarburg Pincus to maintain its proportionate equity interest in the Company on an as-converted basis, subject to certain exceptions. The purchase agreement provides thatWarburg Pincus is restricted from transferring the Convertible Notes or shares of common stock acquired in the private placement or underlying the Convertible Notes untilJuly 1, 2021 , the twelve-month anniversary of the closing date, subject to certain exceptions, including transfers pursuant to pledge arrangements entered into byWarburg Pincus in connection with certain financing arrangements. Pursuant to the terms of the purchase agreement, for so long asWarburg Pincus , together with its affiliates, continue to meet certain ownership thresholds,Warburg Pincus will be entitled to nominate an individual to the board of directors of the Company.Warburg Pincus is also subject to customary standstill restrictions pursuant to the purchase agreement until 90 days after it no longer has a designee on the Company's board of directors and no longer has a right to such a designee. Pursuant to the purchase agreement, the Company agreed to reimburseWarburg Pincus for up to$1.0 million of its reasonable and documented transaction expenses. In connection with the private placement, the Company also entered into a registration rights agreement withWarburg Pincus . InAugust 2020 , the Company filed a resale registration statement with respect to the Convertible Notes and the shares of common stock issued in the private placement and issuable pursuant to conversions of the Convertible Notes. Sale of Subsidiary OnSeptember 30, 2020 , the Company sold its wholly-owned subsidiaryUNIK S.A. , a multi-channel provider of employee benefits and corporate payment solutions to over 1,500 clients inBrazil . Under the conditions of the sale agreement, the Company was required to make a payment to the buyer. The Company wrote-off the associated assets and liabilities of this entity as of the date of sale and recorded a pre-tax loss on sale of subsidiary of$46.4 million , which has been reflected in the unaudited condensed consolidated statement of operations for the three and nine months endedSeptember 30, 2020 . Based on our preliminary analysis, the Company does not expect that the pre-tax loss on sale of subsidiary is likely to be deductible for tax purposes. COVID-19 Pandemic Response and Impact During the first quarter of 2020, we began taking a number of precautionary steps to safeguard our business and employees from the effects of COVID-19 including restricting business travel, temporarily closing offices and canceling participation in various industry events. These precautionary steps have largely remained in force through the third quarter of 2020. The spread of COVID-19, and conditions arising in connection with it, including restrictions on businesses and individuals and wider changes in business and customer behavior, have had a negative impact on our business. The following describes these impacts by reportable segment: Fleet Solutions - Lower average domestic fuel prices and volumes have negatively impacted the Fleet Solutions segment compared to the prior year, primarily resulting from a decrease in demand in connection with the COVID-19 pandemic. While overall segment volumes have increased from theirApril 2020 lows throughSeptember 30, 2020 , we began to see these improvements level off in the third quarter of 2020. Although the full extent of the COVID-19 pandemic and its future impact on the Fleet Solutions segment operations is uncertain, we expect stabilization to continue through at least the remainder of the year. Travel and Corporate Solutions - The Travel and Corporate Solutions segment has been the most impacted by the COVID-19 pandemic relative to the Company's other segments, as the pandemic has resulted in a significant decline in worldwide travel and tourism. These disruptions are expected to have a continuing impact on the Company's Travel and Corporate Solutions segment operating results for at least the remainder of the year, although the full extent of the COVID-19 pandemic and its future impact on the Travel and Corporate Solutions segment's operations is uncertain. Health andEmployee Benefit Solutions - While purchase volume for ourU.S. Health business was challenged by the pandemic during the second quarter of 2020 as customers deferred non-essential medical treatments, it trended upwards throughout the third quarter of 2020. However, the continued deferment of non-essential medical treatments kept health purchase volumes flat compared to the prior year quarter. Although the full extent of the COVID-19 pandemic and its future impact on the Health andEmployee Benefit Solutions segment operations is uncertain, we expect stabilization to continue through at least the remainder of the year.
We are closely tracking and assessing the rapidly evolving effect of the pandemic and are actively managing our responses in collaboration with our employees, customers and suppliers. In an effort to rescale the business and safeguard
43--------------------------------------------------------------------------------
Table of Contents
shareholder value in this unprecedented operating environment, we took certain measures to both permanently reduce headcount and furlough employees across our worldwide offices where necessary. In addition to other cost-cutting and containment efforts, the executive leadership team and the board of directors voluntarily agreed to forgo temporarily a portion of their salaries and their retainers, respectively, in order to reduce business costs during this period. Adoption of a New Accounting Standard We adopted Topic 326 onJanuary 1, 2020 , utilizing the modified-retrospective approach. Under the modified-retrospective approach, prior period comparable financial information is not adjusted. See Part I - Item 1 - Note 1, Basis of Presentation and Note 2, Recent Accounting Pronouncements, in this report for further discussion of the impact from the adoption of this new accounting standard. We use a loss-rate methodology to calculate our general allowance for accounts receivable. This methodology considers historical loss experience to calculate actual loss-rates and analyzes trends in the calculated loss-rates against trends in economic indicators. Analyzing trends in loss-rates against trends in economic indicators allows us to identify correlations between economic environments and loss experience. Strong correlations identified from that analysis are factored into the current and expected conditions of the overall credit loss reserve methodology. The expense we recognized in the quarter is the amount necessary to bring the reserve to its required level based on this methodology. When individual accounts receivable exhibit elevated credit risk characteristics as a result of bankruptcies, disputes, conversations with customers, or other significant credit loss events, they are assessed individual credit loss estimates. Assumptions regarding expected credit losses are reviewed each reporting period and may be impacted by actual performance of accounts receivable and changes in any of the factors discussed above. Key Metrics Below are key metrics from the third quarter of 2020: Increase (Decrease) Q3 2020 Q3 2019 Amount Percent Fleet Solutions Fuel transactions processed (in millions) 149.6 162.2 (12.6) (7.8) % Payment processing transactions (in millions) 120.9 135.2 (14.3) (10.6) % Average vehicles serviced (in millions) 15.3 14.3 1.0 7.0 % Average US fuel price (US$ / gallon)$ 2.23 $ 2.80 $ (0.57) (20.4) %
Travel and Corporate Solutions
Payment solutions purchase volume (in millions)
(59.3) %
Health and
Average number ofU.S. SaaS accounts (in millions) 14.6 13.0 1.6 12.3 % Fleet Solutions •Fuel transactions processed decreased 8 percent from the third quarter of 2019 to 149.6 million for the third quarter of 2020. •Payment processing transactions, which represents the total number of purchases made by fleets that have a payment processing relationship with WEX, are down approximately 11 percent as compared to the same period last year. •Average vehicles serviced increased 7 percent from the third quarter of 2019 to approximately 15.3 million for the third quarter of 2020 primarily related to growth in our North American customer base. •The averageU.S. fuel price per gallon during the third quarter of 2020 was$2.23 , a 20 percent decrease from the same period last year. Travel and Corporate Solutions •Payment 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$4.7 billion for the third quarter of 2020, representing a decrease of 59 percent from the same period last year, driven primarily by the decline in worldwide 44
--------------------------------------------------------------------------------
Table of Contents
travel and tourism as a result of the COVID-19 pandemic. This decrease was partly offset by improved non-travel volumes. Health andEmployee Benefit Solutions •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 1.6 million for the third quarter of 2020, a 12 percent increase from the same period in the prior year. Results of Operations The Company does not allocate foreign currency gains and losses, financing interest expense, unrealized and realized gains and losses on financial instruments, income taxes and adjustments attributable to non-controlling interests to our operating segments as management believes these items are unpredictable and can obscure underlying trends. 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. •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 and information technology assets, and acquired intangible assets other than those included in cost of services. •Loss on sale of subsidiary - The loss on sale of subsidiary relates to the divestiture of the Company's former Brazilian subsidiary as of the date of sale,September 30, 2020 , and the associated write-off of its assets and liabilities. 45
--------------------------------------------------------------------------------
Table of Contents
Fleet Solutions
Revenues
The following table reflects comparative revenue and key operating statistics
within Fleet Solutions:
Three Months Ended September 30 , Increase (Decrease) Nine Months Ended September 30 , Increase (Decrease)
(In thousands, except per gallon
data) 2020 2019 Amount Percent 2020 2019 Amount Percent
Revenues(a)
Payment processing revenue $ 102,418 $ 125,288 $ (22,870) (18) % $ 305,888 $ 353,413 $ (47,525) (13) %
Account servicing revenue 39,350 42,037 (2,687) (6) % 115,252 122,782 (7,530) (6) %
Finance fee revenue 46,129 65,818 (19,689) (30) % 143,934 174,067 (30,133) (17) %
Other revenue 40,807 44,383 (3,576) (8) % 117,857 127,360 (9,503) (7) %
Total revenues $ 228,704 $ 277,526 $ (48,822) (18) % $ 682,931 $ 777,622 $ (94,691) (12) %
Key operating statistics
Payment processing revenue:
Payment processing transactions(1) 120,900 135,236 (14,336) (11) % 345,577 378,626 (33,049) (9) %
Payment processing fuel spend(2) $ 7,609,098 $ 9,737,591 $ (2,128,493) (22) % $ 22,157,005 $ 27,955,406 $ (5,798,401) (21) %
Average price per gallon of fuel -
Domestic - ($USD/gal) $ 2.23 $ 2.80 $ (0.57) (20) % $ 2.29 $ 2.80 $ (0.51) (18) %
Net payment processing rate(3) 1.35 % 1.29 % 0.06 % 5 % 1.38 % 1.26 % 0.12 % 10 %
(a) The impact of foreign currency exchange rate fluctuations on Fleet Solutions
increased revenue by $1.1 million in the third quarter of 2020 and decreased
revenue by $1.7 million in the first nine months of 2020 compared to the same
periods in the prior year.
(1) Payment processing transactions represents the total number of purchases
made by fleets that have a payment processing relationship with WEX.
(2) Payment processing fuel spend represents the total dollar value of the fuel
purchased by fleets that have a payment processing relationship with WEX.
(3) 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.
Fleet Solutions revenue decreased $48.8 million for the third quarter of 2020
and $94.7 million for the first nine months of 2020 as compared to the same
periods in the prior year. As discussed in the preceding "Summary" section, the
business has been adversely impacted by lower average domestic fuel prices
during the three and nine months ended September 30, 2020 as compared to the
prior year, and, to a lesser extent, by lower volumes. These unfavorable trends
have affected both payment processing and finance fee revenue and are expected
to impact the remainder of the year.
Finance fee revenue is comprised of the following components:
Three Months Ended September Increase (Decrease) Increase (Decrease)
30, Nine Months Ended September 30,
(In thousands) 2020 2019 Amount Percent 2020 2019 Amount Percent
Finance income $ 36,232 $ 56,690 $ (20,458) (36) % $ 118,043 $ 147,325 $ (29,282) (20) %
Factoring fee revenue 9,897 9,128 769 8 % 25,891 26,742 (851) (3) %
Finance fee revenue $ 46,129 $ 65,818 $ (19,689) (30) % $ 143,934 $ 174,067 $ (30,133) (17) %
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 are
typically conducted at least annually but may occur more often depending on
macro-economic factors.
46--------------------------------------------------------------------------------
Table of Contents
Finance income decreased$20.5 million for the third quarter of 2020 and decreased$29.3 million for the first nine months of 2020 as compared to the same periods in the prior year. The income reduction for the three and nine months endedSeptember 30, 2020 is due primarily to a reduction of outstanding balances as a result of declining fuel prices and reduced volumes due to COVID-19, as well as improved customer payment patterns. This decrease was partly offset by a$10.0 million benefit for the first nine months of 2020 arising from rate mix differences between the periods. During both the three and nine months endedSeptember 30, 2020 andSeptember 30, 2019 , monthly late fee rates and minimum finance charges ranged up to 9.99 percent and$75 , respectively. The weighted average late fee rate, net of related charge-offs, was 5.9 percent and 5.7 percent for the three and nine months endedSeptember 30, 2020 , respectively, and 5.5 percent and 5.2 percent for the three and nine months endedSeptember 30, 2019 , respectively. 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 nine months endedSeptember 30, 2020 and 2019. Going forward, we may see an increase in concessions granted to customers as a result of COVID-19. 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$0.8 million for the third quarter of 2020 and decreased$0.9 million for the first nine months of 2020, as compared with the same periods in the prior year. The factoring fee revenue for the first nine months of 2020 decreased as a result of a decline in receivable purchases, which was partly offset by increases in receivable purchases during the third quarter of 2020. Operating Expenses The following table compares line items within operating income for Fleet Solutions: Three Months Ended September 30, Increase (Decrease) Nine Months Ended September 30, Increase (Decrease) (In thousands) 2020 2019 Amount Percent 2020 2019 Amount Percent Cost of services Processing costs$ 49,924 $ 49,193 $ 731 1 %$ 146,585 $ 151,883 $ (5,298) (3) % Service fees$ 1,755 $ 2,093 $ (338) (16) %$ 5,318 $ 5,517 $ (199) (4) % Provision for credit losses$ 8,529 $ 13,458 $ (4,929) (37) %$ 47,421 $ 41,860 $ 5,561 13 % Operating interest$ 4,122 $ 6,240 $ (2,118) (34) %$ 15,402 $ 16,254 $ (852) (5) % Depreciation and amortization$ 12,315 $ 11,406 $ 909 8 %$ 35,973 $ 32,053 $ 3,920 12 % Other operating expenses General and administrative$ 23,272 $ 21,534 $ 1,738 8 %$ 67,130 $ 58,605 $ 8,525 15 % Sales and marketing$ 34,906 $ 48,815 $ (13,909) (28) %$ 107,730 $ 141,746 $ (34,016) (24) % Depreciation and amortization$ 22,531 $ 23,725 $ (1,194) (5) %$ 67,412 $ 63,770 $ 3,642 6 % Operating income$ 71,350 $ 101,062 $ (29,712) (29) %$ 189,960 $ 265,934 $ (75,974) (29) % Cost of services Processing costs remained relatively consistent for the third quarter of 2020 and decreased$5.3 million for the first nine months of 2020, as compared with the same periods in the prior year. The decrease during the nine months endedSeptember 30, 2020 was due primarily to a reduction in transactions relative to the prior year and charges incurred during the three months endedMarch 31, 2019 to on-board significant customer acquisitions. While payment processing transactions were also down in the three months endedSeptember 30, 2020 , as compared to the same period in the prior year, this decrease was offset with higher professional service fees and compensation costs. Service fees for the three and nine months endedSeptember 30, 2020 were generally consistent with the same periods in the prior year. Provision for credit losses decreased by$4.9 million for the third quarter of 2020 and increased$5.6 million for the first nine months of 2020 as compared to the same periods in the prior year. The adoption of the new credit loss accounting standard, coupled with an increase in expected credit losses as a result of COVID-19, accounts for the majority of the increase during the nine months endedSeptember 30, 2020 . The third quarter of 2020 benefited from significantly lower credit losses resulting from a change in customer payment behavior and collection efforts. The provision reflects the Company's best 47
--------------------------------------------------------------------------------
Table of Contents
estimate for losses that it expects to incur based on the current level of accounts receivable and the anticipated payment difficulty for some fleet customers due to decreased transportation activity as a result of the COVID-19 pandemic. We generally measure our credit loss performance by calculating fuel-related credit losses as a percentage of total fuel expenditures on payment processing transactions. This metric for credit losses was 10.8 and 20.1 basis points of fuel expenditures for the third quarter and first nine months of 2020, respectively, as compared to 12.6 and 14.0 basis points of fuel expenditures for the same periods in the prior year, respectively. Operating interest decreased$2.1 million for the third quarter of 2020 and$0.9 million for the first nine months of 2020 as compared to the same periods in the prior year. The decrease during the third quarter and first nine months of 2020 was due to lower interest rates and decrease in deposits. Depreciation and amortization increased$0.9 million for the third quarter of 2020 and$3.9 million for the first nine months of 2020 as compared to the same periods in the prior year, due primarily to the amortization of merchant networks obtained in the Go Fuel Card acquisition. Other operating expenses General and administrative expenses increased$1.7 million for the third quarter of 2020 and$8.5 million for the first nine months of 2020 as compared to the same periods in the prior year, due primarily to compensation and professional services cost increases in connection with theJuly 2019 acquisition of Go Fuel Card. Sales and marketing expenses decreased$13.9 million for the third quarter of 2020 and$34.0 million for the first nine months of 2020 as compared to the same periods in the prior year, due primarily to a decline in our discretionary spending as a result of COVID-19 as well as lower relative commission payments to partners. Depreciation and amortization decreased$1.2 million for the third quarter of 2020 and increased$3.6 million for the first nine months of 2020 as compared to the same periods in the prior year. The increase for the nine months of 2020 was due primarily to the amortization of theChevron customer portfolio intangible asset and customer relationships obtained in the Go Fuel Card acquisition. The decrease for the third quarter of 2020 was due primarily to 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 EndedSeptember 30 , Increase (Decrease) Nine Months EndedSeptember 30 , Increase (Decrease) (In thousands) 2020 2019 Amount Percent 2020 2019 Amount Percent Revenues(a) Payment processing revenue $ 53,239$ 85,128 $ (31,889) (37) % $ 166,768$ 222,399 (55,631) (25) % Account servicing revenue 9,964 10,717 (753) (7) % 31,210 32,019 (809) (3) % Finance fee revenue 145 645 (500) (78) % 900 1,498 (598) (40) % Other revenue 948 2,638 (1,690) (64) % 4,272 16,210 (11,938) (74) % Total revenues $ 64,296$ 99,128 $ (34,832) (35) % $ 203,150$ 272,126 (68,976) (25) % Key operating statistics Payment processing revenue: Payment solutions purchase volume(1)$ 4,699,737 $ 11,543,605 $ (6,843,868) (59) %$ 15,908,913 $ 29,997,200 $ (14,088,287) (47) % (a) Foreign currency exchange rate fluctuations had an insignificant impact on Travel and Corporate Solutions revenues during both the three and nine months endedSeptember 30, 2020 . (1) Payment solutions purchase volume represents the total dollar value of all WEX-issued transactions that use WEX corporate card products and virtual card products. As discussed in the preceding "Summary" section, our current travel-related transaction volumes have been impacted by the decline in worldwide travel and tourism as a result of COVID-19. These unfavorable trends, which began during lateFebruary 2020 , have continued and are expected to continue to have an impact for a significant period of time. Travel and Corporate Solutions revenue decreased$34.8 million for the third quarter of 2020 and$69.0 million for the first nine months of 2020 as compared to the same periods in the prior year, primarily due to the impact of the pandemic on 48
--------------------------------------------------------------------------------
Table of Contents
travel volumes. This unfavorable factor was partly offset by benefits realized as part of a contract amendment executed during the second quarter of 2020 and year-to-date growth in the corporate payments portion of the business due to the ongoing migration to virtual payments and increasing usage of our accounts payable products. 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. During the second quarter of 2020, WEX Latin America placed certain delinquent customers, with accounts receivable balances of$11.0 million , on payment plans ranging up to three years in length. As part of the sale of WEX Latin America, the Company retained one of these delinquent, fully reserved for customer balances. No late fee income has been recognized associated with these payment plans during the three and nine months endedSeptember 30, 2020 . There were no material concessions granted to customers during the three and nine months endedSeptember 30, 2019 . Going forward, we may see an increase in concessions granted to customers as a result of the continuing impact that COVID-19 has on their businesses. Operating Expenses The following table compares line items within operating income for Travel and Corporate Solutions: Three Months Ended September Nine Months Ended September 30, Increase (Decrease) 30, Increase (Decrease) (In thousands) 2020 2019 Amount Percent 2020 2019 Amount Percent Cost of services Processing costs$ 12,904 $ 13,879 $ (975) (7) %$ 43,356 $ 44,461 $ (1,105) (2) % Service fees$ 3,663 $ 7,367 $ (3,704) (50) %$ 12,095 $ 20,738 $ (8,643) (42) % Provision for credit losses$ 3,722 $ 1,510 $ 2,212 146 %$ 19,227 $ 5,588 $ 13,639 244 % Operating interest$ 1,117 $ 5,042 $ (3,925) (78) %$ 4,630 $ 13,469 $ (8,839) (66) %
Depreciation and amortization
327 7 %$ 13,704 $ 12,346 $ 1,358 11 % Other operating expenses General and administrative$ 6,948 $ 7,832 $ (884) (11) %$ 21,290 $ 29,129 $ (7,839) (27) % Sales and marketing$ 20,971 $ 16,428 $ 4,543 28 %$ 54,027 $ 44,016 $ 10,011 23 % Depreciation and amortization$ 5,685 $ 4,272 $ 1,413 33 %$ 18,088 $ 13,779 $ 4,309 31 % Operating income$ 4,349 $ 38,188 $ (33,839) (89) %$ 16,733 $ 88,600 $ (71,867) (81) % Cost of services Processing costs for the three and nine months endedSeptember 30, 2020 remained generally consistent with the same periods of the prior year due to the business' fixed cost structure including information technology related expenses. Service fees for the three and nine months endedSeptember 30, 2020 have decreased$3.7 million and$8.6 million , respectively, from the same periods in the prior year due primarily to lower processing volumes and the conversion to an internal transaction processing platform. Provision for credit losses increased$2.2 million for the third quarter of 2020 and$13.6 million for the first nine months of 2020 from the same periods in the prior year resulting primarily from the adoption of Topic 326, coupled with an increase in expected credit losses for the first nine months of 2020 as a result of COVID-19. The impact reflects the Company's best estimate for losses that it expects to incur based on the current level of accounts receivable and the anticipated payment difficulty for some online travel agency customers due to reduced travel as a result of the COVID-19 pandemic. The Company will continue to actively monitor the impact of the COVID-19 pandemic on expected credit losses. The third quarter of 2020 was primarily impacted by a specific reserve taken on a customer inBrazil prior to the sale of WEX Latin America. Operating interest expense decreased$3.9 million for the third quarter of 2020 and$8.8 million for the first nine months of 2020 as compared to the same periods in the prior year, as a result of lower interest rates and lower overall deposit balances. Depreciation and amortization expenses for the three and nine months endedSeptember 30, 2020 were generally consistent with the same periods in the prior year. 49
--------------------------------------------------------------------------------
Table of Contents
Other operating expenses General and administrative expenses for the third quarter of 2020 remained generally consistent and decreased$7.8 million for the first nine months of 2020 as compared to the same periods in the prior year. The decrease during the first nine months of 2020 was primarily due to the expense incurred to accelerate vesting of option awards as part of theNoventis acquisition during the nine months endedSeptember 30, 2019 . Sales and marketing expenses increased for the third quarter of 2020 by$4.5 million and by$10.0 million for the first nine months of 2020 as compared to the same periods in the prior year. These increases were primarily due to higher relative commission payments to partners in the corporate payments business, partly offset by a decrease in our discretionary spending as a result of COVID-19. Depreciation and amortization expenses increased$1.4 million for the third quarter of 2020 and$4.3 million for the first nine months of 2020 as compared to the same periods in the prior year, due primarily to higher amortization on customer relationships associated with theNoventis acquisition. Health andEmployee Benefit Solutions Revenues The following table reflects comparative revenue and key operating statistics within Health andEmployee Benefit Solutions : Three Months Ended September 30, Increase (Decrease) Nine Months Ended September 30, Increase (Decrease) (In thousands) 2020 2019 Amount Percent 2020 2019 Amount Percent Revenues(1) Payment processing revenue $ 15,420$ 14,340 $ 1,080 8 % $ 49,919$ 50,568 $ (649) (1) % Account servicing revenue 63,103 56,451 6,652 12 % 189,274 148,382 40,892 28 % Finance fee revenue 33 (81) 114 (141) % 111 102 9 9 % Other revenue 10,560 12,599 (2,039) (16) % 35,494 34,846 648 2 % Total revenues $ 89,116$ 83,309 $ 5,807 7 % $ 274,798$ 233,898 $ 40,900 17 % Key operating statistics Payment processing revenue: Purchase volume(2)$ 1,120,786 $ 1,126,156 $ (5,370) - %$ 3,730,417 $ 4,158,336 $ (427,919) (10) % Account servicing revenue: Average number of SaaS accounts(3) 14,599 13,022 1,577 12 % 14,515 12,771 1,744 14 % (1) Foreign currency exchange rate fluctuations had an insignificant impact on Health and Employee Benefits Solutions revenue during the three endedSeptember 30, 2020 and decreased segment revenue by$1.6 million during the nine months endedSeptember 30, 2020 . (2) Purchase volume represents the totalU.S. dollar value of all transactions where interchange is earned by WEX. (3) Average number of SaaS accounts represents the number of activeConsumer-Directed Health , COBRA, and billing accounts on our SaaS platforms in theU.S. Payment processing revenue increased$1.1 million for the third quarter of 2020 and decreased$0.6 million for the first nine months of 2020 as compared to the same periods in the prior year. The decrease during the nine months endedSeptember 30, 2020 , was primarily due to a decline in theU.S. Health business customer spend on elective healthcare procedures in connection with COVID-19 restrictions, which was partly offset by the acquisition of Discovery Benefits. As expected, during the third quarter of 2020, we saw volumes improve to a level consistent with the same period of the prior year. Account servicing revenue increased$6.7 million for the third quarter of 2020 and$40.9 million for the first nine months of 2020 as compared to the same periods in the prior year. The third quarter growth is primarily due to a higher number of participants using our SaaS healthcare technology platform. This factor also contributed to the increase during the nine months endedSeptember 30, 2020 , combined with incremental revenue due to the acquisition of Discovery Benefits. Finance fee revenue was not material to Health andEmployee Benefit Solutions' operations for the three and nine months endedSeptember 30, 2020 and 2019. 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. 50
--------------------------------------------------------------------------------
Table of Contents
There were no material concessions granted to customers experiencing financial difficulties during the three and nine months endedSeptember 30, 2020 and 2019. Other revenue decreased$2.0 million for the third quarter of 2020 and increased$0.6 million for the first nine months of 2020 as compared to the same periods in the prior year. The decrease for the third quarter of 2020 was due to lower revenues associated with the Company's former WEX Latin America business, partly offset by an increase in ourU.S. Health business. The increase in the first nine months of 2020 was primarily attributable to professional services revenue and growth in ancillary services to cardholders associated with the increased number of SaaS platform participants of ourU.S. Health Business. Operating Expenses The following table compares line items within operating income for Health andEmployee Benefit Solutions : Three Months Ended September 30, Increase (Decrease) Nine Months Ended September 30, Increase (Decrease) (In thousands) 2020 2019 Amount Percent 2020 2019 Amount Percent Cost of services Processing costs$ 39,340 $ 35,224 $ 4,116 12 %$ 117,135 $ 92,552 $ 24,583 27 % Service fees$ 5,463 $ 5,445 $ 18 - %$ 16,922 $ 17,093 $ (171) (1) % Provision for credit losses$ 32 $ (121) $ 153 (126) %$ 203 $ 22 $ 181 823 % Operating interest$ 23 $ 226 $ (203) (90) %$ 119 $ 2,042 $ (1,923) (94) % Depreciation and amortization$ 8,950 $ 10,107 $ (1,157) (11) %$ 26,438 $ 23,807 $ 2,631 11 % Other operating expenses General and administrative$ 9,041 $ 6,855 $ 2,186 32 %$ 26,322 $ 23,601 $ 2,721 12 % Sales and marketing$ 8,715 $ 8,446 $ 269 3 %$ 26,361 $ 24,877 $ 1,484 6 % Depreciation and amortization$ 10,536 $ 8,252 $ 2,284 28 %$ 31,634 $ 26,080 $ 5,554 21 % Operating income$ 7,016 $ 8,875 $ (1,859) (21) %$ 29,664 $ 23,824 $ 5,840 25 % Cost of services Processing costs increased$4.1 million for the third quarter of 2020 and$24.6 million for the first nine months of 2020 as compared to the same periods in the prior year. The increase during the third quarter of 2020 was primarily driven by higher personnel-related costs to support the account servicing revenue growth. The acquisition of Discovery Benefits contributed to the majority of the increase in the first nine months of 2020. Service fees for the three and nine months endedSeptember 30, 2020 were generally consistent with the same periods in the prior year. Provision for credit losses was not material to Health andEmployee Benefit Solutions' operations for both the three and nine months endedSeptember 30, 2020 and 2019. The adoption of the new accounting standard for credit losses, which requires the Company to utilize an expected loss methodology, did not significantly impact the Health andEmployee Benefit Solutions segment. Operating interest was generally consistent for the third quarter of 2020 as compared to the same period in the prior year and decreased$1.9 million for the first nine months of 2020 as compared to the same period in the prior year. The decrease was due primarily to a decrease in operating debt balances at WEX Latin America. Depreciation and amortization expense decreased$1.2 million for the third quarter of 2020 and increased$2.6 million for the first nine months of 2020 as compared to the same periods in the prior year. The increase for the first nine months of 2020 resulted primarily from higher depreciation expense on internally developed software and incremental amortization of acquired intangibles. The decrease for the third quarter of 2020 was due primarily to the impact of the acquired software. Other operating expenses General and administrative expenses increased$2.2 million for the third quarter of 2020 and$2.7 million for the first nine months of 2020 as compared to the same periods in the prior year. The increases for the first three and nine months of 2020 were due primarily to higher relative personnel related costs. In 2019, general and administrative expenses benefited from the forfeiture of equity awards in connection with the departure of an executive officer. 51
--------------------------------------------------------------------------------
Table of Contents
Sales and marketing expenses in the third quarter of 2020 were generally consistent with the same period in the prior year. Sales and marketing expenses increased$1.5 million for the nine months of 2020 as compared to the same period in the prior year, due primarily to the acquisition of Discovery Benefits, partly offset by the COVID-related cancellation of our annual healthcare payments technology conference and COVID-related travel and entertainment decreases. Depreciation and amortization increased$2.3 million for the third quarter of 2020 and$5.6 million for the first nine months of 2020 as compared to the same periods in the prior year. The increases were primarily attributable to the amortization of customer relationship intangible assets obtained in the acquisition of Discovery Benefits. Unallocated corporate expenses Unallocated corporate expenses represent the portion of expenses relating to general corporate functions including acquisition and divestiture expenses, certain finance, legal, information technology, human resources, administrative and executive expenses and other expenses not directly attributable to a reportable segment. The following table compares line items within operating income for unallocated corporate expenses: Three Months Ended September Nine Months Ended September 30, Increase (Decrease) 30, Increase (Decrease) (In thousands) 2020 2019 Amount Percent 2020 2019 Amount Percent Other operating expenses General and administrative$ 33,870 $ 29,202 $ 4,668 16 %$ 82,690 $ 94,740 $ (12,050) (13) % Depreciation and amortization$ 562 $ 612 $ (50) (8) %$ 1,773 $ 1,635 $ 138 8 % Loss on sale of subsidiary$ 46,362 $ -$ 46,362 NM$ 46,362 $ -$ 46,362 NM NM - not meaningful General and administrative expenses increased$4.7 million for the third quarter of 2020 and decreased$12.1 million for the first nine months of 2020 as compared to the same periods in the prior year. The increase in the third quarter of 2020 was primarily due to litigation costs associated with the eNett andOptal transaction offset by the Company's cost containment measures. The decrease in the first nine months of 2020 was primarily due to a decline in debt restructuring costs incurred in conjunction with our 2019 credit agreement amendments and costs incurred to remediate material weaknesses from 2018 during the prior year, partly offset by litigation costs associated with the eNett andOptal transaction. Loss on the sale of subsidiary relates to the write-off of the associated assets and liabilities of the Company's former WEX Latin America subsidiary as of theSeptember 30, 2020 sale date. Other unallocated corporate expenses were not material to the Company's operations for both the three and nine months endedSeptember 30, 2020 and 2019. Non-operating income and expense The following table reflects comparative results for certain amounts excluded from operating income: Three Months Ended September 30, Increase (Decrease) Nine Months Ended September 30, Increase (Decrease) (In thousands) 2020 2019 Amount Percent 2020 2019 Amount Percent Financing interest expense$ (40,950) $ (34,549) $ (6,401) 19 %$ (101,813) $ (101,299) $ (514) 1 % Net foreign currency loss$ (784) $ (16,528) $ 15,744 (95) %$ (31,973) $ (13,748) $ (18,225) 133 % Net unrealized gain (loss) on financial instruments$ 3,774 $ (5,650) $ 9,424 (167) %$ (32,115) $ (39,078) $ 6,963 (18) %
Income tax provision (benefit)
$ 2,465 13 % $ (3,852)$ 37,352 $ (41,204) (110) % Net income (loss) from non-controlling interests$ 1,244 $ (631) $ 1,875 (297) % $ 3,282$ (233) $ 3,515 NM Change in value of redeemable non-controlling interest$ (6,879) $ (28,459) $ 21,580 (76) % $ 50,437$ (46,179) $ 96,616 (209) % NM - not meaningful Financing interest expense increased$6.4 million for the third quarter of 2020 and$0.5 million for the first nine months of 2020 as compared to the same periods in the prior year, due primarily to interest incurred on our convertible notes issued duringJuly 2020 , partly offset by lower average interest rates. 52
--------------------------------------------------------------------------------
Table of Contents
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 losses of$0.8 million in the third quarter of 2020 and$32.0 million in the first nine months of 2020, as a result of 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, including the Australian dollar and British pound. The majority of these losses were recorded during the three months endedMarch 31, 2020 , as a result of the weakening of foreign currencies relative to theU.S. dollar arising from the COVID-19 pandemic. These currency fluctuations negatively affected and may continue to negatively affect our results of operations. During the three and nine months endedSeptember 30, 2019 , we incurred net foreign currency losses due to similar factors, combined with theU.S. dollar strengthening relative to numerous major foreign currencies, including the Euro, British pound and Australian dollar. The Company incurred an unrealized gain on financial instruments of$3.8 million in the third quarter of 2020 due to a reduction in the fair value of interest rate swap liabilities primarily as a result of a decrease in remaining future settlements. The Company incurred an unrealized loss of$32.1 million in the first nine months of 2020, due primarily to a decrease in the LIBOR forward yield curve. The Company's effective tax rate was (59.8) percent and 6.4 percent for the three and nine months endedSeptember 30, 2020 , respectively, as compared to 31.1 percent and 29.2 percent for the three and nine months endedSeptember 30, 2019 , 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 significant decrease in the Company's tax rate during the three and nine months endedSeptember 30, 2020 was primarily due to the jurisdictional earnings mix and decrease in estimated income before income taxes for the current year with relatively significant non-deductible expenses including the loss on sale of the Company's WEX Latin America subsidiary. The Company's effective tax rate for the nine months endedSeptember 30, 2020 included discrete tax benefits of$9.8 million and$3.6 million reflecting an additional tax basis related to the acquisition of Discovery Benefits andNoventis respectively, partially offset by a valuation allowance of$5.3 million recognized against the beginning of the year deferred tax assets for WEX Latin America. Net income (loss) from non-controlling interests relates to our non-controlling interests in WEX Europe Services and theU.S. Health business. Such amounts were not material to Company operations for the three and nine months endedSeptember 30, 2020 and 2019. During the nine months endedSeptember 30, 2020 , the redeemable non-controlling interest in theU.S. Health business decreased by$96.6 million as compared to the same period in the prior year. This decrease was due substantially to a second quarter change in the redemption value resulting from a decline in revenue multiples of peer companies resulting primarily from the COVID-19 pandemic. Non-GAAP Financial Measures That Supplement GAAP MeasuresThe Company's non-GAAP adjusted net income excludes unrealized gains and losses on financial instruments, net foreign currency remeasurement gains and losses, acquisition-related intangible amortization, other acquisition and divestiture related items, loss on sale of subsidiary, 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. Although adjusted net income is not calculated in accordance with GAAP, this non-GAAP measure is integral to the Company's reporting and planning processes and the CODM of the Company uses segment adjusted operating income to allocate resources among our operating segments. The Company considers this measure integral because it excludes the above-specified items that the Company's management excludes in evaluating the Company's performance. 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 53
--------------------------------------------------------------------------------
Table of Contents
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 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 of divestitures facilitates the comparison of our financial results to the Company's historical operating results and to other companies in our industry. •The loss on sale of subsidiary relates to the divestiture of the Company's former Brazilian subsidiary as of the date of sale,September 30, 2020 , and the associated write-off of its assets and liabilities. As previously discussed, gains and losses from divestitures are considered by the Company to be unpredictable and dependent on factors that may be outside of our control. The exclusion of these gains and losses are consistent with the Company's practice of excluding other non-recurring items associated with strategic transactions •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. •We exclude other costs when evaluating our continuing business performance as such items are not consistently occurring and do not reflect expected future operating expense, nor do they provide insight into the fundamentals of current or past operations of our business. This includes costs to further streamline the business, improve the Company's efficiency, create synergies and globalize the Company's operations. For the three and nine months endedSeptember 30, 2020 , other costs include certain costs incurred in association with COVID-19, including the cost of providing additional health, welfare and technological support to our employees as they work remotely. •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. For the same reasons, WEX believes that adjusted net income may also be useful to investors as one means of evaluating the Company's performance. However, because adjusted net income is a non-GAAP measure, it should not be considered as a substitute for, or superior to, net income, operating income or cash flows from operating activities as determined in accordance with GAAP. In addition, adjusted net income as used by WEX may not be comparable to similarly titled measures employed by other companies. 54
--------------------------------------------------------------------------------
Table of Contents
The following table reconciles net (loss) income attributable to shareholders to adjusted net income attributable to shareholders:
Three Months Ended
2020 2019 2020 2019
Net (loss) income attributable to shareholders
5,650 32,115 39,078
Net foreign currency remeasurement loss 784 16,528 31,973 13,748
Acquisition-related intangible amortization 42,831 42,800 127,847 116,502
Other acquisition and divestiture related items 20,328 7,907 36,005 24,704
Loss on sale of subsidiary 46,362 - 46,362 -
Stock-based compensation 18,170 9,522 45,059 34,956
Other costs 1,045 5,413 7,980 12,914
Debt restructuring and debt issuance cost
amortization 5,329 3,251 9,989 18,200
ANI adjustments attributable to non-controlling
interests 6,233 27,149 (52,101) 43,874
Tax related items (614) (19,348) (72,298) (60,585)
Adjusted net income attributable to shareholders
Liquidity and Capital Resources We believe that our cash generating capability, financial condition and operations, together with the sources of cash listed below, will be adequate to fund our cash needs for at least the next 12 months. The table below summarizes our primary short-term sources and uses of cash: Sources of cash Uses of cash(1) •Borrowings on our 2016 Credit Agreement •Payments on our 2016 Credit Agreement •Convertible Notes •Payments on maturities and withdrawals of •Deposits certificates of deposit and brokered money •Borrowed federal funds market deposits •Participation debt •Payments on borrowed federal funds •Accounts receivable factoring and securitization •Working capital needs of the business arrangements •Capital expenditures
(1) Our long-term cash requirements consist primarily of amounts owed on our 2016 Credit Agreement and Notes and various facilities lease agreements. The table below summarizes our cash activities:
Nine Months Ended September 30,
(In thousands) 2020 2019
Cash flows provided by operating activities $ 774,456 $ 205,235
Cash flows used for investing activities $ (74,958) $ (922,312)
Cash flows provided by financing activities $
42,266
Operating Activities We fund a customer's entire receivable as part of fleet and 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 changes in accounts receivable and accounts payable balances, which directly impact our capital resource requirements. Cash provided by operating activities for the nine months endedSeptember 30, 2020 increased$569.2 million as compared to the same period in the prior year, resulting primarily from a decrease in accounts receivable, partly offset by a corresponding decrease in accounts payable. This decrease is primarily related to a decline in customer spend associated with decreased volumes in Travel and Corporate Solutions and a decline in average fuel prices for a portion of 2020. 55
--------------------------------------------------------------------------------
Table of Contents
Investing Activities Cash used for investing activities for the nine months endedSeptember 30, 2020 decreased$847.4 million as compared to the same period in the prior year, primarily as a result of$838.0 million of payments made for the acquisitions ofNoventis and Discovery Benefits during the first quarter of 2019. Financing Activities Cash provided by financing activities for the nine months endedSeptember 30, 2020 totaled$42.3 million , due primarily to the completion of a private placement withWarburg Pincus onJuly 1, 2020 , which netted$389.2 million of proceeds. This increase was partly offset by a decrease in deposits and participation debt. For the nine months endedSeptember 30, 2019 , cash provided by financing activities totaled$837.7 million primarily due to higher overall borrowings in connection with funding acquisitions and raising deposits in order to fund asset growth. 2016 Credit Agreement OnFebruary 10, 2020 , the Company entered into the Eighth Amendment to the 2016 Credit Agreement making certain changes to the previously amended credit agreement, including among other things, effectuating financial covenant amendments and increasing the Company's capacity to incur additional incremental loan facilities up to$1.4 billion in connection with the acquisition of eNett andOptal . The amendments set forth in the Eighth Amendment were superseded and replaced by the amendments set forth in the Ninth Amendment (as defined below). Such amendments would have only become effective concurrently with the closing of the acquisition of eNett andOptal , if it occurs. Refer to Note 4, Acquisitions, for more information regarding the status of this purchase agreement. OnJune 26, 2020 , the Company entered into the Ninth Amendment to the 2016 Credit Agreement, which made certain changes to the previously amended credit agreement, including among other things, (i) superseding and replacing the amendments set forth in the Eighth Amendment, (ii) increasing the Company's capacity to incur additional incremental loan facilities up to$1.4 billion in connection with the acquisition of eNett andOptal , (iii) increasing the maximum consolidated leverage ratio to 5.50 to 1.00 upon effectiveness of the Ninth Amendment throughSeptember 30, 2021 with step-downs to 5.00 to 1.00 and 4.50 to 1.00 in future years and with additional increases occurring upon a consummation of the acquisition of eNett andOptal , (iv) in the event the Company's consolidated leverage ratio is equal to or exceeds 5.50 to 1.00, (a) creating a new top interest rate margin for the tranche A term loan facility and revolving credit facility of 3.00% with respect to Eurocurrency Rate Loans, as defined in the 2016 Credit Agreement, and 2.00% with respect to Base Rate Loans, as defined in the 2016 Credit Agreement, and (b) if the acquisition of eNett andOptal closes, prohibiting the Company from making certain intercompany investments and restricted payments, (v) increasing cash netting for the purpose of calculating leverage ratios, including unlimited cash netting with respect to the calculation of financial covenants and increased cash netting for pricing purposes for a period of time, with a permanent increase to$250 million for all purposes ($400 million if the eNett andOptal transaction closes), (vi) increasing the LIBOR floor on revolving credit facility borrowings from 0 basis points to 75 basis points, (vii) requiring the Company to maintain unrestricted cash and revolver availability of at least$752 million (as may be reduced pursuant to the terms of the Ninth Amendment) (the "Minimum Availability Amount"), and (viii) to the extent the acquisition of eNett andOptal is consummated, requiring the Company to submit a borrowing request to borrow the Minimum Availability Amount, less the amount of any cash used by the Company for the purpose of consummating the acquisition of eNett andOptal . OnJuly 29, 2020 , the Company entered into the Tenth Amendment to the 2016 Credit Agreement, which increased commitments under the Company's secured revolving credit facility from$820 million to$870 million . OnAugust 20, 2020 , the Company entered into the Eleventh Amendment to the 2016 Credit Agreement, which among other things, limits the borrowing conditions for a$752 million portion of the revolving credit facility in connection with the acquisition of eNett andOptal to the absence of a payment or bankruptcy event of default and the accuracy of specified representations and warranties of eNett andOptal in the purchase agreement and specified representations and warranties of the Company set forth in the Third Amended and Restated Commitment Letter untilApril 22, 2021 . As ofSeptember 30, 2020 , we had an outstanding principal amount of$886.3 million on our secured tranche A term loan, an outstanding principal amount of$1.4 billion on our secured tranche B term loan and outstanding letters of credit of$51.6 million drawn against our$870.0 million secured revolving credit facility, with a$250.0 million sublimit for letters of credit and$20.0 million sublimit for swingline loans. The tranche B term loans mature duringMay 2026 while the revolving credit facility and tranche A term loans mature duringJuly 2023 , subject to earlier maturity inAugust 2022 in certain circumstances. Incremental loans of up to the greater of$375.0 million (plus the amount of certain prepayments) and an unlimited amount subject to satisfaction of a consolidated secured leverage ratio test could be made available under the 2016 Credit 56
--------------------------------------------------------------------------------
Table of Contents
Agreement upon the request of the Company subject to specified terms and conditions, including receipt of lender commitments. Proceeds from the 2016 Credit Agreement may be used for working capital purposes, acquisitions, payment of dividends and other restricted payments, refinancing of indebtedness and other general corporate purposes. The Company has agreed, with its lenders, to maintain at least$752 million of capacity on the secured revolving credit facility until the earlier of the resolution of the eNett andOptal acquisition and related litigation orApril 2021 . See Part I - Item 1 - Note 10, Financing and Other Debt, in this report and Part I - Item 1 - Note 16, Financing and Other Debt, in the notes to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 for further information regarding the 2016 Credit Agreement. Under the 2016 Credit Agreement as amended, and prior to the closing of the acquisition of eNett andOptal , if it occurs, we are required to remain in compliance with a consolidated EBITDA to consolidated interest charge coverage ratio, measured quarterly, of no less than 3.00 to 1.00 and a consolidated leverage ratio, measured quarterly in accordance with the provisions of the 2016 Credit Agreement, of no more than 5.50 to 1.00 for fiscal quarters throughSeptember 30, 2021 and decreasing to 5.00 to 1.0 atDecember 31, 2021 throughSeptember 30, 2022 and 4.50 to 1.0 atDecember 31, 2022 and thereafter. If the closing of the acquisition of eNett andOptal occurs, the consolidated interest charge coverage ratio, measured quarterly, would decrease from 3.00 to 1.0 to 2.75 to 1.0 for the period fromDecember 31, 2020 throughMarch 31, 2021 . Thereafter, the consolidated interest charge coverage ratio would revert back to no less than 3.00 to 1.00. The consolidated leverage ratio would increase to no more than 7.00 to 1.0 for the third quarter of 2020, 7.50 to 1.0 for the quarters endingDecember 31, 2020 andMarch 31, 2021 , 7.00 to 1.0 for the quarter endingJune 30, 2021 , 6.50 to 1.0 for the quarter endingSeptember 30, 2021 , 6.00 to 1.0 for the quarters endingDecember 31, 2021 throughSeptember 30, 2022 and 5.00 to 1.0 thereafter. Notwithstanding the forecasted impacts of COVID-19 on the Company's financial results, the Company does not expect to be in violation of any of its financial covenants for a period of at least one year from the date of these financial statements. DepositsWEX 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.WEX Bank accepts its deposits through: (i) certain customers as required collateral for credit that has been extended ("customer deposits") and (ii) contractual arrangements with brokerage firms for both certificate of deposit and money market deposit products. Customer deposits are generally non-interest bearing, certificates of deposit are issued at fixed rates and brokered money market deposits are issued at variable rates based on LIBOR or the Federal Funds rate. Deposits are classified based on their contractual maturities, which are explicitly stated for certificates of deposit. While brokered money market deposits may be withdrawn by the holder at any time, the allowed number of transactions may be limited and notification may be required. Customer deposits are released at the termination of the relationship, net of any customer receivable, or upon reevaluation of the customer's credit in limited instances. OnApril 9, 2020 ,WEX Bank raised an additional$315.0 million of low-cost funding by issuing certificates of deposit with original maturities ranging from 12 to 24 months and interest rates ranging from 1.25 percent to 1.40 percent. This action was taken as a precautionary measure to preserve financial flexibility in light of the uncertainty of economic conditions and volatility in financial markets as a result of the COVID-19 pandemic. The proceeds from these certificates of deposit may be used in the future for working capital, general corporate or other operational purposes. As ofSeptember 30, 2020 andDecember 31, 2019 we had$1.3 billion and$1.5 billion in deposits with original maturities ranging from 1 year to 5 years as ofSeptember 30, 2020 . See Part I - Item 1 - Note 9, Deposits, in this report for further information regarding our deposits. Borrowed Federal FundsWEX Bank borrows from uncommitted federal funds lines to supplement the financing of the Company's accounts receivable. Our federal funds lines of credit were$380.0 million and$355.0 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. There were no outstanding borrowings as ofSeptember 30, 2020 . As ofDecember 31, 2019 , there were outstanding borrowings of$35.0 million . Participation Debt 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. Associated unsecured borrowings generally carry a variable interest rate of 1 month to 3 month LIBOR plus a margin of 225 basis points. 57
--------------------------------------------------------------------------------
Table of Contents
The following table provides the amounts outstanding under the participation debt agreements in place atSeptember 30, 2020 andDecember 31, 2019 . There are no amounts outstanding as ofSeptember 30, 2020 . September 30, 2020 December 31, 2019 Remaining Remaining Amounts Funding Amounts Amounts Funding (In thousands) Available(1) Amounts Outstanding Capacity Available Outstanding Capacity Short-term debt, net $ -$ 50,000 Total(1)$ 60,000 $ -$ 60,000 $ 80,000 $ 50,000 $ 30,000 Average interest rate Not applicable 4.17 % (1) Amounts available includes up to$60 million under an agreement that terminates onDecember 31, 2021 . WEX Europe Services Accounts Receivable Factoring WEX Europe Services has entered into a factoring arrangement with an unrelated third-party financial institution (the "Purchasing Bank") to sell certain of its accounts receivable throughDecember 31, 2020 in order to accelerate the collection of the Company's cash and reduce the internal costs, thereby improving liquidity. Under this arrangement, thePurchasing Bank establishes a credit limit for each customer account. The factored receivables are without recourse to the extent that the customer balances are maintained at or below the established credit limit. For customer receivable balances in excess of thePurchasing Bank's credit limit, the Company maintains the risk of default. The Company obtained a true sale opinion from an independent attorney, which states that the factoring agreement creates a sale of receivables under local law for amounts transferred both below and above the established credit limits. As a result, thePurchasing Bank is deemed the purchaser of these receivables and is entitled to enforce payment of these amounts from the debtor. The Company continues to service these receivables post-transfer with no participating interest. 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. As such, this factoring arrangement can be reduced or eliminated at any time due to market conditions and changes in the credit worthiness of our customers, which would negatively impact our liquidity. WEX Bank Accounts Receivable FactoringWEX Bank has entered into a receivables purchase agreement with an unrelated third-party financial institution to sell certain of our trade receivables under non-recourse transactions throughJanuary 27, 2021 , after which the agreement can be renewed for successive one-year periods assuming WEX 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 uponWEX Bank bankruptcy or receivership under local law. As such, transfers under this arrangement are treated as a sale. Proceeds from the sale are reported net of negotiated discount rates and are accounted for as a reduction in trade receivables because the agreements transfer effective control of the receivables to the buyer. Securitization Facilities The Company is a party to two securitized debt agreements. Under these agreements, our subsidiaries sell trade accounts receivable to bankruptcy-remote subsidiaries consolidated by the Company. Amounts collected on the securitized receivables are restricted to pay the securitized debt and are not available for general corporate purposes. See Part I - Item 1 - Note 10, Financing and Other Debt, for more information regarding these facilities. Regulatory Risk The Company's subsidiary,WEX Bank , is subject to various regulatory capital requirements administered by theFDIC and theUtah Department of Financial Institutions . Under capital adequacy guidelines and the regulatory framework for prompt corrective action,WEX Bank must meet specific capital guidelines that involve quantitative measures ofWEX 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 our business activities and have a material adverse effect on our business, results of operations and financial condition. Qualitative measures established by regulation to ensure capital adequacy requireWEX Bank to maintain minimum amounts and ratios as defined in the regulations. As ofSeptember 30, 2020 ,WEX Bank met all the requirements to be deemed "well-capitalized" pursuant toFDIC regulation and for purposes of the Federal Deposit Insurance Act. See Part I - Item 1 - Note 19, Supplementary Regulatory Capital Disclosure, for further information. 58
--------------------------------------------------------------------------------
Table of Contents
Interest Rate Risk AtSeptember 30, 2020 , we had variable-rate borrowings of$2.3 billion under our 2016 Credit Agreement, which bore a weighted average effective interest rate of 2.3 percent. We periodically review our projected borrowings under our 2016 Credit Agreement and the current interest rate environment to determine if we should use interest rate swaps to reduce exposure to interest rate volatility. As ofDecember 31, 2019 , we maintained seven interest rate swap contracts with fixed interest rates ranging between 1.108 percent and 2.425 percent. OnApril 15, 2020 , the Company amended five of these contracts with a collective notional value of$935.0 million . The amendments (i) merged two of the previously existing swaps into one, (ii) reduced the fixed interest rates, and (iii) extended all maturity dates by one year. Two of the existing swap contracts with a total notional value of$500.0 million were not amended. As ofSeptember 30, 2020 , we maintained six interest rate swap contracts that are intended to fix the future interest payments associated with$1.4 billion of our variable rate borrowings at between 0.743 percent and 2.413 percent. Foreign Currency Exchange Risk Earnings outside ofthe United States are accompanied by certain financial risks, such as changes in foreign currency exchange rates. Changes in foreign currency exchange rates may reduce the reported value of our foreign currency revenues, net of expenses, and cash flows. We cannot predict changes in currency exchange rates, the impact of exchange rate changes, nor the degree to which we will be able to manage the impact of currency exchange rate changes. Undistributed Earnings Undistributed earnings of certain foreign subsidiaries of the Company amounted to an estimated$35.1 million and$77.4 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. The decrease is primarily due to the exclusion of cumulative earnings of WEX Latin America upon its sale onSeptember 30, 2020 .. Upon distribution of these earnings in the form of dividends or otherwise, the Company would be subject to withholding taxes payable, where applicable, to foreign countries, but would have no further federal income tax liability. The Company's primary tax jurisdictions arethe United States ,Australia and theUnited Kingdom . Off-Balance Sheet Arrangements Even though off-balance sheet arrangements are not recorded as liabilities under GAAP, such arrangements may potentially impact our liquidity, capital resources and results of operations. These arrangements serve a variety of business purposes, 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. As ofSeptember 30, 2020 andDecember 31, 2019 , we had posted letters of credit totaling$51.6 million and$51.3 million , respectively, as collateral under the terms of our lease agreement for our corporate offices, other corporate matters and for payment processing activity at certain foreign subsidiaries. See Part I - Item 1 - Note 11, Off-Balance Sheet Arrangements, for further information about the Company's off-balance sheet arrangements. 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 penalties of$1.2 million and$2.4 million during the three and nine months endedSeptember 30, 2020 , respectively, as a result of lower volumes resulting from COVID-19. 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, 2019 . Commitments In connection with the agreement to purchase eNett andOptal , the Company entered into a commitment letter withBank of America, N.A . andBofA Securities, Inc. , which has been subsequently amended and restated, for senior secured and unsecured credit facilities in the aggregate amount of up to$1.4 billion , which reflects a reduction of$1.7 billion in backstops that were eliminated under the terms of the Eighth Amendment to the 2016 Credit Agreement. OnAugust 20, 2020 , the Company entered into the Third Amended and Restated Commitment Letter to, among other things, reallocate$600.0 million 59
--------------------------------------------------------------------------------
Table of Contents
of aggregate credit commitments from a senior secured bridge facility to a 364-day unsecured credit facility and to extend this portion of the commitment by six months toApril 22, 2021 . The remaining$752.0 million consists of a seven-year term loan B facility commitment that was not affected by this Third Amended and Restated Commitment Letter. Under the Third Amended and Restated Commitment Letter, the Company is subject to various underwriting, ticking, and other fees that are payable from time to time or may only be payable upon funding, if it were to occur. As part of the Third Amended and Restated Commitment Letter, the Company incurred and capitalized$3.0 million of underwriting fees associated with the commitment, which are being amortized to financing interest expense over the commitment period throughApril 22, 2021 . In addition to the underwriting fees incurred, the Company became subject to certain ticking fees payable on the term loan B facility commitment and the unsecured credit facility beginning during the third quarter of 2020. These fees are payable based on the total commitment value through the commitment expiration dates and at rates ranging from 50 basis points to 350 basis points. During the three and nine months endedSeptember 30, 2020 , the Company incurred$4.9 million in ticking fees, which were recorded as financing interest expense in the condensed consolidated statement of operations, and are due duringOctober 2020 andApril 2021 . Share Repurchases We currently have authorization from our board of directors to purchase up to$150 million of our common stock untilSeptember 2021 , which is entirely unused as ofSeptember 30, 2020 . The program is funded either through our future cash flows or through borrowings on our 2016 Credit Agreement. Share repurchases are to be made on the open market and may be commenced or suspended at any time. The Company's management, based on its evaluation of market and economic conditions and other factors, determines the timing and number of shares repurchased. Convertible Notes The Convertible Notes issued onJuly 1, 2020 provided the Company with net proceeds of approximately$299.2 million and bear interest at a rate of 6.5% per annum. The Company has the option to pay this interest in cash semi-annually, defer payment through accretion to the principal amount of the Convertible Notes, or to elect a combination of these two alternatives. The Convertible Notes may be converted at any time at the option of holders of the Convertible Notes, based on an initial conversion price of$200 per share, subject to certain adjustments, into shares of the Company's common stock, cash, or a combination thereof at the Company's election. The indenture associated with the Convertible Notes includes 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, including if, after giving effect to any such proposed incurrence or issuance, and the receipt and application of the proceeds therefrom, the ratio of (x) the Company's consolidated EBITDA for the most recent four fiscal quarters for which financial statements are available, to (y) the Company's consolidated fixed charges for such period would be greater than 1.5:1.0. The indenture contains other customary terms and covenants, including customary events of default. Dividends The Company has not declared any dividends on its common stock since it commenced trading on the NYSE onFebruary 16, 2005 . The timing and amount of future dividends, if any, will be: (i) dependent upon the Company's results of operations, financial condition, cash requirements and other relevant factors; (ii) subject to the discretion of the Board of Directors of the Company; and (iii) payable only out of the Company's surplus or current net profits in accordance with the General Corporation Law of theState of Delaware . The Company has certain restrictions on the dividends it may pay under its revolving credit agreement, including pro forma compliance with a ratio of consolidated funded indebtedness to consolidated EBITDA of less than 2.50:1.00 for the most recent period of four fiscal quarters. In addition, under the purchase agreement for the acquisition of eNett andOptal , the Company is prohibited from paying dividends without the consent of the sellers prior to the consummation of the acquisition or the termination of the purchase agreement. 60
--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies and Estimates Our critical accounting policy for the calculation of credit loss reserves changed effectiveJanuary 1, 2020 with the adoption of ASU 2016-13. We have included the 2020 implemented policy below. We have no other material changes to our critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Reserve for Credit Losses Effect if Actual Results Differ from Description Assumptions/Approach Used Assumptions The allowance for The allowance for expected credit losses is To the extent calculated
expected credit losses primarily calculated by analytical models using expected credit losses are not reflects management's
actual loss-rate experience, and adjustments, indicative of future
estimate of uncollectible where necessary, for current conditions and
performance, actual loss
balances as of the forecasts of leading economic indicators experience could differ
reporting date resulting correlated to loss-rate trends. Management
significantly from management's
from credit risk and monitors the credit quality of accounts judgments and expectations,
including fraud losses. receivables in making judgments necessary to
resulting in either higher or
The reserve for credit estimate expected credit losses by analyzing
lower future provisions for
losses reduces the delinquency reports, loss-rate trends, changes in credit losses, as applicable. As
Company's accounts customer payment patterns, economic indicator of September 30, 2020, we have
receivable balances, as recent trends and forecasts, and competitive,
an estimated reserve for credit
reported in the condensed legal, and regulatory environments. When
losses, including fraud losses,
consolidated financial indicators are forecasted to trend a
that is 2.5 percent of the total
statements, to the net predetermined amount from the historical median, gross accounts receivable
realizable value. the Company uses qualitative assessments to balance.
determine what impact, if any, the trends are
expected to have on the allowance for expected An increase or decrease to this
credit losses. Assumptions regarding expected reserve by 0.5 percent of the
credit losses are reviewed each reporting period total gross accounts receivable
and may be impacted by actual performance of balance would increase or
accounts receivables and changes in any of the decrease the provision for
factors discussed above. credit losses for the quarter by
$11.0 million .
Receivables exhibiting elevated credit risk
characteristics from homogeneous pools are
assessed on an individual basis for expected
credit losses. These receivables are assessed
individual expected credit loss estimates based
on the occurrence of bankruptcies, disputes,
conversations with customers, or other
significant credit loss events.
The allowance for expected credit losses also
includes fraud losses. Management monitors known
and suspected fraudulent activity identified by
the Company, as well as fraudulent claims
reported by customers, in estimating the reserve
for expected fraud losses.
Recently Adopted Accounting Standards
See Part I - Item 1 - Note 2, Recent Accounting Pronouncements, to the unaudited
condensed consolidated financial statements of this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of September 30, 2020 , we have no material changes to the market risk
disclosures in our Annual Report on Form 10-K for the year ended December 31,
2019 .
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 September 30, 2020 . Based on
this evaluation, the Company's principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures were effective as of September 30, 2020 . "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 September 30, 2020 , that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. We have not experienced any material impact to our internal controls
over financial reporting despite the fact that most of our employees are working
remotely due to the COVID-19 pandemic. We are continually monitoring and
assessing the COVID-19 situation on our internal controls to minimize the impact
on their design and operating effectiveness.
61--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
