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    WEX   US96208T1043

WEX INC.

(WEX)
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WEX : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

08/04/2021 | 03:53pm EDT
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide information that will assist the
reader with understanding our financial statements, the changes in key items in
those financial statements from year to year, and the primary factors that
accounted for those changes, as well as how certain accounting estimates affect
our financial statements. The discussion also provides information about the
financial results of the three segments of our business to provide a better
understanding of how those segments and their results affect our financial
condition and results of operations as a whole. Additionally, certain corporate
costs not allocated to our operating segments are discussed below.
Our MD&A is presented in the following sections:
•Overview
•Summary
•Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Policies and Estimates
•Recently Adopted Accounting Standards
This discussion should be read in conjunction with our audited consolidated
financial statements as of December 31, 2020, 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, 2020, filed with the Securities and Exchange
Commission on March 1, 2021, and in conjunction with the condensed consolidated
financial statements and notes in Part I - Item 1 of this report.
Overview
WEX Inc. is a leading financial technology service provider. We currently
operate in three reportable segments: Fleet Solutions, Travel and Corporate
Solutions, and Health and Employee Benefit Solutions. The Fleet Solutions
segment provides customers with fleet vehicle payment processing services
specifically designed for the needs of commercial and government fleets. 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 generates a substantial majority
of its revenues through the provision of consumer-directed healthcare payment
products and processing through our U.S. SaaS platforms.
Summary
COVID-19 Pandemic
A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in
January 2020, and subsequently declared a global pandemic by the World Health
Organization on March 11, 2020. The United States and the global communities in
which we operate continue to face challenges posed by the COVID-19 pandemic
although we, like many companies, are encouraged by the increased availability
of vaccines and we look forward to an ultimate return to a more normalized
working environment. To date however, we have continued to suspend most travel
for employees, our office capacity generally remains limited and, since
mid-March 2020, our employees have largely continued to work remotely in most
geographies. While we continue to operate effectively during this challenge, the
full impact of the COVID-19 pandemic on our business and the global economy
remains uncertain. The ultimate consequences will depend on many factors outside
of our control, including the availability and effectiveness of vaccines and
therapeutics and the ultimate duration and severity of the pandemic itself;
including the impact, if any, of COVID variants.

Certain of our reportable segments, particularly Travel and Corporate Solutions,
have been significantly impacted by COVID-19, however, we continue to see
recovery across all segments with sequential improvement in transaction volumes,
revenues and earnings during both the first and second quarters of 2021. The
Company's revenues are largely recurring in nature, therefore, as we add new
volumes and our existing customer base recovers, we expect to capture the
related growth.
Amended and Restated Credit Agreement
On April 1, 2021, the Company amended and restated the 2016 Credit Agreement.
For further information regarding this amendment and restatement refer to the
following Liquidity and Capital Resources section of this MD&A and Part I - Item
1 - Note 9, Financing and Other Debt, to the condensed consolidated financial
statements of this Form 10-Q.
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Asset Acquisition
On April 1, 2021, WEX Inc. completed the acquisition of certain contractual
rights to serve as custodian or sub-custodian to certain health savings accounts
from the Healthcare Bank division of Bell Bank, which is owned by State
Bankshares, Inc. This acquisition increases the Company's role in its
customer-directed healthcare ecosystem and aligns with its growth strategy. On
the closing of the acquisition, WEX Inc. paid Bell Bank initial cash
consideration of $200.0 million. Pursuant to the purchase agreement, WEX Inc.
agreed to make an additional deferred cash payment of $25.0 million in July 2023
and a second additional deferred cash payment of $25.0 million in January 2024.
As of June 1, 2021, in connection with of the acquisition by WEX Health of
Cirrus Holdings, LLC further discussed below, the second deferred payment of
$25.0 million was reduced by the amount of $12.5 million (the "Payment
Reduction"). As a result of the Payment Reduction, WEX Inc. continues to owe
Bell Bank $12.5 million for the second additional deferred cash payment, which
is due and payable in January 2024.
The purchase agreement also includes potential additional consideration payable
annually that is calculated on a quarterly basis and is contingent, and based,
upon any future increases in the Federal Funds rate. The contingent payment
period began on July 1, 2021 and shall extend until the earlier of (i) the year
ending December 31, 2030, or (ii) the date when the cumulative amount paid as
contingent consideration equals $225 million.
Acquisition of remaining interest in WEX Europe Services
On April 13, 2021, the Company both entered into a share purchase agreement for,
and consummated the acquisition of, the remaining interest in WEX Europe
Services it did not own previously, which consisted of 25 percent of the issued
ordinary share capital, for a purchase price of $97.0 million. As a result of
the transaction, the Company now owns 100 percent of the issued ordinary share
capital of WEX Europe Services, which operates part of our European Fleet
business. This transaction further streamlines the European Fleet business in
order to create revenue synergies and manage the associated cost structure.
benefitexpress Acquisition

On June 1, 2021, WEX Inc.'s subsidiary, WEX Health, completed the acquisition of
Cirrus Holdings, LLC, the indirect owner of Benefit Express Services, LLC, which
is a provider of highly configurable, cloud-based benefits administration
technologies and services doing business under the name benefitexpress (the
"benefitexpress Acquisition"). The transaction expanded the Company's role in
the healthcare ecosystem, bringing together benefit administration, compliance
services, and consumer-directed health and lifestyle spending accounts together
to form a full-service benefits marketplace. Pursuant to the terms of the
definitive purchase agreement, WEX Health consummated the benefitexpress
Acquisition for total consideration of approximately $275 million, subject to
certain working capital and other adjustments. WEX Inc. indirectly owns 95.47
percent of WEX Health. For further information regarding the structure of the
benefitexpress Acquisition refer to Part I - Item 1 - 4, Acquisitions.
Notes Redemption
As disclosed in our Annual Report on Form 10-K for the year ended December 31,
2020, on February 11, 2021, the Company provided irrevocable notice to The Bank
of New York Mellon Trust Company, N.A., of its intent to redeem its outstanding
$400 million 4.75 percent senior secured notes due February 1, 2023. On March
15, 2021, the Company redeemed such senior secured notes outstanding for a
redemption price of $400 million plus accrued and unpaid interest through the
redemption date.
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Key Performance Indicators
Below are key metrics from the second quarter of 2021:
                                                                                                   Increase (Decrease)
                                                    Q2 2021              Q2 2020              Amount               Percent
Fleet Solutions
Fuel transactions processed (in millions)              158.7                127.9                30.8                  24.1  %
Payment processing transactions (in millions)          130.1                103.1                  27                  26.2  %

Average vehicles serviced (in millions)                 16.2                 15.1                 1.1                   7.3  %
Average U.S. fuel price (US$ / gallon)           $      3.04          $      2.07          $     0.97                  46.9  %

Travel and Corporate Solutions Payment solutions purchase volume (in millions) $ 8,736.0 $ 3,168.1 $ 5,567.9

                 175.7  %

Health and Employee Benefit Solutions

  Purchase volume (000s)                         $ 1,311,131          $ 1,017,318          $  293,813                  28.9  %
Average number of U.S. SaaS accounts (in
millions)                                               16.4                 14.5                 1.9                  13.1  %


Fleet Solutions
•Fuel transactions processed increased approximately 24 percent from the second
quarter of 2020 to 158.7 million for the second quarter of 2021.
•Payment processing transactions, which represents the total number of purchases
made by fleets that have a payment processing relationship with WEX, are up
approximately 26 percent as compared to the same period last year.
•Average number of vehicles serviced increased approximately 7 percent from the
second quarter of 2020 to approximately 16.2 million for the second quarter of
2021 primarily related to growth in our North American customer base.
•The average U.S. fuel price per gallon during the second quarter of 2021 was
$3.04, an approximate 47 percent increase 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 $8.7 billion for the second quarter of 2021, representing an
increase of 176 percent from the same period last year. This increase was driven
primarily by the acquisition of eNett and Optal, increased volumes in our
corporate payment solutions business, and a recovery in domestic travel and
tourism from the pandemic related lows.
Health and Employee Benefit Solutions
•Purchase volume, which represents the total dollar value of all transactions
where interchange is earned by the Company, is up approximately 29 percent as
compared to the same period last year.
•Average number of U.S. SaaS accounts, which represents the number of active
Consumer-Directed Health, COBRA, and billing accounts on our U.S. SaaS
platforms, grew by approximately 1.9 million for the second quarter of 2021, a
13 percent increase from the same period in the prior year. Approximately 1.0
million of this increase relates to temporary accounts added directly as result
of COBRA related services we performed as a result of the American Rescue Plan
Act legislation.
Results of Operations
The Company does not allocate 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 a segment's operating trends and results. In
addition, the Company does not allocate certain corporate expenses to our
operating segments, as these items are centrally controlled and are not directly
attributable to any reportable segment.
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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.
Fleet Solutions
Revenues
The following table reflects comparative revenue and key operating statistics
within Fleet Solutions:
                                           Three Months Ended June 30,                       Increase (Decrease)                        Six Months Ended June 30,                       Increase (Decrease)
(In thousands, except per gallon
data)                                       2021                   2020                   Amount                 Percent               2021                  2020                    Amount                 Percent
Revenues(a)
Payment processing revenue            $      126,450          $    90,147          $          36,303                  40  %       $    237,026          $    203,470          $          33,556                  16  %
Account servicing revenue                     42,293               36,694                      5,599                  15  %             82,284                75,902                      6,382                   8  %
Finance fee revenue                           59,258               42,463                     16,795                  40  %            111,098                97,805                     13,293                  14  %
Other revenue                                 46,387               35,076                     11,311                  32  %             87,817                77,050                     10,767                  14  %
Total revenues                        $      274,388          $   204,380          $          70,008                  34  %       $    518,225          $    454,227          $          63,998                  14  %

Key operating statistics
Payment processing revenue:
Payment processing transactions(b)           130,104              103,086                     27,018                  26  %            248,493               224,677                     23,816                  11  %

Payment processing fuel spend(c) $ 10,995,418 $ 6,135,265

        $       4,860,153                  79  %       $ 20,172,378          $ 14,547,907          $       5,624,471                  39  %
Average price per gallon of fuel -
Domestic - ($USD/gal)                 $         3.04          $      2.07          $            0.97                  47  %       $       2.89          $       2.32          $            0.57                  25  %
Net payment processing rate(d)                  1.15  %              1.47  %                   (0.32) %              (22) %               1.18  %               1.40  %                   (0.22) %              (16) %



(a) The impact of foreign currency exchange rate fluctuations on Fleet Solutions
increased revenue by $4.0 million in the second quarter of 2021 and $7.6 million
in the first half of 2021 as compared to the same periods in the prior year.
(b) Payment processing transactions represents the total number of purchases
made by fleets that have a payment processing relationship with WEX.
(c) Payment processing fuel spend represents the total dollar value of the fuel
purchased by fleets that have a payment processing relationship with WEX.
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(d) 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. Continued customer
mix shift to larger over-the-road fleets has resulted in a decline in our net
payment processing rate for the three and six months ended June 30, 2021, as
compared to the same periods in the prior year.

Fleet Solutions revenue increased $70.0 million for the second quarter of 2021
and $64.0 million for the first half of 2021 as compared to the same periods in
the prior year. Revenues have been favorably impacted by higher domestic fuel
prices as well as increased domestic and international volumes from the
pandemic-driven lows of the second quarter of 2020. Favorable impact from fuel
prices and spreads contributed to an increase of $33.3 million and $32.3 million
in revenue for the three and six months ended June 30, 2021, respectively, as
compared to the same periods in the prior year.

Finance fee revenue is comprised of the following components:

                                         Three Months Ended June 30,                 Increase (Decrease)                   Six Months Ended June 30,                  Increase (Decrease)
(In thousands)                             2021                 2020              Amount             Percent                2021                 2020              Amount             Percent
Finance income                       $       45,235          $ 35,071          $   10,164                 29  %       $       86,385          $ 81,811          $    4,574                  6  %
Factoring fee revenue                        14,023             7,392               6,631                 90  %               24,713            15,994               8,719                 55  %
Finance fee revenue                  $       59,258          $ 42,463          $   16,795                 40  %       $      111,098          $ 97,805          $   13,293                 14  %


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.
Finance income increased $10.2 million for the second quarter of 2021 and $4.6
million for the first half of 2021 as compared to the same periods in the prior
year. These increases were driven by improvement in spend volumes and fuel
prices, offset in part by lower customer delinquencies. During both the three
and six months ended June 30, 2021 and June 30, 2020, 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 5.8 percent and
5.9 percent for the three and six months ended June 30, 2021, respectively, and
5.7 percent and 5.6 percent for the three and six months ended June 30, 2020,
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 six months ended June 30, 2021 and 2020.

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 $6.6 million for the second quarter of 2021 and $8.7 million
for the first half of 2021, as compared with the same periods in the prior year
due to increased shipping demand and increased rates, leading to an increase in
the size and volume of factored invoices.

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Operating Expenses The following table compares line items within operating income for Fleet Solutions:

                                      Three Months Ended June 30,                  Increase (Decrease)                   Six Months Ended June 30,                   Increase (Decrease)
(In thousands)                           2021                 2020              Amount             Percent                2021                  2020              Amount             Percent
Cost of services
Processing costs                  $        52,698          $ 46,325          $    6,373                 14  %       $      104,890          $  96,661          $    8,229                  9  %
Service fees                      $         1,974          $  1,722          $      252                 15  %       $        3,702          $   3,563          $      139                  4  %

Provision for credit losses $ 11,522 $ 18,285

 $   (6,763)               (37) %       $       15,886          $  38,892          $  (23,006)               (59) %
Operating interest                $         1,796          $  5,102          $   (3,306)               (65) %       $        3,905          $  11,280          $   (7,375)               (65) %

Depreciation and amortization $ 12,410 $ 11,600

 $      810                  7  %       $       25,125          $  23,658          $    1,467                  6  %

Other operating expenses
General and administrative        $        22,749          $ 22,391          $      358                  2  %       $       43,251          $  43,858          $     (607)                (1) %
Sales and marketing               $        42,130          $ 31,514          $   10,616                 34  %       $       83,155          $  72,824          $   10,331                 14  %

Depreciation and amortization $ 19,412 $ 22,504

 $   (3,092)               (14) %       $       38,997          $  44,881          $   (5,884)               (13) %

Operating income                  $       109,697          $ 44,937          $   64,760                144  %       $      199,314          $ 118,610          $   80,704                 68  %


Cost of services
Processing costs increased by $6.4 million and $8.2 million for the second
quarter and the first half of 2021, respectively, as compared with the same
periods in the prior year. Such increases were primarily driven by higher
business support costs incurred as a result of the increased volumes experienced
during the quarter and year-to-date period ended June 30, 2021 as compared to
the prior year comparable periods.
Service fees for the three and six months ended June 30, 2021 were generally
consistent with the same periods in the prior year.
Provision for credit losses decreased by $6.8 million for the second quarter of
2021 and $23.0 million for the six months ended June 30, 2021, as compared to
the same periods in the prior year. The adoption of the new credit loss
accounting standard during the first quarter of 2020, coupled with an increase
in expected credit losses during the first two quarters of 2020 as a result of
COVID-19, resulted in a higher provision for credit losses in the prior year. 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 8.1 and 7.2 basis points of fuel
expenditures for the second quarter and first half of 2021, respectively, as
compared to 26.9 and 25.0 basis points of fuel expenditures for the same periods
in the prior year, respectively.
Operating interest decreased $3.3 million and $7.4 million for the second
quarter and first half of 2021, respectively, as compared to the same periods in
the prior year. The decreases from the comparable periods in 2020 were due
primarily to lower interest rates.
Depreciation and amortization remained relatively consistent for the second
quarter and first half of 2021, as compared with the same periods in the prior
year.
Other operating expenses
General and administrative expenses remained consistent for the second quarter
and first half of 2021, as compared with the same periods in the prior year.
Sales and marketing expenses increased $10.6 million and $10.3 million for the
three and six months ended June 30, 2021, respectively, as compared with the
same periods in the prior year. These increases were driven by higher partner
commissions due to volume growth and a rise in segment expenses during the
second quarter of 2021 as compared to the prior year's cost containment
initiatives enacted as a result of the pandemic.
Depreciation and amortization decreased $3.1 million for the second quarter of
2021 and $5.9 million for the first half of 2021 as compared to the same periods
in the prior year. These decreases were due primarily to lower ongoing
amortization over time resulting from the impact of the accelerated method of
amortization on certain acquired customer relationships.
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Travel and Corporate Solutions
Revenues
The following table reflects comparative revenue and key operating statistics
within Travel and Corporate Solutions:
                                          Three Months Ended June 30,                      Increase (Decrease)                     Six Months Ended June 30,                     Increase (Decrease)
(In thousands)                             2021                     2020                Amount              Percent                2021                  2020                 Amount              Percent
Revenues(1)
Payment processing revenue        $        68,282              $    43,261          $     25,021                 58  %       $     125,530          $    113,529                12,001                 11  %
Account servicing revenue                  11,222                   10,183                 1,039                 10  %              21,909                21,246                   663                  3  %
Finance fee revenue                           199                      220                   (21)               (10) %                 493                   755                  (262)               (35) %
Other revenue                               2,059                      831                 1,228                148  %               4,472                 3,324                 1,148                 35  %
Total revenues                    $        81,762              $    54,495          $     27,267                 50  %       $     152,404          $    138,854                13,550                 10  %


Key operating statistics
Payment processing revenue:
Payment solutions purchase
volume(2)                         $     8,736,019              $ 3,168,064          $  5,567,955                176  %       $  14,843,694          $ 11,209,176          $  3,634,518                 32  %



(1) Foreign currency exchange rate fluctuations had an immaterial impact on
Travel and Corporate Solutions revenues during each of the three and six months
ended June 30, 2021..
(2) Payment solutions purchase volume represents the total dollar value of all
WEX-issued transactions that use WEX corporate card products and virtual card
products.
Travel and Corporate Solutions revenue increased $27.3 million for the second
quarter of 2021 and $13.6 million for the first half of 2021 as compared to the
same periods in the prior year, primarily due to increased purchase volumes in
our corporate payments business as a result of continued strength in the partner
channel, increased revenues attributable to the acquisition of eNett and Optal,
and continued recovery of travel volumes from pandemic related lows during the
three and six months ended June 30, 2021. These increases were offset in part by
a $3.7 million reduction in revenue during the second quarter of 2021 due to a
deferral of incentives received within the year.
Concessions to certain customers experiencing financial difficulties may be
granted and are limited to extending the time to pay, placing a customer on a
payment plan or granting waivers of late fees. There were no material
concessions granted to customers during the three and six months ended June 30,
2021.

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Operating Expenses
The following table compares line items within operating income for Travel and
Corporate Solutions:
                                     Three Months Ended June 30,                  Increase (Decrease)                   Six Months Ended June 30,                   Increase (Decrease)
(In thousands)                         2021                 2020              Amount              Percent                2021                 2020              Amount              Percent
Cost of services
Processing costs                 $       18,719          $ 15,607          $    3,112                  20  %       $       35,540          $ 30,452          $    5,088                  17  %
Service fees                     $        3,923          $  2,549          $    1,374                  54  %       $        7,787          $  8,432          $     (645)                 (8) %
Provision for credit losses      $        1,358          $  2,241          $     (883)                (39) %       $        1,993          $ 15,505          $  (13,512)                (87) %
Operating interest               $          475          $  1,357          $     (882)                (65) %       $          990          $  3,513          $   (2,523)                (72) %

Depreciation and amortization $ 5,231 $ 4,807 $ 424

                   9  %       $       12,842          $  8,767          $    4,075                  46  %

Other operating expenses
General and administrative       $       12,191          $  6,969          $    5,222                  75  %       $       43,758          $ 14,342          $   29,416                 205  %
Sales and marketing              $       33,405          $ 14,817          $   18,588                 125  %       $       62,388          $ 33,056          $   29,332                  89  %
Depreciation and amortization    $        6,149          $  5,739          $      410                   7  %       $       12,615          $ 12,403          $      212                   2  %

Operating income (loss)          $          311          $    409          $      (98)                (24) %       $      (25,509)         $ 12,384          $  (37,893)               (306) %


Cost of services
Processing costs for the three and six months ended June 30, 2021 increased $3.1
million and $5.1 million, respectively, from the same periods in the prior year
primarily as a result of the acquisition of eNett and Optal, offset in part by a
reduction of costs as a result of the sale of the Company's Brazilian subsidiary
during the third quarter of 2020.
Service fees for the three months ended June 30, 2021 have increased $1.4
million from the prior year comparable period as a result of the acquisition of
eNett and Optal, partially offset by lower fees as a result of a renegotiated
contract with one of our vendors and the conversion of travel and corporate
payments purchase volume to an internal transaction processing platform. Service
fees for the six months ended June 30, 2021 remained relatively consistent with
the comparable prior year period.
Provision for credit losses decreased $0.9 million for the second quarter of
2021 and $13.5 million for the first half of 2021 as compared to the same
periods in the prior year. The first half of 2020's provision for credit losses
included greater expense resulting from the adoption of the new credit loss
accounting standard, coupled with an increase in expected credit losses as a
result of COVID-19. In addition, the provision for credit losses for the second
quarter and first half of 2021 decreased as a result of the sale of our WEX
Latin America business during the third quarter of 2020.
Operating interest expense decreased $0.9 million for the second quarter of 2021
and $2.5 million for the second half of 2021 as compared to the same periods in
the prior year, primarily as a result of lower interest rates.
Depreciation and amortization expenses for the second quarter of 2021 remained
consistent with that of the comparable period of the prior year. Depreciation
and amortization expenses for the six months ended June 30, 2021 increased by
$4.1 million as compared to the same period in the prior year due primarily to
the acquisition of eNett and Optal.
Other operating expenses
General and administrative expenses for the second quarter of 2021 and first
half of 2021 increased by $5.2 million and $29.4 million, respectively, as
compared to the same periods in the prior year, due primarily to integration
costs related to the acquisition of eNett and Optal. Additionally, the increase
in expenses for the first half of 2021 was impacted by a vendor contract
termination payment in the first quarter of 2021.
Sales and marketing expenses increased for the second quarter of 2021 and first
half of 2021 by $18.6 million and $29.3 million, respectively, as compared to
the same periods in the prior year. This increase was primarily due to higher
relative commission payments associated with corporate payments volumes and the
acquisition of eNett and Optal.
Depreciation and amortization expenses during the second quarter and first half
of 2021 remained consistent with the same periods in the prior year.
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Health and Employee Benefit Solutions
Revenues
The following table reflects comparative revenue and key operating statistics
within Health and Employee Benefit Solutions:
                                         Three Months Ended June 30,                      Increase (Decrease)                    Six Months Ended June 30,                     Increase (Decrease)
(In thousands)                            2021                     2020               Amount              Percent                2021                   2020               Amount              Percent
Revenues(1)
Payment processing revenue       $        18,694              $    14,053          $    4,641                  33  %       $       39,259          $    34,499          $    4,760                  14  %
Account servicing revenue                 79,482                   62,602              16,880                  27  %              147,427              126,171              21,256                  17  %
Finance fee revenue                           42                       28                  14                  50  %                   61                   78                 (17)                (22) %
Other revenue                              5,115                   11,526              (6,411)                (56) %               12,864               24,934             (12,070)                (48) %
Total revenues                   $       103,333              $    88,209          $   15,124                  17  %       $      199,611          $   185,682          $   13,929                   8  %

Key operating statistics
Payment processing revenue:
Purchase volume(2)               $     1,311,131              $ 1,017,318          $  293,813                  29  %       $    2,795,357          $ 2,609,631          $  185,726                   7  %
Account servicing revenue:
Average number of SaaS
accounts(3)                               16,380                   14,487               1,893                  13  %               15,946               14,473               1,473                  10  %



(1) Foreign currency exchange rate fluctuations had an insignificant impact on
Health and Employee Benefit Solutions revenue during the three and six months
ended June 30, 2021.
(2) Purchase volume represents the total U.S. dollar value of all transactions
where interchange is earned by WEX.
(3) Average number of SaaS accounts represents the number of active
Consumer-Directed Health, COBRA, and billing accounts on our SaaS platforms in
the U.S. The average number of SaaS accounts for the three and six months ended
June 30, 2021 include approximately 1 million and 0.5 million temporary accounts
resulting directly from services we provided as a result of the American Rescue
Plan Act legislation, respectively.
Payment processing revenue increased $4.6 million and $4.8 million during the
second quarter and first half of 2021, respectively, as compared to the same
periods in the prior year due to increasing cardholder spend volumes.
Account servicing revenue increased $16.9 million and $21.3 million for the
second quarter of 2021 and first half of 2021, respectively, as compared to the
same periods in the prior year. The increases include approximately $7 million
of revenue resulting from COBRA related services we provided as a result of the
American Rescue Plan Act legislation. Remaining increases are due to an
increased number of participants and the effects of the benefitexpress
Acquisition.
Finance fee revenue was not material to Health and Employee Benefit Solutions'
operations for each of the three and six months ended June 30, 2021 and 2020.
Other revenue decreased $6.4 million for the second quarter of 2021 and $12.1
million for the first half of 2021 as compared to the same periods in the prior
year. The decrease for the second quarter of 2021 was due primarily to lower
U.S. Health professional services revenue. For the first half of 2021, other
revenue additionally decreased from the absence of revenues associated with the
Company's former WEX Latin America business, which was sold during the third
quarter of 2020.

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Operating Expenses
The following table compares line items within operating income for Health and
Employee Benefit Solutions:
                                      Three Months Ended June 30,                  Increase (Decrease)                  Six Months Ended June 30,                  Increase (Decrease)
(In thousands)                          2021                 2020               Amount             Percent                2021                2020              Amount             Percent
Cost of services
Processing costs                  $       44,791          $ 38,059          $     6,732                 18  %       $      85,540          $ 77,795          $    7,745                 10  %
Service fees                      $        7,862          $  5,429          $     2,433                 45  %       $      13,416          $ 11,459          $    1,957                 17  %
Provision for credit losses       $           82          $     55          $        27                 49  %       $         142          $    171          $      (29)               (17) %
Operating interest                $            -          $     45          $       (45)              (100) %       $           -          $     96          $      (96)              (100) %
Depreciation and amortization     $        8,810          $  8,717          $        93                  1  %       $      17,678          $ 17,488          $      190                  1  %

Other operating expenses
General and administrative        $        8,824          $  8,205          $       619                  8  %       $      16,199          $ 17,281          $   (1,082)                (6) %
Sales and marketing               $       10,070          $  8,413          $     1,657                 20  %       $      18,409          $ 17,646          $      763                  4  %
Depreciation and amortization     $       14,328          $ 10,518          $     3,810                 36  %       $      25,391          $ 21,098          $    4,293                 20  %

Operating income                  $        8,566          $  8,768          $      (202)                (2) %       $      22,836          $ 22,648          $      188                  1  %


Cost of services
Processing costs increased $6.7 million for the second quarter of 2021 and $7.7
million for the first half of 2021 as compared to the same periods in the prior
year. The increases in processing costs were primarily driven by higher costs to
support partner growth and increases as a result of the benefitexpress
Acquisition. These favorable factors were partly offset by an absence of
expenses associated with the Company's former WEX Latin America business.
Service fees for the three and six months ended June 30, 2021 increased $2.4
million and $2.0 million, respectively, as compared with the same periods in the
prior year. These increases were largely due to increased costs due to COBRA
related services we provided as a result of the American Rescue Plan Act and
growth in existing partner volumes.
Provision for credit losses was not material to Health and Employee Benefit
Solutions' operations for each of the three and six months ended June 30, 2021
and 2020.
Operating interest was not material for the three and six month periods ending
June 30, 2021 or 2020.
Depreciation and amortization expense for the second quarter of 2021 and first
half of 2021 remained consistent with the same periods in the prior year.
Other operating expenses
General and administrative expenses remained relatively consistent for the
second quarter and first half of 2021 as compared to the same periods in the
prior year.
Sales and marketing expenses in the second quarter of 2021 increased $1.7
million as compared to the same period in the prior year due to increased
segment expenses as compared to the prior year's cost containment initiatives
enacted as a result of the pandemic and to the benefitexpress Acquisition. Sales
and marketing expenses remained relatively consistent for the first half of 2021
as compared to the same period in the prior year.
Depreciation and amortization increased $3.8 million and $4.3 million,
respectively, for the three and six months ended June 30, 2021 as compared to
the same periods of the prior year primarily as a result of the April 2021
acquisition of certain contractual rights from Bell Bank to serve as custodian
or sub-custodian of certain HSAs.
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.
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The following table compares line items within operating income for unallocated
corporate expenses:
                                      Three Months Ended June 30,                 Increase (Decrease)                  Six Months Ended June 30,                  Increase (Decrease)
(In thousands)                          2021                 2020              Amount             Percent                2021                2020              Amount             Percent

Other operating expenses General and administrative $ 35,779 $ 24,700 $ 11,079

                 45  %       $      62,766          $ 48,820          $   13,946                 29  %

Depreciation and amortization $ 517 $ 632 $ (115)

               (18) %       $       1,056          $  1,211          $     (155)               (13) %


General and administrative expenses increased $11.1 million for the second
quarter of 2021 and $13.9 million for the first half of 2021 as compared to the
same periods in the prior year. The increase in the second quarter and first
half of 2021 was primarily due to increased professional fees, including those
incurred in connection with the amendment and restatement of our 2016 Credit
Agreement and increased compensation-related costs, including stock compensation
costs resulting from the June 2020 modification of equity awards and granting of
additional awards.
Other unallocated corporate expenses were not material to the Company's
operations for each of the three and six months ended June 30, 2021 and 2020.
Non-operating income and expense
The following table reflects comparative results for certain amounts excluded
from operating income:
                                   Three Months Ended June 30,                   Increase (Decrease)                    Six Months Ended June 30,                   Increase (Decrease)
(In thousands)                       2021                  2020              Amount              Percent                 2021                 2020              Amount              Percent

Financing interest expense $ 32,473 $ 28,832 $

    3,641                   13  %       $      65,757          $  60,863          $    4,894                    8  %
Change in fair value of
contingent consideration       $       47,700          $       -          $   47,700                      NM       $      47,700          $       -          $   47,700                      NM
Net foreign currency gain
(loss)                         $        1,342          $  (2,462)         $    3,804                      NM       $      (1,413)         $ (31,189)         $   29,776                   95  %
Net unrealized gain (loss) on
financial instruments          $        6,013          $  (3,842)         $    9,855                      NM       $      13,046          $ (35,889)         $   48,935                      NM
Income tax benefit             $          746          $  19,747          $  (19,001)                 (96) %       $       2,416          $  25,454          $  (23,038)                 (91) %
Net income from
non-controlling interests      $          239          $     675          $     (436)                 (65) %       $         965          $   2,038          $   (1,073)                 (53) %
Change in value of redeemable
non-controlling interest       $       43,823          $ (59,940)         $  103,763                      NM       $      68,867          $ (57,316)         $  126,183                      NM


NM - Not meaningful
Financing interest expense increased $3.6 million for the second quarter of 2021
and $4.9 million for the first half of 2021 as compared to the same periods in
the prior year, due primarily to the issuance of $310.0 million Convertible
Notes in July 2020, offset by an overall decrease in floating interest rates.
During the quarter ended June 30, 2021, the Company's contingent consideration
derivative liability associated with WEX Inc.'s April 2021 acquisition of
certain contractual rights from Bell Bank to serve as custodian or sub-custodian
to certain HSAs, increased as a result of the steepening of the Federal Funds
futures curve.
Our foreign currency exchange exposure is primarily related to the remeasurement
of our cash, receivable and payable balances, including intercompany
transactions that are denominated in foreign currencies. The Company incurred
net foreign currency gains of $1.3 million in the second quarter of 2021 and
losses of $1.4 million in the first half of 2021. The gain in the second quarter
of 2021 resulted from the strengthening of foreign currencies relative to the
U.S. dollar as compared to the prior quarter. However, for the six months ended
June 30, 2021, the Company's net foreign currency transactions remained in a
loss position as a result of the remeasurement of assets and liabilities and
losses on intercompany transactions, resulting from the U.S. dollar
strengthening relative to numerous major foreign currencies in which we
transact.
The Company incurred unrealized gains on financial instruments of $6.0 million
in the second quarter of 2021 and $13.0 million in the first half of 2021 due to
an increase in the fair value of new and existing interest rate swaps, primarily
as a result of an increase in the LIBOR forward yield curve. The net unrealized
losses on financial instruments for the second quarter and first half of 2020
resulted primarily from a decrease in the LIBOR forward yield curve.
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The Company's effective tax rate was (7.9) percent and (7.8) percent for the
three and six months ended June 30, 2021 as compared to 310.8 percent and 104.6
percent for the three and six months ended June 30, 2020. 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 six months ended June 30, 2021 was
primarily due to excess tax benefits arising from stock-based compensation.
Effective tax rates were higher in the prior year primarily due to the
jurisdictional earnings mix and decrease in estimated income before income taxes
with relatively significant non-deductible expenses.
Net income from non-controlling interests relates to our non-controlling
interests in the U.S. Health business and our non-controlling interests in WEX
Europe Services through April 13, 2021, at which time we purchased the remaining
interest in WEX Europe Services. Such amounts were not material to Company
operations for each of the three and six months ended June 30, 2021 and 2020.
During the three and six months ended June 30, 2021, the change in value of our
redeemable non-controlling interest in the U.S. Health business increased by
$43.8 million and $68.9 million, respectively, due to increases in the trailing
twelve month net revenues and market set multiple used to value the
non-controlling interest redemption value. During the three and six months ended
June 30, 2020, the redeemable non-controlling interest in the U.S. Health
business decreased due substantially to a second quarter change in the
redemption value resulting from a pandemic-driven decline in revenue multiplies
of peer companies.
Non-GAAP Financial Measures That Supplement GAAP Measures
The Company's non-GAAP adjusted net income excludes unrealized gains and losses
on financial instruments, net foreign currency remeasurement gains and losses,
change in fair value of contingent consideration, acquisition-related intangible
amortization, other acquisition and divestiture related items, stock-based
compensation, other costs, debt restructuring and debt issuance cost
amortization, 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 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 or loss on foreign currency hedges relating to these items. The exclusion
of these items helps management compare changes in operating results between
periods that might otherwise be obscured due to currency fluctuations.
•The change in fair value of contingent consideration, which is related to the
acquisition of certain contractual rights from Bell Bank to serve as custodian
or sub-custodian to health savings accounts, is dependent upon changes in future
interest rates and has no significant impact on the ongoing operations of the
Company. Additionally, the non-cash, mark-to-market adjustments on financial
instruments are difficult to forecast accurately, making comparisons across
historical and future quarters difficult to evaluate.
•The Company considers certain acquisition-related costs, including investment
banking fees, warranty and indemnity insurance, certain integration-related
expenses and amortization of acquired intangibles, as well as gains and losses
from divestitures to be unpredictable, dependent on factors that may be outside
of our control and unrelated to the continuing operations of the acquired or
divested business or the Company. In addition, the size and complexity of an
acquisition, which often drives the magnitude of acquisition-related costs, may
not be indicative of such future costs. The Company believes that excluding
acquisition-related costs and gains or losses on divestitures facilitates the
comparison of our financial results to the Company's historical operating
results and to other companies in our industry.
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•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 certain other costs when evaluating our continuing business
performance when such items are not consistently occurring and do not reflect
expected future operating expense, nor provide insight into the fundamentals of
current or past operations of our business. These include costs related to
certain identified initiatives (including technology initiatives) to further
streamline the business, improve the Company's efficiency, create synergies, and
globalize the Company's operations, all with an objective to improve scale and
efficiency and increase profitability going forward. For the six months ended
June 30, 2021, other costs additionally include a penalty of $10.3 million
incurred on a vendor contract termination. For the six months ended June 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 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.
The following table reconciles net (loss) income attributable to shareholders to
adjusted net income attributable to shareholders:
                                                      Three Months Ended June 30,                 Six Months Ended June 30,
(In thousands)                                          2021                  2020                 2021                  2020

Net (loss) income attributable to shareholders $ (33,856) $

72,658 $ (36,421) $ 56,402 Unrealized (gain) loss on financial instruments

           (6,013)             3,842                 (13,046)            35,889
Net foreign currency remeasurement (gain) loss            (1,342)             2,462                   1,413             31,189
Change in fair value of contingent consideration          47,700                  -                  47,700                  -
Acquisition-related intangible amortization               45,294             42,478                  87,748             85,016
Other acquisition and divestiture related items           10,690              7,735                  25,486             15,677

Stock-based compensation                                  21,662             15,069                  40,605             26,889
Other costs                                                1,705              4,695                  13,942              6,935

Debt restructuring and debt issuance cost
amortization                                              11,461              2,578                  16,553              4,660

ANI adjustments attributable to non-controlling
interests                                                 43,206            (60,558)                 67,006            (58,334)
Tax related items                                        (35,613)           (38,004)                (64,818)           (71,684)

Adjusted net income attributable to shareholders $ 104,894 $

52,955 $ 186,168 $ 132,639



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:
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Sources of cash                                         Uses of cash(1)
•Borrowings on our Amended and Restated Credit          •Payments on our Amended and Restated Credit
Agreement                                               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
Amended and Restated Credit Agreement and various facilities lease agreements.
The table below summarizes our cash activities:
                                                                         Six Months Ended June 30,
(In thousands)                                                           2021                    2020
Cash flows (used for) provided by operating activities           $     (121,982)             $  725,946
Cash flows used for investing activities                         $     (595,407)             $  (41,609)
Cash flows provided by (used for) financing activities           $      398,779              $ (203,828)


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 generated by operating activities for the six months ended June 30, 2021
decreased $847.9 million as compared to the same period in the prior year. The
decrease was substantially related to an increase in accounts receivable
balances resulting from higher customer spend volumes and fuel prices, which was
partially offset by a corresponding increase in accounts payable balances.
Investing Activities
Cash used for investing activities for the six months ended June 30, 2021
increased $553.8 million as compared to the same period in the prior year,
primarily resulting from $558.3 million of payments made for acquisitions,
including the acquisition of certain contractual rights to serve as custodian or
sub-custodian of HSAs from Bell Bank and the benefitexpress Acquisition.
Financing Activities
Cash provided by financing activities for the six months ended June 30, 2021
totaled $398.8 million, due primarily to an increase in deposits of
$451.3 million. The early redemption of the Company's $400.0 million of Notes,
as further described within the preceding Summary section of this MD&A, was
substantially offset by additional term loan borrowings of $80.8 million, net of
quarterly repayments, and net borrowings of $265.0 million against our Revolving
Credit Facility (as defined below). During the six months ended June 30, 2020,
the Company used $203.8 million primarily toward the repayment of its debt.
Amended and Restated Credit Agreement
On April 1, 2021, the Company amended and restated the 2016 Credit Agreement
(the "Amended and Restated Credit Agreement"). As part of the Amended and
Restated Credit Agreement, the lenders agreed to (i) increase commitments under
the Company's secured revolving credit facility from $870.0 million to
$930.0 million (the "Revolving Credit Facility"), (ii) provide additional senior
secured tranche A term loans (the Tranche A Term Loans") resulting in an
aggregate outstanding principal amount of the Tranche A Term Loans equal to
$978.4 million, (iii) re-establish the senior secured tranche B term loans'
aggregate principal at $1,442.0 million (the "Tranche B Term Loans"), (iv)
eliminate the 0.75 percent eurocurrency rate floor with respect to the Revolving
Credit Facility, and (v) make certain other changes to the previously existing
2016 Credit Agreement, including without limitation, (a) extending the maturity
dates for the Tranche A Term Loans and Revolving Credit Facility to April 1,
2026 and the maturity date for the Tranche B Term Loans to April 1, 2028, (b)
providing additional flexibility with respect to certain negative covenants,
prepayments and other provisions of the Company's previously existing 2016
Credit Agreement, and (c) revising the Company's maximum consolidated leverage
ratio for all future quarters, including a reduction from 7.50 to 1:00 to 6.25
to 1:00 for quarters ending through September 30, 2021, with step-downs in
periods thereafter.
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As of June 30, 2021, the Company had an outstanding principal amount of $966.2
million on the Tranche A Term Loans, an outstanding principal amount of $1,438.4
million on the Tranche B Term Loans, borrowings of $265.0 million on the
Revolving Credit Facility and letters of credit of $51.7 million drawn against
the Revolving Credit Facility.
The Revolving Credit Facility and the Tranche A Term Loans bear interest at
variable rates, at the Company's option, plus an applicable margin determined
based on the Company's consolidated leverage ratio. The Tranche B Term Loans
bear interest at variable rates, at the Company's option, plus an applicable
margin, which is fixed at 1.25 percent for base rate borrowings and 2.25 percent
with respect to eurocurrency rate borrowings. Under the Amended and Restated
Credit Agreement, the Company pays a quarterly commitment fee at a rate per
annum ranging from 0.25 percent to 0.50 percent of the daily unused portion of
the Revolving Credit Facility, determined based on the Consolidated Leverage
Ratio. Prior to maturity, the Tranche A Term Loans and Tranche B Term Loans
require scheduled quarterly payments of $12.2 million and $3.6 million,
respectively, due on the last day of each March, June, September and December.
Under the terms of the Amended and Restated Credit Agreement, incremental loans
could be made available upon the request of the Company, subject to specified
terms and conditions, including receipt of lender commitments. Such incremental
loans may not exceed the greater of (x) $375.0 million and (y) 75 percent of
consolidated EBITDA, adjusted for certain voluntary prepayments and repurchases
of term loans, reductions of commitments under the Revolving Credit Facility,
and Incremental Facilities, as defined within the Amended and Restated Credit
Agreement, established or incurred, or that could be established or incurred
without causing the Company's consolidated secured leverage ratio to exceed 4:00
to 1:00.
See Part I - Item 1 - Note 9, Financing and Other Debt, in this report for
further information regarding the Amended and Restated Credit Agreement.
Convertible Notes Outstanding
On July 1, 2020, the Company closed on a private placement with Warburg Pincus,
pursuant to which the Company issued $310.0 million in aggregate principal
amount of its Convertible Senior Notes due 2027. The issuance of the Convertible
Notes provided the Company with net proceeds of approximately $299.2 million
after original issue discount. The Convertible Notes have a seven-year term and
mature on July 15, 2027, unless earlier converted, repurchased or redeemed.
Interest on the Convertible Notes is calculated at a fixed rate of 6.5 percent
per annum, payable semi-annually in arrears beginning January 15, 2021. At the
Company's option, interest is either payable in cash, through accretion to the
principal amount of the Convertible Notes, or a combination of cash and
accretion. The Company has paid, and expects to continue to pay interest in cash
as it comes due.

The Convertible Notes may be converted at the option of the holders at any time
prior to maturity, or earlier redemption or repurchase of the Convertible Notes,
based upon an initial conversion price of $200 per share of common stock. The
Company may settle conversions of Convertible Notes, at its election, in cash,
shares of the Company's common stock, or a combination thereof. The initial
conversion price is subject to adjustments customary for convertible debt
securities and a weighted average adjustment in the event of issuances of equity
and equity linked securities by the Company at prices below the then applicable
conversion price for the Convertible Notes or the then market price of the
Company's common stock, subject to certain exceptions. It is the Company's
current intention to settle all conversions of the Convertible Notes in shares
of the Company's common stock.

The Company will have the right, at any time after July 1, 2023, to redeem the
Convertible Notes in whole or in part if the closing price of WEX's common stock
is at least 200 percent of the conversion price of the Convertible Notes for 20
trading days (whether or not consecutive) out of any 30 consecutive trading day
period prior to the time the Company delivers a redemption notice (including at
least one of the five trading days immediately preceding the last day of such 30
trading day period), subject to the right of holders of the Convertible Notes to
convert its Convertible Notes prior to the redemption date.
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.
Deposits
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WEX Bank's regulatory status enables it to raise capital to fund the Company's
working capital requirements by issuing deposits, subject to FDIC rules
governing minimum financial ratios. 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 both fixed and 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.
As of June 30, 2021 and December 31, 2020 we had $1.5 billion and $1.1 billion,
respectively, in deposits. Remaining maturities on the deposits outstanding as
of June 30, 2021 ranged from less than 1 month to 4 years. See Part I - Item 1 -
Note 8, Deposits, in this report for further information regarding our deposits.
Borrowed Federal Funds
WEX Bank borrows from uncommitted federal funds lines to supplement the
financing of the Company's accounts receivable. Our federal funds lines of
credit were $568.0 million and $376.0 million as of June 30, 2021 and
December 31, 2020, respectively. There were no outstanding borrowings as of
June 30, 2021. As of December 31, 2020, there were outstanding borrowings of
$20.0 million.
Participation Debt
From time to time, WEX Bank enters into participation agreements with
third-party banks to fund customers' balances that exceed WEX Bank's lending
limit to individual customers. Associated unsecured borrowings generally carry a
variable interest rate of 1 month to 3 month LIBOR plus a margin of 225 basis
points.
As of June 30, 2021 and December 31, 2020 the Company had an outstanding
participation agreement for the borrowing of up to $60.0 million through
December 31, 2021. There were no amounts borrowed against this participation
agreement as of June 30, 2021 or December 31, 2020.
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 in order to accelerate the collection of the Company's cash
and reduce the internal costs, thereby improving liquidity. The agreement
remains in effect through December 31, 2021, after which the agreement
automatically renews annually unless either party gives not less than 90 days
written notice of their intention to withdraw. Under this arrangement, the
Purchasing Bank establishes a credit limit for each customer account. The
factored 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 the Purchasing 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, the Purchasing 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 Factoring
WEX 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. Subsequent to June 30, 2021, the agreement was
extended through August 2022, 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 upon WEX 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 accounts receivable because effective control of the
receivables is transferred to the buyer.
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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 9, 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 the FDIC and the Utah 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 of WEX Bank's assets, liabilities and certain
off-balance sheet items. WEX Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors. Failure to meet minimum capital requirements can
initiate certain mandatory and possible additional discretionary actions by
regulators that, if undertaken, could limit 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 require WEX Bank to maintain minimum amounts and ratios as defined in
the regulations. As of June 30, 2021, WEX Bank met all the requirements to be
deemed "well-capitalized" pursuant to FDIC regulation and for purposes of the
Federal Deposit Insurance Act. See Part I - Item 1 - Note 18, Supplementary
Regulatory Capital Disclosure, for further information.
Interest Rate Risk
As of June 30, 2021, we had variable-rate borrowings of $2.7 billion under our
Amended and Restated Credit Agreement, which bore a weighted average effective
interest rate of 2.2 percent. We periodically review our projected borrowings
under our Amended and Restated Credit Agreement and the current interest rate
environment to determine if we should use interest rate swaps to reduce exposure
to interest rate volatility.
During the three months ended June 30, 2021, the Company entered into five new
interest rate swap contracts with a collective notional amount of $0.9 billion.
As of June 30, 2021, we maintained eleven interest rate swap contracts in total
that are intended to economically hedge the LIBOR component of future interest
payments associated with our variable rate borrowings. The fixed rates on those
interest rate swap contracts range between 0.435 percent and 2.413 percent.
Foreign Currency Exchange Risk
Earnings outside of the 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 $88.5 million and $58.5 million as of June 30, 2021 and
December 31, 2020, respectively. The Company continues to maintain its
indefinite reinvestment assertion for its investments in foreign subsidiaries
except for any historical undistributed earnings and future earnings for WEX
Australia. Upon distribution of these earnings in the form of dividends or
otherwise, the Company would be subject to withholding taxes payable to foreign
countries, where applicable, but would generally have no further federal income
tax liability. It is not practicable to estimate the unrecognized deferred tax
liability, however, it is not expected to be material.
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 of June 30, 2021 and
December 31, 2020, we had posted letters of credit totaling $51.7 million and
$51.6 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 10, Off-Balance Sheet Arrangements, for further
information about the Company's off-balance sheet arrangements.
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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 $1.5 million
and $3.0 million during the three and six months ended June 30, 2021,
respectively, as a result of lower volumes resulting from COVID-19.
With the exception of the changes as a result of the Amended and Restated Credit
Agreement and our Notes Redemption, as discussed earlier within this Liquidity
and Capital Resources section and in Part I - Item 1 - Note 9, Financing and
Other Debt, respectively, there were no material changes to our contractual
obligations from the information previously provided in Item 7 of our Annual
Report on Form 10-K for the year ended December 31, 2020.
Share Repurchases
We currently have authorization from our board of directors to purchase up to
$150 million of our common stock until September 2021, which is entirely unused
as of June 30, 2021. The program is funded either through our future cash flows
or through borrowings on our Amended and Restated 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.
Asset and Business Acquisitions
On April 1, 2021, WEX Inc. completed the acquisition from Bell Bank of certain
contractual rights to serve as custodian or sub-custodian to health savings
accounts from the Healthcare Bank division of Bell Bank, which is owned by State
Bankshares, Inc.. This acquisition increases the Company's role in its
customer-directed healthcare ecosystem and aligns with its growth strategy. On
the closing of the acquisition, WEX Inc. paid Bell Bank initial cash
consideration of $200.0 million. Pursuant to the purchase agreement, WEX Inc.
agreed to make an additional deferred cash payment of $25.0 million in July 2023
and a second additional deferred cash payment $25.0 million in January 2024. As
of June 1, 2021, in connection with the acquisition by WEX Health of Cirrus
Holdings, LLC, the second deferred payment of $25.0 million in exchange for the
Payment Reduction. As a result of the Payment Reduction, WEX Inc. continues to
owe Bell Bank $12.5 million for the second additional deferred cash payment,
which is due and payable in January 2024.
The purchase agreement also includes potential additional consideration payable
annually that is calculated on a quarterly basis and is contingent, and based,
upon any future increases in the Federal Funds rate. The contingent payment
period began on July 1, 2021 and shall extend until the earlier of (i) the year
ending December 31, 2030, or (ii) the date when the cumulative amount paid as
contingent consideration equals $225.0 million in the aggregate.
On April 13, 2021, the Company both entered into a share purchase agreement for,
and consummated the acquisition of, the remaining interest in WEX Europe
Services it did not own previously, which consisted of 25 percent of the issued
ordinary share capital, for a purchase price of $97.0 million. As a result of
the transaction, the Company now owns 100 percent of the issued ordinary share
capital of WEX Europe Services, which operates part of our fleet business in the
United Kingdom and Europe.
On June 1, 2021, WEX Inc.'s subsidiary, WEX Health, Inc., completed the
benefitexpress Acquisition. Pursuant to the terms of the definitive purchase
agreement, WEX Health consummated the benefitexpress Acquisition for total
consideration of approximately $275 million, subject to certain working capital
and other adjustments. WEX Health is owned by PO Holding, which is majority
owned by WEX Inc., with a non-controlling interest being held by SBI, which is
owned by State Bankshares, Inc., the owner of Bell Bank. To facilitate the
benefitexpress Acquisition, WEX Inc., PO Holding, SBI and Bell Bank entered into
the Subscription Agreement pursuant to which WEX Inc. purchased approximately
$262.5 million in value of shares in PO Holding and SBI acquired approximately
$12.5 million in value of shares in PO Holding in exchange for SBI granting the
Payment Reduction.
Dividends
The Company has not declared any dividends on its common stock since it
commenced trading on the NYSE on February 16, 2005. The timing and amount of
future dividends, if any, will be: (i) dependent upon the Company's results of
operations, financial condition, cash requirements and other relevant factors;
(ii) subject to the discretion of the Board of Directors of the Company; and
(iii) payable only out of the Company's surplus or current net profits in
accordance with the General Corporation Law of the State of Delaware.
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The Company has certain restrictions on the dividends it may pay under the
Amended and Restated Credit Agreement, including pro forma compliance with a
consolidated leverage ratio of 2.75:1.00 as of June 30, 2021.
Critical Accounting Policies and Estimates
Our critical accounting policy for the recording of our convertible debt changed
effective January 1, 2021 with the adoption of ASU 2020-06. We have included the
2021 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 ended December 31, 2020.
Convertible Notes
                                                                                       Effect if Actual Results Differ
                                                                                       from
Description                    Assumptions/Approach Used                               Assumptions

ASU 2020-06 no longer Prior to January 1, 2021, the Convertible Notes Under the "if-converted" method, requires that the

              were recorded at a debt discount with an initial        approximately 1.6 million shares
Company bifurcate its          carrying value of $237.5 million, with the              of the Company's common stock
convertible debt's             residual $54.7 million recognized within                associated with the assumed
conversion feature             additional paid-in capital on the Company's             conversion of these Convertible

between a liability and December 31, 2020 condensed consolidated balance Notes as of the beginning of the equity component. In

           sheet. Effective January 1, 2021, the convertible       period have been excluded from
addition, the standard         debt and its conversion feature are now accounted       diluted shares outstanding for
requires the application       for as a single unit of account, with an                the three and six months ended
of the if-converted            effective interest rate of 7.5 percent.                 June 30, 2021 as the effect of
method to calculate the                                                                including such shares would be
impact of convertible          It is the Company's current intention to settle         anti-dilutive.
instruments on diluted         all conversion of the Convertible Notes in shares
earnings per share.            of the Company's stock.



Recently Adopted Accounting Standards
See Part I - Item 1 - Note 2, Recent Accounting Pronouncements, to the condensed
consolidated financial statements of this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of June 30, 2021, we have no material changes to the market risk disclosures
in our Annual Report on Form 10-K for the year ended December 31, 2020.
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 June 30, 2021. 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 June 30, 2021. "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 June 30, 2021, 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 control 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 control over financial reporting to minimize
the impact on their design and operating effectiveness.


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