WEX Inc. - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2021
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission file number: 001-32426
WEX Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 01-0526993 | |||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| 1 Hancock St., | Portland, | ME | 04101 | |||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
(207) 773–8171
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, $0.01 par value | WEX | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S–T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.
| Large Accelerated Filer | ☒ | Accelerated Filer | ☐ | ||||||||||||||
| Non-accelerated Filer | ☐ | Smaller Reporting Company | ☐ | ||||||||||||||
| Emerging Growth Company | ☐ | ||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act).
☐ Yes ☒ No
Number of shares of common stock outstanding as of April 30, 2021 was 44,741,268.
TABLE OF CONTENTS
| PART I—FINANCIAL INFORMATION | |||||||||||
| Item 1. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| PART II—OTHER INFORMATION | |||||||||||
| Item 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 2. | |||||||||||
| Item 6. | |||||||||||
2
Unless otherwise indicated or required by the context, the terms “we,” “us,” “our,” “WEX,” or the “Company,” in this
Quarterly Report on Form 10–Q mean WEX Inc. and all of its subsidiaries that are consolidated under Generally Accepted Accounting Principles in the United States.
FORWARD–LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for statements that are forward-looking and are not statements of historical facts. This Quarterly Report includes forward-looking statements including, but not limited to, statements about management’s plan and goals. Any statements in this Quarterly Report that are not statements of historical facts are forward-looking statements. When used in this Quarterly Report, the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. Forward-looking statements relate to our future plans, objectives, expectations and intentions and are not historical facts and accordingly involve known and unknown risks and uncertainties and other factors that may cause the actual results or performance to be materially different from future results or performance expressed or implied by these forward-looking statements. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report and in oral statements made by our authorized officers:
•the extent to which the coronavirus (COVID-19) pandemic and measures taken in response thereto impact our business, results of operations and financial condition in excess of current expectations;
•the demand for worldwide travel as a result of COVID-19 and the length of time it may take for the travel industry to experience a rebound after the effects of the COVID-19 pandemic have subsided;
•the impact of fluctuations in fuel prices, including the impact of any reductions in fuel prices and the resulting impact on our revenues and net income;
•the effects of general economic conditions, including those caused by the effects of COVID-19, on fueling patterns as well as payment and transaction processing activity;
•our compliance, or our failure to comply, with the applicable requirements of MasterCard or Visa’s contracts and rules;
•any limitation, reduction, or elimination of interchange fees;
•the impact of foreign currency exchange rates on the Company’s operations, revenue and income;
•changes in interest rates;
•the effects of the Company’s business expansion and acquisition efforts;
•potential adverse changes to business or employee relationships, including those resulting from the completion of an acquisition;
•competitive responses to any acquisitions;
•uncertainty of the expected financial performance of the combined operations following completion of an acquisition;
•the failure to complete or successfully integrate and realize anticipated benefits, synergies and cost savings from the Company’s acquisitions, including the recently completed eNett and Optal acquisition;
•unexpected costs, charges or expenses resulting from an acquisition;
•the Company’s failure to successfully acquire, integrate, operate and expand commercial fuel card programs;
•the failure of corporate investments to result in anticipated strategic value;
•the impact and size of credit losses and fraudulent use of our payment cards or systems;
•the impact of changes to the Company’s credit standards;
•breaches of the Company’s technology systems or those of our third-party service providers and any resulting negative impact on our reputation, liabilities or relationships with customers or merchants;
•the Company’s ability to successfully obtain new customers and commercial agreements, maintain key commercial agreements, or maintain customer volumes under such commercial agreements;
•failure to expand the Company’s technological capabilities and service offerings as rapidly as the Company’s competitors;
•failure to successfully implement the Company’s information technology strategies and capabilities in connection with its technology outsourcing and insourcing arrangements and any resulting cost associated with that failure;
•the regulation, supervision, and examination of our business or our entities by domestic and foreign governmental authorities, as well as litigation and regulatory actions;
•the effect of the United Kingdom’s departure from the European Union and the resulting trade agreement;
•the impact of the transition from LIBOR as a global benchmark to a replacement rate;
•the impact of the 2016 Credit Agreement, as the same was amended and restated on April 1, 2021, and the Convertible Notes on our operations;
•the impact of increased leverage on the Company’s operations, results or borrowing capacity generally, and as a result of acquisitions specifically;
•the impact of sales or dispositions of significant amounts of our outstanding common stock into the public market, or the perception that such sales or dispositions could occur;
•the possible dilution to our stockholders caused by the issuance of additional shares of common stock or equity-linked securities, whether as a result of the Convertible Notes or otherwise;
•the incurrence of impairment charges if our assessment of the fair value of certain reporting units changes;
•the uncertainties of litigation, as well as
•other risks and uncertainties identified in Item 1A of 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.
3
Our forward-looking statements and these factors do not reflect the potential future impact of any alliance, merger, acquisition, disposition or stock repurchases. The forward-looking statements speak only as of the date of the initial filing of this Quarterly Report and undue reliance should not be placed on these statements. We disclaim any obligation to update any forward-looking statements as a result of new information, future events or otherwise.
4
ACRONYMS AND ABBREVIATIONS
The acronyms and abbreviations identified below are used in this Quarterly Report, including the unaudited condensed consolidated financial statements and the notes thereto. The following is provided to aid the reader and provide a reference point when reviewing this Quarterly Report.
| 2016 Credit Agreement | Credit agreement entered into on July 1, 2016, as amended from time to time, by and among the Company and certain of its subsidiaries, as borrowers, WEX Card Holding Australia Pty Ltd., as designated borrower, and Bank of America, N.A., as administrative agent on behalf of the lenders. | ||||
| Adjusted net income or ANI | A non-GAAP measure that adjusts net income attributable to shareholders to exclude unrealized gains and losses on financial instruments, net foreign currency remeasurement gains and losses, acquisition-related intangible amortization, other acquisition and divestiture related items, stock-based compensation, other costs, debt restructuring and debt issuance cost amortization, similar adjustments attributable to our non-controlling interests and certain tax related items. | ||||
| ASC | Accounting Standards Codification | ||||
| Average expenditure per payment processing transaction | Average total dollars of spend in a funded fuel transaction | ||||
| B2B | Business-to-business | ||||
| CODM | Chief operating decision maker | ||||
| Company | WEX Inc. and all entities included in the consolidated financial statements | ||||
| Convertible Notes | Convertible senior unsecured notes due on July 15, 2027 in an aggregate principal amount of $310 million with a 6.5 percent interest rate, issued July 1, 2020. | ||||
COVID-19 or (“coronavirus”) | An infectious disease caused by the SARS-CoV-2 virus. The World Health Organization declared the coronavirus outbreak a global pandemic on March 11, 2020. | ||||
| Discovery Benefits | Discovery Benefits, Inc. | ||||
| DSUs | Deferred stock units | ||||
| EBITDA | A non-GAAP measure that adjusts income before income taxes to exclude interest, depreciation and amortization | ||||
| EFS | Electronic Funds Source, LLC, a provider of customized corporate payment solutions for fleet and corporate customers with a focus on the large and mid-sized over-the-road fleets. On July 1, 2016, the Company acquired WP Mustang Topco LLC, the indirect parent of Electronic Funds Source, LLC and Warburg Pincus Private Equity XI (Lexington), LLC, an affiliated entity, from investment funds affiliated with Warburg Pincus LLC. | ||||
| eNett | eNett International (Jersey) Limited | ||||
| European Fleet business | WEX Fleet Europe (Go Fuel Card) and WEX Europe Services, collectively | ||||
| European Securitization Subsidiary | Gorham Trade Finance B.V., a special purpose entity consolidated by the Company | ||||
| FDIC | Federal Deposit Insurance Corporation | ||||
| GAAP | Generally Accepted Accounting Principles in the United States | ||||
| WEX Fleet Europe (Go Fuel Card) | A fleet business in Europe acquired from EG Group on July 1, 2019 | ||||
| HRA | Health Reimbursement Arrangements | ||||
| HSA | Health Savings Accounts | ||||
| Legal settlement | The settlement of legal proceedings and appeals related to the acquisition of eNett and Optal. | ||||
| NAV | Net asset value | ||||
| Net payment processing rate | The percentage of the dollar value of each payment processing transaction that the Company records as revenue from merchants less certain discounts given to customers and network fees | ||||
| Notes | $400 million senior notes with a 4.75% fixed rate, issued on January 30, 2013, which were redeemed in full by the Company on March 15, 2021 | ||||
| Noventis | Noventis, Inc. | ||||
| NYSE | New York Stock Exchange | ||||
| OFAC | The United States Treasury’s Office of Foreign Assets Control | ||||
| Optal | Optal Limited | ||||
| Over-the-road | Typically heavy trucks traveling long distances | ||||
| Payment processing fuel spend | Total dollar value of the fuel purchased by fleets that have a payment processing relationship with the Company | ||||
| Payment processing transactions | Total number of purchases made by fleets that have a payment processing relationship with the Company, where the Company maintains the receivable for the total purchase | ||||
| Payment solutions purchase volume | Total dollar value of all WEX-issued transactions that use WEX corporate card products and virtual card products | ||||
| Purchase volume | Total U.S. dollar value of all transactions in the Health and Employee Benefit Solutions segment where interchange is earned by the Company | ||||
| Redeemable non-controlling interest | The portion of the U.S. Health business’ net assets owned by a non-controlling interest subject to redemption rights held by the non-controlling interest | ||||
| SaaS | Software-as-a-service | ||||
| SEC | Securities and Exchange Commission | ||||
5
| Segment adjusted operating income | A non-GAAP measure that adjusts operating income to exclude specified items that the Company’s management excludes in evaluating segment performance, including acquisition and divestiture related expenses and adjustments including the acquisition related intangible amortization, stock-based compensation, other costs, debt restructuring costs and unallocated corporate expenses. | ||||
| TSR | Total shareholder return | ||||
| UNIK or WEX Latin America | UNIK S.A., the Company’s Brazilian subsidiary, which is branded WEX Latin America. This subsidiary was sold on September 30, 2020. | ||||
| U.S. Health business | WEX Health and Discovery Benefits, collectively | ||||
| WEX | WEX Inc., unless otherwise indicated or required by the context | ||||
| WEX Europe Services | A European Fleet business acquired by the Company from ExxonMobil on December 1, 2014 | ||||
| WEX Health | WEX Health, Inc, the Company’s healthcare technology and administration solutions provider/business. | ||||
6
PART I
Item 1. Financial Statements.
WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenues | |||||||||||
| Payment processing revenue | $ | 188,389 | $ | 204,037 | |||||||
| Account servicing revenue | 118,623 | 113,840 | |||||||||
| Finance fee revenue | 52,153 | 55,927 | |||||||||
| Other revenue | 51,592 | 57,875 | |||||||||
| Total revenues | 410,757 | 431,679 | |||||||||
| Cost of services | |||||||||||
| Processing costs | 109,762 | 104,917 | |||||||||
| Service fees | 11,146 | 13,754 | |||||||||
| Provision for credit losses | 5,059 | 33,987 | |||||||||
| Operating interest | 2,624 | 8,385 | |||||||||
| Depreciation and amortization | 29,194 | 24,789 | |||||||||
| Total cost of services | 157,785 | 185,832 | |||||||||
| General and administrative | 86,431 | 62,036 | |||||||||
| Sales and marketing | 78,347 | 68,782 | |||||||||
| Depreciation and amortization | 37,653 | 40,200 | |||||||||
| Operating income | 50,541 | 74,829 | |||||||||
| Financing interest expense | (33,284) | (32,031) | |||||||||
| Net foreign currency loss | (2,755) | (28,727) | |||||||||
| Net unrealized gain (loss) on financial instruments | 7,033 | (32,047) | |||||||||
| Income (loss) before income taxes | 21,535 | (17,976) | |||||||||
| Income tax benefit | (1,670) | (5,707) | |||||||||
| Net income (loss) | 23,205 | (12,269) | |||||||||
| Less: Net income from non-controlling interests | 726 | 1,363 | |||||||||
| Net income (loss) attributable to WEX Inc. | 22,479 | (13,632) | |||||||||
| Change in value of redeemable non-controlling interest | (25,044) | (2,624) | |||||||||
| Net loss attributable to shareholders | $ | (2,565) | $ | (16,256) | |||||||
| Net loss attributable to shareholders per share: | |||||||||||
| Basic | $ | (0.06) | $ | (0.37) | |||||||
| Diluted | $ | (0.06) | $ | (0.37) | |||||||
| Weighted average common shares outstanding: | |||||||||||
| Basic | 44,343 | 43,416 | |||||||||
| Diluted | 44,343 | 43,416 | |||||||||
See notes to unaudited condensed consolidated financial statements.
7
WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net income (loss) | $ | 23,205 | $ | (12,269) | |||||||
| Foreign currency translation | (6,877) | (41,404) | |||||||||
| Comprehensive income (loss) | 16,328 | (53,673) | |||||||||
| Less: Comprehensive income attributable to non-controlling interests | 407 | 894 | |||||||||
| Comprehensive income (loss) attributable to WEX Inc. | $ | 15,921 | $ | (54,567) | |||||||
See notes to unaudited condensed consolidated financial statements.
8
WEX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
| March 31, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 561,199 | $ | 852,033 | |||||||
| Restricted cash | 412,451 | 477,620 | |||||||||
Accounts receivable (net of allowances of $55,143 in 2021 and $59,147 in 2020) | 2,506,479 | 1,993,329 | |||||||||
| Securitized accounts receivable, restricted | 133,280 | 93,236 | |||||||||
| Prepaid expenses and other current assets | 95,002 | 86,629 | |||||||||
| Total current assets | 3,708,411 | 3,502,847 | |||||||||
Property, equipment and capitalized software (net of accumulated depreciation of $424,960 in 2021 and $402,406 in 2020) | 182,911 | 188,340 | |||||||||
| Goodwill | 2,759,025 | 2,688,138 | |||||||||
Other intangible assets (net of accumulated amortization of $874,800 in 2021 and $835,163 in 2020) | 1,413,377 | 1,552,012 | |||||||||
| Investment securities | 36,832 | 37,273 | |||||||||
| Deferred income taxes, net | 21,050 | 17,524 | |||||||||
| Other assets | 195,127 | 197,227 | |||||||||
| Total assets | $ | 8,316,733 | $ | 8,183,361 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Accounts payable | $ | 1,123,018 | $ | 778,207 | |||||||
| Accrued expenses | 321,081 | 362,472 | |||||||||
| Restricted cash payable | 412,451 | 477,620 | |||||||||
| Short-term deposits | 1,043,457 | 911,395 | |||||||||
| Short-term debt, net | 354,298 | 152,730 | |||||||||
| Other current liabilities | 53,440 | 58,429 | |||||||||
| Total current liabilities | 3,307,745 | 2,740,853 | |||||||||
| Long-term debt, net | 2,508,311 | 2,874,113 | |||||||||
| Long-term deposits | 118,591 | 148,591 | |||||||||
| Deferred income taxes, net | 198,790 | 220,122 | |||||||||
| Other liabilities | 152,454 | 164,546 | |||||||||
| Total liabilities | 6,285,891 | 6,148,225 | |||||||||
| Commitments and contingencies (Note 15) | |||||||||||
| Redeemable non-controlling interest | 142,616 | 117,219 | |||||||||
| Stockholders’ Equity | |||||||||||
Common stock $0.01 par value; 175,000 shares authorized; 49,010 shares issued in 2021 and 48,616 in 2020; 44,582 shares outstanding in 2021 and 44,188 in 2020 | 489 | 485 | |||||||||
| Additional paid-in capital | 850,108 | 872,711 | |||||||||
| Retained earnings | 1,286,387 | 1,286,976 | |||||||||
| Accumulated other comprehensive loss | (89,493) | (82,935) | |||||||||
Treasury stock at cost; 4,428 shares in 2021 and 2020 | (172,342) | (172,342) | |||||||||
| Total WEX Inc. stockholders’ equity | 1,875,149 | 1,904,895 | |||||||||
| Non-controlling interest | 13,077 | 13,022 | |||||||||
| Total stockholders’ equity | 1,888,226 | 1,917,917 | |||||||||
| Total liabilities and stockholders’ equity | $ | 8,316,733 | $ | 8,183,361 | |||||||
See notes to unaudited condensed consolidated financial statements.
9
WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
| Common Stock Issued | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Treasury Stock | Retained Earnings | Non-Controlling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2020 | 47,749 | $ | 477 | $ | 675,060 | $ | (115,449) | $ | (172,342) | $ | 1,530,614 | $ | 9,385 | $ | 1,927,745 | ||||||||||||||||||||||||||||||||
| Stock issued | 189 | 2 | 1,950 | — | — | — | — | 1,952 | |||||||||||||||||||||||||||||||||||||||
| Share repurchases for tax withholdings | — | — | (8,817) | — | — | — | — | (8,817) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 12,533 | — | — | — | — | 12,533 | |||||||||||||||||||||||||||||||||||||||
| Change in value of redeemable non-controlling interest | — | — | — | — | — | (2,624) | — | (2,624) | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | (40,935) | — | — | (469) | (41,404) | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | (13,632) | 1,221 | (12,411) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | 47,938 | $ | 479 | $ | 680,726 | $ | (156,384) | $ | (172,342) | $ | 1,514,358 | $ | 10,137 | $ | 1,876,974 | ||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 48,616 | $ | 485 | $ | 872,711 | $ | (82,935) | $ | (172,342) | $ | 1,286,976 | $ | 13,022 | $ | 1,917,917 | ||||||||||||||||||||||||||||||||
Cumulative effect adjustment1 | — | — | (41,982) | — | — | 1,976 | — | (40,006) | |||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2021 | 48,616 | 485 | 830,729 | (82,935) | (172,342) | 1,288,952 | 13,022 | 1,877,911 | |||||||||||||||||||||||||||||||||||||||
| Stock issued under share-based compensation plans | 394 | 4 | 22,555 | — | — | — | — | 22,559 | |||||||||||||||||||||||||||||||||||||||
| Share repurchases for tax withholdings | — | — | (21,062) | — | — | — | — | (21,062) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 17,886 | — | — | — | — | 17,886 | |||||||||||||||||||||||||||||||||||||||
| Change in value of redeemable non-controlling interest | — | — | — | — | — | (25,044) | — | (25,044) | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | (6,558) | — | — | (319) | (6,877) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 22,479 | 374 | 22,853 | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | 49,010 | $ | 489 | $ | 850,108 | $ | (89,493) | $ | (172,342) | $ | 1,286,387 | $ | 13,077 | $ | 1,888,226 | ||||||||||||||||||||||||||||||||
1 Reflects the impact of the Company’s modified retrospective adoption of ASU 2020-06 (See Note 2, Recent Accounting Pronouncements).
See notes to unaudited condensed consolidated financial statements.
10
WEX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income (loss) | $ | 23,205 | $ | (12,269) | |||||||
| Adjustments to reconcile net income to net cash (used for) provided by operating activities: | |||||||||||
| Net unrealized (gain) loss | (4,505) | 49,737 | |||||||||
| Stock-based compensation | 17,886 | 12,533 | |||||||||
| Depreciation and amortization | 66,847 | 64,989 | |||||||||
| Debt restructuring and debt issuance cost amortization | 4,455 | 2,002 | |||||||||
| Deferred tax benefit | (2,235) | (8,830) | |||||||||
| Provision for credit losses | 5,059 | 33,987 | |||||||||
| Changes in operating assets and liabilities, net of effects of acquisitions: | |||||||||||
| Accounts receivable and securitized accounts receivable | (565,374) | 488,709 | |||||||||
| Prepaid expenses and other current and other long-term assets | (11,065) | (18,830) | |||||||||
| Accounts payable | 350,563 | (200,428) | |||||||||
| Accrued expenses and restricted cash payable | (100,744) | (75,383) | |||||||||
| Income taxes | (3,877) | 5,822 | |||||||||
| Other current and other long-term liabilities | 2,490 | (1,816) | |||||||||
| Net cash (used for) provided by operating activities | (217,295) | 340,223 | |||||||||
| Cash flows from investing activities | |||||||||||
| Purchases of property, equipment and capitalized software | (18,280) | (20,665) | |||||||||
| Purchases of investment securities | (96) | (131) | |||||||||
| Maturities of investment securities | 61 | 88 | |||||||||
| Acquisitions | 1,909 | — | |||||||||
| Net cash used for investing activities | (16,406) | (20,708) | |||||||||
| Cash flows from financing activities | |||||||||||
| Repurchase of share-based awards to satisfy tax withholdings | (21,062) | (8,817) | |||||||||
| Proceeds from stock option exercises | 22,559 | 1,952 | |||||||||
| Net change in deposits | 102,958 | (143,049) | |||||||||
| Net activity on other debt | 194,798 | (84,985) | |||||||||
| Repayments on term loans | (16,152) | (16,152) | |||||||||
| Redemption of Notes | (400,000) | — | |||||||||
| Net change in securitized debt | 2,320 | (6,909) | |||||||||
| Net cash used for financing activities | (114,579) | (257,960) | |||||||||
| Effect of exchange rates on cash, cash equivalents and restricted cash | (7,723) | (16,543) | |||||||||
| Net change in cash, cash equivalents and restricted cash | (356,003) | 45,012 | |||||||||
Cash, cash equivalents and restricted cash, beginning of period(a) | 1,329,653 | 981,381 | |||||||||
Cash, cash equivalents and restricted cash, end of period(a) | $ | 973,650 | $ | 1,026,393 | |||||||
| Supplemental disclosure of non-cash investing and financing activities | |||||||||||
| Capital expenditures incurred but not paid | $ | 2,213 | $ | 3,362 | |||||||
(a) The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within our condensed consolidated balance sheets to amounts within our condensed consolidated statements of cash flows.
11
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash and cash equivalents at beginning of period | $ | 852,033 | $ | 810,932 | |||||||
| Restricted cash at beginning of period | 477,620 | 170,449 | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | $ | 1,329,653 | $ | 981,381 | |||||||
| Cash and cash equivalents at end of period | $ | 561,199 | $ | 861,188 | |||||||
| Restricted cash at end of period | 412,451 | 165,205 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 973,650 | $ | 1,026,393 | |||||||
See notes to unaudited condensed consolidated financial statements.
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| 1. | Basis of Presentation | ||||
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10–Q and Rule 10–01 of Regulation S–X. Accordingly, they do not include all information and notes required by GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements that are included in the Company’s Annual Report on Form 10–K for the year ended December 31, 2020, filed with the SEC on March 1, 2021. In the opinion of management, all adjustments considered necessary for a fair presentation, which are of a normal recurring nature, have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results for any future periods or the year ending December 31, 2021.
With the exception of the accounting policy over convertible debt, which was impacted by the early adoption of ASU 2020–06 effective January 1, 2021 (refer to Adoption of a New Accounting Standard later within this Note and Note 2, Recent Accounting Pronouncements), we have applied the same accounting policies in preparing these quarterly financial statements as we did in preparing our 2020 annual financial statements.
The Company rounds amounts in the unaudited condensed consolidated financial statements to thousands and calculates all per-share data from underlying whole-dollar amounts. Thus, certain amounts may not foot, crossfoot or recalculate based on reported numbers due to rounding.
COVID-19 Pandemic Response and Impact
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.
During the first quarter of 2020, the Company took a number of precautionary steps to safeguard its business and employees from the effects of COVID-19 including restricting business travel, temporarily closing offices and canceling participation in various industry events. These precautionary steps have largely remained in force through the first quarter of 2021 as the Company continues to closely track and assess the evolving effect of the pandemic. The Company is actively managing its responses in collaboration with its employees, customers and suppliers.
The spread of COVID-19, and conditions arising in connection with it, including restrictions on businesses and individuals and wider changes in business and customer behavior, have continued to impact the Company’s businesses during the three months ended March 31, 2021. The following describes these impacts by reportable segment:
Fleet Solutions — Volumes in the North American fleet and international portions of the business continue their recovery during the first quarter of 2021 while volumes in our over-the-road trucking business continue to maintain strong growth relative to the prior year comparable quarter.
Travel and Corporate Solutions — Of the Company’s segments, Travel and Corporate Solutions continues to be the most impacted by the pandemic and corresponding decline in worldwide travel and tourism. Purchase volume in the travel portion of the segment was significantly lower during the first quarter of 2021 as compared to the corresponding quarter of 2020, however, has increased significantly over the fourth quarter of 2020. The corporate payments portion of the segment has seen an increase in purchase volumes compared to the first quarter of 2020, which is largely attributable to the ongoing migration of businesses to virtual payments and increasing usage of our accounts payable products.
Health and Employee Benefit Solutions — Volume challenges were most felt during the second quarter of 2020 as a result of cardholders deferring non-essential medical treatments when U.S. lockdown restrictions were most severe. Purchase volumes continue to be impacted by the pandemic as deferral of discretionary healthcare spend persists.
The Company continued to evaluate the effects of COVID-19 on its goodwill and long-lived asset groups during the first quarter of 2021, and did not identify any triggering events that would require us to perform goodwill impairment or long-lived asset recoverability tests. The full impact of COVID-19 on the Company's business, operations and the global economy as a whole is unknown, and the duration and changing nature of the pandemic will require us to continually reassess the effects on the Company’s goodwill and long-lived asset groups each reporting period. Changes in our evaluation of economic conditions
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and expectations for the business could prompt goodwill impairment or long-lived asset recoverability tests, and potential impairment charges in the future.
Adoption of a New Accounting Standard
The Company early adopted ASU 2020-06 on January 1, 2021, utilizing the modified-retrospective approach, recognizing the cumulative adjustment to retained earnings as of the effective date, without restatement of prior period amounts. ASU 2020-06 simplifies accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. This standard eliminates the bifurcation of the equity component associated with the cash conversion feature for convertible notes, which were previously recorded within equity. As a result of adoption, the convertible debt and its conversion feature are now accounted for as a single unit of account.
The following table illustrates the adoption impact of ASU 2020-06:
| January 1, 2021 | |||||||||||||||||
| (In thousands) | Prior to adoption | Impact of adoption | As reported | ||||||||||||||
| Long-term debt, net | $ | 2,874,113 | $ | 52,115 | $ | 2,926,228 | |||||||||||
| Deferred income taxes, net (within total liabilities) | $ | 220,122 | $ | (12,109) | $ | 208,013 | |||||||||||
| Additional paid-in capital | $ | 872,711 | $ | (41,982) | $ | 830,729 | |||||||||||
| Retained earnings | $ | 1,286,976 | $ | 1,976 | $ | 1,288,952 | |||||||||||
The Company continues to apply the if-converted method to calculate the impact of the Convertible Notes on the diluted earnings per share as required by ASU 2020-06. See Note 6, Earnings per Share, for more information.
Allowance for Accounts Receivable
The allowance for accounts receivable consists primarily of reserves for credit losses, reflecting management’s current estimate of uncollectible balances on its accounts receivable. The reserve for expected credit losses includes both a quantitative and qualitative reserve component. The quantitative component is primarily calculated using an analytic model, which includes the consideration of historical loss experience and past events to calculate actual loss-rates at the portfolio level. It also includes reserves against specific customer account balances determined to be at risk for non-collection based on customer information including delinquency, changes in payment patterns and other information. The qualitative component is determined through analyzing recent trends in economic indicators and other current and forecasted information to determine whether loss-rates are expected to change significantly in comparison to historical loss-rates at the portfolio level. When such indicators are forecasted to trend a predetermined amount from the historical median, the Company qualitatively determines what impact, if any, the trends are expected to have on the reserve for expected credit losses. Economic indicators include consumer price indices, consumer spending and unemployment trends, among others.
Accounts receivable are evaluated for impairment on a pooling basis based on similar risk characteristics including industry of the borrower, historical or expected credit loss patterns, risk ratings or classification, and geographic location. As a result of this evaluation, our portfolio segments consist of the following:
•Fleet Solutions - The majority of the customer base consists of companies within the transportation, logistics and fleet industries. The associated credit losses by customer are generally low, however, the Fleet Solutions segment has historically comprised the majority of the Company’s provision for credit loss. Credit losses generally correlate with changes in consumer price indices and other indices that measure trends and volatility including the Institute of Supply Management Purchasing Index and the U.S. Volatility Index.
•Travel and Corporate Solutions - The customer base is comprised of businesses operating in a wide range of industries including large online travel agencies. With the exception of the Noventis portfolio, which has minimal credit risk due to its business model and collection terms, and the eNett and Optal portfolio, which has minimal credit risk due to its prefunding model, associated credit losses are sporadic and closely correlate with trends in consumer metrics, including consumer spending and the consumer price index.
•Health and Employee Benefit Solutions - The customer base includes third-party administrators, individual employers and employees. The associated credit losses are generally low.
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When individual accounts receivable exhibit elevated credit risk characteristics as a result of bankruptcies, disputes, conversations with customers, or other significant credit loss events, they are assessed individual credit loss estimates. Assumptions regarding expected credit losses are reviewed each reporting period and may be impacted by actual performance of accounts receivable and changes in any of the factors discussed above.
The allowance for accounts receivable also includes reserves for fraud losses and waived finance fees. Management regularly monitors known and suspected fraudulent activity, including pending fraud cases, customer-identified fraudulent activity and unconfirmed suspicious activity in order to make judgments as to probable fraud losses and determine the reserve. Waived finance fees are used to maintain customer goodwill and recorded against the late fee revenue recognized.
Off-Balance Sheet Arrangements
The Company has off-balance sheet commitments, in the form of extensions of credit to customers and accounts receivables factoring arrangements for the Company’s subsidiaries, WEX Europe Services and WEX Bank, that carry credit risk exposure. See Note 10, Off-Balance Sheet Arrangements, for the terms of the factoring arrangements.
The Company can generally adjust customers’ credit lines at its discretion at any time, and thus the unfunded portion of loan commitments is unconditionally cancellable and does not carry significant credit risk. As it relates to accounts receivables factoring arrangements, the Company does not maintain any beneficial interest in receivables sold, and does not maintain any credit risk on receivables sold below the credit limit. The amount by which factored receivables exceeded the credit limit was insignificant as of March 31, 2021 and 2020. Given the insignificance of credit risk related to off-balance sheet commitments, the Company has not established a liability for expected credit losses as of March 31, 2021.
| 2. | Recent Accounting Pronouncements | ||||
The following table provides a brief description of accounting pronouncements adopted during the three months ended March 31, 2021 and recent accounting pronouncements not yet adopted that could have a material effect on our financial statements:
| Standard | Description | Date/Method of Adoption | Effect on financial statements or other significant matters | |||||||||||||||||
| Adopted During the Three Months Ended March 31, 2021 | ||||||||||||||||||||
| ASU 2020–06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging –Contracts in Entity's Own Equity (Subtopic 815-40) | This standard simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity's own equity. Among other changes, this standard removes from GAAP the liability and equity separation model for convertible instruments with a cash conversion feature. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible debt instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. The standard also requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share. | The Company early adopted ASU 2020–06 effective January 1, 2021, using the modified-retrospective approach. | Refer to Note 1, Basis of Presentation, for a summary of the financial statement effects as a result of this ASU adoption. Additionally, interest expense related to the amortization of the debt discount on our Convertible Notes is expected to decline approximately $5.5 million during the year ending December 31, 2021 as a result of the adoption of this ASU. | |||||||||||||||||
| Not Adopted as of March 31, 2021 | ||||||||||||||||||||
| ASU 2020–04, Reference Rate Reform | This standard provides optional guidance for a limited period of time to ease the potential financial reporting burden in accounting for (or recognizing the effects of) the discontinuation of LIBOR resulting from reference rate reform. The amendments provide optional expedients and exceptions for applying GAAP to contracts and other transactions impacted by reference rate reform. If certain criteria are met, an entity will not be required to remeasure or reassess contracts impacted by reference rate reform. | Election is available through December 31, 2022. | The Company is currently evaluating the implications of these amendments to its current efforts for reference rate reform implementation and any impact the adoption of this ASU would have on its financial condition and results of operations. | |||||||||||||||||
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| 3. | Revenue | ||||
In accordance with Topic 606, revenue is recognized when, or as, performance obligations are satisfied as defined by the terms of the contract, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for goods or services provided.
The following tables disaggregate the Company’s consolidated revenue:
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||
| (In thousands) | Fleet Solutions | Travel and Corporate Solutions | Health and Employee Benefit Solutions | Total | |||||||||||||||||||
| Topic 606 revenues | |||||||||||||||||||||||
| Payment processing revenue | 110,576 | $ | 57,248 | $ | 20,565 | $ | 188,389 | ||||||||||||||||
| Account servicing revenue | 4,369 | 10,687 | 67,945 | 83,001 | |||||||||||||||||||
| Other revenue | 20,246 | 1,800 | 7,745 | 29,791 | |||||||||||||||||||
| Total Topic 606 revenues | $ | 135,191 | $ | 69,735 | $ | 96,255 | $ | 301,181 | |||||||||||||||
| Non-Topic 606 revenues | 108,646 | 907 | 23 | 109,576 | |||||||||||||||||||
| Total revenues | $ | 243,837 | $ | 70,642 | $ | 96,278 | $ | 410,757 | |||||||||||||||
| Three Months Ended March 31, 2020 | |||||||||||||||||||||||
| (In thousands) | Fleet Solutions | Travel and Corporate Solutions | Health and Employee Benefit Solutions | Total | |||||||||||||||||||
| Topic 606 revenues | |||||||||||||||||||||||
| Payment processing revenue | $ | 113,323 | $ | 70,268 | $ | 20,446 | $ | 204,037 | |||||||||||||||
| Account servicing revenue | 4,371 | 11,063 | 63,569 | 79,003 | |||||||||||||||||||
| Other revenue | 21,288 | 771 | 9,023 | 31,082 | |||||||||||||||||||
| Total Topic 606 revenues | $ | 138,982 | $ | 82,102 | $ | 93,038 | $ | 314,122 | |||||||||||||||
| Non-Topic 606 revenues | 110,865 | 2,257 | 4,435 | 117,557 | |||||||||||||||||||
| Total revenues | $ | 249,847 | $ | 84,359 | $ | 97,473 | $ | 431,679 | |||||||||||||||
The vast majority of the above revenue relates to services transferred to the customer over time. Point-in-time revenue recognized was immaterial during the three months ended March 31, 2021 and 2020.
Contract Balances
The majority of the Company’s receivables, which are excluded from the table below, are either due from cardholders who have not been deemed the Company’s customer as it relates to interchange income or from revenues earned outside of the scope of Topic 606. The Company’s contract assets consist of upfront payments made to customers under long-term contracts and are recorded upon payment or when due. The resulting asset is amortized against revenue as the Company performs its obligations under these arrangements. The Company’s contract liabilities consist of customer payments received before the Company has satisfied the associated performance obligations and upfront payments due to the customer.
The following table provides information about these contract balances:
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| (In thousands) | ||||||||||||||||||||
| Contract balance | Location on the unaudited condensed consolidated balance sheets | March 31, 2021 | December 31, 2020 | |||||||||||||||||
Receivables | Accounts receivable, net | $ | 45,294 | $ | 43,541 | |||||||||||||||
Contract assets | Prepaid expenses and other current assets | 6,190 | 5,495 | |||||||||||||||||
Contract assets | Other assets | 22,471 | 19,927 | |||||||||||||||||
Contract liabilities | Other current liabilities | 7,511 | 8,530 | |||||||||||||||||
Contract liabilities | Other liabilities | 21,493 | 24,614 | |||||||||||||||||
| Refund liabilities | Accrued expenses | 5,265 | 5,265 | |||||||||||||||||
During the three months ended March 31, 2021, the Company recognized revenue of $2.7 million related to contract liabilities existing as of December 31, 2020.
Remaining Performance Obligations
The Company’s unsatisfied or partially unsatisfied performance obligations as of March 31, 2021 represent the remaining minimum monthly fees on a portion of contracts across the lines of business and contractually obligated professional services yet to be provided by the Company. The following table includes revenue expected to be recognized related to remaining performance obligations at the end of the reporting period and is not indicative of the Company’s future revenue, as it relates to an insignificant portion of the Company’s operations.
| (In thousands) | Remaining 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | |||||||||||||||||||||||||||||||||||||||
Minimum monthly fees1 | $ | 34,825 | $ | 30,741 | $ | 19,170 | $ | 7,807 | $ | 2,685 | $ | 40 | $ | — | $ | 95,268 | |||||||||||||||||||||||||||||||
Professional services2 | 2,614 | 132 | — | — | — | — | — | 2,746 | |||||||||||||||||||||||||||||||||||||||
Other3 | 3,815 | 3,464 | 3,145 | 3,410 | 3,741 | 3,928 | 4,124 | 25,627 | |||||||||||||||||||||||||||||||||||||||
| Total remaining performance obligations | $ | 41,254 | $ | 34,337 | $ | 22,315 | $ | 11,217 | $ | 6,426 | $ | 3,968 | $ | 4,124 | $ | 123,641 | |||||||||||||||||||||||||||||||
1 The transaction price allocated to the remaining performance obligations represents the minimum monthly fees on certain service contracts, which contain substantive termination penalties that require the counterparty to pay the Company for the aggregate remaining minimum monthly fees upon an early termination for convenience.
2 Includes software development projects and other services sold subsequent to the core offerings, to which the customer is contractually obligated.
3 Represents deferred revenue associated with remaining payment processing service obligations.
| 4. | Acquisitions | ||||
On January 24, 2020, the Company entered into a purchase agreement (the “Original Purchase Agreement”) to purchase eNett, a leading provider of B2B payment solutions to the travel industry, and Optal, a company that specializes in optimizing B2B payments transactions. The parties’ obligations to consummate the acquisition were subject to customary closing conditions, including the absence of a Material Adverse Effect (as defined in the Original Purchase Agreement between WEX, eNett and Optal, among others). The Company subsequently concluded that the COVID-19 pandemic and conditions arising in connection with it had a Material Adverse Effect on the businesses, which was disproportionate to the effect on others in the relevant industry. Because of this Material Adverse Effect, WEX formally advised eNett and Optal on May 4, 2020 that it was not required to close the transaction pursuant to the terms of the purchase agreement. On May 11, 2020, the shareholders of eNett and Optal each initiated separate legal proceedings in the High Court of Justice of England and Wales in the United Kingdom against the Company seeking a declaration that no Material Adverse Effect had occurred and an order for specific performance of WEX's obligations under the Original Purchase Agreement. A London court held a trial of certain preliminary issues from September 21, 2020 through September 29, 2020 and handed down its judgement on October 12, 2020. The Company and the claimants each sought permission to appeal certain portions of the Court’s judgment.
On December 15, 2020, the Company entered into a Deed of Settlement (the “Settlement Deed”) between the Company, eNett, Optal and the other parties thereto, providing for, among other things, (i) the dismissal with prejudice of the legal proceedings and appeals described above, (ii) the amendment of the Original Purchase Agreement (as amended by the Settlement Deed, the “Amended Purchase Agreement”) and (iii) the release of all claims capable of arising out of, or in any way connected with or relating to the COVID-19 pandemic, but excluding any of the claims arising under the Amended Purchase Agreement.
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The closing of the acquisition occurred concurrent with the execution of the Settlement Deed on December 15, 2020. The Amended Purchase Agreement provided for, among other things, a reduction of the aggregate purchase price for the acquisition to $577.5 million, subject to certain working capital and other adjustments as described in the Amended Purchase Agreement, which resulted in a total cash payment of $613.5 million, after a $1.9 million working capital adjustment received by the Company during the first quarter of 2021. The Company purchased these businesses to complement its existing Travel and Corporate Solutions segment and expand its international footprint.
The Company determined that the aggregate purchase price represents consideration paid for the businesses acquired and for the settlement of the legal proceedings described above. The preliminary fair value of the businesses acquired was estimated to be $415.0 million using a discounted cash flow analysis and guideline transaction method. Since the Company was not able to reliably estimate the fair value of the legal settlement, the residual value of $162.5 million has been allocated to the settlement of the legal proceedings, which was included in legal settlement expense during the fourth quarter of 2020.
This acquisition has been accounted for using the acquisition method of accounting, which requires the assets acquired and liabilities assumed to be recognized at their respective fair values on the acquisition date. The table below summarizes the allocated fair values of the assets acquired and liabilities assumed on the acquisition date. These fair values may continue to be revised during the measurement period as third-party valuations on the intangible assets are finalized, further information becomes available and additional analyses are performed, and these adjustments could have a material impact on the purchase price allocation.
The following is a summary of the preliminary allocation of the purchase price to the assets and liabilities acquired, based on the fair value at the date of acquisition:
| (In thousands) | As Reported December 31, 2020 | Measurement Period Adjustments | As Reported March 31, 2021 | |||||||||||||||||
Cash consideration transferred, net of $232,155 in cash and restricted cash acquired | $ | 383,204 | $ | (1,909) | $ | 381,295 | ||||||||||||||
| Less: legal settlement | (162,500) | — | (162,500) | |||||||||||||||||
| Total consideration, net | $ | 220,704 | $ | (1,909) | $ | 218,795 | ||||||||||||||
| Less: | ||||||||||||||||||||
| Accounts receivable | 14,449 | — | 14,449 | |||||||||||||||||
| Property and equipment | 876 | — | 876 | |||||||||||||||||
Customer relationships(a)(c) | 79,923 | (32,323) | 47,600 | |||||||||||||||||
Developed technologies(b)(c) | 63,125 | (56,825) | 6,300 | |||||||||||||||||
| License agreements | 4,208 | (4,208) | — | |||||||||||||||||
| Deferred income tax asset | 9,424 | — | 9,424 | |||||||||||||||||
| Other assets | 16,605 | — | 16,605 | |||||||||||||||||
| Accounts payable | (16,244) | — | (16,244) | |||||||||||||||||
| Accrued expenses | (21,898) | — | (21,898) | |||||||||||||||||
| Restricted cash payable | (186,956) | — | (186,956) | |||||||||||||||||
| Deferred income tax liability | (20,152) | 12,951 | (7,201) | |||||||||||||||||
| Other liabilities | (14,540) | 3,552 | (10,988) | |||||||||||||||||
| Recorded goodwill | $ | 291,884 | $ | 74,944 | $ | 366,828 | ||||||||||||||
(a) Weighted average life - 7.3 years.
(b) Weighted average life - 0.5 years.
(c) The weighted average life of the $53.9 million of amortizable intangible assets acquired in this business combination is 6.5 years.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring the businesses. The majority of the goodwill recognized as a result of the acquisition is not expected to be deductible for tax purposes.
The pro forma information below gives effect to the acquisition as if it had been completed on January 1, 2019. These pro forma results have been calculated after applying the Company’s accounting policies, adjustments to reflect amortization associated with intangibles acquired and related income tax results. The pro forma financial information is presented for
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comparative purposes only, based on certain estimates and assumptions, which the Company believes to be reasonable but not necessarily indicative of future results of operations or the results that would have been reported if the acquisitions had been completed on January 1, 2019.
The following represents unaudited pro forma operational results:
| (In thousands, except per share data) | Three Months Ended March 31, 2020 | ||||
| Total revenues | $ | 452,421 | |||
| Net loss attributable to shareholders | $ | (11,694) | |||
| Net loss attributable to shareholders per share: | |||||
| Basic | $ | (0.27) | |||
| Diluted | $ | (0.27) | |||
| 5. | Accounts Receivable | ||||
Accounts receivable consists of amounts billed to and due from customers across a wide range of industries and other third parties. The Company often extends short-term credit to cardholders and pays the merchant for the purchase price, less the fees it retains and records as revenue. The Company subsequently collects the total purchase price from the cardholder. In general, the Company’s trade receivables provide for payment terms of 30 days or less. Receivables not paid in full by payment due dates as stated within the terms of the agreement are generally considered past due and subject to late fees and interest based upon the outstanding receivables balance. The Company discontinues late fee and interest income accruals on outstanding receivables once customers are 90 and 120 days past the invoice due date, respectively. Payments received subsequent to discontinuing late fee and interest income accruals are first applied to outstanding late fees and interest, and the Company resumes accruing interest and late fee income as earned on future receivables balances. Receivables are generally written off when they are 180 days past due or upon declaration of bankruptcy of the customer, subject to local regulatory restrictions.
The Company extends revolving credit to certain small fleets. These accounts are also subject to late fees and balances that are not paid in full are subject to interest charges based on the revolving balance. The Company had approximately $66.7 million and $60.2 million in receivables with revolving credit balances as of March 31, 2021 and December 31, 2020, respectively.
The following tables present changes in the accounts receivable allowances by portfolio segment:
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| Three Months Ended March 31, 2021 | |||||||||||||||||||||||
| (In thousands) | Fleet Solutions | Travel and Corporate Solutions | Health and Employee Benefit Solutions | Total | |||||||||||||||||||
| Balance, beginning of period | $ | 49,267 | $ | 9,610 | $ | 270 | $ | 59,147 | |||||||||||||||
Provision for credit losses1 | 4,364 | 635 | 60 | 5,059 | |||||||||||||||||||
Charges to other accounts2 | 4,373 | — | — | 4,373 | |||||||||||||||||||
| Charge-offs | (12,774) | (1,532) | (18) | (14,324) | |||||||||||||||||||
| Recoveries of amounts previously charged-off | 1,516 | 6 | — | 1,522 | |||||||||||||||||||
| Currency translation | (565) | (69) | — | (634) | |||||||||||||||||||
| Balance, end of period | $ | 46,181 | $ | 8,650 | $ | 312 | $ | 55,143 | |||||||||||||||
| Three Months Ended March 31, 2020 | |||||||||||||||||||||||
| (In thousands) | Fleet Solutions | Travel and Corporate Solutions | Health and Employee Benefit Solutions | Total | |||||||||||||||||||
| Balance, beginning of period | $ | 50,010 | $ | 5,765 | $ | 8,076 | $ | 63,851 | |||||||||||||||
Provision for credit losses1,3 | 20,607 | 13,264 | 116 | 33,987 | |||||||||||||||||||
Charges to other accounts2 | 5,520 | — | — | 5,520 | |||||||||||||||||||
| Charge-offs | (24,635) | (2,359) | — | (26,994) | |||||||||||||||||||
| Recoveries of amounts previously charged-off | 1,810 | 27 | — | 1,837 | |||||||||||||||||||
| Currency translation | (135) | (96) | (2,544) | (2,775) | |||||||||||||||||||
| Balance, end of period | $ | 53,177 | $ | 16,601 | $ | 5,648 | $ | 75,426 | |||||||||||||||
1 The provision is comprised of estimated credit losses based on the Company’s loss-rate experience and adjustments required for forecasted credit loss information. The provision for credit losses reported within this table also includes the provision for fraud losses.
2 The Company earns revenue by assessing monthly finance fees on accounts with overdue balances. These fees are recognized as revenue at the time the fees are assessed. The finance fee is calculated using the greater of a minimum charge or a stated late fee rate multiplied by the outstanding balance that is subject to a late fee charge. On occasion, these fees are waived to maintain customer relationship goodwill. Charges to other accounts represents the offset against the late fee revenue recognized when the Company establishes a reserve for such waived amounts.
3 The provision for the three months ended March 31, 2020 reflects an increase in expected credit losses as a result of COVID-19.
Concentration of Credit Risk
The receivables portfolio consists of a large group of homogeneous smaller balances across a wide range of industries, which are collectively evaluated for impairment. No one customer receivable balance represented 10 percent or more of the outstanding receivables balance at March 31, 2021 or December 31, 2020. The following table presents the outstanding balance of trade accounts receivable that are less than 30 and 60 days past due, in each case, as a percentage of total trade accounts receivable:
| Delinquency Status | March 31, 2021 | December 31, 2020 | |||||||||
| 29 days or less past due | 98 | % | 97 | % | |||||||
| 59 days or less past due | 99 | % | 98 | % | |||||||
| 6. | Earnings per Share | ||||
Basic earnings per share is computed by dividing net (loss) income attributable to shareholders by the weighted average number of shares of common stock and vested DSUs outstanding during the year. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the numerator is increased for tax effected interest expense associated with our Convertible Notes and the denominator is increased for the assumed issuance of common shares issuable on convertible securities under the “if converted” method unless the effect is anti-dilutive. Additionally, diluted earnings per share includes the assumed exercise of dilutive options and the assumed issuance of unvested restricted stock units
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and performance-based awards for which the performance condition has been met as of the date of determination, using the treasury stock method unless the effect is anti-dilutive. The treasury stock method assumes that proceeds, including cash received from the exercise of employee stock options and the average unrecognized compensation expense for unvested share-based compensation awards, would be used to purchase the Company’s common stock at the average market price during the period.
The following table summarizes net loss attributable to shareholders and reconciles basic and diluted shares outstanding used in the earnings per share computations:
| Three Months Ended March 31, | |||||||||||
(In thousands) | 2021 | 2020 | |||||||||
| Net loss attributable to shareholders | $ | (2,565) | $ | (16,256) | |||||||
| Weighted average common shares outstanding – Basic | 44,343 | 43,416 | |||||||||
Dilutive impact of share-based compensation awards1 | — | — | |||||||||
| Weighted average common shares outstanding – Diluted | 44,343 | 43,416 | |||||||||
1 Due to the Company’s net loss position for the three months ended March 31, 2021 and 2020, 1.0 million and 0.6 million incremental shares, respectively, are excluded from the table above as the effect of including those shares would be anti-dilutive.
It is the Company’s current intention to settle all conversions of the Convertible Notes in shares of the Company's common stock. Under the “if-converted” method, approximately 1.6 million shares of the Company's common stock associated with the assumed conversion of these Convertible Notes as of the beginning of the period have been excluded from diluted shares outstanding for the three months ended March 31, 2021 as the effect of including such shares would be anti-dilutive.
| 7. | Derivative Instruments | ||||
The Company is exposed to certain market risks relating to its ongoing business operations. From time to time, the Company enters into derivative instrument arrangements to manage various risks including interest rate risk.
As of December 31, 2020, the Company had six interest rate swap contracts in effect with a collective notional amount at inception of $1.4 billion, with maturity dates ranging from December 31, 2021 to December 30, 2023, at interest rates between 0.743 percent and 2.413 percent. The Company did not cancel, modify or enter into any additional interest rate swap contracts during the three months ended March 31, 2021. As of March 31, 2021, outstanding interest rate swap contracts are intended to fix the future interest payments associated with $1.4 billion of the $2.3 billion of outstanding borrowings under the Company’s 2016 Credit Agreement.
The following table presents information on the location and amounts of interest rate swap gains and losses:
| (In thousands) | Three Months Ended March 31, | |||||||||||||||||||
| Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in the Statement of Operations | 2021 | 2020 | |||||||||||||||||
| Interest rate swap agreements – unrealized portion | Net unrealized gain (loss) on financial instruments | $ | 7,520 | $ | (32,443) | |||||||||||||||
| Interest rate swap agreements – realized portion | Financing interest expense | $ | (5,457) | $ | (792) | |||||||||||||||
Derivative instruments and their related gains and losses are reported within cash flows from operating activities within the unaudited condensed consolidated statements of cash flows. See Note 12, Fair Value, for more information regarding the valuation of the Company’s interest rate swaps.
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| 8. | Deposits | ||||
WEX Bank’s regulatory status enables it to raise capital to fund the Company’s working capital requirements by issuing deposits, subject to FDIC rules governing minimum financial ratios. See Note 18, Supplementary Regulatory Capital Disclosure, for further information concerning these FDIC requirements.
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 brokered money market deposit products. Customer deposits are generally non-interest bearing, certificates of deposit are issued at fixed rates and brokered money market deposits are issued at variable rates based on LIBOR or the Federal Funds rate.
The following table presents the composition of deposits, which are classified as short-term or long-term based on their contractual maturities:
(In thousands) | March 31, 2021 | December 31, 2020 | |||||||||
Interest-bearing brokered money market deposits1 | $ | 439,810 | $ | 439,894 | |||||||
| Customer deposits | 121,158 | 116,694 | |||||||||
Certificates of deposit with maturities within 1 year1,2 | 482,488 | 354,807 | |||||||||
| Short-term deposits | 1,043,457 | 911,395 | |||||||||
Certificates of deposit with maturities greater than 1 year and less than 5 years1,2 | 118,591 | 148,591 | |||||||||
| Total deposits | $ | 1,162,048 | $ | 1,059,986 | |||||||
| Weighted average cost of funds on certificates of deposit outstanding | 1.51 | % | 1.81 | % | |||||||
| Weighted average cost of interest-bearing brokered money market deposits | 0.24 | % | 0.27 | % | |||||||
1 As of March 31, 2021 and December 31, 2020, all certificates of deposit and brokered money market deposits were in denominations of $250 thousand or less, corresponding to FDIC deposit insurance limits.
2 Original maturities range from 9 months to 5 years, with coupon interest rates ranging from 0.18 percent to 3.52 percent as of March 31, 2021. At December 31, 2020, original maturities ranged from 1 year to 5 years with coupon interest rates ranging from 1.35 percent to 3.52 percent.
In accordance with regulatory requirements, WEX Bank normally maintains reserves against a portion of its outstanding customer deposits by keeping balances with the Federal Reserve Bank, however, due to temporarily relaxed Federal Reserve requirements enacted in response to the COVID-19 pandemic, there was no required reserve at March 31, 2021 and December 31, 2020.
ICS Purchases
From time to time, WEX Bank utilizes alternative funding sources such as Promontory Interfinancial Network, LLC’s ICS service, which provides for one-way buy transactions among banks for the purposes of purchasing cost-effective variable-rate funding without collateralization. WEX Bank may purchase brokered money market demand accounts and demand deposit accounts in amounts not to exceed $125.0 million through this service. There were no outstanding balances for ICS purchases at March 31, 2021 and December 31, 2020.
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| 9. | Financing and Other Debt | ||||
The following table summarizes the Company’s total outstanding debt by type as of March 31, 2021 and December 31, 2020.
| (In thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Tranche A term loan | 861,295 | 873,777 | |||||||||
| Tranche B term loan | 1,438,697 | 1,442,368 | |||||||||
Term loans under 2016 Credit Agreement1 | 2,299,992 | 2,316,145 | |||||||||
| Notes outstanding | — | 400,000 | |||||||||
Convertible Notes1 | 310,000 | 310,000 | |||||||||
Securitized debt1 | 86,496 | 85,945 | |||||||||
Borrowed federal funds1 | 214,798 | 20,000 | |||||||||
| Total gross debt | $ | 2,911,286 | $ | 3,132,090 | |||||||
1 See Note 12, Fair Value, for more information regarding the fair value of the Company’s debt.
The following table summarizes the Company’s total outstanding debt by balance sheet classification:
| (In thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Current portion of gross debt | $ | 365,905 | $ | 170,556 | |||||||
| Less: Unamortized debt issuance costs/debt discount | (11,607) | (17,826) | |||||||||
| Short-term debt, net | $ | 354,298 | $ | 152,730 | |||||||
| Long-term portion of gross debt | $ | 2,545,381 | $ | 2,961,534 | |||||||
| Less: Unamortized debt issuance costs/debt discount | (37,070) | (87,421) | |||||||||
| Long-term debt, net | $ | 2,508,311 | $ | 2,874,113 | |||||||
| Supplemental information under 2016 Credit Agreement: | |||||||||||
Letters of credit(1) | $ | 51,687 | $ | 51,628 | |||||||
Remaining borrowing capacity on revolving credit facility(2) | $ | 818,313 | $ | 818,372 | |||||||
(1) Collateral for lease agreements, virtual card and fuel payment processing activity at the Company’s foreign subsidiaries.
(2) Contingent on maintaining compliance with the financial covenants as defined in the Company’s 2016 Credit Agreement.
2016 Credit Agreement
On July 1, 2016, the Company entered into a credit agreement by and among the Company and certain of its subsidiaries from time to time party thereto, as borrowers, WEX Card Holding Australia Pty Ltd., as specified designated borrower, Bank of America, N.A. as administrative agent, swing line lender and letter of credit issuer and the lenders from time to time party thereto (the “2016 Credit Agreement”). As of March 31, 2021, the 2016 Credit Agreement, as amended through that date, provided for a senior secured tranche A term loan facility in an original principal amount of $1,030.0 million (the “Tranche A Term Loans”), a senior secured tranche B term loan facility in an original principal amount of $1,485.0 million (the “Tranche B Term Loans” and together with the Tranche A Term Loans, the “Term Loans”), and an $870.0 million secured revolving credit facility (the “Revolving Credit Facility”), with a $250.0 million sublimit for letters of credit and $20.0 million sublimit for swingline loans. As of March 31, 2021, the Company had an outstanding principal amount of $861.3 million on the Tranche A Term Loans, an outstanding principal amount of $1.44 billion on the Tranche B Term Loans and outstanding 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 a margin equal to 1.25 percent for base rate loans and 2.25 percent for eurocurrency loans. As of both March 31, 2021 and December 31, 2020, amounts outstanding under the 2016 Credit Agreement bore a weighted average effective interest rate of 2.3 percent. The Company maintains interest rate swap agreements to manage the interest rate risk associated with its outstanding variable-interest rate borrowings under the 2016 Credit Agreement. See
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Note 7, Derivative Instruments, for further discussion. In addition, the Company has agreed to pay a quarterly commitment fee at a rate per annum ranging, as of March 31, 2021, from 0.30% to 0.50% of the daily unused portion of the Revolving Credit Facility (which was 0.40% at both March 31, 2021 and December 31, 2020) determined based on the Company’s consolidated leverage ratio. As of March 31, 2021, the Revolving Credit Facility and the Tranche A Term Loans mature (and the commitments under the Revolving Credit Facility terminate) on July 1, 2023 and the Tranche B Term Loans mature on May 17, 2026.
On April 1, 2021, the Company amended and restated the Company’s 2016 Credit Agreement, which among other things, extended the maturity date for the Tranche A Term Loans and Revolving Credit Facility to April 1, 2026 and the Tranche B Term Loans to April 1, 2028, increased commitments under the Revolving Credit Facility by $60.0 million and provided additional Tranche A Term Loans in the principal amount of approximately $117.1 million. See Note 19, Subsequent Events, for further information regarding changes to the 2016 Credit Agreement as a result of the amendment and restatement.
Debt issuance costs incurred and capitalized in conjunction with the 2016 Credit Agreement and its amendments are being amortized into interest expense over the 2016 Credit Agreement’s term using the effective interest method.
Debt Covenants
As more fully described in the Company’s Annual Report on Form 10–K for the year ended December 31, 2020, the 2016 Credit Agreement contains various affirmative, negative and financial maintenance covenants affecting the Company and its subsidiaries including, in certain limited circumstances, WEX Bank and the Company’s other regulated subsidiaries. As of March 31, 2021, the Company was in compliance with all material covenants of its 2016 Credit Agreement.
Notes Outstanding
On March 15, 2021, the Company redeemed its $400.0 million of Notes outstanding, which were otherwise scheduled to mature on February 1, 2023. The redemption price of the Notes was $400.0 million plus accrued and unpaid interest through the redemption date. Prior to redemption, interest was payable semiannually in arrears on February 1 and August 1 of each year. Unamortized debt issuance costs previously incurred and capitalized in conjunction with the Notes were accelerated as of the redemption date and amortized in full to interest expense of $1.4 million during the three months ended March 31, 2021.
Convertible Notes
Pursuant to a purchase agreement dated June 29, 2020, on July 1, 2020, the Company closed on a private placement with an affiliate of Warburg Pincus LLC (together with its affiliate, "Warburg Pincus"), pursuant to which the Company issued the Convertible Notes due on July 15, 2027 in an aggregate principal amount of $310.0 million and 577,254 shares of the Company's common stock for an aggregate purchase price of $389.2 million, of which $90.0 million constituted the purchase price for the shares, reflecting a purchase price of $155.91 per share.
The 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 maturing July 15, 2027, unless earlier converted, repurchased or redeemed. Interest is calculated at a fixed rate of 6.5% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, with the initial interest payment of $10.9 million paid in cash on 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 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, including exceptions with respect to underwritten offerings, Rule 144A offerings, private placements at discounts not exceeding a specified amount, issuances as acquisition consideration and equity compensation related issuances.
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% of the conversion price of the Convertible Notes for 20 trading days
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(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.
In the event of certain fundamental change transactions, including certain change of control transactions and delisting events involving the Company, holders of the Convertible Notes will have the right to require the Company to repurchase its Convertible Notes at 105% of the outstanding principal amount of the Convertible Notes, plus the present value of future interest payments through the date of maturity. There were no shares issued upon conversion, exercise or satisfaction of required conditions under these Convertible Notes during the three months ended March 31, 2021.
At inception, the $389.2 million of proceeds from this private placement was allocated on a relative fair value basis, with $94.0 million allocated to the sale of the Company's common stock and $295.2 million to the Convertible Notes. As the Convertible Notes permit the Company to settle the conversion in cash, pursuant to ASC 470-20, the proceeds attributed to the Convertible Notes were further allocated between a liability and equity component. The Company estimated the fair value of the liability component of the Convertible Notes using observable inputs based on the present value of cash flows using the interest rate of a hypothetical debt instrument with a similar tenor without a conversion feature and utilizing a combination of a binomial lattice-based model and a discounted cash flow model that includes assumptions such as implied credit spread, expected volatility, and the risk-free rate for notes with a similar term. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the total proceeds allocated to the Convertible Notes.
Applicable transaction costs of $4.0 million have been allocated between the Convertible Notes and shares of the Company's common stock sold in the transaction based on relative fair value and further allocated between the liability and equity component of the Convertible Notes consistent with the initial allocation resulting in $2.5 million classified as debt issuance costs capitalized as a direct reduction to the face value of the Convertible Notes and $1.5 million deducted from the amounts recorded within stockholders' equity. The debt discount and debt issuance costs will be amortized to interest expense using the effective interest rate method over the seven-year contractual life of the Convertible Notes.
Based on this, the Convertible Notes were recorded at a debt discount with an initial carrying value of $237.5 million, with the residual $54.7 million recognized within additional paid-in capital on the Company's condensed consolidated balance sheet as of December 31, 2020. Effective January 1, 2021, the Company adopted ASU 2020-06 using the modified-retrospective approach under which separation of the conversion feature into an equity component is no longer required. See Note 1, Basis of Presentation, for more information. As of March 31, 2021, the Convertible Notes and its conversion feature are accounted for as a single unit of account, with an effective interest rate of 7.5%.
Based on the closing price of the Company's common stock as of March 31, 2021, the “if-converted” value of the Convertible Notes exceeds its principal amount by $14.3 million.
The Convertible Notes consist of the following:
| (In thousands) | March 31, 2021 | December 31, 2020 | ||||||||||||
| Principal | $ | 310,000 | $ | 310,000 | ||||||||||
| Less: Unamortized discounts | (14,164) | (66,755) | ||||||||||||
| Less: Unamortized issuance cost | (2,281) | (2,358) | ||||||||||||
Net carrying amount of Convertible Notes1 | $ | 293,555 | $ | 240,887 | ||||||||||
Equity component2 | $ | — | $ | 54,689 | ||||||||||
1 Recorded within long-term debt, net on our condensed consolidated balance sheet.
2 Represents the proceeds allocated to the conversion option, or debt discount, recorded within additional paid-in capital on the condensed consolidated balance sheet through December 31, 2020. Additional paid-in capital on the condensed consolidated balance sheet through December 31, 2020 was further reduced by $0.6 million of issuance costs and $13.6 million in taxes associated with the equity component. Effective January 1, 2021, the Convertible Notes and its conversion option were accounted for as a single unit of account.
The following table sets forth total interest expense recognized for the Convertible Notes:
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| (In thousands) | Three Months Ended March 31, 2021 | ||||
Interest on 6.5% coupon | $ | 5,038 | |||
| Amortization of debt discount and debt issuance costs | 553 | ||||
| $ | 5,591 | ||||
Australian Securitization Facility
In March 2021, the Company extended its securitized debt agreement with MUFG Bank, Ltd., through April 2022. Under the terms of the agreement, each month on a revolving basis, the Company sells certain of its Australian receivables to the Company’s Australian Securitization Subsidiary, which in turn uses the receivables as collateral to issue asset-backed commercial paper (“securitized debt”). The amount collected on the securitized receivables is restricted to pay the securitized debt and is not available for general corporate purposes.
The Company pays a variable interest rate on the outstanding balance of the securitized debt, based on the Australian Bank Bill Rate plus an applicable margin. The interest rate was 0.96 percent and 0.97 percent as of March 31, 2021 and December 31, 2020, respectively. The Company had $62.1 million and $62.6 million of securitized debt under this facility as of March 31, 2021 and December 31, 2020, respectively, recorded in short-term debt, net.
European Securitization Facility
Under the terms of the Company’s securitized debt agreement with MUFG Bank, Ltd., each month on a revolving basis, the Company sells certain of its receivables from selected European countries to its European Securitization Subsidiary, which in turn, uses the receivables as collateral to issue securitized debt. The amount collected on the securitized receivables is restricted to pay the securitized debt and is not available for general corporate purposes. Subsequent to March 31, 2021, the securitized debt agreement was amended to extend the maturity date through April 2022.
The Company pays a variable interest rate on the outstanding balance of the securitized debt, based on the Sterling Overnight Index Average, (“SONIA”) plus an applicable margin. The interest rate was 0.94 percent and 0.98 percent as of March 31, 2021 and December 31, 2020, respectively. The Company had $24.3 million and $23.4 million of securitized debt under this facility as of March 31, 2021 and December 31, 2020, respectively, recorded in short-term debt, net.
Participation Debt
From time to time, WEX Bank enters into participation agreements with third-party banks to fund customers’ balances that exceed WEX Bank’s lending limit to individual customers. Associated unsecured borrowings generally carry a variable interest rate of 1 month to 3 month LIBOR plus a margin of 225 basis points.
As of March 31, 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 March 31, 2021 or December 31, 2020.
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 $436.0 million and $376.0 million as of March 31, 2021 and December 31, 2020, respectively. There were $214.8 million of outstanding borrowings as of March 31, 2021 and $20.0 million of outstanding borrowings as of December 31, 2020. The average interest rate on borrowed federal funds was 0.10 percent for the three months ended March 31, 2021 and 1.01 percent for the year ended December 31, 2020.
Other
As of March 31, 2021, WEX Bank pledged $342.3 million of fleet receivables held by WEX Bank to the Federal Reserve Bank as collateral for potential borrowings, through the Federal Reserve Bank Discount Window. Amounts that can be borrowed are based on the amount of collateral pledged and were $200.0 million as of March 31, 2021 and $188.4 million as of December 31, 2020. WEX Bank had no borrowings outstanding on this line of credit through the Federal Reserve Bank Discount Window as of March 31, 2021 and December 31, 2020.
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| 10. | Off–Balance Sheet Arrangements | ||||
WEX Europe Services Accounts Receivable Factoring
Under a factoring arrangement between WEX Europe Services and an unrelated third-party financial institution, the Company sells customer accounts receivable balances without recourse to the extent that the customer balances are maintained at or below the credit limit established by the buyer. 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. If customer receivable balances exceed the buyer’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 provides legal isolation upon WEX Europe Services bankruptcy or receivership under local law and creates a sale of receivables for amounts transferred both below and above the established credit limits. The Company continues to service these receivables post-transfer with no participating interest. As such, transfers under this arrangement are treated as sales and are accounted for as reductions in trade accounts receivable because effective control of the receivables is transferred to the buyer.
The Company sold $119.0 million and $128.8 million of accounts receivable under this arrangement during the three months ended March 31, 2021 and 2020, respectively. Proceeds received, which are recorded net of applicable costs, including interest and commissions, are recorded in operating activities in the condensed consolidated statements of cash flows. The loss on factoring, recorded within cost of services, was insignificant for each of the three months ended March 31, 2021 and 2020. As of each of March 31, 2021 and December 31, 2020, the amount of outstanding transferred receivables in excess of the established credit limit was immaterial. Charge-backs on balances in excess of the credit limit during each of the three months ended March 31, 2021 and March 31, 2020 were insignificant.
WEX Bank Accounts Receivable Factoring
Under a factoring agreement with an unrelated third-party financial institution, WEX Bank sells certain of its trade accounts receivable under non-recourse transactions. The agreement extends through August 2021, after which the agreement can be renewed for successive one-year periods assuming WEX provides advance written notice that is accepted by the purchaser. 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. WEX Bank continues to service the receivables post-transfer with no participating interest. As such, transfers under this arrangement are treated as a sale and are accounted for as a reduction in trade accounts receivable because effective control of the receivables is transferred to the buyer.
The Company sold $0.2 billion and $2.8 billion of trade accounts receivable under this arrangement during the three months ended March 31, 2021 and 2020, respectively. Proceeds received, which are reported net of a negotiated discount rate, are recorded in operating activities in the statements of cash flows. The loss on factoring, which is recorded within cost of services in the unaudited condensed consolidated statements of operations, was insignificant for each of the three months ended March 31, 2021 and March 31, 2020.
WEX Latin America Securitization of Receivables
Prior to the sale of WEX Latin America on September 30, 2020, the Company transferred certain unsecured receivables associated with its salary advance payment card product to an investment fund in which WEX Latin America held a non-controlling equity interest, and that was managed by an unrelated third-party. The securitization arrangement met the derecognition conditions under GAAP and transfers under this arrangement were treated as sales and were accounted for as a reduction in trade receivables. During the three months ended March 31, 2020, the Company recognized a $3.7 million gain on the sale of $18.2 million of receivables. The gain recognized consists of the difference between the sales price and the carrying value of the receivables and is recorded within other revenue. Cash proceeds from the transfer of these receivables are recorded within operating activities in the condensed consolidated statements of cash flows.
| 11. | Investment Securities | ||||
The Company’s investment securities were purchased and are held by WEX Bank primarily to meet the requirements of the Community Reinvestment Act. Changes in the fair value of the Company’s equity securities are recognized within net unrealized loss on financial instruments on the unaudited condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020. The Company’s debt securities, and any changes in their fair values, are not material
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individually or in the aggregate as of March 31, 2021 and December 31, 2020. Purchases, sales and maturities associated with investment securities are treated as investing activities within the condensed consolidated statements of cash flows. Refer to Note 12, Fair Value, for further information.
| 12. | Fair Value | ||||
Certain of the Company’s financial assets and liabilities are recorded at fair value. The Company determines fair value based upon quoted prices when available or through the use of alternative approaches, such as model pricing, when market quotes are not readily accessible or available. Various factors are considered in determining the fair value of the Company’s obligations, including: closing exchange or over-the-counter market price quotations; time value and volatility factors underlying options and derivatives; price activity for equivalent instruments; and the Company’s own credit standing. These valuation techniques may be based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:
•Level 1 – Quoted prices for identical instruments in active markets.
•Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
•Level 3 – Instruments whose significant value drivers are unobservable.
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company’s financial instruments that are measured at fair value on a recurring basis:
(In thousands) | Fair Value Hierarchy | March 31, 2021 | December 31, 2020 | |||||||||||
| Financial Assets: | ||||||||||||||
Money market mutual funds1 | 1 | $ | 76,167 | $ | 335,449 | |||||||||
| Investment securities | ||||||||||||||
| Municipal bonds | 2 | $ | 144 | $ | 197 | |||||||||
| Asset-backed securities | 2 | 201 | 210 | |||||||||||
| Mortgage-backed securities | 2 | 149 | 138 | |||||||||||
Pooled investment fund measured at NAV2 | 9,000 | 9,000 | ||||||||||||
| Fixed-income mutual fund | 1 | 27,338 | 27,728 | |||||||||||
| Total investment securities | $ | 36,832 | $ | 37,273 | ||||||||||
Executive deferred compensation plan trust3 | 1 | $ | 11,022 | $ | 9,586 | |||||||||
| Liabilities | ||||||||||||||
Interest rate swaps4 | 2 | $ | 37,418 | $ | 44,938 | |||||||||
1 The fair value is recorded in cash and cash equivalents.
2 The fair value of this security is measured at NAV as a practical expedient and has not been classified within the fair value hierarchy. The amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the condensed consolidated balance sheets.
3 The fair value is recorded as current or long-term based on the timing of the Company’s executive deferred compensation plan payment obligations. At March 31, 2021, $1.0 million and $10.0 million in fair value is recorded within prepaid expenses and other current assets and other assets, respectively. At December 31, 2020, $0.9 million and $8.7 million in fair value is recorded within prepaid expenses and other current assets and other assets, respectively.
4 The fair value is recorded as current or long-term depending on the timing of expected discounted cash flows. At March 31, 2021, $20.9 million and $16.5 million in fair value is recorded within other current liabilities and other liabilities, respectively. At December 31, 2020, $22.0 million and $22.9 million in fair value is recorded within other current liabilities and other liabilities, respectively.
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Money Market Mutual Funds
A portion of the Company’s cash and cash equivalents are invested in money market mutual funds that primarily consist of short-term government securities, which are classified as Level 1 in the fair value hierarchy because they are valued using quoted market prices in an active market.
Investment Securities
When available, the Company uses quoted market prices to determine the fair value of investment securities; such inputs are classified as Level 1 of the fair-value hierarchy. These securities primarily consist of an open-ended mutual fund, which is invested in fixed-income securities and is held in order to satisfy the regulatory requirements of WEX Bank. For mortgage-backed and asset-backed debt securities and municipal bonds, the Company generally uses quoted prices for recent trading activity of assets with similar characteristics to the debt security or bond being valued. The securities and bonds priced using such methods are generally valued using Level 2 inputs.
Pooled Investment Fund
| (In thousands) | Fair Value | Unfunded Commitments | Redemption Frequency | Redemption Notice Period | |||||||||||||||||||
Pooled investment fund, as of March 31, 2021 | $ | 9,000 | — | Monthly | 30 days | ||||||||||||||||||
The pooled investment fund is a Community Reinvestment Act-eligible investment fund, which seeks to provide bank investors with current income consistent with the returns available in adjustable-rate government guaranteed financial products by investing in Community Development loans guaranteed by the Small Business Administration. The fund maintains individual capital accounts for each investor, which reflect each individual investor’s share of the NAV of the fund.
Executive Deferred Compensation Plan Trust
The investments held in the executive deferred compensation plan trust are classified as Level 1 in the fair value hierarchy because the fair value is determined using quoted prices for identical instruments in active markets.
Interest Rate Swaps
The Company determines the fair value of its interest rate swaps based on the discounted cash flows of the difference between the projected fixed payments on the swaps and the implied floating payments using the current LIBOR curve, which are Level 2 inputs of the fair value hierarchy.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company had no assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2021.
Assets and Liabilities Measured at Carrying Value, for which Fair Value is Disclosed
2016 Credit Agreement
The Company determines the fair value of the amount outstanding under its 2016 Credit Agreement based on the market rates for the issuance of the Company’s debt, which are Level 2 inputs in the fair value hierarchy. As of each of March 31, 2021 and December 31, 2020, the carrying value of the 2016 Credit Agreement, including both the Tranche A Term Loans and Tranche B Term Loans, approximated fair value.
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Convertible Notes
The Company determines the fair value of the Convertible Notes outstanding using our stock price and volatility, the conversion premium on the Convertible Notes and effective interest rates for similarly rated credit issuances, all of which are Level 2 inputs in the fair value hierarchy. As of March 31, 2021 and December 31, 2020, the fair value of our Convertible Notes was $408.1 million and $405.6 million, respectively.
Other Assets and Liabilities
The Company’s financial instruments, other than those presented above, include cash, cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses and other liabilities. The carrying values of such assets and liabilities approximate their respective fair values due to their short-term nature. The carrying values of certificates of deposit, interest-bearing brokered money market deposits, securitized debt, participation debt and borrowed federal funds approximate their respective fair values, as the interest rates on these financial instruments are variable market-based rates. All other financial instruments are reflected at fair value on the unaudited condensed consolidated balance sheets.
| 13. | Redeemable Non-Controlling Interest | ||||
On March 5, 2019, the Company acquired Discovery Benefits, an employee benefits administrator. The seller of Discovery Benefits obtained a 4.9 percent equity interest in the newly formed parent company of WEX Health and Discovery Benefits (the “U.S. Health business”). The seller’s 4.9 percent non-controlling interest in the U.S. Health business was initially established at both carrying value and fair value.
The agreement provides the seller with a put right and the Company with a call right for the equity interest, which can be exercised no earlier than seven years following the date of acquisition. Upon exercise of the put or call right, the purchase price is calculated based on a revenue multiple of peer companies (as described in the operating agreement for the U.S. Health business) applied to trailing twelve month revenues of the U.S. Health business. The put option makes the non-controlling interest redeemable and, therefore, the non-controlling interest is classified as temporary equity outside of stockholders’ equity.
The Company calculates the redemption value of the non-controlling interest on a quarterly basis using revenue multiples as determined in accordance with the operating agreement for the U.S. Health business and as described above. The redeemable non-controlling interest is reported at the higher of its redemption value or the non-controlling interest holder’s proportionate share of the U.S. Health business’ net carrying value. Any resulting change in the value of the redeemable non-controlling interest is offset against retained earnings and impacts earnings per share.
The following table presents the changes in the Company’s redeemable non-controlling interest:
(In thousands) | 2021 | 2020 | |||||||||
| Balance at December 31 | 117,219 | $ | 156,879 | ||||||||
| Net income attributable to redeemable non-controlling interest | 353 | 142 | |||||||||
| Change in value of redeemable non-controlling interest | 25,044 | 2,624 | |||||||||
| Balance at March 31 | $ | 142,616 | $ | 159,645 | |||||||
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| 14. | Income Taxes | ||||
The Company’s effective tax rate was (7.8) percent and 31.7 percent for the three months ended March 31, 2021 and 2020, respectively. Income tax expense is based on an estimated annual effective rate, which requires the Company to make its best estimate of annual pretax income or loss. The significant decrease in the Company’s tax rate was primarily due to the increase in excess tax benefits related to stock-based compensation, and jurisdictional earnings mix.
Undistributed earnings of certain foreign subsidiaries of the Company amounted to $81.8 million and $58.5 million at March 31, 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.
| 15. | Commitments and Contingencies | ||||
Restructuring Activities
In connection with the acquisition of eNett and Optal, during the first quarter of 2021, the Company initiated a restructuring program. As of March 31, 2021, the restructuring initiative consisted of employee separation costs within the Travel and Corporate Solutions segment, which the Company has determined are probable and reasonably estimable. As such, the Company has recorded charges incurred under this initiative of $5.4 million as of March 31, 2021 within general and administrative expenses on the unaudited condensed consolidated statements of operations and within accrued expenses on the unaudited condensed consolidated balance sheets. Based on current plans, which are subject to change, the amount of additional restructuring costs that the Company expects to incur under this initiative could be material.
Litigation
The Company is subject to legal proceedings and claims in the ordinary course of business. As of the date of this filing, the current estimate of a reasonably possible loss contingency from all legal proceedings is not material to the Company’s consolidated financial position, results of operations, cash flows or liquidity.
Commitments
Minimum Volume Commitments
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 during the three months ended March 31, 2021 as a result of lower volumes resulting from COVID-19.
Other Commitments
Other significant commitments and contingencies as of March 31, 2021 are consistent with those discussed in Note 21, Commitments and Contingencies, to the consolidated financial statements in the Annual Report on Form 10–K for the year ended December 31, 2020.
| 16. | Stock–Based Compensation | ||||
The Company regularly grants equity awards in the form of stock options, restricted stock, restricted stock units and other stock-based awards under its stockholder-approved WEX Inc. 2019 Equity and Incentive Plan (the “Plan”) to certain employees and directors. The fair value of restricted stock units, DSUs and performance-based restricted stock units, excluding awards that include a TSR provision, is based on the closing market price of the Company’s stock on the grant date as reported by the NYSE. The fair value of each service-based stock option award is estimated on the grant date using a Black-Scholes-Merton option-pricing model. The fair value of awards with market-based performance conditions, including those with TSR provisions, is estimated on the grant date using a Monte-Carlo simulation pricing model.
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Stock-based compensation expense was $17.9 million and $12.5 million for the three months ended March 31, 2021 and 2020, respectively.
| 17. | Segment Information | ||||
The Company determines its operating segments and reports segment information in accordance with how the Company’s CODM allocates resources and assesses performance. The Company’s CODM is its Chief Executive Officer. The operating segments are aggregated into the three reportable segments described below.
•Fleet Solutions provides customers with payment and transaction processing services specifically designed for the needs of commercial and government fleets. This segment also provides information management services to these fleet customers.
•Travel and Corporate Solutions focuses on the complex payment environment of B2B payments, providing customers with payment processing solutions for their corporate payment and transaction monitoring needs.
•Health and Employee Benefit Solutions provides healthcare payment products and SaaS consumer-directed platforms. Prior to the sale of WEX Latin America in September 2020, this operating segment additionally provided payroll related benefits to customers.
The following tables present the Company’s reportable segment revenues:
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||
| (In thousands) | Fleet Solutions | Travel and Corporate Solutions | Health and Employee Benefit Solutions | Total | |||||||||||||||||||
| Payment processing revenue | $ | 110,576 | $ | 57,248 | $ | 20,565 | $ | 188,389 | |||||||||||||||
| Account servicing revenue | 39,991 | 10,687 | 67,945 | 118,623 | |||||||||||||||||||
| Finance fee revenue | 51,840 | 294 | 19 | 52,153 | |||||||||||||||||||
| Other revenue | 41,430 | 2,413 | 7,749 | 51,592 | |||||||||||||||||||
| Total revenues | $ | 243,837 | $ | 70,642 | $ | 96,278 | $ | 410,757 | |||||||||||||||
| Interest income | $ | 311 | $ | 8 | $ | 4 | $ | 323 | |||||||||||||||
| Three Months Ended March 31, 2020 | |||||||||||||||||||||||
| (In thousands) | Fleet Solutions | Travel and Corporate Solutions | Health and Employee Benefit Solutions | Total | |||||||||||||||||||
| Payment processing revenue | $ | 113,323 | $ | 70,268 | $ | 20,446 | $ | 204,037 | |||||||||||||||
| Account servicing revenue | 39,208 | 11,063 | 63,569 | 113,840 | |||||||||||||||||||
| Finance fee revenue | 55,342 | 535 | 50 | 55,927 | |||||||||||||||||||
| Other revenue | 41,974 | 2,493 | 13,408 | 57,875 | |||||||||||||||||||
| Total revenues | $ | 249,847 | $ | 84,359 | $ | 97,473 | $ | 431,679 | |||||||||||||||
| Interest income | $ | 1,266 | $ | 225 | $ | 419 | $ | 1,910 | |||||||||||||||
The CODM evaluates the financial performance of each segment using segment adjusted operating income, which excludes: (i) acquisition and divestiture related expenses (including acquisition-related intangible amortization); (ii) stock-based compensation; (iii) other costs; (iv) debt restructuring costs; and (v) unallocated corporate expenses. Additionally, we do 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.
The following table reconciles total segment adjusted operating income to (loss) income before income taxes:
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| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Segment adjusted operating income | |||||||||||
| Fleet Solutions | $ | 118,258 | $ | 104,608 | |||||||
| Travel and Corporate Solutions | 7,015 | 21,915 | |||||||||
| Health and Employee Benefit Solutions | 30,544 | 29,467 | |||||||||
| Total segment adjusted operating income | $ | 155,817 | $ | 155,990 | |||||||
| Reconciliation: | |||||||||||
| Total segment adjusted operating income | $ | 155,817 | $ | 155,990 | |||||||
| Less: | |||||||||||
| Unallocated corporate expenses | 16,209 | 16,543 | |||||||||
| Acquisition-related intangible amortization | 42,454 | 42,538 | |||||||||
| Other acquisition and divestiture related items | 14,796 | 7,942 | |||||||||
| Debt restructuring costs | 637 | 78 | |||||||||
| Stock-based compensation | 18,943 | 11,820 | |||||||||
| Other costs | 12,237 | 2,240 | |||||||||
| Operating income | 50,541 | 74,829 | |||||||||
| Financing interest expense | (33,284) | (32,031) | |||||||||
| Net foreign currency loss | (2,755) | (28,727) | |||||||||
| Net unrealized gain (loss) on financial instruments | 7,033 | (32,047) | |||||||||
| Income (loss) before income taxes | $ | 21,535 | $ | (17,976) | |||||||
| 18. | Supplementary Regulatory Capital Disclosure | ||||
The Company’s subsidiary, WEX Bank, is subject to various regulatory capital requirements administered by the FDIC and the Utah Department of Financial Institutions. 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 effect on our business, results of operations and financial condition.
Quantitative measures established by regulation to ensure capital adequacy require WEX Bank to maintain minimum amounts and ratios as defined in the regulations. As of March 31, 2021, the most recent FDIC exam report categorized WEX Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events subsequent to that examination report that management believes have changed WEX Bank’s capital rating.
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The following table presents WEX Bank’s actual and regulatory minimum capital amounts and ratios:
| (In thousands) | Actual Amount | Ratio | Minimum for Capital Adequacy Purposes Amount | Ratio | Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio | |||||||||||||||||||||||||||||
| March 31, 2021 | |||||||||||||||||||||||||||||||||||
| Total Capital to risk-weighted assets | $ | 308,262 | 12.80 | % | $ | 192,694 | 8.00 | % | $ | 240,867 | 10.00 | % | |||||||||||||||||||||||
| Tier 1 Capital to average assets | $ | 286,352 | 11.61 | % | $ | 98,663 | 4.00 | % | $ | 123,328 | 5.00 | % | |||||||||||||||||||||||
| Common equity to risk-weighted assets | $ | 286,352 | 11.89 | % | $ | 108,390 | 4.50 | % | $ | 156,564 | 6.50 | % | |||||||||||||||||||||||
| Tier 1 Capital to risk-weighted assets | $ | 286,352 | 11.89 | % | $ | 144,520 | 6.00 | % | $ | 192,694 | 8.00 | % | |||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Total Capital to risk-weighted assets | $ | 299,136 | 15.04 | % | $ | 159,148 | 8.00 | % | $ | 198,935 | 10.00 | % | |||||||||||||||||||||||
| Tier 1 Capital to average assets | $ | 287,570 | 12.71 | % | $ | 90,514 | 4.00 | % | $ | 113,143 | 5.00 | % | |||||||||||||||||||||||
| Common equity to risk-weighted assets | $ | 287,570 | 14.46 | % | $ | 89,521 | 4.50 | % | $ | 129,308 | 6.50 | % | |||||||||||||||||||||||
| Tier 1 Capital to risk-weighted assets | $ | 287,570 | 14.46 | % | $ | 119,361 | 6.00 | % | $ | 159,148 | 8.00 | % | |||||||||||||||||||||||
| 19. | Subsequent Events | ||||
On April 1, 2021, the Company completed its previously announced acquisition of certain health savings account assets of Bell Bank’s Healthcare Bank division, the custodian bank for customers of the U.S. Health business. On closing, the Company paid Bell Bank initial cash consideration of $200 million. Pursuant to the purchase agreement, the Company will make two additional deferred cash payments of $25 million in July 2023 and January 2024. The agreement also includes potential additional consideration payable over the ten years subsequent to the closing date that is contingent on, and calculated based on, any future increases in the Federal Funds rate. Potential additional consideration may not exceed $225 million in the aggregate over the ten year period. The Company is currently evaluating the impact that this asset acquisition will have on its financial position and results of operations.
On April 1, 2021, the Company amended and restated the 2016 Credit Agreement. As part of the amended and restated credit agreement, the lenders have agreed to (i) increase commitments under the Company’s Revolving Credit Facility from $870 million to $930 million, (ii) provide additional Tranche A Term Loans in the principal amount of approximately $117 million, resulting in an aggregate outstanding principal amount of the Tranche A Term Loans equal to $978 million, (iii) re-establish the Tranche B Term Loans’ aggregate principal at $1,442 million, (iv) eliminate the 0.75% eurocurrency rate floor with respect to the Revolving Credit Facility, and (v) make certain other changes to the 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 2016 Credit Agreement, and (c) revising the Company’s maximum consolidated leverage ratio for all future quarters, including a reduction from 7.50 to 6.25 to 1:00 for the quarter ended March 31, 2021 with step-downs in future periods. As of the closing date, the applicable interest rate margin for the Revolving Credit Facility and the Tranche A Term Loans is 1.00% for base rate borrowings and 2.00% for all other all borrowings, including eurocurrency rate loans. Such rates become variable thereafter based on the results of the Company’s consolidated leverage ratio. The applicable interest rate margin for the Tranche B Term Loans is fixed at 1.25% for base rate borrowings and 2.25% with respect to eurocurrency rate loans. In connection with this amended and restated agreement, the Company paid certain customary fees and expenses to the joint lead arrangers, joint bookrunners and documentation agents, and reimbursed fees and expenses of Bank of America, N.A. in its capacity as administrative agent. The Company is evaluating whether to account for this amended and restated Credit Facility as a modification or extinguishment for each member of the loan syndicate.
On April 13, 2021, the Company entered into and consummated a share purchase agreement whereby the Company acquired the remaining interest in WEX Europe Services it did not own previously, which consisted of 25 percent of the issued ordinary share capital, for a purchase price of €81.5 million (equivalent of approximately $97 million as of the date of sale). As a result of the transaction, the Company now owns 100% of the issued ordinary share capital of WEX Europe Services, which operates part of our fleet business in the United Kingdom and Europe.
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On April 14, 2021, the Company announced the signing of a definitive agreement to acquire benefitexpress, a leading provider of highly configurable, cloud-based benefits administration technologies and services. It is expected that this acquisition will extend the U.S. Health business’ products and services across the full end-to-end needs of employer clients and accelerate opportunities for WEX within the public sector. Pursuant to the terms of the agreement, the Company’s subsidiary, WEX Health, will acquire benefitexpress for total consideration of approximately $275 million, subject to certain working capital and other adjustments. The transaction is expected to be completed in the second quarter of 2021, subject to regulatory approvals and other customary closing conditions.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide information that will assist the reader with understanding our financial statements, the changes in key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting estimates affect our financial statements. The discussion also provides information about the financial results of the three segments of our business to provide a better understanding of how those segments and their results affect our financial condition and results of operations as a whole. Additionally, certain corporate costs not allocated to our operating segments are discussed below.
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 unaudited condensed consolidated financial statements and notes in Part I – Item 1 of this report.
Overview
WEX Inc. is a leading financial technology service provider having simplified the complexities of payment systems across continents and industries. 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. As of March 31, 2021, the Health and Employee Benefit Solutions segment generated a substantial majority of its revenues through the provision of consumer-directed healthcare payment products and processing to approximately 15.5 million billing accounts through our U.S. SaaS platforms and reaching an estimated 34.3 million U.S. consumers. We have relationships with approximately 240,000 employers as of March 31, 2021.
Summary
COVID-19 Pandemic Response and Impact
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.
During the first quarter of 2020, the Company took a number of precautionary steps to safeguard its business and employees from the effects of COVID-19 including restricting business travel, temporarily closing offices and canceling participation in various industry events. These precautionary steps have largely remained in force through the first quarter of 2021 as the Company continues to closely track and assess the evolving effect of the pandemic. The Company is actively managing its responses in collaboration with its employees, customers and suppliers.
The spread of COVID-19, and conditions arising in connection with it, including restrictions on businesses and individuals and wider changes in business and customer behavior, have continued to impact the Company’s businesses during the three months ended March 31, 2021. The following describes these impacts by reportable segment:
Fleet Solutions — Volumes in the North American fleet and international portions of the business continue their recovery during the first quarter of 2021 while volumes in our over-the-road trucking business continue to maintain strong growth relative to prior year comparable quarter.
Travel and Corporate Solutions — Of the Company’s segments, Travel and Corporate Solutions continues to be the most impacted by the pandemic and corresponding decline in worldwide travel and tourism. Purchase volume in the travel portion of the segment is significantly lower during the first quarter of 2021 as compared to the corresponding quarter of 2020,
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however, has increased significantly over the fourth quarter of 2020. The corporate payments portion of the segment has seen an increase in purchase volumes compared to the first quarter of 2020, which is largely attributable to the ongoing migration of businesses to virtual payments and increasing usage of our accounts payable products.
Health and Employee Benefit Solutions — Volume challenges were most felt during the second quarter of 2020 as a result of cardholders deferring non-essential medical treatments when U.S. lockdown restrictions were most severe. Purchase volumes continue to be impacted by the pandemic as deferral of discretionary healthcare spend persists.
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% 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.
Recent Events
2016 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 19, Subsequent Events to the unaudited condensed consolidated financial statements of this Form 10-Q.
HSA Purchase Agreement
As disclosed in the Company’s Annual Report on Form 10–K for the year ended December 31, 2020, on February 11, 2021, the Company entered into an asset purchase agreement with Bell Bank to acquire certain HSA assets, including the custodial rights for certain HSAs from Bell Bank's HealthcareBank division, the custodian bank for customers of the U.S. Health business. The transaction closed on April 1, 2021. Pursuant to the purchase agreement, the Company paid Bell Bank initial cash consideration of approximately $200 million, and will make two additional deferred cash payments of $25 million in July 2023 and January 2024. The agreement also includes potential additional consideration payable, over the ten years subsequent to the closing date, that is contingent on, and calculated based on, any future increases in the Federal Funds rate. Potential additional consideration may not exceed $225 million in the aggregate over the ten-year period.
Acquisition of remaining interest in WEX Europe Services
On April 13, 2021, the Company entered into and consummated a share purchase agreement with Radius Payment Solutions Limited whereby the Company acquired the remaining interest in WEX Europe Services it did not own previously, which consisted of 25 percent of the issued ordinary share capital, for a purchase price of €81.5 million (equivalent of approximately $97.1 million as of the date of sale). As a result of the transaction, the Company now owns 100% of the issued ordinary share capital of WEX Europe Services, which is a holding company for part of our fleet business in the United Kingdom and Europe and was originally acquired from ExxonMobil in December 2014.
Entry into Definitive Agreement to Acquire benefitexpress
On April 14, 2021, the Company announced the signing of a definitive agreement to acquire benefitexpress, a leading provider of highly configurable, cloud-based benefits administration technologies and services. It is expected that this acquisition will extend the U.S. Health business’ products and services across the full end-to-end needs of employer clients and accelerate opportunities for WEX within the public sector. Pursuant to the terms of the agreement, the Company’s subsidiary, WEX Health, will acquire benefitexpress for total consideration of approximately $275 million, subject to certain working capital and other adjustments. The transaction is expected to be completed in the second quarter of 2021, subject to regulatory approvals and other customary closing conditions.
.
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Key Performance Indicators
Below are key metrics from the first quarter of 2021:
| Increase (Decrease) | |||||||||||||||||||||||
| Q1 2021 | Q1 2020 | Amount | Percent | ||||||||||||||||||||
| Fleet Solutions | |||||||||||||||||||||||
| Fuel transactions processed (in millions) | 146.4 | 150.7 | (4.3) | (2.9) | % | ||||||||||||||||||
| Payment processing transactions (in millions) | 118.4 | 121.6 | (3.2) | (2.6) | % | ||||||||||||||||||
| Average vehicles serviced (in millions) | 15.8 | 15.1 | 0.7 | 4.4 | % | ||||||||||||||||||
| Average US fuel price (US$ / gallon) | $ | 2.72 | $ | 2.57 | $ | 0.15 | 5.8 | % | |||||||||||||||
Travel and Corporate Solutions | |||||||||||||||||||||||
| Payment solutions purchase volume (in millions) | $ | 6,107.7 | $ | 8,041.1 | $ | (1,933.4) | (24.0) | % | |||||||||||||||
Health and Employee Benefit Solutions | |||||||||||||||||||||||
| Average number of U.S. SaaS accounts (in millions) | 15.5 | 14.5 | 1.0 | 6.9 | % | ||||||||||||||||||
Fleet Solutions
•Fuel transactions processed decreased approximately 3 percent from the first quarter of 2020 to 146.4 million for the first 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 down approximately 3 percent as compared to the same period last year.
•Average number of vehicles serviced increased approximately 4 percent from the first quarter of 2020 to approximately 15.8 million for the first quarter of 2021 primarily related to growth in our North American customer base.
•The average U.S. fuel price per gallon during the first quarter of 2021 was $2.72, an approximate 6 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 $6.1 billion for the first quarter of 2021, representing a decrease of 24 percent from the same period last year, driven primarily by the decline in worldwide travel and tourism as a result of the COVID-19 pandemic. This decrease was partly offset by improved non-travel volumes.
Health and Employee Benefit Solutions
•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 1.0 million for the first quarter of 2021, a 7 percent increase from the same period in the prior year.
Results of Operations
The Company does not allocate foreign currency gains and losses, financing interest expense, unrealized and realized gains and losses on financial instruments, income taxes and adjustments attributable to non-controlling interests to our operating segments, as management believes these items are unpredictable and can obscure a segment’s operating trends and results. In addition, the Company does not allocate certain corporate expenses to our operating segments, as these items are centrally controlled and are not directly attributable to any reportable segment.
The Company’s operating expenses consist of the following:
Cost of Services
•Processing costs - The Company’s processing costs consist of expenses related to processing transactions, servicing customers and merchants and cost of goods sold related to hardware and other product sales.
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•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 March 31, | Increase (Decrease) | ||||||||||||||||||||||
| (In thousands, except per gallon data) | 2021 | 2020 | Amount | Percent | |||||||||||||||||||
Revenues(a) | |||||||||||||||||||||||
| Payment processing revenue | $ | 110,576 | $ | 113,323 | $ | (2,747) | (2) | % | |||||||||||||||
| Account servicing revenue | 39,991 | 39,208 | 783 | 2 | % | ||||||||||||||||||
| Finance fee revenue | 51,840 | 55,342 | (3,502) | (6) | % | ||||||||||||||||||
| Other revenue | 41,430 | 41,974 | (544) | (1) | % | ||||||||||||||||||
| Total revenues | $ | 243,837 | $ | 249,847 | $ | (6,010) | (2) | % | |||||||||||||||
| Key operating statistics | |||||||||||||||||||||||
| Payment processing revenue: | |||||||||||||||||||||||
Payment processing transactions(b) | 118,389 | 121,591 | (3,202) | (3) | % | ||||||||||||||||||
Payment processing fuel spend(c) | $ | 9,176,960 | $ | 8,412,642 | $ | 764,318 | 9 | % | |||||||||||||||
| Average price per gallon of fuel – Domestic – ($USD/gal) | $ | 2.72 | $ | 2.57 | $ | 0.15 | 6 | % | |||||||||||||||
Net payment processing rate(d) | 1.20 | % | 1.35 | % | (0.15) | % | (11) | % | |||||||||||||||
(a) The impact of foreign currency exchange rate fluctuations on Fleet Solutions increased revenue by $3.6 million in the first quarter of 2021 compared to the same period 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.
(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.
Fleet Solutions revenue decreased $6.0 million for the first quarter of 2021 as compared to the same period in the prior year. Revenues have been unfavorably impacted by lower North American customer payment delinquencies and a decline in our payment processing rate resulting from continued customer mix shift to larger over-the-road fleets. Additionally, less
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favorable fuel spreads in Europe as compared to the comparable quarter in 2020 were partially offset by higher domestic fuel prices.
Finance fee revenue is comprised of the following components:
| Three Months Ended March 31, | Increase (Decrease) | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | Amount | Percent | |||||||||||||||||||
| Finance income | $ | 41,150 | $ | 46,740 | $ | (5,590) | (12) | % | |||||||||||||||
| Factoring fee revenue | 10,690 | 8,602 | 2,088 | 24 | % | ||||||||||||||||||
| Finance fee revenue | $ | 51,840 | $ | 55,342 | $ | (3,502) | (6) | % | |||||||||||||||
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 decreased $5.6 million for the first quarter of 2021 as compared to the same period in the prior year. The income reduction for the three months ended March 31, 2021 is due to a reduction in balances and lower customer delinquencies. During both the three months ended March 31, 2021 and March 31, 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 6.0 percent and 5.5 percent for the three months ended March 31, 2021 and 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 months ended March 31, 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 $2.1 million for the first quarter of 2021, as compared with the same period in the prior year as a result of an increase in purchase volumes.
Operating Expenses
The following table compares line items within operating income for Fleet Solutions:
| Three Months Ended March 31, | Increase (Decrease) | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | Amount | Percent | |||||||||||||||||||
| Cost of services | |||||||||||||||||||||||
| Processing costs | $ | 52,192 | $ | 50,336 | $ | 1,856 | 4 | % | |||||||||||||||
| Service fees | $ | 1,728 | $ | 1,841 | $ | (113) | (6) | % | |||||||||||||||
| Provision for credit losses | $ | 4,364 | $ | 20,607 | $ | (16,243) | (79) | % | |||||||||||||||
| Operating interest | $ | 2,109 | $ | 6,178 | $ | (4,069) | (66) | % | |||||||||||||||
| Depreciation and amortization | $ | 12,715 | $ | 12,058 | $ | 657 | 5 | % | |||||||||||||||
| Other operating expenses | |||||||||||||||||||||||
| General and administrative | $ | 20,502 | $ | 21,467 | $ | (965) | (4) | % | |||||||||||||||
| Sales and marketing | $ | 41,025 | $ | 41,310 | $ | (285) | (1) | % | |||||||||||||||
| Depreciation and amortization | $ | 19,585 | $ | 22,377 | $ | (2,792) | (12) | % | |||||||||||||||
| Operating income | $ | 89,617 | $ | 73,673 | $ | 15,944 | 22 | % | |||||||||||||||
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Cost of services
Processing costs increased by $1.9 million for the first quarter of 2021, as compared with the same period in the prior year. Such increase is primarily due to higher personnel related costs.
Service fees for the three months ended March 31, 2021 were generally consistent with the same period in the prior year.
Provision for credit losses decreased by $16.2 million for the first quarter of 2021 as compared to the same period in the prior year. The adoption of the new credit loss accounting standard during the first quarter of 2020, coupled with an increase during that quarter in expected credit losses as a result of COVID-19, resulted in a higher provision for credit losses in the prior year. The provision reflects the Company’s best estimate for losses that it expects to incur based on the current level of accounts receivable and the anticipated payment difficulty for some fleet customers due to decreased transportation activity as a result of the COVID-19 pandemic. We generally measure our credit loss performance by calculating fuel-related credit losses as a percentage of total fuel expenditures on payment processing transactions. This metric for credit losses was 6.2 basis points of fuel expenditures for the first quarter of 2021 as compared to 23.6 basis points of fuel expenditures for the same period in the prior year.
Operating interest decreased $4.1 million for the first quarter of 2021 as compared to the same period in the prior year. The decrease during the first quarter was due to lower interest rates and a decrease in deposits.
Depreciation and amortization remained relatively consistent for the first quarter of 2021, as compared with the same period in the prior year.
Other operating expenses
General and administrative expenses decreased $1.0 million for the first quarter of 2021 as compared to the same period in the prior year, due primarily to a reduction in Go Fuel Card acquisition integration costs, partially offset by increased compensation costs.
Sales and marketing expenses remained relatively consistent for the first quarter of 2021, as compared with the same period in the prior year.
Depreciation and amortization decreased $2.8 million for the first quarter of 2021 as compared to the same period in the prior year. The decrease for the first quarter of 2021 was due primarily to lower ongoing amortization over time resulting from the impact of the accelerated method of amortization on certain acquired customer relationships.
Travel and Corporate Solutions
Revenues
The following table reflects comparative revenue and key operating statistics within Travel and Corporate Solutions:
| Three Months Ended March 31, | Increase (Decrease) | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | Amount | Percent | |||||||||||||||||||
Revenues(a) | |||||||||||||||||||||||
| Payment processing revenue | $ | 57,248 | $ | 70,268 | $ | (13,020) | (19) | % | |||||||||||||||
| Account servicing revenue | 10,687 | 11,063 | (376) | (3) | % | ||||||||||||||||||
| Finance fee revenue | 294 | 535 | (241) | (45) | % | ||||||||||||||||||
| Other revenue | 2,413 | 2,493 | (80) | (3) | % | ||||||||||||||||||
| Total revenues | $ | 70,642 | $ | 84,359 | $ | (13,717) | (16) | % | |||||||||||||||
| Key operating statistics | |||||||||||||||||||||||
| Payment processing revenue: | |||||||||||||||||||||||
Payment solutions purchase volume(1) | $ | 6,107,675 | $ | 8,041,112 | $ | (1,933,437) | (24) | % | |||||||||||||||
(a) Foreign currency exchange rate fluctuations had an insignificant impact on Travel and Corporate Solutions revenues during each of the three months ended March 31, 2021 and 2020.
(1) Payment solutions purchase volume represents the total dollar value of all WEX-issued transactions that use WEX corporate card products and virtual card products. As discussed in the preceding “Summary” section, our current travel-related transaction volumes have been impacted by the decline in worldwide
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travel and tourism as a result of COVID-19. These unfavorable trends, which began during late February 2020, have continued and are expected to continue to have an impact for a significant period of time.
Travel and Corporate Solutions revenue decreased $13.7 million for the first quarter of 2021 as compared to the same period in the prior year, primarily due to the impact of the pandemic on travel volumes, partially offset by additional revenues attributable to the acquisition of eNett and Optal. Unfavorability in travel was partly offset by increased purchase volumes in our corporate payments business, which resulted in 20 percent revenue growth relative to the prior 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 months ended March 31, 2021.
Operating Expenses
The following table compares line items within operating income for Travel and Corporate Solutions:
| Three Months Ended March 31, | Increase (Decrease) | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | Amount | Percent | |||||||||||||||||||
| Cost of services | |||||||||||||||||||||||
| Processing costs | $ | 16,821 | $ | 14,845 | $ | 1,976 | 13 | % | |||||||||||||||
| Service fees | $ | 3,864 | $ | 5,883 | $ | (2,019) | (34) | % | |||||||||||||||
| Provision for credit losses | $ | 635 | $ | 13,264 | $ | (12,629) | (95) | % | |||||||||||||||
| Operating interest | $ | 515 | $ | 2,156 | $ | (1,641) | (76) | % | |||||||||||||||
| Depreciation and amortization | $ | 7,611 | $ | 3,960 | $ | 3,651 | 92 | % | |||||||||||||||
| Other operating expenses | |||||||||||||||||||||||
| General and administrative | $ | 31,567 | $ | 7,373 | $ | 24,194 | 328 | % | |||||||||||||||
| Sales and marketing | $ | 28,983 | $ | 18,239 | $ | 10,744 | 59 | % | |||||||||||||||
| Depreciation and amortization | $ | 6,466 | $ | 6,664 | $ | (198) | (3) | % | |||||||||||||||
| Operating (loss) income | $ | (25,820) | $ | 11,975 | $ | (37,795) | (316) | % | |||||||||||||||
Cost of services
Processing costs for the three months ended March 31, 2021 increased $2.0 million from the same period in the prior year as a result of the acquisition of eNett and Optal.
Service fees for the three months ended March 31, 2021 have decreased $2.0 million from the same period in the prior year due primarily to a renegotiated contract with one of our vendors and the conversion of travel and corporate payments purchase volume to an internal transaction processing platform, partially offset by increased service fees as a result of the acquisition of eNett and Optal.
Provision for credit losses decreased $12.6 million for the first quarter of 2021 from the same period in the prior year. This decrease is substantially due to an overall reduction in volumes as a result of the pandemic and a reduction in the provision associated with the Company's former WEX Latin America business. The provision reflects the Company’s best estimate for losses that it expects to incur based on the current level of accounts receivable and the anticipated payment difficulty for some online travel agency customers due to reduced travel as a result of the COVID-19 pandemic. The Company will continue to actively monitor the impact of the COVID-19 pandemic on expected credit losses.
Operating interest expense decreased $1.6 million for the first quarter of 2021 as compared to the same period in the prior year, as a result of lower interest rates and lower overall deposit balances.
Depreciation and amortization expenses for the three months ended March 31, 2021 increased by $3.7 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 first quarter of 2021 increased by $24.2 million. The increase was primarily due to a vendor contract termination payment and integration costs related to the acquisition of eNett and Optal.
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Sales and marketing expenses increased for the first quarter of 2021 by $10.7 million as compared to the same period 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 first quarter of 2021 remained consistent with the same period in the prior year.
Health and Employee Benefit Solutions
Revenues
The following table reflects comparative revenue and key operating statistics within Health and Employee Benefit Solutions:
| Three Months Ended March 31, | Increase (Decrease) | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | Amount | Percent | |||||||||||||||||||
Revenues(1) | |||||||||||||||||||||||
| Payment processing revenue | $ | 20,565 | $ | 20,446 | $ | 119 | 1 | % | |||||||||||||||
| Account servicing revenue | 67,945 | 63,569 | 4,376 | 7 | % | ||||||||||||||||||
| Finance fee revenue | 19 | 50 | (31) | (62) | % | ||||||||||||||||||
| Other revenue | 7,749 | 13,408 | (5,659) | (42) | % | ||||||||||||||||||
| Total revenues | $ | 96,278 | $ | 97,473 | $ | (1,195) | (1) | % | |||||||||||||||
| Key operating statistics | |||||||||||||||||||||||
| Payment processing revenue: | |||||||||||||||||||||||
Purchase volume(2) | $ | 1,484,226 | $ | 1,592,313 | $ | (108,087) | (7) | % | |||||||||||||||
| Account servicing revenue: | |||||||||||||||||||||||
Average number of SaaS accounts(3) | 15,513 | 14,458 | 1,055 | 7 | % | ||||||||||||||||||
(1) Foreign currency exchange rate fluctuations had an insignificant impact on Health and Employee Benefits Solutions revenue during the three months ended March 31, 2021 and 2020.
(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.
Payment processing revenue remained consistent during the first quarter of 2021 with the same period in the prior year. Individual cardholder spend continues to be impacted by the deferral of discretionary health care spending due to the pandemic, however, increases in participants fully offset those unfavorable impacts.
Account servicing revenue increased $4.4 million for the first quarter of 2021 as compared to the same period in the prior year. The first quarter growth is primarily due to a higher number of participants using our SaaS healthcare technology platform.
Finance fee revenue was not material to Health and Employee Benefit Solutions’ operations for each of the three months ended March 31, 2021 and 2020.
Other revenue decreased $5.7 million for the first quarter of 2021 as compared to the same period in the prior year. The decrease for the first quarter of 2021 was due to lower revenues associated with the Company's former WEX Latin America business, which was sold during the third quarter of 2020, and lower U.S. Health professional services revenue.
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Operating Expenses
The following table compares line items within operating income for Health and Employee Benefit Solutions:
| Three Months Ended March 31, | Increase (Decrease) | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | Amount | Percent | |||||||||||||||||||
| Cost of services | |||||||||||||||||||||||
| Processing costs | $ | 40,749 | $ | 39,736 | $ | 1,013 | 3 | % | |||||||||||||||
| Service fees | $ | 5,554 | $ | 6,030 | $ | (476) | (8) | % | |||||||||||||||
| Provision for credit losses | $ | 60 | $ | 116 | $ | (56) | (48) | % | |||||||||||||||
| Operating interest | $ | — | $ | 51 | $ | (51) | (100) | % | |||||||||||||||
| Depreciation and amortization | $ | 8,868 | $ | 8,771 | $ | 97 | 1 | % | |||||||||||||||
| Other operating expenses | |||||||||||||||||||||||
| General and administrative | $ | 7,375 | $ | 9,076 | $ | (1,701) | (19) | % | |||||||||||||||
| Sales and marketing | $ | 8,339 | $ | 9,233 | $ | (894) | (10) | % | |||||||||||||||
| Depreciation and amortization | $ | 11,063 | $ | 10,580 | $ | 483 | 5 | % | |||||||||||||||
| Operating income | $ | 14,270 | $ | 13,880 | $ | 390 | 3 | % | |||||||||||||||
Cost of services
Processing costs increased $1.0 million for the first quarter of 2021 as compared to the same period in the prior year. The increase during the first quarter of 2021 was primarily driven by higher costs to support the account growth.
Service fees for the three months ended March 31, 2021 were generally consistent with the same period in the prior year.
Provision for credit losses was not material to Health and Employee Benefit Solutions’ operations for each of the three months ended March 31, 2021 and 2020.
Operating interest was not material for either the first quarter of 2021 or the same period in the prior year.
Depreciation and amortization expense for the first quarter of 2021 remained consistent with the same period in the prior year.
Other operating expenses
General and administrative expenses decreased $1.7 million for the first quarter of 2021 as compared to the same period in the prior year primarily due to the decrease in expenses associated with the Company's former WEX Latin America business.
Sales and marketing expenses in the first quarter of 2021 decreased $0.9 million as compared to the same period in the prior year due primarily to a COVID-19-related decrease in employee travel.
Depreciation and amortization was generally consistent for the first quarter of 2021 as compared to the same period in the prior year.
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 March 31, | Increase (Decrease) | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | Amount | Percent | |||||||||||||||||||
| Other operating expenses | |||||||||||||||||||||||
| General and administrative | $ | 26,987 | $ | 24,120 | $ | 2,867 | 12 | % | |||||||||||||||
| Depreciation and amortization | $ | 539 | $ | 579 | $ | (40) | (7) | % | |||||||||||||||
General and administrative expenses increased $2.9 million for the first quarter of 2021 as compared to the same period in the prior year. The increase in the first quarter of 2021 was primarily due to increased compensation, partly offset by a decrease in transaction-related professional services. The compensation increase is due to increased stock compensation as a result of the modification and granting of certain awards during the second quarter of 2020 and to costs incurred in connection with the acquisition of eNett and Optal.
Other unallocated corporate expenses were not material to the Company’s operations for each of the three months ended March 31, 2021 and 2020.
Non-operating income and expense
The following table reflects comparative results for certain amounts excluded from operating income:
| Three Months Ended March 31, | Increase (Decrease) | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | Amount | Percent | |||||||||||||||||||
| Financing interest expense | $ | 33,284 | $ | 32,031 | $ | 1,253 | 4 | % | |||||||||||||||
| Net foreign currency loss | $ | 2,755 | $ | 28,727 | $ | (25,972) | (90) | % | |||||||||||||||
| Net unrealized gain (loss) on financial instruments | $ | 7,033 | $ | (32,047) | $ | 39,080 | NM | ||||||||||||||||
| Income tax benefit | $ | 1,670 | $ | 5,707 | $ | (4,037) | (71) | % | |||||||||||||||
| Net income from non-controlling interests | $ | 726 | $ | 1,363 | $ | (637) | (47) | % | |||||||||||||||
| Change in value of redeemable non-controlling interest | $ | 25,044 | $ | 2,624 | $ | 22,420 | 854 | % | |||||||||||||||
Financing interest expense increased $1.3 million for the first quarter of 2021 as compared to the same period in the prior year, due primarily to interest incurred on our Convertible Notes issued during July 2020 partly offset by lower average interest rates.
Our foreign currency exchange exposure is primarily related to the remeasurement of our cash, receivable and payable balances, including intercompany transactions that are denominated in foreign currencies. The Company incurred net foreign currency losses of $2.8 million in the first quarter of 2021 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 greater losses recorded during the three months ended March 31, 2020, were as a result of the weakening of foreign currencies relative to the U.S. dollar arising from the COVID-19 pandemic. These currency fluctuations negatively affected and may continue to negatively affect our results of operations.
The Company incurred an unrealized gain on financial instruments of $7.0 million in the first quarter of 2021 due to a reduction in the fair value of interest rate swap liabilities primarily as a result of a decrease in remaining future settlements, coupled with an increase in the LIBOR forward yield curve. The net unrealized loss on financial instruments for the first quarter of 2020 resulted primarily from a decrease in the LIBOR forward yield curve.
The Company’s effective tax rate was (7.8) percent for the three months ended March 31, 2021 as compared to 31.7 percent for the three months ended March 31, 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 months ended March 31, 2021 was primarily due to the increase in excess tax benefits related to stock-based compensation and jurisdictional earnings mix.
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Net income from non-controlling interests relates to our non-controlling interests in WEX Europe Services and the U.S. Health business. Such amounts were not material to Company operations for each of the three months ended March 31, 2021 and 2020.
During the three months ended March 31, 2021, the change in value of our redeemable non-controlling interest in the U.S. Health business decreased by $22.4 million as compared to the same period in the prior year due to increases in the trailing twelve month net revenues and market set multiple used to value the non-controlling interest redemption value.
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, acquisition-related intangible amortization, other acquisition and divestiture related items, stock-based compensation, other costs, debt restructuring and debt issuance cost amortization, similar adjustments attributable to our non-controlling interests, and certain tax related items.
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 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.
•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 three months ended March 31, 2021, other costs additionally include a penalty of $10.3 million incurred on a vendor contract termination. For the three months ended March 31, 2020, other costs include certain costs incurred in association with COVID-19, including the cost of providing additional health, welfare and technological support to our employees as they work remotely.
•Debt restructuring and debt issuance cost amortization are unrelated to the continuing operations of the Company. Debt restructuring costs are not consistently occurring and do not reflect expected future operating expense, nor do they provide insight into the fundamentals of current or past operations of our business. In addition, since debt
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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 March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Net (loss) income attributable to shareholders | $ | (2,565) | $ | (16,256) | |||||||
| Unrealized (gain) loss on financial instruments | (7,033) | 32,047 | |||||||||
| Net foreign currency remeasurement loss | 2,755 | 28,727 | |||||||||
| Acquisition-related intangible amortization | 42,454 | 42,538 | |||||||||
| Other acquisition and divestiture related items | 14,796 | 7,942 | |||||||||
| Stock-based compensation | 18,943 | 11,820 | |||||||||
| Other costs | 12,237 | 2,240 | |||||||||
| Debt restructuring and debt issuance cost amortization | 5,092 | 2,082 | |||||||||
| ANI adjustments attributable to non-controlling interests | 23,800 | 2,224 | |||||||||
| Tax related items | (29,205) | (33,680) | |||||||||
| Adjusted net income attributable to shareholders | $ | 81,274 | $ | 79,684 | |||||||
Liquidity and Capital Resources
We believe that our cash generating capability, financial condition and operations, together with the sources of cash listed below, will be adequate to fund our cash needs for at least the next 12 months.
The table below summarizes our primary short-term sources and uses of cash:
| Sources of cash | Uses of cash(1) | |||||||
•Borrowings on our 2016 Credit Agreement •Convertible Notes •Deposits •Borrowed federal funds •Participation debt •Accounts receivable factoring and securitization arrangements | •Payments on our 2016 Credit Agreement •Payments on maturities and withdrawals of certificates of deposit and brokered money market deposits •Payments on borrowed federal funds •Working capital needs of the business •Capital expenditures | |||||||
(1) Our long-term cash requirements consist primarily of amounts owed on our 2016 Credit Agreement and various facilities lease agreements.
The table below summarizes our cash activities:
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Cash flows (used for) provided by operating activities | $ | (217,295) | $ | 340,223 | |||||||
| Cash flows used for investing activities | $ | (16,406) | $ | (20,708) | |||||||
| Cash flows used for financing activities | $ | (114,579) | $ | (257,960) | |||||||
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Operating Activities
We fund a customer’s entire receivable as part of fleet and travel payment processing transactions, while the revenue generated by these transactions is only a small percentage of that amount. Consequently, cash flows from operations are impacted significantly by changes in accounts receivable and accounts payable balances, which directly impact our capital resource requirements.
Cash provided by operating activities for the three months ended March 31, 2021 decreased $557.5 million as compared to the same period in the prior year, resulting primarily from rebounding customer spend volumes and fuel prices.
Investing Activities
Cash used for investing activities for the three months ended March 31, 2021 decreased $4.3 million as compared to the same period in the prior year, primarily due to a $2.4 million reduction in the acquisition of property, equipment and capitalized software and as a result of a $1.9 million working capital adjustment related to the acquisition of eNett and Optal received by the Company during the first quarter of 2021.
Financing Activities
Cash used by financing activities for the three months ended March 31, 2021 totaled $114.6 million, due primarily to the early redemption of the Company’s $400.0 million of Notes, as further described within the preceding Summary section of this MD&A. The redemption was funded with cash on-hand. This use of cash was partly offset by federal fund borrowings of $194.8 million and an increase in deposits of $103.0 million. During the three months ended March 31, 2020, there were no similar federal fund borrowings.
2016 Credit Agreement
On July 1, 2016, we entered into the 2016 Credit Agreement in order to permit the additional financing necessary to facilitate the EFS acquisition. As of March 31, 2021, after giving effect to amendments prior to such date, we had an outstanding principal amount of $861.3 million on our senior secured tranche A term loan facility (the “Tranche A Term Loans”), an outstanding principal amount of $1.4 billion on our senior secured tranche B term loan facility (the “Tranche B Term Loans”) and outstanding letters of credit of $51.7 million drawn against our $870.0 million secured revolving credit facility (the “Revolving Credit Facility”), with a $250.0 million sublimit for letters of credit and $20.0 million sublimit for swingline loans.
Through March 31, 2021, the Revolving Credit Facility and Tranche A Term Loans bore interest at variable rates, at the Company’s option, plus an applicable margin determined based on the Company’s consolidated leverage ratio. However, as set forth below, effective April 1, 2021, the Company entered into an amended and restated 2016 Credit Agreement, which as of April 1, 2021, established the following with respect to interest rate margins: the applicable interest rate margin for the Revolving Credit Facility and the Tranche A Term Loans is 2.00 percent for eurocurrency rate loans and 1.00 percent for base rate loans. The Tranche B Term Loans bear interest at a variable rate plus a margin equal to 2.25 percent for eurocurrency rate loans and 1.25 percent for base rate loans.
Effective April 1, 2021, the Company amended and restated the 2016 Credit Agreement, increasing commitments under the Revolving Credit Facility from $870.0 million to $930.0 million, providing additional Tranche A Term Loans in the amount of approximately $117 million and making certain other changes to the 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) reducing the eurocurrency rate floor from 0.75 percent to 0.00 percent with respect to the Revolving Credit Facility, (c) revising the Company’s maximum consolidated leverage ratio for all future quarters, including a reduction from 7.50 to 6.25 to 1:00 for the quarter ended March 31, 2021, with step-downs in future periods, and (d) providing additional flexibility with respect to certain negative covenants, prepayments and other provisions of the 2016 Credit Agreement.
Under the terms of the amended and restated 2016 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 2016 Credit Agreement, established or incurred, or that could be established or incurred without causing the Company’s consolidated leverage ratio to exceed 4:00 to 1:00.
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See Part I – Item 1 – Note 9, Financing and Other Debt, in this report and Part I – Item 1 – Note 16, Financing and Other Debt, in the notes to the consolidated financial statements in our Annual Report on Form 10–K for the fiscal year ended December 31, 2020 for further information regarding the 2016 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% 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
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 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 March 31, 2021 and December 31, 2020 we had $1.2 billion and $1.1 billion, respectively, in deposits. Remaining maturities on the deposits outstanding as of March 31, 2021 ranged from 9 months to 5 years. See Part I – Item 1 – Note 8, Deposits, in this report for further information regarding our deposits.
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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 $436.0 million and $376.0 million as of March 31, 2021 and December 31, 2020, respectively. There were $214.8 million of outstanding borrowings as of March 31, 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 March 31, 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 March 31, 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. The agreement extends through August 2021, after which the agreement can be renewed for successive one-year periods assuming WEX provides advance written notice that is accepted by the purchaser. WEX Bank continues to service the receivables post-transfer with no participating interest. The Company obtained a true-sale opinion from an independent attorney, which states that the factoring agreement provides legal isolation 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.
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.
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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 March 31, 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
At March 31, 2021, we had variable-rate borrowings of $2.3 billion under our 2016 Credit Agreement, which bore a weighted average effective interest rate of 2.3 percent. We periodically review our projected borrowings under our 2016 Credit Agreement and the current interest rate environment to determine if we should use interest rate swaps to reduce exposure to interest rate volatility.
As of March 31, 2021, we maintained six interest rate swap contracts that are intended to fix the future interest payments associated with $1.4 billion of our variable rate borrowings at between 0.743 percent and 2.413 percent.
Foreign Currency Exchange Risk
Earnings outside 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 $81.8 million and $58.5 million as of March 31, 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 March 31, 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.
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 during the three months ended March 31, 2021, as a result of lower volumes resulting from COVID-19.
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 March 31, 2021. The program is funded either through our future cash flows or through borrowings on our 2016 Credit Agreement. Share repurchases are to be made on the open market and may be commenced or suspended at any time. The Company’s management, based on its evaluation of market and economic conditions and other factors, determines the timing and number of shares repurchased.
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Business and Asset Acquisitions
As disclosed in our Annual Report on Form 10–K for the year ended December 31, 2020, on February 11, 2021, the Company entered into an asset purchase agreement with Bell Bank to acquire certain HSA assets, including the custodial rights for certain HSAs from Bell Bank's HealthcareBank division, the custodian bank for customers of the U.S. Health business. The transaction closed on April 1, 2021 and pursuant to the purchase agreement, the Company paid Bell Bank initial cash consideration of $200 million. Pursuant to the purchase agreement, the Company will make two additional deferred cash payments of $25 million in July 2023 and January 2024. The agreement also includes potential additional consideration payable over the ten years subsequent to the closing date that is contingent on, and calculated based on, any future increases in the Federal Funds rate. Potential additional consideration may not exceed $225 million in the aggregate over the ten year period. For further information regarding this transaction refer to Part I – Item 1 – Note 19, Subsequent Events to the unaudited condensed consolidated financial statements of this Form 10-Q.
On April 13, 2021, the Company entered into and consummated a share purchase agreement whereby the Company acquired the remaining interest in WEX Europe Services it did not own previously, which consisted of 25 percent of the issued ordinary share capital, for a purchase price of €81.5 million (equivalent of approximately $97 million as of the date of sale). As a result of the transaction, the Company now owns 100% of the issued ordinary share capital of WEX Europe Services, which operates part of our fleet business in the United Kingdom and Europe.
On April 14, 2021, the Company announced the signing of an agreement whereby its subsidiary, WEX Health, would acquire benefitexpress, a leading provider of highly configurable, cloud-based benefits administration technologies and services, for total consideration of approximately $275 million, subject to certain working capital and other adjustments. The transaction is expected to be completed in the second quarter of 2021, subject to regulatory approvals and other customary closing conditions. For further information regarding this transaction refer to the preceding Summary section of this MD&A and Part I – Item 1 – Note 19, Subsequent Events to the unaudited condensed consolidated financial statements of this Form 10-Q.
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.
The Company has certain restrictions on the dividends it may pay under the 2016 Credit Agreement, including pro forma compliance with a consolidated leverage ratio of 2.50:1.00 as of March 31, 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
| Description | Assumptions/Approach Used | Effect if Actual Results Differ from Assumptions | ||||||||||||
| ASU 2020-06 no longer requires that the Company bifurcate its convertible debt’s conversion feature between a liability and equity component. In addition, the standard requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share. | Prior to January 1, 2021, the Convertible Notes were recorded at a debt discount with an initial carrying value of $237.5 million, with the residual $54.7 million recognized within additional paid-in capital on the Company’s December 31, 2020 condensed consolidated balance sheet. Effective January 1, 2021, the convertible debt and its conversion feature are now accounted for as a single unit of account, with an effective interest rate of 7.5 percent. It is the Company’s current intention to settle all conversion of the Convertible Notes in shares of the Company’s stock. | Under the “if-converted” method, approximately 1.6 million shares of the Company’s common stock associated with the assumed conversion of these Convertible Notes as of the beginning of the period have been excluded from diluted shares outstanding for the three months ended March 31, 2021 as the effect of including such shares would be anti-dilutive. | ||||||||||||
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Recently Adopted Accounting Standards
See Part I – Item 1 – Note 2, Recent Accounting Pronouncements, to the unaudited condensed consolidated financial statements of this Form 10–Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of March 31, 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 March 31, 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 March 31, 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 March 31, 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 controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
PART II
Item 1. Legal Proceedings.
As of the date of this filing, we are not involved in any material legal proceedings. We also were not involved in any material legal proceedings that were terminated during the first quarter of 2021. However, from time to time, we are subject to legal proceedings and claims in the ordinary course of business, including but not limited to: commercial disputes; contract disputes; employment litigation; disputes regarding our intellectual property rights; alleged infringement or misappropriation by us of intellectual property rights of others; and, matters relating to our compliance with applicable laws and regulations. In addition, we are cooperating with an SEC investigation arising from the revision of our financial statements as noted in our Annual Report on Form 10-K/A for the year ended December 31, 2018 due to issues involving our former Brazil subsidiary, which was sold in September 2020, including financial and disclosure controls and procedures. As of the date of this filing, the current estimate of a reasonably possible loss contingency from these matters is not material to the Company’s consolidated financial position, results of operations, cash flows or liquidity.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10–K for the year ended December 31, 2020, which could materially affect our business, financial condition or future results. The risk factors disclosure in our Annual Report on Form 10-K for the year ended December 31, 2020 is qualified by the information that is described in this Quarterly Report on Form 10-Q. The risks described in our Annual Report on Form 10–K for the year ended December 31, 2020 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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On September 20, 2017, our board of directors approved a share repurchase program authorizing the purchase of up to $150 million of our common stock expiring on September 2021. Share repurchases are to be made on the open market and can be commenced or suspended at any time. We did not purchase any shares of our common stock during the quarter ended March 31, 2021. The approximate dollar value of shares that were available to be purchased under our share repurchase program was $150 million as of March 31, 2021.
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Item 6. Exhibits.
| Exhibit No. | Description | ||||||||||
| 3.1 | |||||||||||
| 3.2 | |||||||||||
| 3.3 | |||||||||||
| * | 31.1 | ||||||||||
| * | 31.2 | ||||||||||
| * | 32.1 | ||||||||||
| * | 32.2 | ||||||||||
| * | 101.INS | Inline XBRL Instance Document | |||||||||
| * | 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||||
| * | 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document | |||||||||
| * | 101.LAB | Inline XBRL Taxonomy Label Linkbase Document | |||||||||
| * | 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document | |||||||||
| * | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||||
| * | 104 | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) | |||||||||
| * | These exhibits have been filed with this Quarterly Report on Form 10–Q. | ||||
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| WEX INC. | |||||||||||
| May 6, 2021 | By: | /s/ Roberto Simon | |||||||||
| Roberto Simon | |||||||||||
| Chief Financial Officer | |||||||||||
| (principal financial officer and principal accounting officer) | |||||||||||
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