WEX Inc.: Form 10-Q for the period ended Sep 30, 2022

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 herein.

Our MD&A is presented in the following sections:

• Overview
• Summary
• Results of Operations
• Liquidity and Capital Resources
• Critical Accounting Policies and Estimates
• Recently Adopted Accounting Standards

This discussion should be read in conjunction with our audited consolidated financial statements as of December 31, 2021, the notes accompanying those financial statements and MD&A as contained in our Annual Report on Form 10–K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 1, 2022, and in conjunction with the condensed consolidated financial statements and notes in Part I – Item 1 of this report.

Overview

WEX Inc. is the global commerce platform that simplifies the business of running a business. We currently operate in three reportable segments: Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. The Fleet Solutions segment provides payment processing, transaction processing, and information management services specifically designed for the needs of fleets of all sizes from small businesses to federal and state government fleets and over-the-road carriers. The Travel and Corporate Solutions segment focuses on the complex payment environment of global B2B payments, enabling customers to utilize our payments solutions to integrate into their own workflows and manage their accounts payable automation and spend management functions. The Health and Employee Benefit Solutions segment provides a SaaS platform for consumer directed healthcare benefits and a full-service benefit enrollment solution, bringing together benefits administration, certain compliance services and consumer-directed and benefits accounts. Additionally, WEX serves as the non-bank custodian to certain HSA assets.

Summary

Key Performance Indicators

Below are key metrics from the third quarter of 2022:

Total volume processed across the Company, which includes purchases on WEX-issued accounts as well as purchases issued by others using a WEX platform, increased 41 percent over the third quarter of 2021 to $57.5 billion for the third quarter of 2022. Total purchase volume across the Company in the third quarter of 2022, which includes payment processing $ of fuel in the Fleet Solutions segment and purchase volumes in the Travel and Corporate Solutions and Health and Employee Benefit Solutions segments, grew 52 percent from the same period in the prior year reflecting the strong performance in each of our segments, as further described below.

Fleet Solutions

• Payment processing transactions, which represents the total number of purchases made by fleets that have a payment processing relationship with WEX where the Company maintains the receivable for the total purchase, were up approximately 8 percent as compared to the same period last year, substantially as a result of increased transactions processed in North America.
• Average vehicles serviced increased 13 percent for the third quarter of 2022 from the same period last year.
• Payment processing $ of fuel, which represents the total dollar value of the fuel purchased by fleets that have a payment processing relationship with the Company, increased 44 percent for the third quarter of 2022 from the same period last year, driven primarily by higher fuel prices.

Travel and Corporate Solutions

• Purchase volume, which represents the total dollar value of all WEX-issued transactions that use WEX corporate card products and virtual card products, was $20.7 billion for the third quarter of 2022, representing an increase of 61 percent from the same period last year. This increase was primarily due to continued travel market recovery during the third quarter of 2022.

Health and Employee Benefit Solutions

• Purchase volume, which represents the total U.S. dollar value of all transactions where interchange is earned by WEX, was up approximately 15 percent as compared to the same period last year.
• Average number of U.S. SaaS accounts, which represents the number of active Consumer-Directed Health, COBRA, and billing accounts on our U.S. SaaS platforms, grew by approximately 1.3 million for the third quarter of 2022, an 8 percent increase from the same period in the prior year building off a strong open enrollment season.

Results of Operations

Fleet Solutions

Revenues

The following table reflects comparative revenue and key operating statistics within Fleet Solutions:

(In thousands, except per gallon data)

1 The impact of foreign currency exchange rate fluctuations on Fleet Solutions decreased revenue by $5.3 million in the third quarter of 2022 and by $12.2 million in the nine months ended September 30, 2022, as compared to the same periods in the prior year. Favorable impact from domestic fuel prices increased revenue by $55.7 million and $161.1 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in the prior year.

2 The increase in fuel prices, offset in part by a release of minimum volume commitment penalty reserves during the first half of 2022, has substantially contributed to a decline in our net payment processing rate for the nine months ended September 30, 2022, as compared to the same period in the prior year. However, transactional shifting toward slightly smaller but more frequent transactions in our over-the-road business, where revenue is typically earned based on a fixed amount per transaction, has resulted in a slight benefit to our net payment processing rate during the third quarter of 2022.

Total Fleet Solutions revenue increased $91.7 million for the third quarter of 2022 and $271.9 million for the nine months ended September 30, 2022, as compared to the same periods in the prior year. Revenue increases primarily reflect higher fuel prices, an increase in late fees and growth in our existing customer base.

Finance fee revenue is comprised of the following components:

(In thousands)

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. 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. We typically conduct an assessment of our late fee rates at least annually but such assessment may occur more often depending on macro-economic factors. In addition, we periodically assess the market rates within our industry to determine appropriate late fee rates.

Finance income increased $30.1 million for the third quarter of 2022 and $77.6 million for the nine months ended September 30, 2022, as compared to the same periods in the prior year. These increases were driven by higher domestic fuel prices and increased customer delinquencies. Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time to pay, placing a customer on a payment plan or granting waivers of late fees. There were no material concessions granted to customers experiencing financial difficulties during the three and nine months ended September 30, 2022 and 2021.

The primary source of factoring fee revenue is calculated as a negotiated percentage fee of the receivable balance that we purchase. A secondary source of factoring fee revenue is a flat rate service fee to our customers that request a non-contractual same day funding of the receivable balance. Factoring fee revenue increased $3.7 million for the nine months ended September 30, 2022, as compared with the same period in the prior year, due to increased shipping demand in the first quarter of 2022, leading to an increase in the size and volume of factored invoices. The softening of the spot rates, or uncontracted transactional market rates paid by a shipper to move a truckload of goods, in the over-the-road market during the third quarter of 2022 resulted in decreased factoring fee revenue from the comparable period in the prior year, a trend which we expect to continue through the remainder of the year.

Operating Expenses

The following table compares line items within operating income and presents segment adjusted operating income and segment adjusted operating income margin for Fleet Solutions:

(In thousands)

NM - Not meaningful

1 Our CODM evaluates the financial performance of each segment using segment adjusted operating income, which excludes: (i) unallocated corporate expenses; (ii) acquisition-related intangible amortization and other acquisition and divestiture related items; (iii) debt restructuring costs; (iv) stock-based compensation; (v) impairment charges and (vi) other costs. See “Non-GAAP Financial Measures That Supplement GAAP Measures” later in this Item 2 for a reconciliation of total segment adjusted operating income to income before income taxes. See also Part I – Item 1 – Note 18, Segment Information, to our condensed consolidated financial statements for more information regarding our segment determination.

2 Segment adjusted operating income margin is calculated by dividing segment adjusted operating income by segment revenue. The third quarter and nine months ended September 30, 2022 saw decreases in segment adjusted operating income margin over the prior year comparable periods. These decreases reflect unfavorability in credit and fraud losses, partly offset by operating leverage from higher revenues.

Cost of services

Processing costs increased by $12.9 million and $32.5 million for the three and nine months ended September 30, 2022, as compared with the same periods in the prior year. Such increases were driven in nearly equal parts by higher compliance costs incurred primarily in association with a consent order issued by the FDIC and UDFI, as further discussed within the Liquidity and Capital Resources section later in this MD&A, and by business support costs incurred as a result of the increased volumes experienced during the quarter and nine months ended September 30, 2022, as compared to the prior year comparable periods.

Provision for credit losses, which includes estimates for both credit and fraud losses, increased by $42.5 million for the third quarter of 2022 and $92.3 million for the nine months ended September 30, 2022 as compared to the same periods in the prior year. We generally measure our loss performance by calculating fuel-related losses as a percentage of total fuel expenditures on payment processing transactions. This metric for provision for credit losses was 30.9 and 23.7 basis points of fuel expenditures for the three and nine months ended September 30, 2022, respectively, as compared to 5.9 and 6.7 basis points of fuel expenditures for the same periods in the prior year, respectively. Estimated fraud losses contributed 11.8 and 9.4 basis points to the provision for credit losses totals noted above during the three and nine months ended September 30, 2022, respectively, while not materially contributing to the totals for the comparable periods of 2021. The increases in both the credit-related and fraud-related loss metrics are in part driven by the economic effects of PPG rate increases. In addition, slower payments from small customers in our over-the-road business, likely due to declining spot shipping rates, led to the recording of a loss reserve during the third quarter of 2022.

Operating interest increased $3.9 million for the third quarter of 2022 and $3.0 million for the nine months ended September 30, 2022 as compared to the same periods in the prior year. These increases are reflective of higher interest rates on operating debt balances and increased deposits in support of working capital needs as a result of volume and PPG increases.

Service fee and depreciation and amortization expense for the three and nine months ended September 30, 2022 were all generally consistent with those from the same periods in the prior year.

Other operating expenses

General and administrative expenses increased $3.2 million for the three months ended September 30, 2022 and $9.6 million for the nine months ended September 30, 2022, as compared with the same periods in the prior year due to increased compensation, professional services and information technology expense in support of business growth.

Sales and marketing expenses increased $7.9 million for the three months ended September 30, 2022 and $26.4 million for the nine months ended September 30, 2022, as compared with the same periods in the prior year. These increases were primarily driven by higher partner commissions due to fuel price increases and volume growth, coupled to a lesser extent with increased employee compensation in support of that growth.

Depreciation and amortization expense for the three and nine months ended September 30, 2022 remained generally consistent with the same periods in the prior year.

During the three months ended September 30, 2022, we recorded non-cash goodwill impairment charges of $136.5 million within our Fleet Solutions segment. See Part I – Item 1 – Note 2, Recent Accounting Pronouncements and Supplemental Information, to our condensed consolidated financial statements for more information.

Travel and Corporate Solutions

Revenues

The following table reflects comparative revenue and key operating statistics within Travel and Corporate Solutions:

(In thousands)

1 The impact of foreign currency exchange rate fluctuations on Travel and Corporate Solutions decreased revenues by $6.5 million and $10.7 million during the three and nine months ended September 30, 2022, respectively, compared to the prior year comparable periods.

2 Purchase volume in the Travel and Corporate Solutions segment represents the total dollar value of all WEX issued transactions that use WEX corporate card products and virtual card products.

Total Travel and Corporate Solutions revenue increased $23.0 million for the third quarter of 2022 and $48.2 million for the nine months ended September 30, 2022, as compared to the same periods in the prior year. The increases were primarily driven by continued strength in consumer travel demand, which more than doubled travel-related revenues for the nine months ended September 30, 2022 compared to the prior year comparable period, and volume growth in the corporate payments partner channel. These revenue increases were partly offset by the impact of an accounting change in the fourth quarter of 2021, which required a shift from gross revenue presentation to net revenue presentation for one customer.

Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time to pay, placing a customer on a payment plan or granting waivers of late fees. There were no material concessions granted to customers during the three and nine months ended September 30, 2022 and 2021.

Operating Expenses

The following table compares line items within operating income (loss) and presents segment adjusted operating income and segment adjusted operating income margin for Travel and Corporate Solutions:

(In thousands)

NM - Not meaningful

1 Our CODM evaluates the financial performance of each segment using segment adjusted operating income, which excludes: (i) unallocated corporate expenses; (ii) acquisition-related intangible amortization and other acquisition and divestiture related items; (iii) debt restructuring costs; (iv) stock-based compensation; (v) impairment charges and (vi) other costs. See “Non-GAAP Financial Measures That Supplement GAAP Measures” later in this Item 2 for a reconciliation of total segment adjusted operating income to income before income taxes. See also Part I – Item 1 – Note 18, Segment Information, to our condensed consolidated financial statements for more information regarding our segment determination.

2 Segment adjusted operating income margin is calculated by dividing segment adjusted operating income by segment revenue. The third quarter and nine months ended September 30, 2022 increases in segment adjusted operating income margin primarily reflect accelerated travel volumes and the benefit of an accounting change effective in the fourth quarter of 2021 from gross revenue presentation to net revenue presentation for one customer.

Cost of services

Processing costs for the three and nine months ended September 30, 2022 increased $3.4 million and $4.3 million, respectively, compared to the comparable prior year periods due to business support costs incurred as a result of the increased volumes experienced.

Provision for credit losses for the three and nine months ended September 30, 2022 was not material to Travel and Corporate Solutions’ operations, decreasing $2.9 million and $3.5 million for the comparable prior year periods, respectively. Credit losses in the Travel and Corporate Solutions segment are sporadic and generally correlate closely with trends in consumer metrics.

Operating interest for the three and nine months ended September 30, 2022 increased $1.6 million and $2.8 million, respectively, as compared to the comparable prior year periods. These increases are reflective of higher interest rates and increased deposits in support of working capital needs as a result of volume increases.

Depreciation and amortization expense for the nine months ended September 30, 2022 decreased $3.8 million, as compared to the same period in the prior year, primarily due to the prior year amortization of developed technology intangible assets with a one-year life that were acquired as part of the eNett and Optal acquisition. Depreciation and amortization expense for the third quarter of 2022 remained consistent with the comparable prior year period.

Other operating expenses

General and administrative expense decreased $11.8 million for the nine months ended September 30, 2022, as compared to the same period in the prior year, primarily due to a vendor contract termination payment during the first quarter of 2021. General and administrative expense for the third quarter of 2022 remained consistent with the comparable period of the prior year.

Sales and marketing expenses decreased for the third quarter and nine months ended September 30, 2022 by $11.5 million and $45.8 million, respectively, as compared to the same periods in the prior year. These decreases were primarily due to a reduction in partner commissions as a result of the impact of an accounting change in the fourth quarter of 2021, which required a shift from gross revenue presentation to net revenue presentation for one customer.

Depreciation and amortization expense during the third quarter and nine months ended September 30, 2022 remained consistent with the same periods in the prior year.

Health and Employee Benefit Solutions

Revenues

The following table reflects comparative revenue and key operating statistics within Health and Employee Benefit Solutions:

(In thousands)

1 Purchase volume in the Health and Employee Benefit Solutions segment represents the total U.S. dollar value of all transactions where interchange is earned by WEX.

Payment processing revenue increased $2.6 million during the third quarter of 2022 and $7.2 million for the nine months ended September 30, 2022, as compared to the same periods in the prior year, due to cardholder growth and increased cardholder spend volumes.

Account servicing revenue increased $25.5 million for the nine months ended September 30, 2022, as compared to the same period in the prior year. The increase was primarily due to increased revenues recognized as a result of the benefitexpress Acquisition along with account growth and an increased number of participants, offset in part by a reduction of revenue resulting from one-time COBRA related services provided as a result of the American Rescue Plan Act legislation during 2021. Account servicing revenue for the third quarter of 2022 remained generally consistent with the comparable period of the prior year.

Finance fee revenue was not material to Health and Employee Benefit Solutions’ operations for the three and nine months ended September 30, 2022 and 2021.

Other revenue increased $13.3 million for the third quarter of 2022 and $26.1 million for the nine months ended September 30, 2022, as compared to the same periods in the prior year. The increases were due primarily to interest income earned on the investment of HSA deposits obtained as a result of the April 2021 acquisition of contractual rights to serve as custodian to certain HSAs from Bell Bank, including the impact from higher rates.

Operating Expenses

The following table compares line items within operating income and presents segment adjusted operating income and segment adjusted operating income margin for Health and Employee Benefit Solutions:

(In thousands)

NM - Not meaningful

1 Our CODM evaluates the financial performance of each segment using segment adjusted operating income, which excludes: (i) unallocated corporate expenses; (ii) acquisition-related intangible amortization and other acquisition and divestiture related items; (iii) debt restructuring costs; (iv) stock-based compensation; (v) impairment charges and (vi) other costs. See “Non-GAAP Financial Measures That Supplement GAAP Measures” later in this Item 2 for a reconciliation of total segment adjusted operating income to income before income taxes. See also Part I – Item 1 – Note 18, Segment Information, to our condensed consolidated financial statements for more information regarding our segment determination.

2 Segment adjusted operating income margin is calculated by dividing segment adjusted operating income by segment revenue. Segment adjusted operating income margin for both the three and nine months ended September 30, 2022 have remained relatively consistent with the prior year periods.

Cost of services

Processing costs increased $8.8 million for the third quarter of 2022 and $32.3 million for the nine months ended September 30, 2022, as compared to the same periods in the prior year. The increases in processing costs primarily resulted from higher customer service and technology costs to support partner growth, along with increased costs as a result of the benefitexpress Acquisition during the nine months ended September 30, 2022.

Service fees for the three and nine months ended September 30, 2022 increased $2.7 million and $8.5 million, respectively, as compared with the same periods in the prior year. The increase in service fees for the three months ended September 30, 2022 was primarily related to greater interest-bearing HSA program fees incurred. For the nine months ended September 30, 2022, these HSA program fees contributed to the increase in service fees along with increases due to the benefitexpress Acquisition and volume increases.

Provision for credit losses and operating interest were not material to Health and Employee Benefit Solutions’ operations for the three and nine months ended September 30, 2022 and 2021.

Depreciation and amortization expense for the three and nine months ended September 30, 2022 remained consistent with the same periods in the prior year.

Other operating expenses

General and administrative expense increased $4.2 million for the nine months ended September 30, 2022 as compared to the same period in the prior year primarily due to increased employee compensation and professional service fees. General and administrative expense for the third quarter of 2022 remained consistent with the comparable prior year period.

Sales and marketing expenses increased $2.3 million and $8.6 million during the three and nine months ended September 30, 2022, respectively, as compared to the same periods in the prior year due primarily to the expansion of the sales and marketing team, coupled with increased expense during the nine months ended September 30, 2022 due to the benefitexpress Acquisition and a return to in-person partner conferences.

Depreciation and amortization expense increased $3.9 million for the nine months ended September 30, 2022, as compared to the same period of the prior year, primarily due to the amortization of intangible rights obtained as a result of the April 2021 acquisition of contractual rights to serve as custodian of certain HSAs. Depreciation and amortization expense for the third quarter of 2022 remained consistent with the comparable prior year period.

Unallocated corporate expenses

Unallocated corporate expenses represent the portion of expenses relating to general corporate functions, including acquisition and divestiture expenses, certain finance, legal, information technology, human resources, administrative and executive expenses, and other expenses not directly attributable to a reportable segment.

The following table compares line items within operating income for unallocated corporate expenses:

(In thousands)

General and administrative expenses increased $3.9 million for the third quarter of 2022 as compared to the same period in the prior year. The increase was due primarily to increased stock and other compensation expense. Increased stock and other compensation expense was substantially offset by a reduction in professional fees, including legal and arrangement fees incurred in connection with the amendment and restatement of our 2016 Credit Agreement during 2021, resulting in general and administrative expenses for the nine months ended September 30, 2022 remaining consistent with the prior year comparable period.

Unallocated depreciation and amortization for the three and nine months ended September 30, 2022 was comparable to the same periods in the prior year.

Non-operating income and expense

The following table reflects comparative results for certain amounts excluded from operating income:

(In thousands)

NM - Not meaningful

Financing interest expense for the third quarter of 2022 remained consistent with the prior year comparable period. During the nine months ended September 30, 2022, financing interest expense remained consistent with the comparable prior year period due to reductions as a result of the early redemption of the Company’s $400.0 million senior notes and the write-off of certain deferred financing costs in conjunction with the amendment and restatement of the Company’s 2016 Credit

Agreement, both during 2021, being offset substantially by increased expense related to the accretion of deferred payments associated with the acquisition of the remaining interest in PO Holding during March 2022.

During the three and nine months ended September 30, 2022, the Company’s contingent consideration derivative liability increased as a result of the steepening of the Federal Funds futures curve. See Part I – Item 1 – Note 13, Fair Value, to our condensed consolidated financial statements for further information on the valuation of this derivative liability.

During the quarter ended September 30, 2021, the Company recognized other income of $3.6 million resulting from a gain on the sale of a fully impaired equity investment.

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 $23.4 million in the third quarter of 2022 and $37.8 million in the nine months ended September 30, 2022. The losses resulted from the weakening of certain foreign currencies, including the Australian dollar, the Euro and the British Pound sterling, in which we transact relative to the U.S. dollar.

The Company incurred unrealized gains on financial instruments of $23.5 million and $90.3 million for the three and nine months ended September 30, 2022, respectively, substantially due to significant increases in the LIBOR forward yield curve. The net unrealized gains on financial instruments for the three and nine months ended September 30, 2021 resulted primarily from a reduction in the interest rate swap liabilities due to a decrease in remaining future settlements.

The Company’s effective tax rate was (1.9) percent and 42.1 percent for the three and nine months ended September 30, 2022, respectively, as compared to 27.2 percent and 16.6 percent for the three and nine months ended September 30, 2021, respectively. Income tax expense is based on an estimated annual effective rate, which requires the Company to make its best estimate of annual pretax income or loss. The Company’s effective tax rates for the three and nine months ended September 30, 2022 were adversely impacted primarily by a discrete tax adjustment of $12.7 million relating to the establishment of a valuation allowance recorded against a portion of deferred tax assets resulting from goodwill impairment charges. The Company’s effective tax rate for the nine months ended September 30, 2022 was also adversely impacted by a discrete tax item of $7.5 million recorded during the first quarter of 2022, primarily associated with an uncertain tax position. The effective tax rate for the nine months ended September 30, 2021 was favorably impacted primarily by significant excess tax benefits arising from stock-based compensation.

Net income from non-controlling interests was not material to Company operations for the three and nine months ended September 30, 2022 and 2021.

During the nine months ended September 30, 2022, the Company purchased the remaining non-controlling interest in PO Holding from SBI, reducing the carrying value of the redeemable non-controlling interest to zero. The transaction resulted in a $34.2 million gain, net of tax expense. See Part I – Item 1 – Note 4, Acquisitions, to our condensed consolidated financial statements for further information.

Non–GAAP Financial Measures That Supplement GAAP Measures

In addition to evaluating the Company’s performance on a GAAP basis, the CODM of the Company uses segment adjusted operating income, a non-GAAP measure, to allocate resources among our operating segments. The Company considers this measure, which excludes unallocated corporate expenses, acquisition-related intangible amortization, other acquisition and divestiture related items, debt restructuring costs, stock-based compensation, impairment charges and other costs integral in evaluating the Company’s performance.

WEX believes that adjusted net income, another non-GAAP measure that similarly excludes all items discussed in the paragraph above except unallocated corporate expenses, and further excludes unrealized gains and losses on financial instruments, net foreign currency gains and losses, change in fair value of contingent consideration, debt issuance cost amortization, other adjustments attributable to non-controlling interests, and tax related items, is also integral to the Company’s reporting and planning processes.

Segment adjusted operating income and adjusted net income may be useful to investors as a means of evaluating our performance. However, because segment adjusted operating income and adjusted net income are non-GAAP measures, they should not be considered as a substitute for, or superior to, operating income or net income as determined in accordance with GAAP. Segment adjusted operating income and adjusted net income as used by WEX may not be comparable to similarly titled measures employed by other companies.

Specifically, in addition to evaluating the Company’s performance on a GAAP basis, management evaluates the Company’s performance on a basis that excludes the above items because:

• Exclusion of the non-cash, mark-to-market adjustments on financial instruments, including interest rate swap agreements and investment securities, helps management identify and assess trends in the Company’s underlying business that might otherwise be obscured due to quarterly non-cash earnings fluctuations associated with these financial instruments. Additionally, the non-cash, mark-to-market adjustments on financial instruments are difficult to forecast accurately, making comparisons across historical and future quarters difficult to evaluate;
• Net foreign currency gains and losses primarily result from the remeasurement to functional currency of cash, accounts receivable and accounts payable balances, certain intercompany notes denominated in foreign currencies and any gain or loss on foreign currency hedges relating to these items. The exclusion of these items helps management compare changes in operating results between periods that might otherwise be obscured due to currency fluctuations;
• The change in fair value of contingent consideration, which is related to the acquisition of certain contractual rights to serve as custodian or sub-custodian to HSAs, is dependent upon changes in future interest rate assumptions and has no significant impact on the ongoing operations of the Company. Additionally, the non-cash, mark-to-market adjustments on financial instruments are difficult to forecast accurately, making comparisons across historical and future quarters difficult to evaluate;
• The Company considers certain acquisition-related costs, including certain financing costs, investment banking fees, warranty and indemnity insurance, certain integration-related expenses and amortization of acquired intangibles, as well as gains and losses from divestitures to be unpredictable, dependent on factors that may be outside of our control and unrelated to the continuing operations of the acquired or divested business or the Company. In addition, the size and complexity of an acquisition, which often drives the magnitude of acquisition-related costs, may not be indicative of such future costs. The Company believes that excluding acquisition-related costs and gains or losses on divestitures facilitates the comparison of our financial results to the Company’s historical operating results and to other companies in our industry;
• Stock-based compensation is different from other forms of compensation as it is a non-cash expense. For example, a cash salary generally has a fixed and unvarying cash cost. In contrast, the expense associated with an equity-based award is generally unrelated to the amount of cash ultimately received by the employee, and the cost to the Company is based on a stock-based compensation valuation methodology and underlying assumptions that may vary over time;
• Other costs are not consistently occurring and do not reflect expected future operating expense, nor do they provide insight into the fundamentals of current or past operations of our business. This also includes non-recurring professional service costs, 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 nine months ended September 30, 2021, other costs additionally include a penalty incurred on a vendor contract termination;
• Impairment charges represent non-cash asset write-offs, which do not reflect recurring costs that would be relevant to the Company’s continuing operations. The Company believes that excluding these nonrecurring expenses facilitates the comparison of our financial results to the Company’s historical operating results and to other companies in its industry;
• Debt restructuring and debt issuance cost amortization are unrelated to the continuing operations of the Company. Debt restructuring costs are not consistently occurring and do not reflect expected future operating expense, nor do they provide insight into the fundamentals of current or past operations of our business. In addition, since debt issuance cost amortization is dependent upon the financing method, which can vary widely company to company, we believe that excluding these costs helps to facilitate comparison to historical results as well as to other companies within our industry;
• The adjustments attributable to non-controlling interests, including adjustments to the redemption value of a non-controlling interest, have no significant impact on the ongoing operations of the business;
• The tax related items are the difference between the Company’s GAAP tax provision and a pro forma tax provision based upon the Company’s adjusted net income before taxes as well as the impact from certain discrete tax items. The methodology utilized for calculating the Company’s adjusted net income tax provision is the same methodology utilized in calculating the Company’s GAAP tax provision; and
• The Company does not allocate certain corporate expenses to our operating segments, as these items are centrally controlled and are not directly attributable to any reportable segment.

The following table reconciles net (loss) income attributable to shareholders to adjusted net income attributable to shareholders:

(In thousands)

The following table reconciles total segment adjusted operating income to (loss) income before income taxes:

(In thousands)

51

Liquidity and Capital Resources

We fund our business operations primarily via cash on hand, cash generated from operations, the issuance of deposits, borrowings under our Amended and Restated Credit Agreement, our participation debt and our accounts receivable factoring and securitization arrangements. As of September 30, 2022, we had cash and cash equivalents of $759.4 million and remaining borrowing availability of $810.8 million under the revolving credit facility provided by our Amended and Restated Credit Agreement along with access to various sources of funds, including uncommitted federal funds lines of credit from other banks.

Our Amended and Restated Credit Agreement provides for a secured revolving credit facility (the “Revolving Credit Facility”), senior secured tranche A term loans (the “Tranche A Term Loans”) and senior secured tranche B term loans (the “Tranche B Term Loans”). As of September 30, 2022, the Company had an outstanding principal amount of $905.1 million on the Tranche A Term Loans, an outstanding principal amount of $1,420.4 million on the Tranche B Term Loans, borrowings of $88.2 million on the Revolving Credit Facility and letters of credit of $31.0 million drawn against the Revolving Credit Facility.

As of September 30, 2022, the Company had outstanding $310.0 million in principal amount of Convertible Notes, issued in a private placement with Warburg Pincus. At the Company’s option, interest is either payable in cash, through accretion to the principal amount of the Convertible Notes, or a combination of cash and accretion. The Company has paid, and expects to continue to pay interest in cash as it comes due.

The Company is also party to two securitized debt agreements. Under these agreements, the Company sells certain of its Australian and European trade accounts receivable to bankruptcy-remote subsidiaries consolidated by the Company, which in turn use the receivables as collateral to issue securitized debt. Amounts collected on the securitized receivables are restricted to pay the securitized debt and are not available for general corporate purposes. The Company had $93.9 million of securitized debt under these facilities as of September 30, 2022. In addition, from time to time, WEX Bank enters into participation agreements with third-party banks to fund customers’ balances that exceed WEX Bank’s lending limit to individual customers. There was $29.9 million borrowed against these participation agreements as of September 30, 2022. WEX Bank also borrows from uncommitted federal funds lines to supplement the financing of the Company’s accounts receivable. There were no outstanding borrowings under these lines of credit as of September 30, 2022. See Part I – Item 1 – Note 10, Financing and Other Debt, to our condensed consolidated financial statements for more information regarding these facilities.

We utilize two off-balance sheet factoring arrangements to sell certain of our accounts receivable to unrelated third-party financial institutions in order to accelerate the collection of the Company’s cash and reduce internal costs. Under the arrangements, the factored receivables have been transferred without recourse. Available capacity is dependent on the level of our trade accounts receivable eligible to be sold and the financial institutions’ willingness to purchase such receivables. However, the Company is not dependent on them to maintain its liquidity and capital resources. We are not aware of any circumstances that are reasonably likely to cause the off-balance sheet arrangements to have a material adverse effect on liquidity and capital resources. See Part I – Item 1 – Note 11, Off-Balance Sheet Arrangements, to our condensed consolidated financial statements for further information about the Company’s off-balance sheet arrangements.

WEX Bank’s regulatory status enables it to raise capital to fund the Company’s working capital requirements by issuing deposits, subject to FDIC rules governing minimum financial ratios. As of September 30, 2022, we had $3,635.7 million in deposits. See Part I – Item 1 – Note 9, Deposits, to our condensed consolidated financial statements for more information regarding our deposits.

We believe that our current cash and cash equivalents, cash generating capabilities, financial condition and operations, and access to available funding sources will be adequate to fund our cash needs for the next 12 months and the foreseeable future. The table below summarizes our primary sources and uses of cash:

1 Our long-term cash requirements consist primarily of amounts owed on our Amended and Restated Credit Agreement and various facilities lease agreements.

Cash Flows

The table below summarizes our cash activities:

(In thousands)

Operating Activities

We fund a customer’s entire receivable in the majority of our 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 increases or decreases in fuel prices, driving changes in accounts receivable and accounts payable balances, which directly impact our capital resource requirements.

Cash provided by operating activities for the nine months ended September 30, 2022 increased $467.0 million as compared to the same period in the prior year. The increase in cash provided by operating activities year over year was primarily the result of higher net income adjusted for non-cash items as well as an increase in restricted cash payable.

Investing Activities

Investing cash flows generally consist of capital expenditures, cash used for acquisitions and the investment of eligible custodial cash assets.

Cash used for investing activities for the nine months ended September 30, 2022 increased $53.2 million as compared to the same period in the prior year, primarily resulting from the investment of $632.8 million of transferred HSA deposits in available-for-sale debt securities during the nine months ended September 30, 2022, offset substantially by $558.3 million of payments made for acquisitions during the nine months ended September 30, 2021.

Financing Activities

Financing cash flows generally consist of the issuance and repayment of debt, deposits and proceeds from employee exercises of stock options and purchases of treasury shares. Repurchases of our common stock may vary based on management’s evaluation of market and economic conditions and other factors.

Cash provided by financing activities for the nine months ended September 30, 2022 totaled $753.4 million, due primarily to an increase in deposits of $960.6 million, partially offset by $149.6 million of share repurchases of our common stock and $47.5 million of repayments on our term loans. Cash provided by financing activities for the nine months ended September 30, 2021 totaled $477.7 million due primarily to an increase in deposits of $558.0 million. The early redemption of the Company’s $400.0 million of Notes during the nine months ended September 30, 2021 was substantially offset by additional term loan borrowings of $65.0 million, net of quarterly repayments, and net borrowings of $213.4 million against our Revolving Credit Facility.

During the nine months ended September 30, 2022, the Company repurchased approximately 1 million shares of our common stock subject to a $150.0 million share buyback plan previously authorized and outstanding as of December 31, 2021 for a total cost of $149.6 million. During August 2022, our board of directors terminated the substantially exhausted plan and authorized a new share buyback plan for the repurchase of up to $150.0 million of our outstanding shares through August 2026, under which the Company repurchased 0.5 million of shares during the month of October 2022, at a total cost of $75.0 million. On October 27, 2022, the Company announced that our board of directors approved an increase of $500.0 million to the share buyback plan, resulting in a total repurchase authorization of $650.0 million, and shortened the duration of the plan to December 31, 2025. As of the date of this filing, there is $575.0 million in shares of common stock that are available to be purchased pursuant to the existing repurchase authorization.

Financial Covenants

The Amended and Restated Credit Agreement contains customary affirmative and negative covenants affecting the Company and its subsidiaries, including covenants limiting the Company’s ability to, among other things, incur debt (including disqualified stock), grant liens, make certain investments, pay dividends, repurchase equity interests and sell assets, subject to certain exceptions. The Amended and Restated Credit Agreement also contains customary financial maintenance covenants, including a consolidated interest coverage ratio and a consolidated leverage ratio. The indenture associated with the Convertible Notes also includes customary covenants, including a debt incurrence covenant that restricts the Company from incurring certain indebtedness, including disqualified stock and preferred stock issued by the Company or its subsidiaries, subject to customary exceptions. At September 30, 2022, we were in compliance with such covenants. See Part II – Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources and Part II – Item 8 – Note 16, Financing and Other Debt, in our Annual Report on Form 10-K for the year ended December 31, 2021 for more information regarding these covenants.

Undistributed Earnings

Undistributed earnings of certain foreign subsidiaries of the Company amounted to an estimated $157.1 million and $133.0 million as of September 30, 2022 and December 31, 2021, respectively. The Company continues to maintain its indefinite reinvestment assertion for its investments in foreign subsidiaries except for any historical undistributed earnings and future earnings for WEX Australia. Upon distribution of the foreign subsidiaries’ earnings in which the Company continues to assert indefinite reinvestment, the Company would be subject to withholding taxes payable to foreign countries, where applicable, but would generally have no further federal income tax liability. It is not practicable to estimate the unrecognized deferred tax liability, however, it is not expected to be material.

Other Commitments, Contingencies and Contractual Obligations

During June 2022, the Company and its European fuel suppliers amended existing contracts, modifying both prior period and future minimum volume commitments through 2025. As a result of these amendments, the Company reversed previously accrued penalties totaling approximately $7 million as revenue within the condensed consolidated statement of operations during the nine months ended September 30, 2022. During the three and nine months ended September 30, 2022, the Company incurred shortfall penalties of approximately $0.6 million and $1.6 million, respectively, under the amended agreements.

During June 2022, the Company entered into a definitive agreement to purchase a portfolio of certain assets, consisting primarily of branded commercial fleet cards from a third-party. During September 2022, the Company closed on the acquisition of these receivables, paying the seller a preliminary purchase price of $45.1 million, consisting of the face value of the account balances as of the valuation date, plus certain customary adjustments, as defined in the purchase agreement. The actual amount of accounts receivable purchased was less than the balances as of the valuation date, therefore, the Company expects to receive back approximately $4.3 million in excess funds transferred at closing from the seller.

WEX Bank is working to resolve matters with the FDIC and the UDFI, including with respect to a consent order issued by the FDIC and the UDFI (the “Order”) on May 6, 2022. The Order requires WEX Bank to strengthen its Bank Secrecy Act/anti-money laundering compliance program and to address related matters, including with respect to controls. The terms of the Order will remain in effect and be enforceable until they are modified, terminated, suspended or set aside by the FDIC and the UDFI. The matters identified are not expected to have a material adverse effect on our results of operations, financial condition or cash flows.

On March 7, 2022, WEX Inc. and SBI entered into the Share Purchase Agreement whereby WEX Inc. purchased SBI’s remaining 4.53 percent interest in PO Holding for a purchase price of $234.0 million plus any interest accruing pursuant to the terms of the Share Purchase Agreement. The purchase price is payable in three installments of $76.7 million in each of March of 2024, 2025 and 2026, with a final payment of $4.0 million payable in March 2026. Pursuant to the Share Purchase Agreement, WEX Inc. owes SBI interest on the outstanding purchase price balance from March 2024 to March 2025 at the 12-month SOFR rate (as determined on March 1, 2024) plus 1.25 percent and on the outstanding balance from March 2025 to March 2026 at the 12-month SOFR rate (as determined on March 3, 2025) plus 2.25 percent, except that no interest accrues on the $4.0 million payment due in March 2026. For further information regarding this transaction refer to Part I - Item 1 - Note 4, Acquisitions, to the condensed consolidated financial statements.

There were no other material changes to our contractual obligations from the information previously provided in Item 7 of our Annual Report on Form 10–K for the year ended December 31, 2021.

Critical Accounting Policies and Estimates

We have no material changes to our critical accounting policies and estimates discussed in our Annual Report on Form 10–K for the year ended December 31, 2021.

Recently Adopted Accounting Standards

See Note 2, Recent Accounting Pronouncements and Supplemental Information, to the condensed consolidated financial statements included in Part I, Item 1 of this Form 10–Q.

As of September 30, 2022, we have no material changes to the market risk disclosures in our Annual Report on Form 10–K for the year ended December 31, 2021.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of the principal executive officer and principal financial officer of WEX Inc., evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2022. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2022. “Disclosure controls and procedures” are controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended September 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10–K for the year ended December 31, 2021, which could materially affect our business, financial condition or future results. The risk factors disclosure in our Annual Report on Form 10-K for the year ended December 31, 2021 is qualified by the information that is described in this Quarterly Report on Form 10-Q. The risks described in our Annual Report on Form 10–K for the year ended December 31, 2021 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.