UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10-K
(Mark One)
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| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20202023
OR
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| ☐ | 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)
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| Delaware | | 01-0526993 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
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| 1 Hancock St., | Portland, | ME | | 04101 |
| (Address of principal executive offices) | | (Zip Code) |
(207) 773-8171
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| 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 |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
þ Yes ¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
¨ Yes þ No
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.
þ 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
þ 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.
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| Large accelerated filer | þ | | | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑þ
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b)
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Act).
Act. ☐ Yes þ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant (assuming for the purpose of this calculation, but without conceding, that all directors, officers and any 10 percent or greater stockholders are affiliates of the registrant) as of June 30, 2020,2023, the last business day of the registrant’s most recently completed second fiscal quarter, was $7,140,251,666approximately $7.8 billion (based on the closing price of the registrant’s common stock on that date as reported on the New York Stock Exchange).
There were 44,190,99541,734,802 shares of the registrant’s common stock outstanding as of February 22, 2021.15, 2024.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive Proxy Statement to be delivered to stockholders in connection withproxy statement for the Company's 2021Company’s 2024 Annual Meeting of Stockholders (the "2021“2024 Proxy Statement"Statement”) are incorporated by reference into Part III of this 10–K. Such 2024 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the Company’s fiscal year ended December 31, 2023. With the exception of the sections of the 20212024 Proxy Statement specifically incorporated herein by reference, the 20212024 Proxy Statement is not deemed to be filed as part of this Annual Report on 10–K.
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| TABLE OF CONTENTS | |
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| Business | | |
| Risk Factors | | |
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| Properties | | |
| Legal Proceedings | | |
| Mine Safety Disclosures | | |
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Item 9A. | Controls and Procedures | |
Item 9B. | Other Information | |
Part III
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Item 10.9A. | | |
| Executive Compensation | | |
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| Form 10–K Summary
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Unless otherwise indicated or required by the context, the terms “we,” “us,” “our,” “WEX,” or the “Company,” in this Annual Report on Form 10–10–K mean WEX Inc. and all of its subsidiaries that are consolidated under Generally Accepted Accounting Principlesaccounting principles generally accepted 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 Annual Report on Form 10-K includes forward-looking statements including, but not limited to, statements about management’s planplans and goals and statements of strategic priorities included within the “Strategy” section of this Annual Report in Item 1.goals. Any statements in this Annual Report that are not statements of historical facts are forward-looking statements. When used in this Annual Report, the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project”“project,” “will,” “positions,” “confidence,” 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 Annual 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 demand for fuel and the volatility and prices of fuel, including fuel spreads in the impact of any continued reductions in fuel priceCompany’s international markets, and the resulting impact on ourthe Company’s margins, revenues, and net income;
•the effects of general economic conditions, including COVID-19, on fueling patterns, as well asa decline in demand for fuel, corporate payment services, travel related services, or healthcare related products and transaction processing activity;services;
•our compliance, or ourthe failure to comply with the applicable requirements of MasterCardMastercard or Visa;
•any limitation, reduction, or elimination of interchange fees;Visa contracts and rules;
•the impact of foreign currency exchange rates onextent to which unpredictable events in the locations in which the Company or the Company’s operations, revenue and income;
•changes in interest rates;
•the effects ofcustomers operate or elsewhere may adversely affect the Company’s employees, ability to conduct business, expansionresults of operations 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 competed 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;condition;
•the impact and size of credit losses, including fraud losses, and other adverse effects if the Company fails to adequately assess and monitor credit risk or fraudulent use of our payment cards or systems;
•the impact of changes to the Company’s credit standards;
•limitations on, or compression of, interchange fees;
•the effect of adverse financial conditions affecting the banking system;
•the impact of increasing scrutiny with respect to our environmental, social and governance practices;
•failure to implement new technologies and products;
•the failure to realize or sustain the expected benefits from our cost and organizational operational efficiencies initiatives;
•the failure to compete effectively in order to maintain or renew key customer and partner agreements and relationships, or to maintain volumes under such agreements;
•the ability to attract and retain employees;
•the ability to execute the Company’s business expansion and acquisition efforts and realize the benefits of acquisitions we have completed;
•the failure to achieve commercial and financial benefits as a result of our strategic minority equity investments;
•the impact of foreign currency exchange rates on the Company’s operations, revenue and income and other risks associated with our operations outside the United States;
•the failure to adequately safeguard custodial HSA assets;
•the incurrence of impairment charges if the Company’s assessment of the fair value of certain of its reporting units changes;
•the uncertainties of investigations and litigation;
•the ability of the Company to protect its intellectual property and other proprietary rights;
•the impact of regulatory capital requirements and other regulatory requirements on the operations of WEX Bank or its ability to make payments to WEX Inc.;
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| Table of Contents | FORWARD-LOOKING STATEMENTS |
•the impact of the Company’s debt instruments on the Company’s operations;
•the impact of leverage on the Company’s operations, results or borrowing capacity generally;
•changes in interest rates, including those which we must pay for our deposits, and the rate of inflation;
•the ability to refinance certain indebtedness or obtain additional financing;
•the actions of regulatory bodies, including tax, banking and securities regulators, or possible changes in tax, banking or financial regulations impacting the Company’s industrial bank, the Company as the corporate parent or other subsidiaries or affiliates;
•the failure to comply with the Treasury Regulations applicable to non-bank custodians;
•the impact from breaches of, or other issues with, the Company’s technology systems or those of ourits third-party service providers and any resulting negative impact on ourthe Company’s reputation, liabilities or relationships with customers or merchants;
•the Company’s abilityimpact of regulatory developments with respect to successfully obtain new customersprivacy 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;data protection;
•the impact of any disruption to the transition from LIBOR as a global benchmarktechnology and electronic communications networks we rely on;
•the ability to a replacement rate;incorporate artificial intelligence in our business successfully and ethically;
•the ability to maintain effective systems of internal controls;
•the impact of the 2016 Credit Agreement, the Notesprovisions in our charter documents, Delaware law and the Convertible Notes onapplicable banking laws that may delay or prevent our operations;
•the impact of increased leverage on the Company’s operations, results or borrowing capacity generally, and asacquisition by 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 of our reporting units changes;
•the uncertainties of litigation;third party; as well as
•other risks and uncertainties identified in Item 1A of this Annual Report and in connection with such forward-looking statements.
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 Annual 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.
RISK FACTOR SUMMARY
Investment in our securities involves risk. Below is a summary of what we believe to be the principal risks facing our business. You should carefully review and consider this summary along with the risks described more fully in Item 1A, “Risk Factors” of Part I of this Annual Report and other information included in this Annual Report. The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations.
If any of the following risks occurs, our business, financial condition, and results of operations and future growth prospects could be materially and adversely affected, and the actual outcomes of matters as to which forward-looking statements are made in this report could be materially different from those anticipated in such forward-looking statements.
•Our operations, business, and financial condition have been and are expected to continue to be adversely affected by the COVID-19 pandemic. COVID-19 has negatively impacted the business and consumer spending habits which result in revenues for us and has impacted our workforce and operations and the operations of our customers, suppliers and business partners.
•A significant portion of our revenues are related to the dollar amount of fuel purchased by or through our customers and from our fuel retailer partners, and, as a result, a reduction in the demand for fuel and other vehicle products and services and/or volatility in fuel prices could have a material adverse effect on our revenues and financial condition.
•If we fail to comply with the applicable requirements of MasterCard or Visa, they could seek to fine us, suspend us or terminate our registrations. We depend on MasterCard or Visa to process a large number of transactions and any disruption or elimination of that ability could have a material adverse effect on our revenues and business.
•A substantial portion of our revenue is generated by network processing fees, known as interchange fees, associated with transactions processed using our payment systems. Any limitation, reduction or elimination of these fees, whether by regulation or by private actions or otherwise could have a material adverse effect on our revenues and business.
•If we fail to adequately assess and monitor credit risks posed by our counterparties or there is fraudulent use of our payment cards or systems, we could experience an increase in credit loss and other intangible damages. This could affect our results from operations as well as our business reputation, among other things.
•The payments solutions industry is highly competitive. Such competition could have a material adverse effect on the fees we receive, our margins, and our ability to gain, maintain, or expand customer relationships, all on favorable terms.
•We may never realize the anticipated benefits of acquisitions we have completed or may undertake and we may encounter difficulties in trying to integrate such acquisitions and incur significant expenses or charges as a result of an acquisition. In December 2020, we consummated the acquisition of two travel focused electronic payments companies that were significantly impacted by the global COVID-19 pandemic. Given that the global COVID-19 pandemic has had, and will likely continue to have, a large effect on the travel industry, there can be no guarantee that we will achieve any of the anticipated benefits from this acquisition.
•Unpredictable events, including natural catastrophes or public health crises, dangerous weather conditions, technology failure, political unrest, and terrorist attacks in the locations in which we or our customers operate, or elsewhere, may adversely affect our ability to conduct business and could impact our results.
•WEX Bank operates under an industrial loan charter (ILC), which allows us to accept brokered deposits, which we believe provides us access to lower cost funds than many of our competitors, thus helping us to offer competitive products. The loss or suspension of WEX Bank's industrial loan charter, changes in applicable regulatory requirements, or an increase in the number or type of institutions eligible for an ILC could be disruptive to certain of our operations, increase costs, and increase competition.
•We currently have a substantial amount of indebtedness and may incur additional indebtedness, which could affect our flexibility in managing our business and could materially and adversely affect our ability to meet our debt service obligations.At December 31, 2020, we had approximately $3,026.8 million of debt outstanding, net of unamortized debt issuance costs and debt discount, including $152.7 million in current liabilities.
•We may want or need to refinance a significant amount of indebtedness or otherwise require additional financing to react to changing economic or business conditions or to replace maturing debt, fund working capital, capital expenditures, acquisitions, or other general corporate purposes. In addition, our access to lenders in the future is also dependent on, among other things, market conditions, which are variable and potentially volatile, and which could result in increased costs for obtaining and servicing our indebtedness. Accordingly, there is no guarantee, however, that we will be able to finance or obtain additional financing on favorable terms, or at all.
•Existing and new laws and regulations and enforcement activities could negatively impact our business and the markets we presently operate in or could limit our expansion opportunities.These regulations can negatively impact our revenues and increase our compliance costs. In addition, failure to comply with laws and regulations may result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of services, and/or the imposition of civil and criminal penalties, including fines, among other things.
•If the technologies we use in operating our business and interacting with our customers fail, are unavailable, or do not operate to expectations, or we fail to successfully implement technology strategies and capabilities in connection with our outsourcing arrangements, our business and results of operations could be adversely impacted.
•Our business is regularly subject to cyberattacks and attempted security and privacy breaches and we may not be able to adequately protect our information systems, including the data we collect about our customers, which could subject us to liability and damage our reputation.
•Provisions in our charter documents, Delaware law, applicable banking law and the Convertible Notes may delay or prevent our acquisition by a third party.
•The issuance by us of additional shares of common stock or equity-linked securities, including in connection with conversions of our outstanding Convertible Notes (as defined below), may cause dilution to our stockholders.
ACRONYMS AND ABBREVIATIONS
The acronyms and abbreviations identified below are used in this Annual Report including the accompanying consolidated financial statements and the notes thereto. The following is provided to aid the reader and provide a reference point when reviewing the Annual Report:
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| 2017 Tax Act | | Tax Cuts and Jobs Act of 2017 |
2016Adjusted free cash flow | A non-GAAP measure calculated as cash flows from operating activities, adjusted for net purchases of current investment securities, capital expenditures, the change in net deposits, changes in borrowings under the BTFP and borrowed federal funds and certain other adjustments. |
| Adjusted net income or ANI | A non-GAAP measure that adjusts net income (loss) attributable to shareholders to exclude all items excluded in segment adjusted operating income except unallocated corporate expenses, further excluding unrealized gains and losses on financial instruments, net foreign currency gains and losses, debt issuance cost amortization, tax related items and certain other non-operating items, as applicable depending on the period presented. |
| Amended and Restated Credit Agreement | | Amended and Restated Credit agreementAgreement entered into on JulyApril 1, 2016, as2021 (as amended from time to time,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. |
| 2017 Tax Act | Tax Cuts and Jobs Act of 2017 |
Adjusted Net Income or ANIAscensus Acquisition | | A non-GAAP measure that adjusts net income attributable to shareholders to exclude unrealized gainsThe acquisition from Ascensus, LLC of certain entities, which comprised the health and losses on financial instruments, net foreign currency remeasurement gains and losses, acquisition-related intangible amortization, other acquisition and divestiture related items, loss on salebenefits business of subsidiary, stock-based compensation, restructuring and other costs, legal settlement, impairment charges, debt restructuring and debt issuance cost amortization, non-cash adjustments related to tax receivable agreement, similar adjustments attributable to our non-controlling interests and certain tax related items. |
AOC | | AOC Solutions and one of its affiliate companies, 3Delta Systems, Inc.Ascensus. |
| ASC | | Accounting Standards Codification |
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ASU 2014–09 | | Accounting Standards Update No. 2014–09 Revenue from Contracts with Customers (Topic 606) |
ASU 2016–01 | | Accounting Standards Update No. 2016–01 Financial Instruments–Overall (Subtopic 825–10): Recognition and Measurement of Financial Assets and Financial Liabilities
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ASU 2016–02 | | Accounting Standards Update No. 2016–02 Leases (Topic 842)
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ASU 2016–13 | | Accounting Standards Update No. 2016–13 Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
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ASU 2017–04 | | Accounting Standards Update 2017–04–Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
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Australian Securitization Subsidiary | | Southern Cross WEX 2015-1 Trust, a special purpose entity consolidated by the Company |
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| Average number of SaaS accounts | | Represents the average number of active consumer-directed health, COBRA, and billing accounts on our SaaS platforms. SaaS accounts include HSA accounts for which WEX Inc. serves as the non-bank custodian under designation by the U.S. Department of Treasury. |
| B2B | Business-to-Business |
| benefitexpress | Benefit Express Services, LLC, a provider of highly configurable, cloud-based benefits administration technologies and services, and its indirect and direct parents, which were acquired on June 1, 2021 and merged into WEX Health, Inc. on April 30, 2022. |
| BTFP | Business-to-businessThe Federal Reserve Bank Term Funding Program, which provides liquidity to U.S. depository institutions. |
| CDH | | Consumer-directedConsumer directed healthcare |
CompanyCFPB | Consumer Financial Protection Bureau |
| CODM | Chief Operating Decision Maker |
| Company | WEX Inc. and all entities included in the consolidated financial statementsstatements. |
| Consolidated EBITDA | A non-GAAP measure calculated in accordance with the terms of the Company’s Amended and Restated Credit Agreement. |
| Convertible Notes | | Convertible senior unsecured notes due on July 15, 2027 in an aggregate principal amount of $310$310.0 million with a 6.5 percent interest rate, issued July 1, 2020.2020, which were repurchased by the Company and canceled by the trustee at the instruction of the Company on August 11, 2023. |
COVID-19 or (“coronavirus”) | Corporate Cash | Calculated in accordance with the terms of our consolidated leverage ratio in the Company’s Amended and Restated Credit Agreement. |
| COVID-19 | An infectious disease caused by the SARS-CoV-2 virus.coronavirus. The World Health Organization declared the coronavirus outbreak a global pandemic on March 11, 2020. |
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CFPBDCFM | | Consumer Financial Protection BureauDiscounted Cash Flow Method of valuation |
| Discovery Benefits | | Discovery Benefits, Inc.LLC, which was subsequently merged with and into WEX Health as of March 31, 2021. |
| DSUs | | Deferred stock units |
EBITDA | | A non-GAAP measure that adjusts income before income taxes to exclude interest, depreciation and amortizationStock Units held by non-employee directors. |
| 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. |
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| eNett | | eNett International (Jersey) Limited |
European Fleet businessEVs | | WEX Fleet Europe and WEX Europe Services, collectively |
European Securitization Subsidiary | | Gorham Trade Finance B.V., a special purpose entity consolidated by the CompanyElectric Vehicles |
| FASB | | Financial Accounting Standards Board |
| FCPA | | U.S. Foreign Corrupt Practices Act |
| FDIC | | Federal Deposit Insurance Corporation |
FinCENFederal Reserve Bank Discount Window | Monetary policy that allows WEX Bank to borrow funds on a short-term basis to meet temporary shortages of liquidity caused by internal or external disruptions. |
| FinCEN | Financial Crimes Enforcement Network of the U.S. Department of the Treasury |
FRAFleetOne | FleetOne Holdings, LLC and its direct and indirect subsidiaries |
| FRA | Federal Reserve Act |
| FSA | | Flexible Spending Accounts |
| GAAP | | Generally Accepted Accounting Principles in the United States |
| GILTI | | Global Intangible Low Taxed Income |
WEX Fleet Europe (Go Fuel Card)GPCM | Guideline Public Company Method of valuation |
| GPCs | A fleet business in Europe acquired from EG Group on July 1, 2019Guideline Public Companies |
| HRA | | Health Reimbursement Arrangements |
| HSA | | Health Savings AccountsAccount |
ICSICE | | Insured Cash SweepInternal Combustion Engine |
IndentureLIBOR | | The Notes were issued pursuant to an indenture dated as of January 30, 2013 among the Company, the guarantors listed therein, and The Bank of New York Mellon Trust Company, N.A., as trustee |
Legal Settlement | | The settlement of legal proceedings and appeals related to the acquisition of eNett and Optal.London Interbank Offered Rate |
| NAV | | Net asset valueAsset Value |
Net payment processinginterchange rate | | TheRepresents 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. |
| Net late fee rate | Net late fee rate represents late fee revenue as a percentage of fuel purchased by fleets that have a payment processing relationship with WEX. |
| Net payment processing rate | The percentage of each payment processing $ of fuel that the Company records as revenue from merchants less certain discounts given to customers and network feesfees. |
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| Notes | | $400400.0 million senior notes with a 4.75%4.75 percent fixed rate, issued on January 30, 2013, |
Noventis | | Noventis, Inc. which were redeemed in full by the Company on March 15, 2021. |
| NYSE | | New York Stock Exchange |
| OFAC | | The United States Treasury’s Office of Foreign Assets Control |
OptalOperating cash flow | Net cash provided by (used for) operating activities |
| Operating interest | Interest expense incurred on the operating debt obtained to provide liquidity for the Company’s short-term receivables or used for investing purposes in fixed income debt securities. |
| Optal | Optal Limited |
Over-the-roadOTA | Online travel agency |
| Over-the-road | Typically, heavy trucks traveling long distances |
Pavestone Capital | | Pavestone Capital, LLCdistances. |
Payment processing $ of fuel spend | | Total dollar value of the fuel purchased by fleets that have a payment processing relationship with the CompanyWEX. |
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| ACRONYMS AND ABBREVIATIONS |
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| 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 purchasepurchase. |
Payment solutions purchasePBRSUs | Performance-based restricted stock units |
| PO Holding | PO Holding, LLC, a wholly-owned subsidiary of WEX Inc. and the direct parent of WEX Health. |
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| Processing costs | Expenses related to processing transactions, servicing customers and merchants and costs of goods sold related to hardware and other product sales. |
| Purchase volume | | TotalPurchase volume in the Corporate Payments segment represents the total dollar value of all WEX-issued transactions that use WEX corporate card products and virtual card products |
PBRSUs | | Performance-based restricted stock units |
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| products. Purchase volume | | Total U.S. in the Benefits segment represents the total dollar value of all transactions in the Health and Employee Benefit Solutions segment where interchange is earned by the CompanyWEX. |
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| Redeemable non-controlling interest | | The portion of the U.S. HealthBenefits business’ net assets owned by a non-controlling interest subjectholder, SBI, prior to redemption rights held by the non-controllingMarch 7, 2022 acquisition of SBI’s remaining interest in PO Holding. |
| Revolving Credit Facility | The Company’s secured revolving credit facility under the Amended and Restated Credit Agreement. |
| RSUs | | Restricted stock units |
| SaaS | Software-as-a-Service |
| SBI | Software-as-a-serviceSBI Investments, Inc., which is owned by State Bankshares, Inc., and was a minority interest holder in PO Holding, LLC. |
| SEC | | Securities and Exchange Commission |
| 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 unallocated corporate expenses, acquisition-related intangible amortization, other acquisition and divestiture related expenses and adjustments including the acquisition related intangible amortization, impairment charges, stock-based compensation, restructuring and other costs,items, debt restructuring costs, stock-based compensation, other costs and unallocated corporate expenses.certain non-recurring or non-cash operating charges that are not core to our operations, as applicable depending on the period presented. |
| Service fees | | Costs incurred from third-party networks utilized to deliver payment solutions and other third-parties utilized in performing services directly related to generating revenue. |
| SOFR | Secured Overnight Financing Rate |
| SPE | Wholly-owned special purpose entity |
| Topic 320 | Accounting Standards Codification Section 320, Debt Securities |
| Topic 606 | Accounting Standards Codification Section 606, Revenue from Contracts with Customers |
| Total volume | Includes purchases on WEX-issued accounts as well as purchases issued by others, but using a WEX platform. |
| TSR | | Total shareholder return |
Transaction processing transactionsUDFI | | Unfunded payment transactions where the Company is the processor and only has receivables for the processing fee |
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 |
Utah DFI | | Utah Department of Financial Institutions |
VCNU.S. Benefits business | (i) prior to March 31, 2021, WEX Health, Inc. and Discovery Benefits, LLC., collectively, (ii) from March 31, 2021 to June 1, 2021, WEX Health, Inc., (iii) from June 1, 2021 to April 30, 2022, WEX Health, Inc. and benefitexpress, collectively, and (iv) from April 30, 2022, WEX Health, Inc. |
| VCN | Virtual card number |
VPNWACC | | Virtual private networkWeighted Average Cost of Capital |
| WEX | | WEX Inc., and all of its subsidiaries that are consolidated under accounting principles generally accepted in the United States, unless otherwise indicated or required by the contextcontext. |
| WEX Australia | WEX Card Holdings Australia Pty Ltd and its subsidiaries |
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| ACRONYMS AND ABBREVIATIONS |
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| WEX Bank | An industrial bank organized under the laws of the State of Utah, and wholly owned subsidiary of WEX Inc. |
| WEX Europe Services | | AWEX Europe Service Limited, a European FleetMobility 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. |
| WEX Payments | Legacy healthcare operations prior to the acquisition of Discovery Benefits
WEX Payments Inc. (formerly known as Noventis, Inc.) |
PART I
ITEM 1. BUSINESS
Our Company
WEX’s mission is focused on simplifying the business of running a business. WEX Inc.owns and operates a B2B ecosystem that helps our customers overcome highly manual processes and reconciliations, navigate the complexity of consumer driven healthcare benefits, and solve their administrative challenges. We believe that WEX offers the marketplace a unique combination of capabilities to simplify complexity, thereby setting WEX’s offerings apart from those of our competition, including:
•Global commerce platform. Our technology is engineered and operated with global scale and reliability. We have invested heavily, and expect to continue to invest, in technology. Using our technology, our customers have trusted us to conduct hundreds of billions of dollars in money movements in more than 20 currencies. We believe that our products and services play integral roles in the infrastructure of businesses.
•Personalized solutions, seamlessly embedded. We believe WEX is a leading financial technology service provider having simplifiedleader in our end markets with solutions shaped by customer focused innovation and deep industry expertise. Both in our direct-to-corporate and partner channels, our solutions focus on simplifying the complexitiesbusiness of payment systemsrunning a business by deeply embedding our solutions within our end customer workflows.
•Insights that power success. Customers look to WEX for a powerful combination of specialized expertise and rich data to assist them in driving better decisions, moving more quickly, and in dealing with risk. We put control in the hands of our customers.
The combination of our capabilities across continentssegments forms a diverse B2B ecosystem for us to provide products and industries. We currently operateservices to our customers, as depicted in the following graphic:
Our Ecosystem of Solutions
Incorporates the Best of Our Vertical Expertise and the Power of Our Commerce Platform
WEX Solutions Ecosystem
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| Simplify Benefits | Reimagine Mobility | Pay & Get Paid |
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CDH Program
Management | Non-Bank
Custodian | Benefits
Administration | Analytics &
Controls | Proprietary
Network | EV & Mixed
Fleets | Expense
Management | Workflow
Automation | Fraud
Controls |
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| Global Commerce Platform |
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| Payments | Access to Funds | API Integration | Flexible UIs | Global Omnichannel
Servicing | Scalable Data,
Analytics, AI | Risk & Security |
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Leveraging these unique capabilities, WEX offers solutions that organizations use to drive efficiencies and manage risk. These solutions, which share and benefit from our underlying capabilities, are provided across the following three reportablebusiness segments: Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions, which are described in more detail below. The Company’s U.S. operations include WEX Inc., the majority-owned U.S. Health business (currently consisting of WEX Health and Discovery Benefits), and our wholly-owned subsidiaries
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Mobility WEX reimagines mobility across fleets of all sizes. WEX has more than 600,000 mobility customers worldwide. | | | Benefits WEX simplifies administration of benefits for employers, including consumer directed health accounts in the United States both directly and through partners. We serve more than half of the Fortune 1000 companies in the United States. | | | Corporate Payments WEX is both one of the largest commercial payment companies in the world as well as a trusted technology partner for some of the largest organizations in the world. WEX is unique in our space as we couple wholly owned market leading technology with a global issuing and funding capability. |
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Our wholly owned subsidiary, WEX Bank, WEX FleetOne, Noventis and EFS. Our international operations include our wholly-owned operations including, WEX Fuel Cards Australia, WEX Prepaid Cards Australia, WEX Canada, WEX Asia, WEX Europe Limited, WEX Fleet Europe, and eNett and Optal and their respective operating subsidiaries, and a controlling interest in WEX Europe Services Limited and its subsidiaries.
WEX Bank, a Utah industrial bank incorporated in 1998, is an FDIC insured depository institution. The functions performed at WEX Bank contribute to the U.S. and Canadian operations of Fleet Solutions andcurrently funds the majority of operations of Travelour Mobility and Corporate Solutions by providingPayments operations, provides us with a funding mechanism, among other services. Withnumber of services, including credit adjudication, and is a depository institution for certain HSA cash assets. We believe that our ownership of WEX Bank we haveprovides us with a competitive advantage through access to low-costlow cost sources of capital. WEX Bank raises capital primarily through the issuanceand liquidity and enables us to design funding solutions for customers that complement our technology solutions.
Our ecosystem of brokered deposit accounts andsolutions provides the financingCompany with multiple and makes credit decisions that enablediverse levers and opportunities to help WEX achieve its financial and business goals. Current goals include winning new customers, growing our share of wallet, expanding and diversifying our offering, deepening our global presence, and executing strategic mergers and acquisitions. Our existing and evolving technology, talented workforce, and robust customer and partner footprint all continue to drive our business forward and we expect will help us achieve our goals. We have established a growth engine in large end markets and we are a leader in the Fleet Solutions and Travel and Corporate Solutions segments to extend credit to customers. WEX Bank approves customer applications, maintains appropriate credit lines for each customer, is the account issuer, and is the counterparty for the customer relationships for mostmarkets in which we participate.
Seasonality
Certain parts of our programsbusiness are affected by seasonal variations. For example, in a typical year, fuel prices are typically higher during the summer and online travel sales are typically higher during the third quarter. In addition, we experience seasonality in our Benefits segment as consumer spend is correlated with insurance deductibles, typically resulting in higher spend in the U.S. Operations such as sales, marketing, merchant relations, customer service, software development and IT are performed as a service within our organization but outside of WEX Bank. WEX Bank’s primary regulators are Utah DFI and the FDIC. The activities performed by WEX Bank are integrated into the operations of our Fleet Solutions and Travel and Corporate Solutions segments. The relationship between WEX Inc. and WEX Bank is governed under a master service agreement, which establishes the parametersearly part of the services described above.
Recent Developments
Acquisition of eNett and Optal
On January 24, 2020, the Company entered into a purchase agreement to purchase eNett, a leading provider of B2B payments solutions to the travel industry, and Optal, a company that specializes in optimizing B2B transactions, for an aggregate purchase price comprised of $1.3 billion in cash and 2.0 million shares of the Company’s common stock, subject to customary closing conditions, including the absence of a Material Adverse Effect (as defined in the purchase agreement between WEX, eNett and Optal, among others). The Company concluded that the COVID-19 pandemic and conditions arising in connection with it had a Material Adverse Effect on the eNett and Optal businesses, disproportionate to the effect on othersyear until employees meet their deductibles.
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 purchase agreement. From September 21, 2020 through September 29, 2020, a London court held a trial of certain preliminary issues. On October 12, 2020, the Court handed down its judgment, which concluded, among other things, that the Optal and eNett Groups operate in the payments industry and the B2B payments industry and that, for the purpose of the definition of the Material Adverse Effect clause, the relevant industry is the B2B payments industry. The Court found that there was no travel payments industry, as argued for by eNett and Optal. This finding meant that when determining whether eNett or Optal have been disproportionately impacted by the pandemic, a comparison would be made against other B2B payments companies. 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”) with 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 original 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 claims arising under the amended purchase agreement. 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 adjustments) consisting entirely of cash, which the company paid with cash on hand, and the closing of the acquisition occurring concurrent with the execution of the Settlement Deed on December 15, 2020. The Company determined the aggregate purchase price represents consideration paid for the businesses acquired and for the settlement of 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 legal proceedings settlement, which has been included in legal settlement expense in the consolidated statement of operations for the year ended December 31, 2020.Key Developments
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| Renamed reportable segments •In connection with a rebranding initiative, during the first quarter of 2023 the Company renamed its existing reportable segments. The Fleet Solutions segment was renamed to Mobility, the Travel and Corporate Solutions segment was renamed to Corporate Payments and the Health and Employee Benefits Solutions segment was renamed to Benefits. There were no changes to the composition of our reportable segments. |
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| EV-related initiatives •We have made progress against many of our EV-related initiatives, including our DriverDash® mobile app, which we recently expanded to include EV functionality. This means that, through their existing WEX portal, fleet managers can enable their cards for EV charging and use our integrated app, DriverDash®, to find, activate, pay for, and track charges all on one credit line, invoice, dataset, and management interface. This simplifies customer workflows while eliminating the need for drivers to have multiple fobs and apps in order to manage their mixed fleet. We have also launched an at-home reimbursement product in the U.S. We began rolling out the initial phase of this product during the fourth quarter of 2023, and expect to roll out depot functionality later in 2024. •During 2023, our Board of Directors authorized the Company to invest up to $100 million through 2025 in predominantly early-stage companies focused on the energy transition. To-date, the Company has invested a total of $7.5 million in three such minority investments and has entered into subscription and limited partnership agreements for the investment of up to an additional $10 million in two venture capital funds that invest in climate/alternative energy technologies. |
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| Cloud migration •We accomplished our cloud migration goal with the full migration of the Benefits segment in the third quarter of 2023. All of our core technology is now cloud-based. In an effort to reduce our dependency on physical data centers, during the fourth quarter of 2023 we achieved our data center reduction goal of consolidating from 33 data centers in 2019 to seven by the end of 2023. We will continue our Cloud-first development philosophy, which enables improved data security, infrastructure resiliency, system availability, and speed to market. |
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| Business acquisitions •During the third quarter of 2023, we acquired a collection of entities from Ascensus, LLC that provide employee health benefit accounts. We believe the technology of these acquired entities complements ours, while increasing our scale in the Benefits space and expanding our Benefits product offering with their Affordable Care Act compliance and dependent verification capabilities. •During the fourth quarter of 2023 we acquired Payzer, a leading cloud-native field service management software provider. We expect Payzer to strengthen our relationships with vertical customers in our Mobility segment, allowing us to match our payments capabilities with integrated software that creates durable value to our customer base. Payzer's high-growth, top-tier service offering and feature set, which includes end-to-end business management software and enables a wide range of payment solutions, is at the convergence of SaaS and payments. |
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| AI experiments •We have conducted AI experiments across the enterprise, which have driven customer-focused outcomes, uncovered opportunities for workflow efficiencies, and identified many other opportunities for us to continue driving value by leveraging these technologies. We believe our efforts in using machine learning in credit adjudication and monitoring have helped reduce delinquencies significantly in 2023 as seen in our credit loss results. |
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| Operational improvement efforts •By the end of 2023 we achieved $75 million in run-rate cost savings and are on track to generate $100 million by the end of 2024. We are reinvesting a portion of these cost savings in enhancing our capabilities, including digital products, technology and risk management capabilities and tools. |
On September 30, 2020, the Company sold its wholly-owned subsidiary UNIK S.A, (the "WEX Latin America" business). The operations of WEX Latin America were primarily included in the Health and Employee Benefit Solutions segment through the date of sale. A pre-tax loss on sale of subsidiary of $46.4 million, has been reflected in the consolidated statement of operations for the year ended December 31, 2020. The Company decided to sell UNIK S.A. because it no longer aligned with the strategic direction of the Company.
Our Business Segments
Overview
Our Fleet SolutionsWithin our Mobility segment, WEX is a leader in fleet vehicle payment solutions, transaction processing, services specifically designed forand information management services. We address the marketplace through three different business units.
•North American Fleet. Addresses the needs of large fleets, government fleets, over-the-road carriersbusinesses that utilize primarily light and small businesses. medium duty vehicles central to the operation of the service economy in North America.
•Over-the-Road. Addresses the needs of businesses that utilize primarily medium and heavy duty vehicles central to the operation of the freight economy in North America.
•International Fleet. Addresses the needs of businesses that utilize primarily light and medium duty vehicles central to the operation of the service economy outside of North America inclusive of our Fleet portfolios in Europe and Asia-Pacific.
As of December 31, 2020, 15.82023, more than 19 million vehicles useused our payment solutions for fleet management.
SalesSolution
We believe our key source of differentiation in the Mobility segment is the enhanced data and controls we provide fleet operators based on our proprietary closed loop payments network. This proprietary closed-loop network enables us to capture rich data, deploy custom controls, and establish the economics between fleets and merchants. Our data and tools allow fleet owners and managers to control spend and limit fraud while optimizing their fleet operations. At the point-of-sale, we capture an array of information. Examples of information captured, which varies by type of customer, include the amount of the purchase, the driver, the vehicle, the odometer reading, the fuel or vehicle maintenance provider, and the items purchased. We provide standard and personalized information to customers through vehicle analysis reports, custom reports, and our websites. We also alert customers of unusual transactions or those that fall outside of pre-established parameters. Customers can access their account information through our platform including account history and recent transactions and download the related details. In addition, fleet managers can elect to be notified when limits are exceeded in specified purchase categories, including limits on transactions within a time range and gallons per day. In the over-the-road space, we additionally offer fleets customizable payment solutions including real-time interactive and seamless interfaces delivering data integrity, alternative payment and money transfer options, comprehensive settlement solutions, real-time reports and analytics for compliance and cost-optimization and fuel reconciliation and mobile optimization tools.
In conjunction with the above, we offer our mobility customers the following additional products and services:
•Account activation and account retention: We provide activation and retention services that promote the adoption and use of our products.
•Authorization and billing inquiries and account maintenance: We handle authorization and billing questions, account changes, and other issues through our dedicated contact centers, which are available 24 hours a day, seven days a week. Self-service options are also provided through our online tools.
•Account management: We assign account managers to customers who operate large fleets. Our account managers have in-depth knowledge of both our programs and the objectives of the fleets they service.
•Credit and collections services: We extend short term credit in the majority of Mobility transactions. Related to this service we have developed proprietary account approval, underwriting, credit management, and collections programs.
•Merchant services: Our representatives work with fuel and vehicle maintenance providers to enroll these providers in our network, test all network technology, and provide training on our processes.
•Analytics solutions: We provide customers with access to analytics platforms and custom reporting tools targeted toward identifying cost savings opportunities and managing their fleet.
•Ancillary services and offerings: We provide a variety of ancillary services and tools to fleets to help them better manage expenses and capital requirements. Additionally, beginning in November 2023, we provide a cloud-native
software solution that has various capabilities, including scheduling, dispatch navigation, marketing and payment acceptance, to mobility field service customers in HVAC, roofing and other similar verticals.
Building upon our historical ICE-related fleet solutions, we are working on solutions we believe will ease the integration of EVs into mixed fleets. We are well positioned to help our customers transition to an expected mixed-fleet future. As fleet owners look to add vehicles powered by alternative energy sources, such as EVs, we are building on our deep experience in fleet and mobility in an attempt to develop and provide solutions to address specific customer needs, including charging, EV transition planning, and tools to successfully manage a mix of vehicle types ranging from connectivity to advanced route planning and carbon emissions reporting.
Payment processing transactions are the primary revenue source in Fleet Solutions and arethe Mobility segment. Revenue is earned based on a percentage of the aggregate dollar amount of the customer’s purchase, a fixed amount per transaction, or a combination of both. Normally, inIn a typical domestic payment processing transaction for which we extend short-term credit to the fleet cardholder, andwe pay the merchant within ten days, on average, for the purchase price, less the fees we retain and record as revenue.revenue according to their specific merchant agreement, which generally occurs within ten days. Revenue from our WEX Europe Services and Go Fuel Card operations is primarily derived from the difference between the negotiated price of the fuel from the supplier and the price charged to the fleet customer. In both types of transactions, weWe collect the total purchase price from the fleet customer, normallyour North America and international Mobility customers, typically within 2530 days from the billing date. In 2020, we processed approximately 464 million payment processing transactions, compared to approximately 505 million payment processing transactions in 2019.
The following illustration depicts our over-the-road fleet business, process for a typical closed-loop domestic fuel payment processing transaction and a breakdown of the related Fleet Solutions revenue streams:
At the point-of-sale, we capture an array of information including the amount of time between when we pay the expenditure,merchants and collect from our customers is significantly reduced relative to a typical North America or International Fleet transaction. There are instances, primarily within our over-the-road business, in which WEX processes a fleet customer transaction with the driver,merchant bearing the vehicle,credit risk and collecting the odometer reading,receivable from the fuel or vehicle maintenance provider and the items purchased. We provide standard and customized information to customers through monthly vehicle analysis reports, custom reports and our websites. We also alert customers of unusual transactions or transactions that fall outside of pre-established parameters. Customers can access their account information through our website including account history and recent transactions and download the related details. In addition, fleet managers can elect to be notified by email when limits are exceeded in specified purchase categories, including limits on transactions within a time range and gallons per day.fleet.
In the over-the-road space, we offer customizable payment solutions including real-time interactive and seamless interfaces delivering data integrity, alternative payment and money transfer options, comprehensive settlement solutions, real-time reports and analytics for compliance and cost-optimization and fuel reconciliation and mobile optimization tools.
In addition to revenue derived from payment processing transactions, we recognize account servicing revenue on fees charged to the cardholders, finance fee revenue on overdue accounts and other revenue through the followingon transaction processing revenue and miscellaneous other products and services:services.
•Customer service, account activation and account retention: We offer customer service, account activation and account retention services to fleets, fleet management companies and the fuel and vehicle maintenance providers on our network. Our services include promoting the adoption and use of our products and programs and account retention programs on behalf of our customers and partners.Distribution
•Authorization and billing inquiries and account maintenance: We handle authorization and billing questions, account changes and other issues for fleets through our dedicated customer contact centers, which are available 24 hours a day, seven days a week. Fleet customers also have self-service options available to them through our websites.
•Premium fleet services: We assign designated account managers to businesses and government agencies with large fleets. These representatives have in-depth knowledge of both our programs and the operations and objectives of the fleets they service.
•Credit and collections services: We have developed proprietary account approval, credit management and fraud detection programs. Our underwriting model produces a proprietary score, which we use to predict the likelihood of an account becoming delinquent at application and on an ongoing basis. We have developed a collections scoring model that we use to rank and prioritize past due accounts for collection activities. We also employ fraud specialists who monitor accounts, alert customers and provide case management expertise to minimize losses and reduce program abuse.
•Merchant services: Our representatives work with fuel and vehicle maintenance providers to enroll these providers in our network, test all network and terminal software and hardware, and to provide training on our sale, transaction authorization and settlement processes.
•Analytics solutions: We provide customers with access to web-based data analytics platforms and custom reporting tools that offer insights to fleet managers, including integrating and analyzing business fleet fuel purchases to uncover fraud, manage product type controls and identify cost saving opportunities.
•Ancillary services and offerings: We provide a variety of ancillary services and tools to fleets to help them better manage expenses and capital requirements including tracking driver performance, location and speed; mobile account maintenance and payment tools; tax reporting and permitting services.
Marketing Channels
We market our fleetMobility products and services both directly and indirectly to commercialbusinesses and government vehicle fleet customersagencies with small, medium and large fleets of commercial vehicles, including fleets of all sizes, and over-the-road, long haul fleets. Our direct product suite includes payment processing and transaction processing services, WEX branded fleet cards in North America, and Motorpass/Motorcharge-brandedMotorpass branded fleet cards in Australia. Additionally, our over-the-road line of business isthe WEX products and services are marketed under the EFS, EFS Transportation Services, T-Chek, and Fleet One network brands.
We also market our products and services using the WEX network indirectly through co-branded and private label relationships. With a co-branded relationship product, we market our products and services for, and in collaboration with, both fuel providers and fleet management companies using their brand names and our logo on a co-branded fleet card. These companies seek to offer our payment processing and information management services as a component of their total offering to their fleet customers.
Our private label programs market our products and services for, and in collaboration with, fuel retailers, using only their brand names. The fuel retailers with which we have formed strategic relationships offer our payment processing and information management products and services to their fleet customers in order to establish and enhance customer loyalty. These fleets use these products and services to purchase fuel at locations of the fuel retailer with whom we have the private label relationship.
TRAVEL AND CORPORATE SOLUTIONS SEGMENTCompetition
In general, our Mobility business competes with financial institutions that provide general payment services without the enhanced capabilities of our solution set. We also compete against similar more specialized offerings from Fleetcor, U.S. Bank Voyager, Radius Payment Solutions, DKV, and Edenred. We believe we compete favorably against these competitors and others through the combination of the breadth of our solution, the reach of our payments network, and our advantaged funding model through WEX Bank.
Overview
Our TravelBenefits segment simplifies the business of administering and Corporate Solutions segment provides innovative corporate purchasingmanaging employee benefit plans. We provide SaaS software with embedded payment solutions and plan administration services for consumer-directed health benefits, COBRA accounts, and benefit enrollment and administration. In addition, WEX Inc. and WEX Bank provide custodial and depository services, respectively, with respect to HSAs.
Solution
Our products simplify the process of navigating and managing employee benefits for plan administrators, employers, and plan participants and their families. Our solutions power a variety of benefit plans, including HSAs, FSAs, HRAs, Lifestyle Spending Accounts, COBRA accounts, wellness incentives, Medicare Advantage supplemental benefits, commuter benefits, and other account-based benefit plans. We also provide the software that enables employees to choose and enroll in their benefits and manage those benefits throughout the plan year. In addition, WEX Inc. is an IRS-designated non-bank custodian of HSA assets. As of December 31, 2023, WEX Inc. was the custodian to $5.4 billion in HSA assets, $1.5 billion of which were in investment funds at a third-party brokerage firm, and $3.9 billion of which were in cash.
The following summarizes our key products and services within the Benefits segment:
•Consumer-directed benefits. We provide a software platform for record-keeping and administration of account-based benefit plans, which reimburse eligible expenses incurred by plan participants and their eligible dependents. We also provide debit card processing services to enable immediate electronic reimbursement.
•Non-bank custodial services. We provide non-bank custodial services for HSAs, with consumer balances placed at a variety of bank depositories including WEX Bank.
•COBRA administration. We provide a software platform for the administration of COBRA plans. In addition, we collect and process consumer premium payments.
•Enrollment and benefits administration. We provide a software platform that guides employees through their benefits options and enables them to enroll in the plans and access and manage their benefits information throughout the year.
•Administrative services. We provide a wide range of benefit plan administration services, including employer and participant service, claims administration, and reporting.
We simplify plan administration and management by providing a feature-rich software platform that automates and streamlines processes for stakeholders. In addition, through robust data analytics, we help administrators and employers understand consumer usage and engagement and benchmark against firms of similar size, geography, and industry. These same capabilities enable us to help consumers navigate their choices and make informed decisions about how to use their benefits. Our ability to gain rich insights from our expansive database enables us to provide personalized, relevant messages to consumers that connect with them where they are. We also enable administrators to compare their performance against their peers on dozens of metrics related to growth, operating efficiency, and consumer experience. Our products are designed to reduce friction, lower administrative costs, and provide a more elegant user experience. Participants can use our web portal and mobile app to access and manage their benefits at anytime from anywhere.
Our platform supports a multitude of benefit plan types, enables customization of plan design, and is extendable to power new benefit offerings in a dynamic market, consistent with the increasing importance of choice in employer benefit strategy. Our solutions are deployed flexibly, from software-only to full benefit administration, with a wide range of options in between.
Our revenues derive primarily from three sources:
•Per participant per month fees charged for our software and administrative services.
•Interest on deposits and fees related to cash balances in HSAs over which WEX Inc. is the custodian.
•Interchange on debit cards used by plan participants and their dependents to pay for eligible expenses from their benefit plan.
Distribution
We distribute our software and payment capabilities thatsolutions through a variety of partners, such as third-party administrators, financial institutions, payroll providers, and health plans. These partners use our software and payment solutions in their administration of employee benefit plans for their employer clients. Our team works with these partners to help them deploy go-to-market strategies and tactics to grow their business. In addition, we provide business process outsourcing of administrative services on behalf of certain partners.
We distribute full administrative services to the employer market directly and through brokers and consultants. Our solutions can be fully white-labeled, co-branded, or WEX-branded.
Our flexible distribution capabilities enhance our ability to penetrate our addressable markets through hundreds of partners as well as direct to employer. We had an average of approximately 19.9 million SaaS accounts on our platform during the year ended December 31, 2023.
Competition
In our partner channel, we compete with other specialized providers of similar benefit solutions, such as Alegeus Technologies and Nations Benefits, providers of core banking platforms, such as FIS, Fiserv, and Jack Henry, as well as proprietary technology solutions developed and maintained in-house by plan administrators.
In our direct channel, we compete with providers of consumer-directed benefit and COBRA administration as well as providers of benefit enrollment software and services. Competitors in this segment include companies such as HealthEquity, Alight Technologies, Businessolver, and Inspira Financial. We believe we compete favorably against these competitors through the combination of the breadth of our solution, the feature-richness of our platform and the fact that our offerings can be deployed flexibly, from software-only to full benefit administration, with a wide range of options in between.
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| Corporate Payments Segment |
Overview
Our Corporate Payments segment focuses on the complex payment environment of global B2B payments. Our capabilities and solutions broadly fall into two categories:
•Embedded Payments. Our primary service offering is to enable customers to utilize our highly scalable and vertically integrated payments solutions to integrate into their own workflows. Customers access our capabilities primarily via our proprietary set of application programming interfaces (“APIs”). We combine wholly-owned and developed cloud-based technology along with our customers’ internal systemswholly-owned and operated global financial services capabilities, inclusive of WEX Bank and our various electronic money institutions around the world, to streamlinesatisfy the commercial payments needs of our customer base. Our end customers are primarily using our services to create and use virtual credit cards to satisfy payment obligations in their corporate payments,business models. Customers for this solution include OTAs, tour operators, and airlines, as well as non-travel customers such as financial technology firms that focus on spend management, accounts payable automation, insurance payments, and reconciliation processes.media payments.
Sales•Accounts Payable (AP) Automation and Spend Management. Built on top of our embedded payment capabilities, our AP Automation and Spend Management capabilities provide an enhanced user interface and Enterprise Resource Planning (“ERP”) software integration points for organizations to manage their AP Automation and Spend Management functions. Our solutions in this space address corporations of all sizes and are sold direct to customers and also white-labeled by leading financial institutions who license our technology.
Solution
The Travel and Corporate SolutionsPayments segment allows businesses to centralize purchasing, simplify complex supply chain processes, and eliminate the paper check writing associated with traditional purchase order programs. OurIt also enables technology companies and innovators across the globe to streamline their payment needs with a single, integrated technology and issuing partner.
At the core of our Corporate Payments product suite includes electronic payments and corporate cards offered across travel, insurance & warranty and other industries.
Our electronic payments product includesset is a virtual payments and integrated payables.card. Our virtual payments programcapability is used for transactions where no physical card is presented, including transactions conductedthat are increasingly completed online in a
digitally connected world, but can also be used over the telephone, by mail, by faxemail, or on the Internet or for transactions that require pre-authorization, such as hotel reservations. Under our virtual payments program, eachby fax. Each transaction is assigned a unique account numberVCN on either of the Mastercard or Visa networks, with a customized creditspend limit, expiration date, and expiration date.various other purchase controls. These controls are in place to limit fraud and unauthorized spending. The unique account numberVCN limits purchase amounts and tracks, settles, and reconciles purchases more easily, creating efficiencies and cost savings for our customers. Our electronic accounts payablevirtual card solution combines (i) wholly-owned, end-to-end highly reliable technology, (ii) global currency capabilities with over 20 currencies active, and (iii) a wholly-owned global compliance and funding mechanism that allows WEX to be the issuer in addition to the payment processor. The use of a commercial virtual card is particularly appealing for its ability to easily reconcile, protect against fraud, provide chargeback protections, have global currency capabilities, and generate rebates through interchange economics.
We surround our core virtual card capabilities with a cloud-based web platformset of additional solution features to serve our customers. For our embedded payments solution, these capabilities include: (i) more than a dozen customized data fields that managesallow customers to tie together information such as invoice numbers, booking numbers, or purchase orders that enable industry-leading automated reporting and optimizes all accounts payable disbursements, regardlessreconciliation benefits, (ii) a wide variety of type. Automated clearing house,different virtual cards, electronic fundscard products with each of the card associations to optimize card acceptance and interchange yield, (iii) bank transfer and check payments are streamlinedissuance capabilities, (iv) modern, RESTful API, with associated, developer-focused explanation of use, and automated through(v) the ability to optimize our centralized application.
We offersystems and processes for bespoke solutions to large customer needs. For our AP automation and spend management solution, these capabilities include: (i) customizable integrations with different ERPs, (ii) enhanced AP data analysis and supplier enablement teams focused on increasing card acceptance, (iii) a wide variety of corporate cards, designed to combine all of a customer’s purchasing needs into a single integrated card, streamline the procure-to-pay process with a single card and control travel and entertainment spending and provide employees with greater flexibility.
Additionally, WEX Prepaid Card Australia offers prepaid and giftdifferent virtual card products which provide secure paymentwith each of the card associations to optimize card acceptance and financial management solutions with single card options, accessinterchange yield, (iv) bank transfer and check issuance capabilities allowing WEX to open or closed loop redemption, load limitsfulfill full AP file needs, and variable expirations.
(v) different user interfaces oriented toward more simple small business needs as well as complex corporate needs. The following illustration depictsvast majority of the segment’s revenue is derived from net interchange revenue, which is the gross interchange created by the issuance, authorization, settlement, and clearing of card network spend less rebates paid to customers. For our business process forembedded payments offering used by leading technology companies across various industries, our net interchange rate is lower than that on our direct-to-corporate AP automation and spend management solution. Due to the largely fixed or semi-fixed cost nature of our solution, this segment benefits from a typical travel virtual card product transaction:
1 Guest books a hotel through a travel website owned by an online travel company
2 Online travel company reserves room at hotel through reservation system using a WEX VCN to reserve the room
3 Upon checkout, hotel authorizes payment using the WEX VPN
4 The WEX virtual card restrictshigh variable margin contribution. A portion of revenue is derived from licensing fees we charge to predetermined cost of roompartner financial institutions who white-label our AP automation and incidental expenses are paid for by guest
5 Online travel company pays WEX. WEX earnsspend management solution. These financial institutions pay a technology fee by retainingas a percentage of the online travel company reimbursement paymentspend that the software enables them to issue.
Marketing ChannelsDistribution
We market our Travel and Corporate SolutionsPayments segment products and services both directly and indirectly to new and existing customers. Our products are marketed to commercial and government organizations and we use existing open-loop networks.
HEALTH AND EMPLOYEE BENEFIT SOLUTIONS SEGMENT
Overview
Our Health and Employee Benefit Solutions segment is comprised of our healthcare payment products and SaaS platforms with which we provide simplified payment capabilitiescustomers in a complex healthcare market.variety of models.
Sales
Our healthcare payment products provide consumer-directedWithin our embedded payments solutions, we focus on direct sales to leading companies in the complex healthcare market. We partner with employers, health plans, third-party administrators, financial institutions, payroll companiestravel, fintech, insurance, consumer bill pay, and the public sectormedia verticals. Our customers’ product set is largely focused on aggregating and managing large amounts of payments where a commercial payment solution is required.
Within our AP Automation and Spend Management solutions, we focus on both direct sales to provide a SaaS product to support healthcare benefit programs and administer COBRA, flexible spending, health saving and reimbursement accounts, and other healthcare related employee and dependent benefits.
We currently have relationships with approximately 408,000 employers, reaching approximately 33.1 million consumers. Revenue is generated primarily from SasS licensing fees charged to partners and interchange fees from spending on customer debit cards issued under flexible spending, health savings and reimbursement accounts. Cards are branded with either Visa or MasterCard and operate on a restricted open loop network.
Health and Employee Benefit Solutions segment revenues are generated primarily from subscription fees and interchange fees from spending on the WEX Health payment cards.
The following illustration depicts our business process and parties involved in our healthcare benefits solution:
BPO: Business Process Outsourcing
Marketing Channels
We market our Health and Employee Benefit Solutions products and services to consumers through an extensive partner network, which includes health plans, third-party administrators, financial institutions, payroll companies and software providers,businesses as well as individual employer groups.
OTHER ITEMS
Markets
We face competition in all ofempowering financial institutions to serve their customers directly using our segments.technology. Our competitors vie with us for prospective customers as well as for companies with whichdirect sales team focuses on new sales directly to form strategic relationships. The most significant competitive factors include the breadth of features offered, functionality, servicing capabilitymid- and price. We compete with companies that perform paymentlarge- corporations where our custom ERP integration and transaction processing or similar services. Financial institutions that issue Visa, MasterCardsupplier enablement functions help them turn their AP function from a highly manual and American Express credit and specialized proprietary cards currently compete primarily with our Fleet Solutions and Travel and Corporate Solutions segments. Our Health and Employee Benefit Solutions segment also competes with other healthcare payment service providers. For more information regarding risks related to competition, see the information in Item 1A, under the heading “Our industry continues to become increasingly competitive, which makes it more challenging for us to maintain profit margins at historical levels.”
The demand for our payment processing, account servicing and transaction processing services combined with significant operating scale has historically driven strong revenue growth and earnings potential. We have an extensive history of organic revenue growth driven by our various marketing channels, our extensive network of fuel and service providers, and our growth in transaction volume. Further, we have completed a number of strategic acquisitions to expand our product and service offerings, which have contributed to our revenue growth and diversification of our products and services. We have an experienced and committed management team that has substantial industry knowledge and a proven track record of financial success. The team has been successful in driving strong growth with consistent operating performance. We believe that our management team positions us well to continue successfully implementing our growth strategy and capturing operating efficiencies. In addition, we believe that the following factors, by reportable segment, distinguish us from our competitors and place us in a strong competitive position.
Fleet Solutions
•Our proprietary closed-loop fuel networks in the U.S. and Australia are among the largest in each country. We describe our fleet payment processing networks as “closed-loop” because we have a direct contractual relationship with both the merchant and the fleet, and only WEX transactions can be processed on these networks. We have built networks that management estimates provide coverage to over 90 percent of fuel locations in the U.S. and Australia, as well as wide acceptance in Europe. This provides our customers with the convenience of broad acceptance.
•Our proprietary closed-loop fuel networks provide us with accesscostly endeavor to a higher level of fleet-specific informationhighly automated and control as compared to what is typically available on an open-loop network. This provides high-level purchase controls at the point-of-sale, including the flexibility of allowing fleets to restrict purchasesrevenue generating function. Our AP Automation and receive automated alerts. Additionally,Spend Management solutions are also white labeled for financial institutions and we have the ability to refine the reporting provided to our fleet customers and customers of our strategic relationships.
•We offer a differentiated set of products and services, including security and purchase controls, to allow our customers and the customers of our strategic relationships to better manage their vehicle fleets. We provide customized analysis and reporting on the efficiency of fleet vehicles and the purchasing behavior of fleet vehicle drivers. We make this data available to fleet customers through both traditional reporting services and sophisticated web-based data analytics tools.
•Our long-standing strategic relationships, multi-year contracts and high contract renewal rates have contributed to the stability and recurring nature of our revenue base. We believe that we offer a compelling value to our customers relative to our competitors given the breadth and quality of our products and services and our deep understanding of our customers’ operational needs. We have a large installed customer base and co-branded strategic relationships withpower some of the largest U.S. fleetworld’s leading financial institutions offering our white labeled technology to their corporate customers.
Competition
In general, WEX Corporate Payments competes with financial institutions that provide general payment services without the enhanced capabilities of our solution set. Financial institutions, including but not limited to J.P. Morgan, Barclays, Capital One, American Express, and Citi, have access to technology solutions coupled with payment capabilities. We compete against specialized financial technology firms that are focused on delivering processing capabilities to the marketplace, such as I2C, Global Payments, and Marqeta, in partnership with partner banks who provide payments services, such as Cross River Bank, Celtic Bank, MVB Bank, or Sutton Bank. We also compete with financial technology firms focused on accounts payable and spend management, providerssuch as Adyen, ConnexPay, and with various oil companiesStripe. We believe we compete favorably against these competitors through our wide geographic reach, deep payments expertise, enduring relationships, in-house technology and convenience store operators that useissuing capabilities, and our private label solutions. cloud-based proprietary technology stack.
Our wide site acceptance, together with our private-label portfolios and value-added product and service offerings, drive high customer satisfaction levels, as evidence by high customer retention rates.Strategy
•Our capabilitiesAs a continuing innovator in the over-the-road market space enhancepayments and business technology industry, WEX has significant experience in bringing and expanding our abilitysolutions to serve fleet customers who operate both heavy duty trucks and cars or light duty vehicles in the U.S. and Canada as well as to blend the small fleet and private label businesses for greater scale.
•markets. Our European commercial fuel card programs, which usecurrent strategy is a closed-loop network, combined with long term supply agreements to serve the current and future European Fleet business, provides us with a strong foundation in the large European fleet market.
Travel and Corporate Solutions
•Our travel and corporate payment products offer customers enhanced security and control for complex payment needs and the accounts payable segment of the market. Our strategic relationships include many of the largest online travel agencies in the world. We continue to expand our online travel payment solution capabilities and geographies, which currently include North America, South America, the United Kingdom, Europe, Africa, Asia and Australia/New Zealand. As of December 31, 2020, we settle transactions in over 20 currencies.
Health and Employee Benefit Solutions
•The U.S. Health business uses an industry leading proprietary cloud-based platform to simplify healthcare benefits administration for employers and consumers. We provide a comprehensive suite of products and services that can be customized to fit the needs of the complex healthcare space. As a result of this complete solution, which distinguishes us from competitors, we have high customer retention rates. Our large partner network expands our opportunities in the healthcare financial technology market and solidifies our strong competitive position.
Another factor that places us in a strong competitive position is that we have an enterprise-wide risk management program that helps us identify and manage inherent risks related to our liquidity, extension of credit and interest rates. Our ownership of WEX Bank provides us with access to low cost sources of capital, which provide liquidity to fund our short-term card receivables. We have maintained a long record of low credit losses due to the short-term, non-revolving credit issued to our customer base. Our credit risk management program is enhanced by our proprietary scoring models, managing credit lines and early suspension policy. Interest rate risk is managed through diversified funding sources at WEX Bank including interest bearing money market deposits and certificates of deposit with varying maturities. Somesimplified articulation of our merchant contracts provide the abilityapproach to raise rates if interest rates rise.
Strategy
The Company’s performance during the year ended December 31, 2020, was shaped by a newly updated corporate strategygrowing our business and the global COVID pandemic. While we continue to prioritize customers, technology, talent, and execution, we refined our strategy to more specifically focus onoutlines how we willexpect to continue to meet the needs of an evolving landscape.
•ContinueGlobal Commerce Platform. A key foundation to Win & Expand Using Customer Relationshipsthe solutions we deliver to our customers is our platform, through which we deliver the solutions that serve our customers’ businesses. We continue to focus on differentiating ourselves through the global scale and reliability of our underlying infrastructure, and by anticipating our customers’ technology needs. We attempt to do this through integrating and continuously improving our payment and software technologies and by embedding intelligence, agility, and resiliency across the organization.
•Personalized Solutions, Seamlessly Embedded. Through our platform, we deliver a suite of solutions specifically tailored to help our customers tackle some of their most complex pain points. With our deep industry expertise we try to differentiate ourselves from the market through customer-focused innovation, working alongside customers to ensure our solutions are relevant to their specific needs. We enhance the value we deliver by seamlessly embedding our solutions into our customers’ operations, which enables customers to access our capabilities through systems and interfaces they already use.
•Insights that Power Success. The value of the solutions we provide is further amplified by the insights we deliver through the extensive data we maintain and the specialized expertise of our employees. Through these insights, we enable our customers to make better, more informed decisions, move more quickly and mitigate risk. We continue to expand our use of AI, machine learning, and other innovative tools to ensure we can scale with our growth while managing risk both for ourselves and our customers.
While our strategy articulates the choices we are making to grow our business in the market and competitive landscape we play in, we expect those choices to deliver growth across five drivers:
•Win New Customers. We seek to drive organic growth across our segments by nurturing our customer relationships and ensuring we are a trusted strategic partner. We have successfully integrated the two major oil wins and those portfolios are continuing to perform well. Our industry-leading support and service willcapabilities continue to enable us to grow with existing customers and win new customers.
•Deliver Modular Solutions on Integrated PlatformsGrow Share of Wallet. We will focus on differentiating ourselvesseek to expand our relevance and the value we deliver to our customers by anticipatinggrowing the services we provide to them. Through our customers’ technology needsbroad and providing innovative offerings. We will do this through integrating and continuously improvingdiverse solution suite, we have a unique combination of solutions that can serve our payment platforms and by embedding intelligence, agility, and resiliency everywherecustomers in multiple areas. While we have proven cases of customers consuming our solutions across the organization.our product suite, there is continued opportunity to more deeply penetrate our customer base across all our solutions.
•Continuously Reinvent Through Diversification.Expand & Diversify Offerings. We continuously seek to identify, experiment and launch products in new solution spaces. As business models evolve, we seek to adapt our solution suite to stay relevant, and at the forefront of serving our customers’ needs.
•Deepen Global Presence. As a global marketsbusiness, we have an established footprint around the world. Through the scalability of our platform, we seek to leverage capabilities across geographies to continue to evolve, we will minimizegrowing our exposure to macro forces and customer concentration. We will accomplish this by identifying new verticals, business models, and geographies for expansion.international business.
•Strategic M&A. Along with our organic growth, we will achieve this with our acquisition strategy, which bringsview growth through strategic acquisitions as an attractive use of capital to bring further scale and diversification to our offerings. In December, we closed the acquisition of eNett
Our Technology and Optal, which complementsResources
WEX’s digital and technology strategy remains grounded in deeply understanding our existing travel business by expanding our presence in Europe and entering into new markets in Asia.
•Transform to Mitigate Risk & Maximize Scale. To drive efficiency, we will optimize operations by improving technological capabilities and risk management. To accomplish this, we will maximize the value of shared services, streamline and standardize our technologies, and automate wherever possible. This year we built out a new data team and platform to optimize our operations and identify new ways to drive growth. We will expand our use of AI, machine learning, and other innovative tools to ensure we can scale with our growth and further mature our risk management.
•Leverage Our Culture & Grow Our Talent. Throughcustomers’ needs, leveraging our winning, inclusive,technology and values-based culture,payments expertise and continuing strong investment to deliver great products for the near and long term. The solutions we will mine, grow,offer our customers across our B2B ecosystem consist primarily of proprietary technologies, including closed loop payments networks, SaaS software with embedded payment solutions, and maximize talent that adapts to our future business. During the pandemic, the safety and health of our employees have taken on even more importance. We have made significant technology investments to rapidly support our remote workforce, we gave all US employees an additional two weeks of paid time off to allow for personal time away from “the office”, and we leveraged our Compassion Fund to help both furloughed and active employees.virtual payments capabilities. We have also invested in our Diversitydevelopment pipelines to enable the faster deployment of systems with tooling that is streamlined and Inclusion effortsstandardized end to end.
Core to our technology vision is delivery of responsive, reliable technology. Our multi-cloud strategy allows us to operate more scalable, flexible, and compliant systems across our product suite while shedding dependency on more costly and less flexible data centers. As we simplify and decouple systems, we are introducing more flexibility, scalability, and reuse of our core components. This not only advances our ability to continuously deploy solutions, but it also improves the customer experience by enabling us to isolate issues and create opportunities for targeted integration with our partners.
This work is paired with multi-layer security and privacy controls to mitigate the risk of security threats, including from cybersecurity attacks, so that our customers are provided with reliable, compliant systems that put a premium on data protection. See Part I – Item 1C – Cybersecurity for information on our processes and procedures in place for managing cybersecurity risk.
Our approach to data will be a critical differentiator for WEX as we continue our digital transformation. We are modernizing our data platform while introducing experimentation at scale to accelerate the pace at which we can process and present data to enable data-driven decisions for both employees and customers. We are integrating AI capabilities across the breadth of our activities, reducing process inefficiencies and enriching customer-focused outcomes, while remaining focused on having an effective AI governance framework in place.
We rely on a combination of patent, copyright, trade secret and trademark laws, confidentiality procedures, contractual provisions and other similar measures to protect the proprietary information and technology used in our business. We generally enter into agreements with clients, consultants, service providers and other partners, whether current or prospective, that contain provisions restricting use and disclosure of our proprietary information and technology. Operationally, we have implemented certain safeguards designed to control access to and distribution of our proprietary information and technology. We pursue registration and protection of certain trademarks in the U.S. and other countries in which we operate or plan to operate. We market our products and services using the WEX brand name globally, as well as other brand names such as FleetOne, EFS, and benefitexpress in the U.S. and eNett and Go Fuel Card in Europe and Motorpass in Australia.
Regulation and Supervision
The Company is subject to a substantial number of laws and regulations, both in the United States and in foreign jurisdictions, which apply to businesses offering financial technology services and payment cards to customers or processing or servicing for payment cards and related accounts. In addition, a substantial number of laws and regulations govern or affect WEX Bank, as an insured depository institution, and our operations related to our Benefits business.
We are also subject to direct supervision and periodic examinations by various governmental agencies and industry self-regulatory organizations that are charged with overseeing the kinds of business activities in which we engage, including the launchUDFI, the FDIC, the SEC, and a number of state and foreign regulatory and licensing authorities. These agencies and authorities generally have broad authority and discretion in restricting and otherwise affecting our businesses and operations and may take formal or informal supervisory, enforcement, and other actions against us when, in the applicable agency’s or organization’s judgment, our businesses or operations fail to comply with applicable law, or meet its supervisory expectations. We strive to maintain constructive relationships with regulatory authorities.
The laws and regulations that apply to the Company are often evolving and sometimes ambiguous or inconsistent, and the extent to which they apply to us is at times unclear. This section, while not exhaustive, summarizes certain federal and state laws and regulations in the United States, as well as foreign laws and regulations, that are applicable to our business. In addition, the scope and interpretation of the legal and regulatory framework governing our businesses could change in the future and have a significant effect on us. See Part I – Item 1A – Risk Factors – Risks Related to Regulation for a more detailed discussion of regulatory risks affecting us.
General Regulation, Supervision and Examination of WEX Bank
As an industrial bank organized under the laws of the State of Utah that does not accept demand deposits that may be withdrawn by check or similar means, WEX Bank currently meets the criteria for exemption as an industrial bank from the definition of “bank” under the Bank Holding Company Act. As a result, WEX Inc. is generally not subject to the Bank Holding Company Act. WEX Bank is, however, subject to examination and supervision by the FDIC and the UDFI. Regular examinations are conducted and ratings are issued based on the FDIC’s examination policies and composite ratings framework. As regulatory bodies, the FDIC and the UDFI may issue informal or formal enforcement actions for violations of law, unsafe or unsound practices, and other actionable misconduct. Enforcement actions may include, but are not limited to, memoranda of understanding, consent orders, orders of restitution, and civil money penalties.
Additionally, WEX Bank does business with customers outside of the United States and, in some countries, relies on a letter of non-objection from the local banking authority to provide services to customers in the said country from the United States. WEX Bank complies with the applicable United States regulations for services provided to those countries from the United States.
Restrictions on Intercompany Borrowings and Transactions
Sections 23A and 23B of the FRA and the implementing regulations limit the extent to which the Company can borrow or otherwise obtain credit from, or engage in, other “covered transactions” with WEX Bank. These rules also require that the Company or any of its affiliates (as such term is defined in Section 23A of the FRA) engage in transactions with WEX Bank only on terms and under circumstances that are substantially the same, or at least as favorable to WEX Bank, as those prevailing at the time for comparable transactions with nonaffiliated companies. “Covered transactions” include loans or extensions of credit, purchases of or investments in securities, purchases of assets, including assets subject to an agreement to repurchase, acceptance of securities as collateral for a loan or extension of credit, or the issuance of a guarantee, acceptance, or letter of credit. Although the applicable rules do not serve as an outright ban on engaging in “covered transactions,” they do limit the amount of covered transactions WEX Bank may have with any one affiliate and with all affiliates in the aggregate. Furthermore, with certain exceptions, each loan or extension of credit by WEX Bank to the Company or its other affiliates must be secured by collateral with a market value ranging from 100 percent to 130 percent of the amount of the loan or extension of credit, depending on the type of collateral. See Part I – Item 1A – Risk Factors – “WEX Bank is subject to regulatory requirements that have in the past, and may in the future, require us to make capital contributions to WEX Bank or that may restrict WEX Bank’s ability to make cash available to WEX Inc.”
Consumer Protection
The Dodd-Frank Act granted the CFPB general authority to prevent covered persons or service providers from committing or engaging in unfair, deceptive or abusive acts or practices under federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. Although WEX Bank is not currently subject to the examination and supervisory authority of the CFPB because it has less than $10 billion in total assets, it is required to comply with the rules and regulations issued by the CFPB, with the FDIC having the primary responsibility for supervising and examining WEX Bank’s compliance with federal rules and regulations. The UDFI is responsible for examining and supervising WEX Bank’s compliance with state consumer protection laws and regulations.
The CFPB is also engaged in regulating the payments industry, including with respect to prepaid cards under Regulation E, which imposes requirements on general-use prepaid cards, store gift cards and electronic gift cards, which currently comprise a limited number of WEX products but could evolve with the business over time.
In addition, the Federal Trade Commission Act prohibits unfair or deceptive acts or practices in or affecting commerce for entities including WEX Inc. and its subsidiaries that are not directly regulated by the CFPB. Additionally, all fifty states and the District of Columbia have their own laws prohibiting unfair or deceptive acts and practices, many of which also include a private right of action. For information regarding a consent order issued by the FDIC on September 20, 2023, relating to our compliance management program, see Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Matters.
Interchange Fees
On July 1, 2022, WEX Bank became subject to provisions in the Durbin Amendment to the Dodd-Frank Act, which provide that interchange fees that a card issuer or payment network receives or charges for debit transactions will be regulated by the Federal Reserve and must be “reasonable and proportional” to the cost incurred by the card issuer in authorizing, clearing and settling the transaction. Payment network fees may not be used directly or indirectly to compensate card issuers in circumvention of the interchange transaction fee restrictions. As of the date of this filing, the applicability of the Durbin Amendment to any prepaid or debit card products we have is minimal.
Over-the-Counter Derivatives Market
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) also establishes federal oversight and regulation of the over-the-counter derivatives market and entities that participate in that market. Compliance with derivatives regulations have added costs to our business, and any additional requirements, such as future registration requirements or increased regulation of derivative contracts, may add additional costs or may require us to change any fuel price, currency and interest rate hedging practices we may then use to comply with new regulatory requirements. Potential changes could also include clearing and execution methodology of our derivatives transactions.
Brokered Deposits
Section 29 of the Federal Deposit Insurance Act restricts the acceptance of brokered deposits by an insured depository institution unless the institution is “well capitalized.” For insured depository institutions that are “less than well capitalized,” certain interest rate cap restrictions are imposed. See Part I – Item 1A – Risk Factors – “WEX Bank is subject to funding risks associated with its reliance on brokered deposits.”
Anti-Money Laundering, Counter Terrorist and Sanctions Regulations
The applicable laws and regulations in the various employee resource groupsjurisdictions in which we operate impose significant anti-money laundering compliance and due diligence obligations on their local entities. We must verify the identity of customers, monitor and report unusual or suspicious account activity, as well as transactions involving amounts in excess of prescribed limits, and refrain from transacting with designated persons or in designated regions, in each case as required by the applicable laws and regulations (such as the Bank Secrecy Act and regulations of the United States Treasury Department and the Internal Revenue Service in the United States). Financial regulators have issued various implementing regulations and have made enforcement a high priority. For information regarding a consent order issued by the FDIC and UDFI on May 6, 2022, relating to our Bank Secrecy Act and anti-money laundering compliance program that was terminated by the UDFI and the FDIC on November 8, 2023 and November 21, 2023, respectively, see Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Matters.
The U.S. government has imposed economic sanctions that affect transactions with designated foreign countries, foreign nationals and others. These sanctions, which are administered by OFAC, take many different forms but generally include one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (for example, property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC.
In addition to the applicable U.S. laws and regulations, we are also subject to various international laws and regulations aimed at combating money-laundering and terrorism, including:
•in Canada, Freezing Assets of Corrupt Foreign Officials Act, Justice for Victims of Corrupt Foreign Officials Act, Listed Terrorist Entities under the Criminal Code, Special Economic Measures Act, United Nations Act and their respective regulations;
•in the EU, the Fourth and Fifth Anti-Money Laundering Directives (2015/849/EU) and (2018/843/EU), and the EU’s economic sanctions regime;
•in the UK, Proceeds of Crime Act 2002 (as amended), Terrorism Act 2000 (as amended by the Anti-terrorism, Crime and Security Act 2001), Money Laundering Regulations 2017 (as amended), Counter-terrorism Act 2008, Schedule 7, Financial Sanctions - HM Treasury Sanctions Notices and News Releases;
•in Australia, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, the Anti-Money Laundering and Counter-Terrorism Financing Rules, Autonomous Sanctions Act 2011, the Australian Autonomous Sanctions Regulations 2011, the Charter of the United Nations Act 1945 (the United Nations Act) and its sets of regulations; and
•in Singapore, the Corruption, Drug Trafficking and other Serious Crimes (Confiscation of Benefits) Act 1992, the Terrorism (Suppression of Financing) Act 2002 and various Monetary Authority of Singapore (“MAS”) regulations, notices, guidelines and guidance relating to sanctions and anti-money laundering.
Healthcare Regulation
The federal and state governments in the U.S. continue to enact and consider many broad-based legislative and regulatory proposals that could materially impact various aspects of our benefits-related business. The plans that our partners and clients administer feature consumer-directed accounts that pay for out-of-pocket expenses incurred by employees and qualified dependents. These accounts include CDH accounts such as HSAs, FSAs and HRAs, as well as wellness incentives, commuter benefits, and other account-based arrangements. Most of these accounts are tax-advantaged under the appropriate law.
Employers are continuing to use CDH approaches to manage the rate of increase in healthcare expenditures and to enable employees to make decisions about the use of their healthcare savings. CDH programs provide consumers with visibility into and control over payment for healthcare expenses.
The products that WEX Health’s software and payment solutions support are subject to various state and federal laws, including the Patient Protection and Affordable Care Act (the “ACA”) and the Health Care and Education Reconciliation Act (collectively referred to as “Health Care Reform”), and regulations promulgated by the Internal Revenue Service, the Department of Health and Human Services, the Department of Labor, and similar state laws and regulatory authorities.
In addition to tax-related regulation, the Health Care Reform law imposes coverage standards affecting insured and self-insured health benefit plans that impact our current employeesbusiness model, including our relationships with current and developfuture customers, producers and health care providers, products, services, processes and technology.
Privacy and Information Security Regulations
In connection with the processing of data, we frequently undertake or are subject to specific compliance obligations under privacy and data security-related laws.
Under the Financial Services Modernization Act of 1999, also referred to as the Gramm-Leach-Bliley Act (“GLBA”), and certain state laws, WEX Bank is required to maintain a culturecomprehensive written information security program that includes administrative, technical and physical safeguards relating to consumer information. This requirement generally does not extend to information about companies or about individuals who obtain financial products or services for business, commercial, or agricultural purposes. In October 2021, the FTC updated the GLBA Safeguards Rule to specify new safeguards that financial institutions must include in their information security programs, such as setting limits on who can access consumer data, requiring encryption to secure data, and requiring financial institutions to designate a single qualified individual to oversee their information security program and to report periodically to the entity’s board of inclusiondirectors or a senior officer in charge of information security.
The GLBA also requires WEX Bank to attract new talent. Oneprovide initial and annual privacy notices to customers that describe our information sharing practices. If WEX Bank intends to share nonpublic personal information about consumers with affiliates and/or nonaffiliated third parties, WEX Bank must provide customers with a notice and a reasonable period of time for each customer to “opt out” of any such disclosure. The GLBA also regulates certain activities of WEX Inc., with respect to privacy and information security practices.
In addition to federal privacy laws with which we must comply, states also have adopted statutes, regulations and other measures, such as: (i) the California Consumer Protection Act, as amended by the California Privacy Rights Act, effective January 1, 2023 (together, the “CCPA”); (ii) the Virginia Consumer Data Protection Act, effective January 1, 2023; (iii) the Colorado Privacy Act, effective July 1, 2023, (iv) the Connecticut Data Privacy Act, effective July 1, 2023; and (v) the Utah Consumer Privacy Act, effective December 31, 2023. Several other states have also adopted their own comprehensive privacy laws. Privacy laws in Delaware, Florida, Iowa, Montana, Oregon and Texas are set to be effective by the end of 2024, and other states have passed similar laws that will become effective in 2024 and 2025. In some cases, data regulated by federal law (e.g., HIPAA and HITECH or the GLBA) is carved out of the benefitsscope of supportingthese state laws. With respect to all other data, WEX and WEX Bank must monitor and seek to comply with individual state privacy laws in the remote workforceconduct of our businesses.
A final rule issued by U.S. federal banking regulators including the Office of the Comptroller of the Currency, Treasury, the Board of the Governors of the Federal Reserve Board and the FDIC in April 2022 requires banking organizations to notify their primary federal regulators of any “computer-security incident” that rises to the level of a “notification incident,” as soon as possible but no later than 36 hours after the banking organization determines that the incident has occurred.
WEX and WEX Bank are also subject to certain international privacy and data protection laws. For example, in Europe and the United Kingdom, the General Data Protection Regulation (“GDPR”) and the UK GDPR applies to all companies processing data of EU/UK residents, regardless of the company’s location. The GDPR and the UK GDPR impose stringent privacy protections and provide EU and UK residents with extensive rights in their personal data (such as rights to delete, obtain access to, and correct their personal data) and requires the establishment of certain legitimate bases for collecting, using, and disclosing personal data. Additionally, we are subject to other international and data protection laws in certain jurisdictions, including:
•in Canada, the Personal Information Protection and Electronic Documents Act and provincial-level private sector privacy legislation enacted in Alberta, British Columbia, and Québec;
•in Australia, the Privacy Act (1988) and the Australian Privacy Principles; and
•in Singapore, the Personal Data Protection Act 2012.
With respect to our healthcare services only, we have certain obligations under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and its implementing regulations, as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”). HIPAA and HITECH impose requirements relating to the privacy, security and transmission of protected health information, including breach notification and reporting requirements. HITECH also requires consideration of a company’s implementation of recognized security standards in assessing administrative fines and penalties under the HIPAA security standards.
Email and Text Marketing Laws
We use direct email marketing and text-messaging to reach out to current or potential customers and therefore are subject to various statutes, regulations, and rulings, including the Telephone Consumer Protection Act, the Controlling the Assault of Non-Solicited Pornography and Marketing Act and related Federal Communication Commission orders as well as similar international legislation such as Canada’s Anti-Spam Legislation, which regulates the sending of commercial electronic messages. Several states have enacted additional, more restrictive and punitive laws regulating commercial email. Violations of these laws could result in enforcement actions, statutory fines and penalties, and class action litigation.
FACT Act
The Fair and Accurate Credit Transactions Act of 2003 amended the Fair Credit Reporting Act and requires creditors to adopt identity theft prevention programs to detect, prevent and mitigate identity theft in connection with covered accounts, which can include business accounts for which there is a reasonably foreseeable risk of identity theft.
Truth in Lending Act
The Truth in Lending Act, or TILA, was enacted as a consumer protection measure to increase consumer awareness of the cost of credit and to protect consumers from unauthorized charges or billing errors, and is implemented by the CFPB’s Regulation Z. Most provisions of TILA and Regulation Z apply only to the extension of consumer credit, but a limited number of provisions apply to commercial cards as well. For example, the limitation on liability for unauthorized use applies to business cards, although a business that acquires 10 or more credit cards for its personnel can agree by contract to more expansive liability.
Money Transmission and Payment Instrument Licensing Regulations
United States
We are subject to various U.S. laws and regulations governing money transmission and the issuance and sale of payment instruments relating to certain aspects of our business. In the United States, most states license money transmitters and issuers of payment instruments. Through our subsidiaries, we are licensed in all states where required for business. Many states exercise authority over the operations of our services related to money transmission and payment instruments and, as part of this authority, subject us to periodic examinations, which may include a review of our compliance practices, policies and procedures, financial position and related records, privacy and data security policies and procedures, and other matters related to our business. Following these periodic examinations, state agencies can issue us findings and recommendations, prompting us to make changes to our operations and procedures.
As a licensee, we are subject to certain restrictions and requirements, including net worth and surety bond requirements, record keeping and reporting requirements, requirements for regulatory approval of controlling stockholders or direct and indirect changes of control of the licensee and certain other corporate events, and requirements to maintain certain levels of permissible investments in an amount equal to our outstanding payment obligations. Many states also require money transmitters and issuers of payment instruments to comply with federal and state anti-money laundering laws and regulations.
In addition, non-banks that provide certain financial services are required to register with FinCEN as “money services businesses” (“MSBs”). The Company, through a subsidiary, is a registered MSB. As a result, we have established anti-money laundering compliance programs that include: (i) internal policies and controls; (ii) designation of a compliance
officer; (iii) ongoing employee training; and (iv) an independent review function. We have developed and implemented compliance programs comprised of policies, procedures, systems and internal controls to monitor and address various legal requirements and developments.
Government agencies may impose new or additional requirements on money transmission and sales of payment instruments, and we expect that compliance costs will increase in the future for our regulated subsidiaries.
European Union
The Company’s European operations are subject to laws and regulations governing payment services, including under the Payment Services Directive (EU 2015/2366 PSD2) and the Electronic Money Directive (2009/110/EC EMD2).
In addition to being subject to the regulations under the above directives, the Company is also subject to the local laws of the EU member state of Ireland in which we are an authorized electronic money institution.
Optal Financial Europe Limited (“OFEL”) is an Irish authorized electronic money institution, authorized under the European Communities (Electronic Money) Regulations 2011, as amended (which implements 2EMD). A pertinent requirement of such authorization is to safeguard customer funds against the firm’s insolvency. In addition, OFEL must be compliant with multiple other regulatory requirements in Ireland as part of being an authorized electronic money institution. Of most significance are: (a) the European Union (Payment Services) Regulations 2018, which implement PSD2, (b) the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010, as amended (CJA 2010), which implements 5 AMLD, (c) the European Banking Authority’s Outsourcing Guidelines and the Central Bank of Ireland (CBI) Cross-Industry Guidance on Outsourcing and (d) the CBI’s Cross-Industry Guidance on Operational Resilience. Any material failure by us to comply with these requirements could result with us incurring sanctions up to and including suspension or relinquishment of our authorization.
United Kingdom
WEX’s operations in the United Kingdom are also subject to applicable laws and regulations governing payment services. Optal Financial Limited (“OFL”) is authorized as an electronic money institution under, and must comply with, the Electronic Money Regulations 2011 (“EMRs”) and the Payment Services Regulations 2017 (“PSRs”). It is supervised by the Financial Conduct Authority (“FCA”) and is subject to the FCAs “Principles for Business”. Among other obligations, the EMRs and PSRs require OFL to safeguard the relevant funds of its customers. A material failure to comply with these regulations could result with us incurring sanctions up to and including suspension or relinquishment of our applicable licenses.
In addition to the PSRs and the EMRs, OFL must also comply with the following anti-financial crime regulations: The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (as amended); and the Proceeds of Crime Act 2002 (as amended). Further, OFL must comply with the UK sanctions regime which imposes serious and extensive restrictions on dealing with designated persons or entities.
Other pertinent regulatory requirements applicable to OFL are the FCA’s expectations around outsourcing and operational resilience as set out in its Handbook and/or its Payments Services Approach Document.
Singapore
In Singapore, WEX Finance Inc. and Optal Singapore Pte Ltd are licensed to carry on the business of issuing credit cards and/or charge cards and must comply with the Banking Act 1970 and the applicable sections of the Payment Services Act 2019 (“PSA”). These entities are supervised by the MAS. Among other obligations, the PSA requires the entities to safeguard the relevant funds of their customers.
Australia
eNett International (Singapore) Pte Ltd holds an Australian Financial Services License (“AFSL”) granted by the Australian Securities and Investments Commission, which authorizes it to provide a non-cash payment facility to wholesale customers. Optal Australia Pty Ltd holds an intermediary authorization under eNett International (Singapore) Pte. Ltd’s AFSL. Any material failure by us to comply with the rules and regulations to which AFSL holders are subject could result with us incurring sanctions up to and including suspension or relinquishment of our license. WEX entities providing payment services to Australian customers must also comply with the Payment Systems (Regulation) Act 1998.
WEX Australia Pty Ltd, WEX Fuel Cards Australia Ltd and WEX Prepaid Cards Australia pty Ltd operate within a framework of regulatory relief and exemptions afforded them on the basis that they satisfy the requisite conditions.
Third Party Administration Licensing Regulations
We are subject to various U.S. laws and regulations governing third party administration of employee benefit plans. In the U.S., most states license third party administrators. Many states exercise authority over the operations of our services related to third party administration of employee benefit plans and, as part of this authority, may subject us to periodic examinations, which may include a review of our policies and procedures, financial position and related records, and other matters related to our business. Following these periodic examinations, state agencies can issue us findings and recommendations, prompting us to make changes to our operations and procedures.
As a licensee, we are subject to certain restrictions and requirements, which vary by state, including surety bond requirements and record keeping and reporting requirements.
Escheatment Laws
We are subject to unclaimed or abandoned property state laws in the United States and in certain foreign countries that require us to transfer to certain government authorities the unclaimed property of others that we hold when that property has been unclaimed for a certain period of time. Moreover, we are subject to audit by state and foreign regulatory authorities with regard to our escheatment practices.
Restrictions on Dividends
WEX Bank is subject to various regulatory requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. Further, a banking regulator may determine that the payment of dividends would be inappropriate and could impose other conditions on the payment of dividends or even prohibit their payment. Further, WEX Bank may not pay a dividend if it is undercapitalized or would become undercapitalized as a result of paying the dividend. Utah law permits WEX Bank to pay dividends out of the net profits of the industrial bank after providing for all expenses, losses, interest, and taxes accrued or due, but if WEX Bank’s surplus account is less than 100 percent of its capital stock, WEX Bank must transfer up to 10 percent of its net profits to the surplus account prior to the payment of any dividends.
Company Obligations to WEX Bank
Any non-deposit obligation of WEX Bank to the Company is subordinate, in right of payment, to deposits and other indebtedness of WEX Bank. In the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of WEX Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Restrictions on Ownership of WEX Inc. Common Stock
WEX Bank, and therefore the Company, is subject to banking regulations that impose requirements on entities that might control WEX Bank through control of the Company. These requirements are discussed in Part I – Item 1A – Risk Factors – “Provisions in our charter documents, Delaware law and applicable banking laws may delay or prevent our acquisition by a third party, and could adversely impact the market price of our common stock.”
Anti-Bribery Regulations
WEX is a global business and is required to comply with anti-bribery and corruption laws in the jurisdictions it operates within, including but not limited to, the FCPA, UK Bribery Act 2010 (“UKBA”), the Canadian Criminal Code and Corruption of Foreign Public Officials Act and the Singapore Prevention of Corruption Act 1960. The FCPA prohibits the payment of bribes to foreign government officials and political figures and includes anti-bribery provisions enforced by the Department of Justice and accounting provisions enforced by the SEC. The statute has a broad reach, covering all U.S. companies and citizens doing business abroad, among others, and defining a foreign official to include not only those holding public office but also local citizens affiliated with foreign government-run or -owned organizations. The statute also requires maintenance of appropriate books and records and maintenance of adequate internal controls to prevent and detect possible FCPA violations.
Non-Bank Custodian Regulations
As a U.S. Internal Revenue Service approved passive non-bank custodian for HSAs, WEX Inc. is subject to the provisions of Treasury Regulations Section 1.408-2(e) (the “Treasury Regulations”), including the net worth, surety bond, recordkeeping, audit, and administration of fiduciary duties requirements, among other requirements. The Internal Revenue Service exercises authority over WEX Inc.’s operations related to the non-bank custodian designation and, as part of this authority, subjects WEX Inc. to periodic examinations, which may include a review of its operational practices, policies and procedures, net worth and related records, and other matters related to such business. Following these periodic examinations, the Internal Revenue Service can now recruit from more diverse geographies.issue findings and recommendations, prompting us to make changes to our operations and procedures.
Human CapitalBrokered Deposits
Section 29 of the Federal Deposit Insurance Act restricts the acceptance of brokered deposits by an insured depository institution unless the institution is “well capitalized.” For insured depository institutions that are “less than well capitalized,” certain interest rate cap restrictions are imposed. See Part I – Item 1A – Risk Factors – “WEX Bank is subject to funding risks associated with its reliance on brokered deposits.”
Anti-Money Laundering, Counter Terrorist and Sanctions Regulations
The applicable laws and regulations in the various jurisdictions in which we operate impose significant anti-money laundering compliance and due diligence obligations on their local entities. We believe that maintaining our continued growthmust verify the identity of customers, monitor and position as a leading provider of financial technology solutions requires a strategy focused on attracting, developing and retaining exceptional talent,report unusual or suspicious account activity, as well as fostering a culture that supports innovationtransactions involving amounts in excess of prescribed limits, and collaboration globally. Eachrefrain from transacting with designated persons or in designated regions, in each case as required by the applicable laws and regulations (such as the Bank Secrecy Act and regulations of our employees contributes to our growththe United States Treasury Department and success. As of December 31, 2020, WEX Inc. and its subsidiaries had approximately 5,300 employees, of which approximately 4,300 were locatedthe Internal Revenue Service in the United States. NoneStates). Financial regulators have issued various implementing regulations and have made enforcement a high priority. For information regarding a consent order issued by the FDIC and UDFI on May 6, 2022, relating to our Bank Secrecy Act and anti-money laundering compliance program that was terminated by the UDFI and the FDIC on November 8, 2023 and November 21, 2023, respectively, see Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Matters.
The U.S. government has imposed economic sanctions that affect transactions with designated foreign countries, foreign nationals and others. These sanctions, which are administered by OFAC, take many different forms but generally include one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (for example, property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC.
In addition to the applicable U.S. laws and regulations, we are also subject to various international laws and regulations aimed at combating money-laundering and terrorism, including:
•in Canada, Freezing Assets of Corrupt Foreign Officials Act, Justice for Victims of Corrupt Foreign Officials Act, Listed Terrorist Entities under the Criminal Code, Special Economic Measures Act, United Nations Act and their respective regulations;
•in the EU, the Fourth and Fifth Anti-Money Laundering Directives (2015/849/EU) and (2018/843/EU), and the EU’s economic sanctions regime;
•in the UK, Proceeds of Crime Act 2002 (as amended), Terrorism Act 2000 (as amended by the Anti-terrorism, Crime and Security Act 2001), Money Laundering Regulations 2017 (as amended), Counter-terrorism Act 2008, Schedule 7, Financial Sanctions - HM Treasury Sanctions Notices and News Releases;
•in Australia, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, the Anti-Money Laundering and Counter-Terrorism Financing Rules, Autonomous Sanctions Act 2011, the Australian Autonomous Sanctions Regulations 2011, the Charter of the United Nations Act 1945 (the United Nations Act) and its sets of regulations; and
•in Singapore, the Corruption, Drug Trafficking and other Serious Crimes (Confiscation of Benefits) Act 1992, the Terrorism (Suppression of Financing) Act 2002 and various Monetary Authority of Singapore (“MAS”) regulations, notices, guidelines and guidance relating to sanctions and anti-money laundering.
Healthcare Regulation
The federal and state governments in the U.S. continue to enact and consider many broad-based legislative and regulatory proposals that could materially impact various aspects of our U.S.-basedbenefits-related business. The plans that our partners and clients administer feature consumer-directed accounts that pay for out-of-pocket expenses incurred by employees and qualified dependents. These accounts include CDH accounts such as HSAs, FSAs and HRAs, as well as wellness incentives, commuter benefits, and other account-based arrangements. Most of these accounts are tax-advantaged under the appropriate law.
Employers are continuing to use CDH approaches to manage the rate of increase in healthcare expenditures and to enable employees to make decisions about the use of their healthcare savings. CDH programs provide consumers with visibility into and control over payment for healthcare expenses.
The products that WEX Health’s software and payment solutions support are subject to various state and federal laws, including the Patient Protection and Affordable Care Act (the “ACA”) and the Health Care and Education Reconciliation Act (collectively referred to as “Health Care Reform”), and regulations promulgated by the Internal Revenue Service, the Department of Health and Human Services, the Department of Labor, and similar state laws and regulatory authorities.
In addition to tax-related regulation, the Health Care Reform law imposes coverage standards affecting insured and self-insured health benefit plans that impact our current business model, including our relationships with current and future customers, producers and health care providers, products, services, processes and technology.
Privacy and Information Security Regulations
In connection with the processing of data, we frequently undertake or are subject to specific compliance obligations under privacy and data security-related laws.
Under the Financial Services Modernization Act of 1999, also referred to as the Gramm-Leach-Bliley Act (“GLBA”), and certain state laws, WEX Bank is required to maintain a collective bargaining agreement. Certain non U.S.-based employeescomprehensive written information security program that includes administrative, technical and physical safeguards relating to consumer information. This requirement generally does not extend to information about companies or about individuals who obtain financial products or services for business, commercial, or agricultural purposes. In October 2021, the FTC updated the GLBA Safeguards Rule to specify new safeguards that financial institutions must include in their information security programs, such as setting limits on who can access consumer data, requiring encryption to secure data, and requiring financial institutions to designate a single qualified individual to oversee their information security program and to report periodically to the entity’s board of directors or a senior officer in charge of information security.
The GLBA also requires WEX Bank to provide initial and annual privacy notices to customers that describe our information sharing practices. If WEX Bank intends to share nonpublic personal information about consumers with affiliates and/or nonaffiliated third parties, WEX Bank must provide customers with a notice and a reasonable period of time for each customer to “opt out” of any such disclosure. The GLBA also regulates certain activities of WEX Inc., with respect to privacy and information security practices.
In addition to federal privacy laws with which we must comply, states also have adopted statutes, regulations and other measures, such as: (i) the California Consumer Protection Act, as amended by the California Privacy Rights Act, effective January 1, 2023 (together, the “CCPA”); (ii) the Virginia Consumer Data Protection Act, effective January 1, 2023; (iii) the Colorado Privacy Act, effective July 1, 2023, (iv) the Connecticut Data Privacy Act, effective July 1, 2023; and (v) the Utah Consumer Privacy Act, effective December 31, 2023. Several other states have also adopted their own comprehensive privacy laws. Privacy laws in Delaware, Florida, Iowa, Montana, Oregon and Texas are membersset to be effective by the end of trade unions2024, and other states have passed similar laws that will become effective in 2024 and 2025. In some cases, data regulated by federal law (e.g., HIPAA and HITECH or works councils.
Values
We believe our core values of Community, Execution, Innovation, Integrity and Relationships differentiate us from our competitors and meaningfully contribute to our growth and business success.
Operating with transparency and authenticitythe GLBA) is carved out of the utmost importance, internallyscope of these state laws. With respect to all other data, WEX and externally. Collaboration acrossWEX Bank must monitor and seek to comply with individual state privacy laws in the organization, a cultureconduct of curiosity and respectful communication supportour businesses.
A final rule issued by U.S. federal banking regulators including the development and retentionOffice of superior talentthe Comptroller of the Currency, Treasury, the Board of the Governors of the Federal Reserve Board and the growthFDIC in April 2022 requires banking organizations to notify their primary federal regulators of our business. For WEX, it’s all about the people.
Along with being a growth-focused company, we take pride in prioritizing and maintaining a positive corporate environment where WEX employees enjoy their work, respect and support their colleagues and are encouraged to innovate and collaborate. We strive to foster a culture where our employees recognize the value of their contributions—and of our business—to support the growth and development of the communities in which we operate.
Talent Management Focused on Recruitment, Development and Retention
We believeany “computer-security incident” that attracting, developing and retaining key employees and members of our management team are of paramount importancerises to the successlevel of oura “notification incident,” as soon as possible but no later than 36 hours after the banking organization including meeting or exceeding our businessdetermines that the incident has occurred.
WEX and growth goals. The skills, experience, institutionalWEX Bank are also subject to certain international privacy and industry knowledge of our employees significantly benefit our operations and performance.
There are several waysdata protection laws. For example, in which we attract, develop, and retain highly qualified talent. Here is an overview on key programs at WEX that support each of these pillars:
•In line with our values, we encourage creativity and innovation and regularly reinforce the importance of integrity and respectful communication.
•We strategically recruit diverse, qualified candidates to help support our culture of innovation and fostering creativity. We support our talent pipeline through internships, co-ops, and partnerships with universities.
•In addition, we collaborate with a broad range of organizations to introduce us to qualified diverse candidates.
•We provide competitive and valuable Total Rewards benefits that help our employees thrive while protecting what is most important: health, families and overall well-being. Our Total Rewards program consists of five elements: social; health; community; financial; and career, and is designed to support employees in reaching their personal and professional goals. We offer market-competitive compensation packages as well as a variety of benefits through our Total Rewards program, including a 401(k) employer match, incentive-based cash and/or equity based compensation awards, company-subsidized medical insurance coverage, recognition programs, paid volunteer time off, and paid time off, among other benefits.
•We provide employees with comprehensive training programs, tools and education throughout their employment with us, including online self-service learning platforms, professional development, leadership and mentoring programs, wellness challenges, incentives to foster community and engagement, dedicated well-being campaigns and personal financial counseling.
•Through our Great Leader Behaviors, employees are provided a baseline of behaviors and qualities to embody in their daily interactions with colleagues, customers and partners. We believe it’s not just what we do, but how we do it that matters, and our Great Leader pillars lay the foundation for clear and consistent behavior at all levels. In turn, we are better able to maintain an inclusive, innovative and collaborative environment for all employees to work, live and thrive.
•We do not limit equity awards to our senior leadership; employees at different levels throughout our organization are eligible to receive equity awards as part of their annual compensation, including a number of individual contributors. Equity compensation supports retention of key employees and further aligns the interests of those individuals with those of our stockholders. We operate in a highly competitive talent marketplace, and our approach to equity compensation supports WEX having the right people in the right roles at the right time to achieve our short- and long-term goals.
•Our leadership recognizes that small tweaks in processes or in the way we engage with employees or customers can lead to big successes. We believe in continuous improvement and regularly evaluate, and consider potential enhancements to, our internal processes and technologies to support and increase employee engagement, productivity and efficiency.
•One way we capture employee feedback is employee surveys, which measures cultural and engagement indicators.
•We regularly review talent retention at different levels of our organization relative to expectation, over-time trends and market norms.
Diversity, Equity and Inclusion
At WEX, we strive to achieve a fully inclusive global workplace that unifies and celebrates the diversity of our people, and this is embedded in our core values. We believe that to fully realize our potential as a company, we must continue to foster a workplace that ignites a sense of belonging and provides equal opportunities and treatment for our employees. We embed diversity and inclusion as a business imperative because we believe the best solutions happen when all individuals are treated fairly and respectfully, have equal access to opportunities and resources and can contribute fully to our organization’s success.
Our commitment to diversity and inclusion is shown in many ways, including:
•Our blend of managers comes from both homegrown talent and from outside the company, and leveraging talent internally and from companies we have acquired. Our leaders hail from businesses large and small, and bring a diversity of thought and approach to WEX.
•We furthered our commitment to diversity, equity and inclusion during 2020 by expanding the responsibilities section of the charter for the Compensation Committee of our Board of Directors to specifically include providing direction and perspective to management on key diversity initiatives, among other strategies, policies and practices with significant human resource implications.
•As part of WEX’s commitment to creating a diverse and inclusive workplace, we proudly sponsor employee resource groups (ERGs) that focus on, among other employee groups: early career professionals; parents; the LGBTQIA+ community; women; employees of color, employees with differing abilities; and multicultural employee interests. ERGs are part of our larger commitment to diversity, equity and inclusion and our long-term strategy of commitment to maintain an inclusive community. They serve as a key diversity tool in facilitating the recruitment of minority staff, raising diversity awareness across the company and driving strategic discussions about the advancement of employees and a more inclusive workplace. We continue to sponsor newly formed groups and employees are encouraged to form groups to satisfy their individual needs.
•Including our chair and CEO, nearly one-third of the members of our board are women, and 40 percent of our executive leadership team are women. Women, who are a key part of WEX’s business at all levels, represent nearly half of our global workforce.
Employee Health and Safety
We are committed to protecting the safety, health and well-being of our employees, contractors and visitors to our office locations and to ensuring compliance with local health and safety regulations. The health and safety of our employees has been—and continues to be—of vital importance amidst the COVID-19 pandemic. In early 2020, we implemented a COVID-19 global task force to prioritize our pandemic response. Operating on the task force’s recommendation, we pivoted to a remote work environment in March 2020 and instituted a series of employee-focused initiatives, such as increasing flexibility on when and where we work, adding an additional 10 days of emergency time off and expanding child- and elder-care benefits. As the pandemic continues, we remain committed to developing a staged plan for global office reentry when safe to do so. In 2020, we also expanded the criteria of the WEX Cares Foundation, funded by employees and the WEX Board of Directors, to include support for employees severely impacted by COVID-19 hardships.
We continue to provide frequent communications and information to our employees through a dedicated Chief Human Resource Officer COVID-19 newsletter series, town hall meetings, an internal COVID-19 Google Site and external website page, all with the goal of keeping our employees, customers, partners, and communities healthy, safe and informed.
Technology
We believe that investment in technology is crucial in maintaining and enhancing our competitive position in the marketplace. Our technology infrastructure is supported by secure and redundant data centers and cloud services distributed globally, including locations in the United States, Europe Australia and Singapore.
Our fleet fuel-based closed-loop proprietary platforms capture detailed information from the fuel and maintenance locations within our network. Operating a proprietary network not only enhances our value proposition, it also enables us to limit dependence on third-party processors and to respond rapidly to changing customer needs with system upgrades, while maintaining a more secure environment than an open-loop network typically allows. The majority of payments processed on our virtual card open-loop network are through the Company's internally developed software, while a smaller portion are processed using third-party processors. Our infrastructure has been designed around industry-standard architectures to minimize downtime in the event of outages or catastrophic occurrences. At WEX Health, we maintain an integrated multi-account payment platform, including a mobile application. In Australia, Asia Pacific and the United Kingdom, the General Data Protection Regulation (“GDPR”) and the UK GDPR applies to all companies processing data of EU/UK residents, regardless of the company’s location. The GDPR and the UK GDPR impose stringent privacy protections and provide EU and UK residents with extensive rights in their personal data (such as rights to delete, obtain access to, and correct their personal data) and requires the establishment of certain legitimate bases for collecting, using, and disclosing personal data. Additionally, we use standalone platformsare subject to support operations.other international and data protection laws in certain jurisdictions, including:
Our secure networks are designed to isolate our data from unauthorized access. We use secure protocols among all applications,•in Canada, the Personal Information Protection and our employees access critical components on a need-to-know basis. We are not aware of any material data breaches experienced byElectronic Documents Act and provincial-level private sector privacy legislation enacted in Alberta, British Columbia, and Québec;
•in Australia, the Company during 2020. We are continually improving our technology to enhance customer experiencePrivacy Act (1988) and to increase efficiencythe Australian Privacy Principles; and security. We also review technologies and services provided by others
•in order to maintainSingapore, the high level of service expected by our customers and continue to invest in our technology infrastructure.Personal Data Protection Act 2012.
For information regarding technology related risks, see the information in Item 1AWith respect to our healthcare services only, we have certain obligations under the headings “Our business is regularlyHealth Insurance Portability and Accountability Act of 1996 (“HIPAA”) and its implementing regulations, as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”). HIPAA and HITECH impose requirements relating to the privacy, security and transmission of protected health information, including breach notification and reporting requirements. HITECH also requires consideration of a company’s implementation of recognized security standards in assessing administrative fines and penalties under the HIPAA security standards.
Email and Text Marketing Laws
We use direct email marketing and text-messaging to reach out to current or potential customers and therefore are subject to cyberattacksvarious statutes, regulations, and attempted security and privacy breaches and we may not be able to adequately protect our information systems,rulings, including the dataTelephone Consumer Protection Act, the Controlling the Assault of Non-Solicited Pornography and Marketing Act and related Federal Communication Commission orders as well as similar international legislation such as Canada’s Anti-Spam Legislation, which regulates the sending of commercial electronic messages. Several states have enacted additional, more restrictive and punitive laws regulating commercial email. Violations of these laws could result in enforcement actions, statutory fines and penalties, and class action litigation.
FACT Act
The Fair and Accurate Credit Transactions Act of 2003 amended the Fair Credit Reporting Act and requires creditors to adopt identity theft prevention programs to detect, prevent and mitigate identity theft in connection with covered accounts, which can include business accounts for which there is a reasonably foreseeable risk of identity theft.
Truth in Lending Act
The Truth in Lending Act, or TILA, was enacted as a consumer protection measure to increase consumer awareness of the cost of credit and to protect consumers from unauthorized charges or billing errors, and is implemented by the CFPB’s Regulation Z. Most provisions of TILA and Regulation Z apply only to the extension of consumer credit, but a limited number of provisions apply to commercial cards as well. For example, the limitation on liability for unauthorized use applies to business cards, although a business that acquires 10 or more credit cards for its personnel can agree by contract to more expansive liability.
Money Transmission and Payment Instrument Licensing Regulations
United States
We are subject to various U.S. laws and regulations governing money transmission and the issuance and sale of payment instruments relating to certain aspects of our business. In the United States, most states license money transmitters and issuers of payment instruments. Through our subsidiaries, we collect aboutare licensed in all states where required for business. Many states exercise authority over the operations of our customers, which couldservices related to money transmission and payment instruments and, as part of this authority, subject us to liabilityperiodic examinations, which may include a review of our compliance practices, policies and damageprocedures, financial position and related records, privacy and data security policies and procedures, and other matters related to our reputation”, “Our failurebusiness. Following these periodic examinations, state agencies can issue us findings and recommendations, prompting us to effectively implement new technology could jeopardizemake changes to our positionoperations and procedures.
As a licensee, we are subject to certain restrictions and requirements, including net worth and surety bond requirements, record keeping and reporting requirements, requirements for regulatory approval of controlling stockholders or direct and indirect changes of control of the licensee and certain other corporate events, and requirements to maintain certain levels of permissible investments in an amount equal to our outstanding payment obligations. Many states also require money transmitters and issuers of payment instruments to comply with federal and state anti-money laundering laws and regulations.
In addition, non-banks that provide certain financial services are required to register with FinCEN as “money services businesses” (“MSBs”). The Company, through a leader in our industry,” “We are dependent on technologysubsidiary, is a registered MSB. As a result, we have established anti-money laundering compliance programs that include: (i) internal policies and controls; (ii) designation of a compliance
officer; (iii) ongoing employee training; and (iv) an independent review function. We have developed and implemented compliance programs comprised of policies, procedures, systems and electronic communications networks managed by third parties, which could resultinternal controls to monitor and address various legal requirements and developments.
Government agencies may impose new or additional requirements on money transmission and sales of payment instruments, and we expect that compliance costs will increase in the future for our inabilityregulated subsidiaries.
European Union
The Company’s European operations are subject to prevent service disruptions”laws and “Ifregulations governing payment services, including under the technologies we use in operating our businessPayment Services Directive (EU 2015/2366 PSD2) and interacting with our customers fail, are unavailable, or do not operate to expectations, or we fail to successfully implement technology strategies and capabilities in connection with our outsourcing arrangements, our business and results of operation could be adversely impacted.”the Electronic Money Directive (2009/110/EC EMD2).
Seasonality
Our businesses are affected by seasonal variations. For example, in a typical year, fuel prices are typically higher during the summer and online travel sales are typically higher during the third quarter. In addition we experience seasonality in our Health and Employee Benefit Solutions segment as consumer spendto being subject to the regulations under the above directives, the Company is correlated with insurance deductibles, typically resulting in higher spend inalso subject to the early partlocal laws of the year until employees meet their deductibles.
Resources
We rely on a combinationEU member state of patent, copyright, trade secret and trademark laws, confidentiality procedures, contractual provisions and other similar measures to protect the proprietary information and technology used in our business. We generally enter into agreements with clients, consultants, service providers and other partners, whether current or prospective, that contain provisions restricting use and disclosure of our proprietary information and technology. Operationally, we have implemented certain safeguards designed to control access to and distribution of our proprietary information and technology. Despite these efforts, unauthorized parties may attempt to access or use our proprietary information and technology, and third parties may develop similar and/or competing technology independently. We pursue registration and protection of certain trademarks in the U.S. and other countriesIreland in which we operateare an authorized electronic money institution.
Optal Financial Europe Limited (“OFEL”) is an Irish authorized electronic money institution, authorized under the European Communities (Electronic Money) Regulations 2011, as amended (which implements 2EMD). A pertinent requirement of such authorization is to safeguard customer funds against the firm’s insolvency. In addition, OFEL must be compliant with multiple other regulatory requirements in Ireland as part of being an authorized electronic money institution. Of most significance are: (a) the European Union (Payment Services) Regulations 2018, which implement PSD2, (b) the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010, as amended (CJA 2010), which implements 5 AMLD, (c) the European Banking Authority’s Outsourcing Guidelines and the Central Bank of Ireland (CBI) Cross-Industry Guidance on Outsourcing and (d) the CBI’s Cross-Industry Guidance on Operational Resilience. Any material failure by us to comply with these requirements could result with us incurring sanctions up to and including suspension or plan to operate. We marketrelinquishment of our products and services using the WEX brand name globally, as well as other brand names such as Fleet One, EFS, WEX Health Cloud and Discovery Benefitsauthorization.
United Kingdom
WEX’s operations in the U.S.,United Kingdom are also subject to applicable laws and Motorpassregulations governing payment services. Optal Financial Limited (“OFL”) is authorized as an electronic money institution under, and must comply with, the Electronic Money Regulations 2011 (“EMRs”) and the Payment Services Regulations 2017 (“PSRs”). It is supervised by the Financial Conduct Authority (“FCA”) and is subject to the FCAs “Principles for Business”. Among other obligations, the EMRs and PSRs require OFL to safeguard the relevant funds of its customers. A material failure to comply with these regulations could result with us incurring sanctions up to and including suspension or relinquishment of our applicable licenses.
In addition to the PSRs and the EMRs, OFL must also comply with the following anti-financial crime regulations: The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (as amended); and the Proceeds of Crime Act 2002 (as amended). Further, OFL must comply with the UK sanctions regime which imposes serious and extensive restrictions on dealing with designated persons or entities.
Other pertinent regulatory requirements applicable to OFL are the FCA’s expectations around outsourcing and operational resilience as set out in Australia. its Handbook and/or its Payments Services Approach Document.
RegulationSingapore
The CompanyIn Singapore, WEX Finance Inc. and its affiliatesOptal Singapore Pte Ltd are licensed to carry on the business of issuing credit cards and/or charge cards and must comply with the Banking Act 1970 and the applicable sections of the Payment Services Act 2019 (“PSA”). These entities are supervised by the MAS. Among other obligations, the PSA requires the entities to safeguard the relevant funds of their customers.
Australia
eNett International (Singapore) Pte Ltd holds an Australian Financial Services License (“AFSL”) granted by the Australian Securities and Investments Commission, which authorizes it to provide a non-cash payment facility to wholesale customers. Optal Australia Pty Ltd holds an intermediary authorization under eNett International (Singapore) Pte. Ltd’s AFSL. Any material failure by us to comply with the rules and regulations to which AFSL holders are subject could result with us incurring sanctions up to and including suspension or relinquishment of our license. WEX entities providing payment services to Australian customers must also comply with the Payment Systems (Regulation) Act 1998.
WEX Australia Pty Ltd, WEX Fuel Cards Australia Ltd and WEX Prepaid Cards Australia pty Ltd operate within a framework of regulatory relief and exemptions afforded them on the basis that they satisfy the requisite conditions.
Third Party Administration Licensing Regulations
We are subject to a substantial number ofvarious U.S. laws and regulations bothgoverning third party administration of employee benefit plans. In the U.S., most states license third party administrators. Many states exercise authority over the operations of our services related to third party administration of employee benefit plans and, as part of this authority, may subject us to periodic examinations, which may include a review of our policies and procedures, financial position and related records, and other matters related to our business. Following these periodic examinations, state agencies can issue us findings and recommendations, prompting us to make changes to our operations and procedures.
As a licensee, we are subject to certain restrictions and requirements, which vary by state, including surety bond requirements and record keeping and reporting requirements.
Escheatment Laws
We are subject to unclaimed or abandoned property state laws in the United States and otherin certain foreign jurisdictions, which applycountries that require us to businesses offering financial technology servicestransfer to certain government authorities the unclaimed property of others that we hold when that property has been unclaimed for a certain period of time. Moreover, we are subject to audit by state and payment cards to customers or processing or servicing for payment cards and related accounts. In addition, a substantial number of laws and regulations govern insured depository institutions and their affiliates, such as WEX Bank, and our operations in the healthcare market.
The laws and regulations that apply to the Company and its affiliates are often evolving and sometimes ambiguous or inconsistent, and the extent to which they apply to us is at times unclear. Failure to complyforeign regulatory authorities with regulations may result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of services, and/or the imposition of civil and criminal penalties, including fines. The following, while not exhaustive, is a description of certain federal and state laws and regulations in the United States, as well as foreign laws and regulations, that are applicableregard to our business, and therefore can materially affect our capital expenditures, earnings, and competitive position. In addition, the legal and regulatory framework governing our businessescheatment practices.
Restrictions on Dividends
WEX Bank is subject to ongoing revision, and changes in that framework could have a significant effect on us.
Regulation - United States
Exemption from Certain Requirements of the Bank Holding Company Act
As an industrial bank organized under the laws of Utah that does not accept demand deposits that may be withdrawn by check or similar means, WEX Bank currently meets the criteria for exemption as an industrial bank from the definition of “bank” under the Bank Holding Company Act. As a result, the Company is generally, except as stated above, not subjectvarious regulatory requirements relating to the Bank Holding Company Act.
Restrictionspayment of dividends, including requirements to maintain capital above regulatory minimums. Further, a banking regulator may determine that the payment of dividends would be inappropriate and could impose other conditions on Intercompany Borrowings and Transactions
Sections 23A and 23Bthe payment of the FRA and the implementing regulations limit the extent to which the Company can borrowdividends or otherwise obtain credit from or engage in other “covered transactions” with WEX Bank. “Covered transactions” include loans or extensions of credit, purchases of or investments in securities, purchases of assets, including assets subject to an agreement to repurchase, acceptance of securities as collateral for a loan or extension of credit, or the issuance of a
guarantee, acceptance, or letter of credit. Although the applicable rules do not serve as an outright ban on engaging in “covered transactions,” they do limit the amount of covered transactionseven prohibit their payment. Further, WEX Bank may have with any one affiliate and with all affiliates innot pay a dividend if it is undercapitalized or would become undercapitalized as a result of paying the aggregate. The applicable rules also require that the Company engage in such transactions withdividend. Utah law permits WEX Bank only on termsto pay dividends out of the net profits of the industrial bank after providing for all expenses, losses, interest, and under circumstances that are substantiallytaxes accrued or due, but if WEX Bank’s surplus account is less than 100 percent of its capital stock, WEX Bank must transfer up to 10 percent of its net profits to the same, or at least as favorablesurplus account prior to the payment of any dividends.
Company Obligations to WEX Bank as those prevailing at the time for comparable transactions with nonaffiliated companies. Furthermore, with certain exceptions, each loan or extension
Any non-deposit obligation of credit by WEX Bank to the Company or itsis subordinate, in right of payment, to deposits and other affiliates must be secured by collateral with a market value ranging from 100 percent to 130 percentindebtedness of WEX Bank. In the event of the amountCompany’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of WEX Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Restrictions on Ownership of WEX Inc. Common Stock
WEX Bank, and therefore the Company, is subject to banking regulations that impose requirements on entities that might control WEX Bank through control of the loanCompany. These requirements are discussed in Part I – Item 1A – Risk Factors – “Provisions in our charter documents, Delaware law and applicable banking laws may delay or extensionprevent our acquisition by a third party, and could adversely impact the market price of credit, depending onour common stock.”
Anti-Bribery Regulations
WEX is a global business and is required to comply with anti-bribery and corruption laws in the typejurisdictions it operates within, including but not limited to, the FCPA, UK Bribery Act 2010 (“UKBA”), the Canadian Criminal Code and Corruption of collateral.
The Dodd-FrankForeign Public Officials Act and the Consumer Financial Protection Bureau
Singapore Prevention of Corruption Act 1960. The Dodd-Frank Act createdFCPA prohibits the CFPBpayment of bribes to regulateforeign government officials and political figures and includes anti-bribery provisions enforced by the offeringDepartment of consumer financial productsJustice and accounting provisions enforced by the SEC. The statute has a broad reach, covering all U.S. companies and citizens doing business abroad, among others, and defining a foreign official to include not only those holding public office but also local citizens affiliated with foreign government-run or services under the federal consumer financial laws.-owned organizations. The CFPB assumed rulemaking authority under the existing federal consumer financial protection laws,statute also requires maintenance of appropriate books and enforces those laws againstrecords and examines certain non-depository institutions and insured depository institutions with total assets greater than $10 billion and their affiliates. In addition, the CFPB was granted general authoritymaintenance of adequate internal controls to prevent covered persons or service providers from committing or engaging in unfair, deceptive or abusive acts or practices under federal law in connection with any transaction withand detect possible FCPA violations.
Non-Bank Custodian Regulations
As a consumerU.S. Internal Revenue Service approved passive non-bank custodian for HSAs, WEX Inc. is subject to the provisions of Treasury Regulations Section 1.408-2(e) (the “Treasury Regulations”), including the net worth, surety bond, recordkeeping, audit, and administration of fiduciary duties requirements, among other requirements. The Internal Revenue Service exercises authority over WEX Inc.’s operations related to the non-bank custodian designation and, as part of this authority, subjects WEX Inc. to periodic examinations, which may include a consumer financial product or service, or the offering of a consumer financial product or service. The CFPB is also engaged in regulating the payments industry, including with respect to prepaid cards. The CFPB amended several aspectsreview of its prepaid accounts rule, which became effective on April 1, 2019. Amongoperational practices, policies and procedures, net worth and related records, and other things,matters related to such business. Following these periodic examinations, the rule established requirements for the treatment of funds on lost or stolen cards, error resolutionInternal Revenue Service can issue findings and investigation, upfront fee disclosures, accessrecommendations, prompting us to account information, and overdraft features if offered in conjunction with prepaid accounts. The extensive nature of these types of regulations and the implementation dates for any such additional rulemaking may result in additional compliance obligations and expense for our business and our customers. From an enforcement perspective, the legislation also gives the state attorneys general the ability to enforce applicable federal consumer protection laws, expanding the sources of regulatory oversight. Relatedly, the Utah DFI is responsible for examining and supervising WEX Bank's compliance with state consumer protection laws and regulations.
In addition, the Durbin Amendment to the Dodd-Frank Act provided that interchange fees that a card issuer or payment network receives or charges for debit transactions will now be regulated by the Federal Reserve and must be “reasonable and proportional” to the cost incurred by the card issuer in authorizing, clearing and settling the transaction. Payment network fees may not be used directly or indirectly to compensate card issuers in circumvention of the interchange transaction fee restrictions. In July 2011, the Federal Reserve published the final rules governing debit interchange fees. Effective in October 2011, with certain exemptions, debit interchange rates were capped at $0.21 per transaction with an additional component of five basis points of the transaction’s value to reflect a portion of the issuer’s fraud losses plus, for qualifying issuing financial institutions, an additional $0.01 per transaction in debit interchange for fraud prevention costs.
The Dodd-Frank Act also establishes federal oversight and regulation of the over-the-counter derivatives market and entities that participate in that market. Compliance with derivatives regulations have added costsmake changes to our business,operations and any additional requirements, such as future registration requirements or increased regulation of derivative contracts, may add additional costs or may require us to change any fuel price, currency and interest rate hedging practices we may then use to comply with new regulatory requirements. Potential changes could also include clearing and execution methodology of our derivatives transactions.procedures.
Brokered Deposits
AsSection 29 of December 31, 2020, the most recent FDIC exam report categorized WEX Bank as “well capitalized” under the regulatory framework for prompt corrective action. Under applicable regulations, however, if WEX Bank were to be no longer categorized as "well capitalized" under such framework, it would not be able to finance its operations throughFederal Deposit Insurance Act restricts the acceptance of brokered deposits withoutby an insured depository institution unless the approval of the FDIC. Moreover, in December 2020, the FDIC amendedinstitution is “well capitalized.” For insured depository institutions that are “less than well capitalized,” certain interest rate cap restrictions are imposed. See Part I – Item 1A – Risk Factors – “WEX Bank is subject to funding risks associated with its brokered deposits regulations, effective April 1, 2021, and may in the future change the definition of brokered deposits or extend the classification to deposits not currently classified asreliance on brokered deposits.”
Anti-Money Laundering, and Counter Terrorist and Sanctions Regulations
The applicable laws and regulations in the various jurisdictions in which we operate impose significant anti-money laundering compliance and due diligence obligations on itstheir local entities. We must verify the identity of customers, monitor and report unusual or suspicious account activity, as well as transactions involving amounts in excess of prescribed limits, and refrain from transacting with designated persons or in designated regions, in each case as required by the applicable laws and regulations (such as the Bank Secrecy Act and regulations of the United States Treasury Department and the Internal Revenue Service in the United States). Financial regulators have issued various implementing regulations and have made enforcement a high priority.
The U.S. federal government has imposed economic sanctions that affect transactions with designated foreign countries, foreign nationals and others. These sanctions, which are administered by the OFAC, take many different forms but generally include one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (for example, property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. We have implemented measures designed to ensure compliance with these sanctions and failure to comply with these sanctions could have serious legal and reputational consequences.
Privacy and Information Security Regulations
Under the Financial Services Modernization Act of 1999, also referred to as the Gramm-Leach-Bliley Act or GLBA, and certain state laws, we and WEX Bank are required to maintain a comprehensive written information security program that includes administrative, technical and physical safeguards relating to consumer information. This requirement generally does not extend to information about companies or about individuals who obtain financial products or services for business, commercial, or agricultural purposes.
The GLBA also requires us and WEX Bank to provide initial and annual privacy notices to customers that describe in general terms our information sharing practices. If we or WEX Bank intend to share nonpublic personal information about consumers with affiliates and/or nonaffiliated third parties, we and WEX Bank must provide customers with a notice and a reasonable period of time for each customer to “opt out” of any such disclosure. In addition to U.S. federal privacy laws with which we must comply, states also have adopted statutes, regulations and other measures, such as the California Consumer Protection Act (CCPA), governing the collection and distribution of nonpublic personal information about customers. In some cases, these state measures are preempted by federal law, but if not, we and WEX Bank must monitor and seek to comply with individual state privacy laws in the conduct of our businesses.
FACT Act
The Fair and Accurate Credit Transactions Act of 2003 amended the Fair Credit Reporting Act and requires creditors to adopt identity theft prevention programs to detect, prevent and mitigate identity theft in connection with covered accounts, which can include business accounts for which there is a reasonably foreseeable risk of identity theft.
Truth in Lending Act
The Truth in Lending Act, or TILA, was enacted as a consumer protection measure to increase consumer awareness of the cost of credit and to protect consumers from unauthorized charges or billing errors, and is implemented by the Federal Reserve’s Regulation Z. Most provisions of TILA and Regulation Z apply only to the extension of consumer credit, but a limited number of provisions apply to commercial cards as well. One example where TILA and Regulation Z are generally applicable is a limitation on liability for unauthorized use, although a business that acquires 10 or more credit cards for its personnel can agree to more expansive liability.
Money Transmission and Payment Instrument Licensing Regulations
We are subject to various U.S. laws and regulations, governing money transmission and the issuance and sale of payment instruments relating to certain aspects of our business. In the United States, most states license money transmitters and issuers of payment instruments. Through our subsidiaries, we are licensed in all states where required for business. Many states exercise authority over the operations of our services related to money transmission and payment instruments and, as part of this authority, subject us to periodic examinations, which may include a review of our compliance practices, policies and procedures, financial position and related records, privacy and data security policies and procedures, and other matters related to our business.
As a licensee, we are subject to certain restrictions and requirements, including net worth and surety bond requirements, record keeping and reporting requirements, requirements for regulatory approval of controlling stockholders or direct and indirect changes of control of the licensee and certain other corporate events, and requirements to maintain certain levels of permissible investments in an amount equal to our outstanding payment obligations. Many states also require money transmitters and issuers of payment instruments to comply with federal and state anti-money laundering laws and regulations.
In addition, non-banks that provide certain financial services are required to register with FinCEN as “money services businesses” (“MSBs”). Through a subsidiary we are registered as a MSB. As a result, we have established anti-money laundering compliance programs that include: (i) internal policies and controls; (ii) designation of a compliance officer; (iii)
ongoing employee training; and (iv) an independent review function. We have developed and implemented compliance programs comprised of policies, procedures, systems and internal controls to monitor and address various legal requirements and developments.
Government agencies may impose new or additional requirements on money transmission and sales of payment instruments, and we expect that compliance costs will increase in the future for our regulated subsidiaries.
Escheat Laws
We are subject to unclaimed or abandoned property state laws in the United States and in certain foreign countries that require us to transfer to certain government authorities the unclaimed property of others that we hold when that property has been unclaimed for a certain period of time. Moreover, we are subject to audit by state and foreign regulatory authorities with regard to our escheatment practices.
Restrictions on Dividends
WEX Bank is subject to various regulatory requirementsinternational laws and regulations aimed at combating money-laundering and terrorism, including:
•in Canada, Freezing Assets of Corrupt Foreign Officials Act, Justice for Victims of Corrupt Foreign Officials Act, Listed Terrorist Entities under the Criminal Code, Special Economic Measures Act, United Nations Act and their respective regulations;
•in the EU, the Fourth and Fifth Anti-Money Laundering Directives (2015/849/EU) and (2018/843/EU), and the EU’s economic sanctions regime;
•in the UK, Proceeds of Crime Act 2002 (as amended), Terrorism Act 2000 (as amended by the Anti-terrorism, Crime and Security Act 2001), Money Laundering Regulations 2017 (as amended), Counter-terrorism Act 2008, Schedule 7, Financial Sanctions - HM Treasury Sanctions Notices and News Releases;
•in Australia, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, the Anti-Money Laundering and Counter-Terrorism Financing Rules, Autonomous Sanctions Act 2011, the Australian Autonomous Sanctions Regulations 2011, the Charter of the United Nations Act 1945 (the United Nations Act) and its sets of regulations; and
•in Singapore, the Corruption, Drug Trafficking and other Serious Crimes (Confiscation of Benefits) Act 1992, the Terrorism (Suppression of Financing) Act 2002 and various Monetary Authority of Singapore (“MAS”) regulations, notices, guidelines and guidance relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. A banking regulator may determine that the payment of dividends would be inappropriatesanctions and could prohibit payment. Further, WEX Bank may not pay a dividend if it is undercapitalized or would become undercapitalized as a result of paying the dividend. Utah law permits WEX Bank to pay dividends out of the net profits of the industrial bank after providing for all expenses, losses, interest, and taxes accrued or due, but if WEX Bank’s surplus account is less than 100 percent of its capital stock, WEX Bank must transfer up to 10 percent of its net profits to the surplus account prior to the payment of any dividends.
Company Obligations to WEX Bankanti-money laundering.
Any non-deposit obligation of WEX Bank to the Company is subordinate, in right of payment, to deposits and other indebtedness of WEX Bank. In the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of WEX Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Restrictions on Ownership of WEX Inc. Common Stock
WEX Bank, and therefore the Company, is subject to banking regulations that impose requirements on entities that might control WEX Bank through control of the Company. These requirements are discussed in Item 1A under the heading “Provisions in our charter documents, Delaware law, applicable banking law and the Convertible Notes may delay or prevent our acquisition by a third party.”
Healthcare Regulation
The federal and state governments in the U.S. continue to enact and consider many broad-based legislative and regulatory proposals that could materially impact various aspects of our health-relatedbenefits-related business. The plans that our partners and clients administer feature consumerconsumer-directed accounts that pay for out-of-pocket expenses incurred by employees and qualified dependents. These accounts include CDH accounts such as HSAs, FSAs and HRAs, as well as wellness incentives, commuter benefits, and other account-based arrangements. Most of these accounts are tax-advantaged under the appropriate law.
Employers are continuing to use CDH approaches to manage the rate of increase in healthcare expenditures and to enable employees to make decisions about the use of their healthcare savings. CDH programs provide consumers with visibility into and control over payment for healthcare expenses.
The products that WEX Health’s software and payment solutions support are subject to various state and federal laws, including the Patient Protection and Affordable Care Act (the “ACA”) and the Health Care and Education Reconciliation Act (collectively referred to as “Health Care Reform”), and regulations promulgated by the Internal Revenue Service, the Department of Health and Human Services, the Department of Labor, and the Consumer Financial Protection Bureau, and similar state laws and regulatory authorities. As such, changes in the status of tax-advantaged CDH accounts could affect the attractiveness of these products.
In addition to tax-related regulation, the Health Care Reform law imposes coverage standards affecting insured and self-insured health benefit plans that impact our current business model, including our relationships with current and future customers, producers and health care providers, products, services, processes and technology. Health Care Reform left many details to be established through regulations. The 2017 Tax Act repealed certain provisions of Health Care Reform, including reducing to zero the tax penalty for individuals who decline to obtain Health Care Reform-compliant healthcare coverage. Since
Privacy and Information Security Regulations the enactment of Health Care Reform, there has been persistent political pressure to significantly modify or completely repeal Health Care Reform and the associated implementing regulations, while the incoming Biden Administration has committed to pursuing significant expansion of the Health Care Reform and is likely to reverse actions taken by the previous U.S. Administration to reduce enrollment and coverage requirements under Health Care Reform. There have been judicial and Congressional challenges to certain aspects of Health Care Reform, and we expect there will be additional challenges and amendments to the ACA in the future. In addition, portions of Health Care Reform were ruled unconstitutional by a federal appeals court in 2019. This ruling is under review by the United States Supreme Court, which is expected to rule on the validity of Health Care Reform during the Court term that ends in June 2021. It is unclear what, if any, additional legislative or regulatory actions may be taken in this regard. Accordingly, there may be an extended period of uncertainty and unpredictability in the U.S. health care market, which may materially affect the availability and cost of health coverage, the viability of health care providers and health benefit plans, the proportion of persons in the U.S. who have health insurance; the distribution between privately funded and government funded health insurance; and the future demand for, and profitability of, the offerings of our health-related business under our current business model.
In connection with the processing of data, we frequently undertake or are subject to specific compliance obligations under privacy and data security-related laws.
Under the Financial Services Modernization Act of 1999, also referred to as the Gramm-Leach-Bliley Act (“GLBA”), and certain state laws, WEX Bank is required to maintain a comprehensive written information security program that includes administrative, technical and physical safeguards relating to consumer information. This requirement generally does not extend to information about companies or about individuals who obtain financial products or services for business, commercial, or agricultural purposes. In October 2021, the FTC updated the GLBA Safeguards Rule to specify new safeguards that financial institutions must include in their information security programs, such as setting limits on who can access consumer data, requiring encryption to secure data, and requiring financial institutions to designate a single qualified individual to oversee their information security program and to report periodically to the entity’s board of directors or a senior officer in charge of information security.
The GLBA also requires WEX Bank to provide initial and annual privacy notices to customers that describe our information sharing practices. If WEX Bank intends to share nonpublic personal information about consumers with affiliates and/or nonaffiliated third parties, WEX Bank must provide customers with a notice and a reasonable period of time for each customer to “opt out” of any such disclosure. The GLBA also regulates certain activities of WEX Inc., with respect to privacy and information security practices.
In addition to federal privacy laws with which we must comply, states also have adopted statutes, regulations and other measures, such as: (i) the California Consumer Protection Act, as amended by the California Privacy Rights Act, effective January 1, 2023 (together, the “CCPA”); (ii) the Virginia Consumer Data Protection Act, effective January 1, 2023; (iii) the Colorado Privacy Act, effective July 1, 2023, (iv) the Connecticut Data Privacy Act, effective July 1, 2023; and (v) the Utah Consumer Privacy Act, effective December 31, 2023. Several other states have also adopted their own comprehensive privacy laws. Privacy laws in Delaware, Florida, Iowa, Montana, Oregon and Texas are set to be effective by the end of 2024, and other states have passed similar laws that will become effective in 2024 and 2025. In some cases, data regulated by federal law (e.g., HIPAA and HITECH or the GLBA) is carved out of the scope of these state laws. With respect to all other data, WEX and WEX Bank must monitor and seek to comply with individual state privacy laws in the conduct of our businesses.
A final rule issued by U.S. federal banking regulators including the Office of the Comptroller of the Currency, Treasury, the Board of the Governors of the Federal Reserve Board and the FDIC in April 2022 requires banking organizations to notify their primary federal regulators of any “computer-security incident” that rises to the level of a “notification incident,” as soon as possible but no later than 36 hours after the banking organization determines that the incident has occurred.
WEX and WEX Bank are also subject to certain international privacy and data protection laws. For example, in Europe and the United Kingdom, the General Data Protection Regulation (“GDPR”) and the UK GDPR applies to all companies processing data of EU/UK residents, regardless of the company’s location. The GDPR and the UK GDPR impose stringent privacy protections and provide EU and UK residents with extensive rights in their personal data (such as rights to delete, obtain access to, and correct their personal data) and requires the establishment of certain legitimate bases for collecting, using, and disclosing personal data. Additionally, we are subject to other international and data protection laws in certain jurisdictions, including:
•in Canada, the Personal Information Protection and Electronic Documents Act and provincial-level private sector privacy legislation enacted in Alberta, British Columbia, and Québec;
•in Australia, the Privacy Act (1988) and the Australian Privacy Principles; and
•in Singapore, the Personal Data Protection Act 2012.
With respect to our healthcare services only, we have certain obligations under the Health Insurance Portability and Accountability Act of 1996 or HIPAA, GLBA, and similar state and federal laws governing the collection, use, protection and disclosure of nonpublic personally identifiable information, including individually identifiable health information.
HIPAA(“HIPAA”) and its implementing regulations, as amended by the Health Information Technology for Economic and Clinical Health Act or the(“HITECH”). HIPAA and HITECH Act, impose requirements relating to the privacy, security and transmission of individually identifiableprotected health information. Among other things, HIPAA, as amended by the HITECH Act, and its implementing regulations, subjects us to regulations and contractual obligations that impose privacy and security standards andinformation, including breach notification and reporting requirements. An amendment to the HITECH Act enacted in January 2021 will requirealso requires consideration of a company’s implementation of recognized security standards in assessing administrative fines and penalties under the HIPAA security standards.
In additionEmail and Text Marketing Laws
We use direct email marketing and text-messaging to tax, federal data privacy, securityreach out to current or potential customers and therefore are subject to various statutes, regulations, and rulings, including the Telephone Consumer Protection Act, the Controlling the Assault of Non-Solicited Pornography and Marketing Act and related Federal Communication Commission orders as well as similar international legislation such as Canada’s Anti-Spam Legislation, which regulates the sending of commercial electronic messages. Several states have enacted additional, more restrictive and punitive laws regulating commercial email. Violations of these laws could result in enforcement actions, statutory fines and penalties, and class action litigation.
FACT Act
The Fair and Accurate Credit Transactions Act of 2003 amended the Fair Credit Reporting Act and requires creditors to adopt identity theft prevention programs to detect, prevent and mitigate identity theft in connection with covered accounts, which can include business accounts for which there is a reasonably foreseeable risk of identity theft.
Truth in Lending Act
The Truth in Lending Act, or TILA, was enacted as a consumer protection measure to increase consumer awareness of the cost of credit and to protect consumers from unauthorized charges or billing errors, and is implemented by the CFPB’s Regulation Z. Most provisions of TILA and Regulation Z apply only to the extension of consumer credit, but a limited number of provisions apply to commercial cards as well. For example, the limitation on liability for unauthorized use applies to business cards, although a business that acquires 10 or more credit cards for its personnel can agree by contract to more expansive liability.
Money Transmission and Payment Instrument Licensing Regulations
United States
We are subject to various U.S. laws and regulations governing money transmission and the issuance and sale of payment instruments relating to certain aspects of our business. In the United States, most states license money transmitters and issuers of payment instruments. Through our subsidiaries, we are licensed in all states where required for business. Many states exercise authority over the operations of our services related to money transmission and payment instruments and, as part of this authority, subject us to periodic examinations, which may include a review of our compliance practices, policies and procedures, financial position and related records, privacy and data security policies and procedures, and other matters related to our business. Following these periodic examinations, state agencies can issue us findings and recommendations, prompting us to make changes to our operations and procedures.
As a licensee, we are subject to certain restrictions and requirements, including net worth and surety bond requirements, record keeping and reporting requirements, requirements for regulatory approval of controlling stockholders or direct and indirect changes of control of the licensee and certain other corporate events, and requirements to maintain certain levels of permissible investments in an amount equal to our outstanding payment obligations. Many states also require money transmitters and issuers of payment instruments to comply with federal and state anti-money laundering laws and regulations.
In addition, non-banks that provide certain financial services are required to register with FinCEN as “money services businesses” (“MSBs”). The Company, through a subsidiary, is a registered MSB. As a result, we have established anti-money laundering compliance programs that include: (i) internal policies and controls; (ii) designation of a compliance
officer; (iii) ongoing employee training; and (iv) an independent review function. We have developed and implemented compliance programs comprised of policies, procedures, systems and internal controls to monitor and address various legal requirements and developments.
Government agencies may impose new or additional requirements on money transmission and sales of payment instruments, and we expect that compliance costs will increase in the future for our regulated subsidiaries.
European Union
The Company’s European operations are subject to laws and regulations governing payment services, including under the Payment Services Directive (EU 2015/2366 PSD2) and the Electronic Money Directive (2009/110/EC EMD2).
In addition to being subject to the regulations under the above directives, the Company is also subject to the local laws of the EU member state of Ireland in which we are an authorized electronic money institution.
Optal Financial Europe Limited (“OFEL”) is an Irish authorized electronic money institution, authorized under the European Communities (Electronic Money) Regulations 2011, as amended (which implements 2EMD). A pertinent requirement of such authorization is to safeguard customer funds against the firm’s insolvency. In addition, OFEL must be compliant with multiple other regulatory requirements in Ireland as part of being an authorized electronic money institution. Of most significance are: (a) the California Consumer PrivacyEuropean Union (Payment Services) Regulations 2018, which implement PSD2, (b) the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010, as amended (CJA 2010), which implements 5 AMLD, (c) the European Banking Authority’s Outsourcing Guidelines and the Central Bank of Ireland (CBI) Cross-Industry Guidance on Outsourcing and (d) the CBI’s Cross-Industry Guidance on Operational Resilience. Any material failure by us to comply with these requirements could result with us incurring sanctions up to and including suspension or relinquishment of our authorization.
United Kingdom
WEX’s operations in the United Kingdom are also subject to applicable laws and regulations governing confidentialitypayment services. Optal Financial Limited (“OFL”) is authorized as an electronic money institution under, and securitymust comply with, the Electronic Money Regulations 2011 (“EMRs”) and the Payment Services Regulations 2017 (“PSRs”). It is supervised by the Financial Conduct Authority (“FCA”) and is subject to the FCAs “Principles for Business”. Among other obligations, the EMRs and PSRs require OFL to safeguard the relevant funds of personally identifiable informationits customers. A material failure to comply with these regulations could result with us incurring sanctions up to and additional state-imposed breach notificationincluding suspension or relinquishment of our applicable licenses.
In addition to the PSRs and the EMRs, OFL must also comply with the following anti-financial crime regulations: The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (as amended); and the Proceeds of Crime Act 2002 (as amended). Further, OFL must comply with the UK sanctions regime which imposes serious and extensive restrictions on dealing with designated persons or entities.
Other pertinent regulatory requirements applicable to OFL are the FCA’s expectations around outsourcing and operational resilience as set out in its Handbook and/or its Payments Services Approach Document.
Singapore
In Singapore, WEX Finance Inc. and Optal Singapore Pte Ltd are licensed to carry on the business of issuing credit cards and/or charge cards and must comply with the Banking Act 1970 and the applicable sections of the Payment Services Act 2019 (“PSA”). These entities are supervised by the MAS. Among other obligations, the PSA requires the entities to safeguard the relevant funds of their customers.
Australia
eNett International (Singapore) Pte Ltd holds an Australian Financial Services License (“AFSL”) granted by the Australian Securities and Investments Commission, which authorizes it to provide a non-cash payment facility to wholesale customers. Optal Australia Pty Ltd holds an intermediary authorization under eNett International (Singapore) Pte. Ltd’s AFSL. Any material failure by us to comply with the rules and regulations to which AFSL holders are subject could result with us incurring sanctions up to and including suspension or relinquishment of our license. WEX entities providing payment services to Australian customers must also comply with the Payment Systems (Regulation) Act 1998.
WEX Australia Pty Ltd, WEX Fuel Cards Australia Ltd and WEX Prepaid Cards Australia pty Ltd operate within a framework of regulatory relief and exemptions afforded them on the basis that they satisfy the requisite conditions.
Third Party Administration Licensing Regulations
We are subject to various U.S. laws and regulations governing third party administration of employee benefit plans. In the U.S., most states license third party administrators. Many states exercise authority over the operations of our services related to third party administration of employee benefit plans and, as part of this authority, may subject us to periodic examinations, which may include a review of our policies and procedures, financial position and related records, and other matters related to our business. Following these periodic examinations, state agencies can issue us findings and recommendations, prompting us to make changes to our operations and procedures.
As a licensee, we are subject to certain restrictions and requirements, which vary by state, including surety bond requirements and record keeping and reporting requirements.
Escheatment Laws
We are subject to unclaimed or abandoned property state laws in the United States and in certain foreign countries that require us to transfer to certain government authorities the unclaimed property of others that we hold when that property has been unclaimed for a certain period of time. Moreover, we are subject to audit by state and foreign regulatory authorities with regard to our escheatment practices.
Restrictions on Dividends
WEX Bank is subject to various regulatory requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. Further, a banking regulator may determine that the payment of dividends would be inappropriate and could impose other conditions on the payment of dividends or even prohibit their payment. Further, WEX Bank may not pay a dividend if it is undercapitalized or would become undercapitalized as a result of paying the dividend. Utah law permits WEX Bank to pay dividends out of the net profits of the industrial bank after providing for all expenses, losses, interest, and taxes accrued or due, but if WEX Bank’s surplus account is less than 100 percent of its capital stock, WEX Bank must transfer up to 10 percent of its net profits to the surplus account prior to the payment of any dividends.
Company Obligations to WEX Bank
Any non-deposit obligation of WEX Bank to the Company is subordinate, in right of payment, to deposits and other indebtedness of WEX Bank. In the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of WEX Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Restrictions on Ownership of WEX Inc. Common Stock
WEX Bank, and therefore the Company, is subject to banking regulations that impose requirements on entities that might control WEX Bank through control of the Company. These requirements are discussed in Part I – Item 1A – Risk Factors – “Provisions in our charter documents, Delaware law and applicable banking laws may delay or prevent our acquisition by a third party, and could adversely impact the market price of our common stock.”
Anti-Bribery Regulations
WEX is a global business and is required to comply with anti-bribery and corruption laws in the jurisdictions it operates within, including but not limited to, the FCPA, UK Bribery Act 2010 (“UKBA”), the Canadian Criminal Code and Corruption of Foreign Public Officials Act and the Singapore Prevention of Corruption Act 1960. The FCPA prohibits the payment of bribes to foreign government officials and political figures and includes anti-bribery provisions enforced by the Department of Justice and accounting provisions enforced by the SEC. The statute has a broad reach, covering all U.S. companies and citizens doing business abroad, among others, and defining a foreign official to include not only those holding public office but also local citizens affiliated with foreign government-run or -owned organizations. The statute also requires maintenance of appropriate books and records and maintenance of adequate internal controls to prevent and detect possible FCPA violations.
Regulation - Foreign Jurisdictions
The Company’s Australian operations are subject to laws and regulations of the Commonwealth of Australia governing banking and payment systems, financial services, credit products and money laundering. Because none ofNon-Bank Custodian Regulations
As a U.S. Internal Revenue Service approved passive non-bank custodian for HSAs, WEX Australia, WEX Fuel Cards Australia or WEX Prepaid Cards Australia holds an Australian Financial Services License or credit license orInc. is an authorized deposit-taking institution, they operate within a framework of regulatory relief and exemptions afforded them on the basis that they satisfy the requisite conditions. The Company’s Australian operations are also subject to the Privacy Act (1988)provisions of Treasury Regulations Section 1.408-2(e) (the “Treasury Regulations”), including the net worth, surety bond, recordkeeping, audit, and administration of fiduciary duties requirements, among other requirements. The Internal Revenue Service exercises authority over WEX Inc.’s operations related to the non-bank custodian designation and, as part of this authority, subjects WEX Inc. to periodic examinations, which may include a review of its operational practices, policies and procedures, net worth and related records, and other matters related to such business. Following these periodic examinations, the Internal Revenue Service can issue findings and recommendations, prompting us to make changes to our operations and procedures.
Human Capital
Talent Strategy
Culture and engagement are of utmost importance to our business. We foster a collaborative and supportive culture based on our core values:
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| Community | Execution | Innovation | Integrity | Relationships |
Our employees, their well-being, and the Australian Privacy Principles.culture in which they operate are core to our success as an organization and as an operating business. As of December 31, 2023, we had a substantial workforce of approximately 7,200 full time employees, of which approximately 5,500 were located in the United States. The remainder were located across fifteen countries. We believe that achieving our growth goals and maintaining our position as a leading global commerce platform requires a strategy focused on attracting, developing, and retaining exceptional talent. The satisfaction, development, and well-being of our people will always be among our top priorities.
Asia,We promote employee career growth and development through comprehensive training programs, tools, and education, including Singaporeonline self-service learning platforms, professional development programs, leadership and mentoring programs, incentives to foster community and engagement, dedicated well-being campaigns, and personal financial counseling. Through these programs, we strive to foster improved individual and business performance and employee engagement, satisfaction, and fulfillment. In addition, our global recognition program allows employees to nominate each other for recognition. These acknowledgments are then incorporated into our annual performance management process, which factors into an employee’s annual total compensation package (or “Total Rewards”). WEX’s Total Rewards program includes salary, paid time off, 401(k) employer match, eligibility for cash short term incentive payments and long term incentive equity awards, as well as health and wellness, conception, career, social, community, and overall well-being benefits.
The Company’s operations in AsiaOur talent strategy includes a focus on retention and we regularly monitor employee turnover and engagement to identify opportunities to strengthen our approach to human capital management. During 2023, our global voluntary turnover rate was approximately 10 percent, while our voluntary turnover among global employees who generally have managerial responsibilities (“leadership roles”) was approximately 6 percent. We care deeply about employee engagement and satisfaction and capture employee feedback through an annual employee survey and pulse surveys throughout the year, which measure cultural and engagement indicators. We utilize the survey results to guide our decisions throughout the organization.
We are subjectdedicated to cultivating a diverse, equitable and inclusive business culture. This culture is essential to creating value for our stakeholders, including driving the operationdevelopment of the lawsinnovative solutions our customers depend on. We embrace our employees’ unique experiences and regulation of the countries inbackgrounds and their cultural influences and identities, which we operate, including laws with regardsenables a fully engaged and thriving workplace to banking and payment systems, financial services, money laundering and data protection.drive our business forward.
Europe and the United Kingdom The Company’s European and United Kingdom operations are subject to laws and regulations of the European Union and United Kingdom and the countries in which we operate including, among others, those governing payment services, data protection, including General Data Protection Regulation (commonly referred to as “GDPR”), anti-money laundering and
counter terrorist regulations, including the Money LaunderingDecember 31, 2023, employees identifying as female represented approximately 53 percent of our total global workforce, 55 percent of our executive officers and Terrorist Financing Regulations 201942 percent of our board of directors while people of color represented approximately 23 percent of our workforce in the UKU.S., 20 percent of our U.S. executive officers and 17 percent of our board of directors. During 2023, our global female representation in leadership roles was approximately 45 percent and U.S. employees of color representation in leadership roles was approximately 14 percent.
We execute on our Diversity, Equity, and Inclusion business aspirations with an intention of achieving gender parity in leadership roles and increasing U.S. employees of color in leadership roles, to be more representative of national demographics and the Actcustomers and partners we serve. As further shown by our publishing of DEI, ESG, and other reports, WEX is committed to creating a global talent base that is representative of our communities, partners, and customers, and to cultivating a diverse and inclusive environment where all employees can thrive.
2023 Gender Diversity
Total global workforce
Executive Officers
Board of Directors
Global representation in leadership roles
Health, Safety, and Wellness
We aim to promote and facilitate a holistic well-being continuum of care for our employees, which goes beyond just physical, emotional, and behavioral safety, in order to ensure their well-being is at the forefront. WEX continues to model the learnings from the COVID-19 pandemic and remains mindful of the unique challenges it created for our workforce. As a result, we continue to champion flexible working for our workforce, as our employee surveys indicate an appreciation for the flexibility of being able to work remotely. Whether our employees are working in office or at home, our primary objective remains the same - to support a healthy and safe environment for our employees. We support their holistic health and overall safety by providing a wide range of resources and tools, including, but not be limited to, wealth management services, virtual ergonomic assessments, on Financial Supervision in the Netherlands,demand fitness classes, access to a mindfulness app, telehealth services, time off options, and information security,a family concierge along with mental, behavioral and consumer credit.emotional support for our employees and their immediate family members.
Available Information
The Company’s principal executive offices are located at 1 Hancock St, Portland, ME 04101. Our telephone number is (207) 773-8171, and our Internet address is www.wexinc.com. | | | | | | | | | | | | | | | | | | | | |
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Location The Company’s principal executive offices are located at 1 Hancock St., Portland, ME 04101. | | | Telephone Number (207) 773-8171 | | | Internet www.wexinc.com |
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The Company’s annual, quarterly and current reports, proxy statements and certain other information filed with the SEC, as well as amendments thereto, may be obtained free of charge from our website. These documents are posted to our website as soon as reasonably practicable after we have filed or furnished these documents with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.www.sec.gov. The Company’s Audit Committee Charter, Leadership Development and Compensation Committee Charter, Finance Committee Charter, Corporate Governance Committee Charter, Technology and Cybersecurity Committee Charter, Corporate Governance Guidelines and Code of Business Conduct and Ethics are available without charge through the “Corporate Governance”“Governance” portion of the Investor Relations page of the Company’s
website. Copies will also be provided, free of charge, to any stockholder upon written request to Investor Relations at the address above or by telephone at (866) 230-1633.
The Company’s Internet site and the information contained on it or accessible through it are not incorporated into this Annual Report on Form 10–10–K and should not be considered part of this report.
ITEM 1A. RISK FACTORS
The risks and uncertainties described below are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of those risks actually occurs, our business, financial condition, results of operations and cash flows could suffer. The risks and uncertainties discussed below also include forward-looking statements and our actual results may differ materially from those discussed in these forward-looking statements.
Risk Factor Summary
Investment in our securities involves risk. Below is a summary of what we believe to be the principal risks facing our business. You should carefully review and consider this summary along with the risks described more fully in this Item 1A, “Risk Factors” of Part I of this Annual Report and other information included in this Annual Report. The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations.
If any of the following risks occurs, our business, financial condition, and results of operations and future growth prospects could be materially and adversely affected, and the actual outcomes of matters as to which forward-looking statements are made in this report could be materially different from those anticipated in such forward-looking statements.
Our Business and Industry
•A reduction in the demand for or supply of gasoline and/or diesel fuel, and/or volatility in such fuel prices, could have a material adverse effect on our business, financial condition, and operating results.
•A decline in general economic conditions, and in particular, a decline in demand for fuel, travel related services or health care services could significantly affect our business, operating results, and financial condition.
•We process transactions through the Mastercard and Visa networks through the financial services of WEX issuers and other third party licensed institutions. If any of these licensed institutions stop or are unable to provide these services to us, we would need to find other appropriate institutions to provide such services.
•Unpredictable or catastrophic events may adversely affect our ability to conduct business.
•We have experienced and may in the future experience substantial credit and fraud losses and other adverse effects.
•Changes in or limits on interchange fees could decrease our revenue.
•Bank failures or other similar events could adversely affect our and our customers’ liquidity and financial performance.
•Increasing scrutiny and changing expectations from investors, customers and our employees with respect to our ESG practices may negatively affect our business, result in additional costs or expose us to new or additional risks.
•Our failure to adapt to technological and industry changes and effectively implement new technology and products could materially affect our competitive position and our business.
•We may not realize or sustain the expected benefits from our cost and organizational operational efficiencies initiatives.
•We operate in a highly competitive business environment.
•Our ability to attract, motivate, and retain qualified employees is critical to our success.
•We may not be able to successfully execute on acquisitions as part of our growth strategy.
•We are subject to risks associated with our strategic minority equity investments.
•We are exposed to risks associated with our operations outside of the U.S.
•Fluctuations in foreign currency exchange rates have affected and could continue to affect our financial results.
•As a non-bank custodian of HSA assets, WEX Inc.’s failure to adequately place and safeguard our custodial assets, or the failure of any of our depository partners, could have a material adverse effect on our business.
•We have incurred, and may incur in the future, impairment charges on goodwill or other intangible assets.
•The Company is, and may in the future become, involved in various claims, investigations, and legal proceedings.
•If we fail to adequately protect our IP, our competitive position could be impaired.
WEX Bank
•The loss or suspension of WEX Bank’s ILC, changes in applicable regulatory requirements, or an increase in the number or type of institutions eligible for an ILC could be disruptive to our operations, increase costs, and increase competition.
•WEX Bank is subject to extensive supervision and regulation that could restrict our activities and impose financial requirements or limitations on the conduct of our business and limit our ability to generate income.
•Conditions in the economy or other markets may have a negative impact on WEX Bank’s ability to attract deposits.
•WEX Bank’s cost of capital has increased and may continue to increase.
•WEX Bank is subject to funding risks associated with its reliance on brokered deposits.
•If WEX Bank fails to meet certain criteria, WEX Inc. may become subject to the Bank Holding Company Act.
•WEX Bank’s results may be affected by market fluctuations and significant changes in the value of financial instruments.
Our Indebtedness
•We currently have a substantial amount of indebtedness and may incur additional indebtedness, which could affect our flexibility in managing our business and could materially and adversely affect our ability to meet our obligations.
•Fluctuations in interest rates could materially affect the interest expense incurred under our Amended and Restated Credit Agreement and any other payments subject to variable interest rates.
•We may want or need to refinance a significant amount of indebtedness or otherwise require additional financings, but we cannot guarantee that we will be able to refinance or obtain additional financing on favorable terms or at all.
Regulation
•Existing and new laws and regulations and enforcement activities, could negatively impact our business, limit our expansion opportunities and significantly impact our results of operations and financial condition.
•Laws or regulations developed in one jurisdiction or for one product could result in new laws or regulations in other jurisdictions or for other products.
•Changes in our tax rates, the adoption of new legislation or exposure to additional tax liabilities could affect our results.
•As a non-bank custodian WEX Inc. is subject to regulation and noncompliance could render it unable to maintain its status.
•Evolution and expansion of our business may subject us to additional regulatory requirements and other risks, for which failure to comply or adapt could harm our operating results.
•Our increased presence in foreign jurisdictions increases the possibility of foreign law violations.
Our Dependence on Technology
•We regularly experience cyberattacks and expect they will continue in the future and we may not be able to adequately protect our information systems.
•We are subject to privacy and data protection regulations, and compliance with these regulations could impose significant burdens. Failure to comply could have a negative impact on our business.
•If the technologies we use are unavailable, or do not operate to expectations, or we fail to successfully implement technology, our business and results of operations could be adversely impacted.
•Our business is dependent on electronic communications networks managed by third parties.
•We use AI in our business, and challenges with properly managing its use could result in harm.
Ownership of Our Common Stock
•The failure to maintain effective systems of internal control over financial reporting and disclosure controls and procedures could result in the inability to accurately report our financial results.
•Provisions in our charter documents, Delaware law and applicable banking law may delay or prevent our acquisition by a third party, and could adversely impact the market price of our common stock.
Risks Relating to Our Business and Industry
Our operations, business, and financial condition have been and are expected to continue to be adversely affected by the COVID-19 pandemic.
In December 2019, a novel strain of coronavirus, known as COVID-19, was first reported and was subsequently declared a pandemic by the World Health Organization in March 2020. The spread and continued outbreak of the COVID-19 pandemic has significantly increased economic uncertainty while reducing economic activity. The pandemic has resulted in transformational change in business and consumer behavior, as well as the implementation by authorities around the world of numerous measures aimed at containing the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and business shutdowns, among others, while some markets have also implemented multi-step policies with the goal of resuming activities that are or have previously been restricted. The effects of the pandemic, along with the measures implemented to combat the pandemic, will continue to change and evolve as the pandemic changes and evolves. The regions in which we operate are continuously in varying stages of dealing with, and suffering impacts from, the COVID-19 pandemic. Certain jurisdictions have experienced recoveries from the various stages of the pandemic, only to then face a resurgence or increase in new COVID-19 cases. New variants of the virus that causes COVID-19 have recently been discovered. These events have not only negatively impacted business and consumer spending habits, they have also impacted and may further impact our workforce and operations and the operations of our customers, suppliers and business partners.
In particular, we expect that we will continue to experience impacts on our business and results of operations due to a number of factors, including, but not limited to:
•The effect of COVID-19 on worldwide economic and financial market conditions, including conditions in the regions in which we operate.
•The negative impact of COVID-19 on the demand for worldwide travel 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.
•Volatility in the demand for, and the price of, fuel, caused by declines in demand as a result of the impact of COVID-19, economic conditions, and geopolitical pressures affecting supply, which impact our operating results and may continue to do so if such trends continue.
•Losses arising from customer, partner and merchant failures, and credit settlement risks.
•Increased exposure to industries substantially affected by the COVID-19 pandemic, including as a result of acquisitions such as our December 2020 acquisition of eNett and Optal.
•The modification of our business practices (including restricting employee travel, social distancing and remote working plans for our employees, and the cancellation of physical participation in meetings, events and conferences).
These and other factors may remain prevalent for a significant and unknown period of time and may continue to materially affect our business, results of operations and financial condition even after the COVID-19 pandemic has subsided. There are no comparable recent events that provide guidance as to the ultimate and total impact of the COVID-19 global pandemic, and therefore the ultimate effects are highly uncertain and subject to change. The extent to which the COVID-19 pandemic will continue to impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the pandemic, its continued severity, whether resultant changes in business and consumer behavior continue for extended periods of time, the success of the actions to contain the virus or treat its impact, the emergence and effect of new virus variants, and how quickly and to what extent normal economic and operating conditions can resume.
In addition, failure by the relevant governments to enact or implement adequate or necessary stimulus packages could exacerbate the effect of COVID-19 on us, particularly the credit risks listed above. Increased volatility or significant disruption of global financial markets due in part to COVID-19 could have a negative impact on our ability to access capital markets and other funding sources on acceptable terms or at all and impede our ability to comply with debt covenants. Even after the COVID-19 pandemic has subsided, we may continue to experience impacts to our business as a result of the virus’s global economic impact and its potential effect on the ways people and businesses conduct themselves, including the availability of credit, impacts on our liquidity, continued governmental restrictions, continued reduced demand for worldwide travel, and continued volatility in fuel demand and prices.
The foregoing and other continued effects on our business as a result of the COVID-19 pandemic could result in a material adverse effect on our business, results of operations, financial condition, cash flows and our ability to service our indebtedness and could heighten the risks in certain of the other risk factors described herein.
A significant portion of our revenuesrevenue is related togenerated by the dollar amountpurchase and sale of gasoline and diesel fuel purchased by or through our customers and from our fuel retailer partners, and, as a result, a reduction in the demand for or supply of gasoline and/or diesel fuel and other vehicle products and services and/or volatility in such fuel prices could have a material adverse effect on our revenuesbusiness, financial condition, and financial condition.operating results.
Our Fleet SolutionsMobility segment is our largest segment by total revenue and our customers and fuel retailer partners in this segment primarily purchase or sell gasoline or diesel fuel. Accordingly, a significant partsubstantial amount of our overallCompany’s total revenue is derived fromgenerated through the purchase and/or sale of fuel, purchases, making us dependent onour revenues in this segment subject to the demand for and supply of fuel prices, which areand historically prone to volatility. As of December 31, 2020, management estimates that approximately 20 percentvolatile fuel prices.
A substantial portion of our Mobility segment total segment revenues, particularly in our North American Fleet business, result from fees paid to us by fuel providers based on a negotiated percentage of the purchase price of fuel purchased by our customers. We estimate that during 2021, each one cent decline in average domesticcurrently do not utilize fuel prices below average actual prices would result in a $1.5 million decline in 2021 revenue. Wehedging derivatives, and therefore, these revenues are currently exposed to the full impact of fuel price declines and our net income is exposed to fuel price volatility. Therefore, extended declines in the price of fuel, as well as declines in the amount of fuel purchased by our customers or sold by our fuel retailer partners would have a material adverse effect on our total revenues and therefore our business, financial condition, and operating results.
Fuel prices are volatile andprice volatility is influenced by many factors, all of which are beyond our control. These factors include, but are not limited to:
•domestic and foreign supply and demand for oil and gas, and market expectations regarding such supply and demand;
•the demand for trucking and freight hauling services;
•investor speculation in commodities;
•actions by major oil exporting nations, including members of the Organization of Petroleum Exporting Countries, and the ability of the same to maintain oil price and production controls;
•level of domestic and foreign oil production;
•advances in oil production technologies;
•excess, or overbuiltalternatively, lack of adequate, infrastructure;
•politicalgeo-political conditions, in oil-producing, gas-producing or supply-route regions or countries, including revolution, insurgency, environmental activism, terrorism, or war;war, such as, the ongoing conflicts between Russia and Ukraine and Israel and Hamas;
•oil refinery capacity and utilization rates;
•weather, including climate change and natural disasters;
•the value of the U.S. dollar (or other relevant currencies) versus other major currencies;
•implementation of fuel efficiency standards and the adoption by fleet customers of vehicles with greater fuel efficiency or alternative fuel sources,unexpected events such as electricity, ethanol, biodiesel, hydrogen, and natural gas;global pandemics like the COVID-19 pandemic;
•general local, regional, or worldwide economic conditions;
•taxes and tariffs; and
•governmental regulations taxes and tariffs.legislation, including those pertaining to greenhouse gases (“GHG”) and fuel efficiency standards.
Some of these factors can vary by region and may change quickly, adding to market volatility, while others may have longer-term effects. The long-term effects of these and other factors on prices for fuel could be substantial. For example, although we cannot predict the duration or severity of impact, the ongoing conflicts in Europe and the Middle East, and the resulting sanctions and military actions have significantly impacted and will likely continue to impact volatility in worldwide fuel prices, and we cannot predict the ultimate impact of these conflicts on fuel prices.
Another component of ourOur revenue stream comes fromis also dependent, in part, on the late fees that our customers pay on past due balances. As a result, a decrease in the price of fuel may lead to a decline in the amount of late fees we earn from customers who fail to pay us timely.
Table Alternatively, an increase in the price of Contentsfuel could lead to higher amounts of receivables or payables we fund, thereby increasing the risk of, and our exposure to, a failure to pay by our counterparty, as well as an increase in the amount of fraudulent activity. See Part I – Item 1A – Risk Factors – "In addition to its impact on the price of fuel, the market demand for and supply of fuel and other vehicle products and services may affect the number of transactions or the volume of fuel sold. Fewer gallons sold equates to a lesser lower total
purchase price of fuel on which our negotiated percentage revenue is determined. Another of our revenue streams comes fromOur revenues, particularly in the over-the-road business, are also dependent, in part, on a flat fee derived from aeach fuel purchase transaction. Accordingly, in a soft fuel demand environment, which could be caused by a number of factors beyond our control, including higher prices, general local, regional, or worldwide economic conditions, public health crises, decreased demand for trucking and freight hauling services and governmental regulations and legislation, including those pertaining to GHG and fuel efficiency standards, fewer transactions will occur, resulting in less revenue to us. The factors that affect theCredit and other standards set by us can also limit demand for and supplythe purchase of fuel are beyondusing our control and include general local, regional, or worldwide economic conditions, the implementation of fuel efficiency standards, andproducts. In addition, there is a trend toward the development by vehicle manufacturers, and adoption by our fleetMobility customers and others, of vehicles with greater fuel efficiency or alternative fuel sources, such as electric, hydrogen, or natural gas powered vehicles, among other factors. Therefore, althoughincluding hybrid vehicles. The continued adoption of alternative fuel and hybrid vehicles by our customers or others, an increase in the speed at which such adoption occurs, or any material increase in the use of alternative fuel vehicles currently make up a small portion of vehicle sales, any substantial increase in their production or usage or their expansion to heavier duty vehiclesvehicle fleets, such as over-the-road trucks,truck fleets, would lead to less gasoline or diesel fuels being sold and affect our financial performance. This trend could have a material adverse effect on our financial performance if we are unable to develop products and introduce them to the market to replace any decrease in revenue caused by any resulting decrease in the sale of gasoline or diesel fuels. For further information on any trend toward alternative fuel and hybrid vehicles and how legislation and regulation of GHG could affect our business, see Part I – Item 1A – Risk Factors – "Our failure to adapt to technological and industry changes and effectively implement new technology and products could materially affect our competitive position and our business." and Item 1A – Risk Factors – "Legislation and regulation of, and private business actions related to the reduction of GHG emissions could adversely affect our revenues over time through reduced fuel demand. business."
On the supply side, disruptions to supply caused by factors such as geopolitical issues, war (such as the wars in Europe and the Middle East), weather, environmental considerations, infrastructure, labor shortages, or economic conditions could also affect the amount of fuel purchased by our customers. To the extent that our customers require, or have access to, less fuel, thatthe resulting decline in purchase volume or transactions could reduce our revenues, or any growth in our revenues, and have a material adverse effect on our business, financial condition and operating results.
Finally, revenue from our European fleet business is primarily derived from transactions in which our revenue is tied to the difference between the negotiated price of the fuel from the supplier and the price charged to the fleet customer. The merchant’s cost of fuel and the amount we charge to our fleet customer for fuel are dependent on several factors including, among others, the factors described herein affecting fuel prices. We experience fuel price related revenue contraction when the merchant’s cost of fuel increases at a faster rate than the fuel price we charge to our mobility customers, or the fuel price we charge to our mobility customers decreases at a faster rate than the merchant’s cost of fuel. If the foregoing scenarios exist or persist we would generate less revenue, which could have a material adverse effect on our business, financial condition, and operating results.
A decline in general economic conditions, including any potential recession, and in particular, a decline in demand for fuel, travel related services or health care services, and other business related products and services that we provide, adversely affects our business, operating results, and financial condition.
Our business and operating results are materially affected by general conditions in the economy, both in the U.S. and internationally. We generate a substantial part of our revenue based on the volume of purchases and other transactions we process and our business generally depends heavily upon the overall level of spending. Demand for our services has in the past been, and may in the future be, at least partially correlated with general economic conditions and the amount of business activity in the regional economies in which we operate, particularly in the U.S., Europe, and the United Kingdom. Unfavorable changes in economic conditions, which are typically beyond our control and include declining consumer confidence, increasing unemployment, a restructured or reduced workforce and business patterns, inflation, recession, changes in the political climate, war (including the wars in Europe and the Middle East) or other changes, are generally characterized by reduced commercial activity and may lead to a reduction or plateau in spending by those whose spending directly or indirectly contributes to our revenues, resulting in reduced or stagnant demand for, or use of, our products and services, including fuel, travel related services, health care services, CDH accounts, accounts payables services, and other business related products and services by our customers or partners and our customers’ or partners’ customers. In addition, if the U.S. or global economy enters a recession, we may experience a decline in demand for our services and may have to decrease our pricing, all of which could have a material adverse impact on our financial results. The severity and length of time that any downturn in economic and financial market conditions may persist, as well as the timing, strength and sustainability of any recovery from such downturn, are typically unknown and are beyond our control. As a result, a sustained decline in general economic conditions in the U.S. or internationally could have a material adverse effect on our business, financial condition, and operating results.
We process transactions through the Mastercard and Visa networks through the financial services of WEX issuers and other third party licensed institutions. If any of these licensed institutions stop or are unable to provide these services to us, we would need to find other appropriate institutions to provide such services. In addition, if we fail to comply with the applicable requirements of MasterCardMastercard or Visa, they could seek to fine us, suspend us or terminate our registrations.license with them.
A significant source of our revenue in our Travel and Corporate Solutions segment and Health and Employee Benefit Solutions segment comes from processing transactions through the MasterCardMastercard and Visa networks. Licensing with the MasterCardMastercard and Visa schemes is achieved through multiple WEX Bank, our regulated subsidiaries in Hong Kong, Singapore,owned issuers and Australia, and our Dutch, UK, and Irish licensed e-money institutions. In the case of the Health and Employee Benefit Solutions segment, the scheme license is held by a third party sponsor bank. We will establish additionalfinancial institutions. If these licensed e-money institutions or regulated subsidiaries to license with the MasterCard and Visa schemes as necessary. If our licensed or regulated subsidiaries or our third party sponsor bankentities should stop providing, or are otherwise unable to provide, services for any reason, or, in the case of oura third party, sponsor bank, determine to provide sponsorshipservices on materially less favorable terms, we would need to find other appropriate institutions to provideproviders of those services in the applicable jurisdictions. In addition, MasterCardservices.
Mastercard and Visa routinely update and modify their requirements. Changes in the requirements may make it significantly more expensive for us to maintain compliance with the conditions of a license. In addition we have agreed to deliver a certain percentage of our license conditions.transaction volume in certain of our business areas to certain networks. If we do not comply with the MasterCard or Visa schemea network’s requirements, as the case may be, we could face fines,additional costs, license suspensions or termination of registration.termination. Any suspension of a licenserelevant licenses could limit or eliminate our ability to provide MasterCardMastercard or Visa payment processing services, in a given jurisdiction, which would materially affect our operations and revenues. Further, the terminationregulatory changes or
non-compliance of a registration,an issuer with regulatory requirements, could impair or any changes in the payment network rules that would impair a registration, could require us to stop providing MasterCardMastercard or Visa payment processing services in the applicable jurisdictions. If we are unable to find a replacement financial institution to provide sponsorship,provider, we may no longer be able to provide such payment processing services to affectedour customers, which would materially affect our operations and have a material adverse effect on our business, financial condition and operating results.
Unpredictable or catastrophic events in the locations in which we or our customers operate, or elsewhere, including events such as the COVID-19 pandemic, may adversely affect our ability to conduct business and could impact our financial condition and operating results.
Unpredictable events, including events such as pandemics and public health crises like the COVID-19 pandemic, political unrest, war, including the ongoing wars in Europe and the Middle East, terrorist attacks, power or technological failures, natural disasters or catastrophes (such as wildfires or hurricanes) and severe weather, including conditions arising from climate change, could interrupt our operations by causing disruptions in global markets, economic conditions, fuel supply or demand, travel and tourism, and the use of health care services. Such events, including the ongoing wars in Europe and the Middle East and the COVID-19 pandemic, have triggered and could also trigger in the future, large-scale technology failures, delays, or security lapses as well as increased volatility or significant disruption of global financial markets. Such events, if continuing or significant, could affect our revenues, including by reducing the demand for our products and services, by limiting our ability to provide our services or by resulting in security or other issues to our technology systems and the information contained therein. As a result, such events could negatively impact our business, financial condition, and operating results, potentially materially.
We believe the COVID-19 pandemic has, in many respects, resulted in transformational change in business and consumer behavior, as well as the implementation by authorities and businesses around the world of numerous measures aimed at containing the virus, at various times, such as travel bans and restrictions, quarantines, shelter in place orders, business shutdowns, vaccination requirements, and mask mandates, among others. Even now that restrictions relating to the COVID-19 pandemic have substantially subsided within the regions in which we operate, we may continue to experience impacts to our business as a result of the virus’s global economic impact and its lasting effects on the ways people and businesses conduct themselves, including fluctuations in demand for worldwide travel, impacts to the supply chain, workforce effects (such as difficulty recruiting, training, motivating and developing employees due to evolving health and safety requirements and protocols, changing worker expectations and talent marketplace variability regarding flexible work models), the availability of credit, impacts on our liquidity, continued governmental restrictions in certain geographies, and continued volatility in fuel demand and prices. The foregoing and any other continued effects on our business as a result of the COVID-19 pandemic and its aftermath could substantially impact our business, results of operations.operations, financial condition, cash flows and our ability to service our indebtedness and generally heighten the risks in certain of the other risk factors described herein.
We have experienced and may in the future experience substantial credit and fraud losses and other adverse effects if we fail to adequately assess and monitor credit risks posed by our counterparties or if there continues to be fraudulent use of our payment cards or systems.
We are subject to credit risks posed by our counterparties, many of which are small-to mid-sized businesses. Because we often fund a counterparty’s entire receivable or payable, as the case may be, while our revenue is generated from only a small percentage of that amount, our risk of loss is amplified by a counterparty’s failure to pay. Although we use various models and techniques to screen potential counterparties and establish appropriate credit limits, these models and
techniques cannot eliminate all potential credit risks and may not prevent us from approving applications that are fraudulently completed and submitted. Moreover, businesses that are good credit risks at the time of application may deteriorate over time and we may fail to detect such changes. In addition, in order to grow our business we may institute changes to our policies on the types and profiles of businesses to which we extend credit, which could also have an adverse impact on our credit losses. As an example, from time to time, such as during the recent supply chain slowdown, the freight industry experiences cycles that attract smaller, independent truckers to the market with lesser credit profiles. As the cycle of freight economics normalizes, a portion of these smaller, independent truckers are not able to pay back the credit we extend them, leading to increases in payment defaults. Further, in times of economic slowdown, the number of our counterparties who default on payments owed to us increases. Additionally, inflationary market conditions and rising interest rates have increased, and may continue to increase, the notional amount of receivables or payables we fund as well as our counterparty’s ability to pay.
With respect to certain transactions with our counterparties, we bear, contractually or otherwise, the risk of substantial losses due to fraudulent use of our payment cards or payment systems. We also face risk of losses as a result of fraudulent acts of employees, merchants, or contractors. Our insurance coverage may be insufficient or limited and may not protect against those losses. Additionally, criminals use sophisticated illegal activities to target us, including “skimming”, counterfeit cards and accounts, and identity theft. A single, significant incident or a series of incidents of fraud or theft could lead to, among other things, increased overall levels of fraud; direct financial losses as a result of fraudulent activity; reputational harm; decreased desirability of our services; greater regulation; increased compliance costs; the imposition of regulatory sanctions; or significant monetary fines. Accordingly, if material fraud, as described above or otherwise, occurs or continues to occur, the result could be a material adverse effect on our business, financial condition and operating results.
In prior years we incurred material credit and fraud losses, particularly in our Mobility segment and there can be no guarantee that the strategies we have implemented to reduce the impact of credit loss and fraud will continue to be successful to reduce the effect of credit loss and fraud on our business. Moreover, if our strategies do not continue to work as intended, the Company may limit revenue and earnings growth. Accordingly, if we fail to adequately manage our credit risks, if economic conditions affect the businesses of our counterparties or of their customers, or if we experience material fraud losses our provision for credit losses on the statement of operations could increase, which could have a material adverse effect on our business, financial condition and operating results.
Changes in or limits on interchange fees could decrease our revenue.
A substantial portion of our revenue is generated by network processing fees charged to merchants, known as interchange fees, associated with transactions processed using our payment systems, including those using MasterCardMastercard or Visa branded cards or using the MasterCardMastercard or Visa system. Interchange fee amounts associated with these payment methods are affected by a number of factors, including regulatory limits in certain of the markets in which we operate and fee or program changes imposed or allowed by our third-party partners, including MasterCardMastercard and Visa. In addition, interchange fees are continually the subject of intense legal, regulatory, and legislative scrutiny and competitive pressures in the markets in which we operate, any of which could result in interchange fees being limited, lowered, or eliminated altogether in any given jurisdiction in the future. Future changes may further restrict or otherwise impact the way we do business or limit our ability to charge certain fees to customers. Moreover, temporary or permanent decreases in, limitations on or elimination of the interchange fees associated with our card or virtual payment transactions, could have a material adverse effect on our business, financial condition, and operating results.
A portion of our Fleet Solutions segment revenueOn July 1, 2022, WEX Bank became subject to the caps on debit card interchange fees set forth in Europe is derived from the difference betweenDurbin Amendment to the negotiated priceDodd-Frank Act. Although, at present, the applicability of the fuel fromDurbin Amendment to any prepaid or debit card products we have is minimal, the supplier andDurbin Amendment’s interchange fee caps may limit the price chargedgrowth prospects, viability or profitability of any such existing products or any such products we may want to develop in the fleet customer. As a result, a contraction in these differences would reduce revenues andfuture.
Bank failures or other events affecting financial institutions could adversely affect our operatingand our customers’ liquidity and financial performance.
In early 2023, concerns arose with respect to the financial condition of a number of banking organizations in the United States and abroad, in particular those with exposure to certain types of depositors and large portfolios of debt investment securities. The FDIC took control and was appointed receiver of Silicon Valley Bank and Signature Bank on March 10, 2023 and March 12, 2023, respectively. While we did not and do not have any direct exposure to SVB or Signature Bank, we regularly maintain domestic cash deposits in FDIC insured banks, which exceed the FDIC insurance limits. We also maintain cash deposits in foreign banks where we operate, some of which are not insured or are only partially insured by the FDIC or other similar agencies. In addition, our investment portfolio includes investments in securities of certain banking and financial organizations.
If banks and financial institutions where we maintain cash balances, cash equivalents, or financial investments enter receivership or become insolvent, or concerns or rumors about such events occur, our ability to access our cash, the value of our investment in such institutions and/or our liquidity and financial performance may be adversely impacted. There can be no assurance that our deposits in excess of the FDIC or other comparable insurance limits will be backstopped by the U.S. or applicable foreign government, or that any bank or financial institution with which we do business will be able to obtain needed liquidity in the event of a failure or liquidity crisis.
Our customers, including those that are banks, may be similarly adversely affected by any bank failure or other event affecting financial institutions. Any resulting adverse effects to our customers’ liquidity or financial performance could reduce the demand for our services or affect our allowance for expected credit losses and collectability of accounts receivable. A significant change in the liquidity or financial position, including a credit rating downgrade, of our customers could cause unfavorable trends in receivable collections and cash flows and additional allowances for anticipated losses may be required. These additional allowances could materially affect our future financial results.
Revenue
Increasing scrutiny and changing expectations from investors, customers and our European Fleetemployees with respect to our environmental, social and governance practices may negatively affect our business and result in the decline of gasoline or diesel fuel use, result in additional costs or expose us to new or additional risks.
There have been efforts in recent years aimed at the investment community, including investment advisors, sovereign wealth funds, public pension funds, universities and other groups, promoting the divestment of equities issued by companies connected to fossil fuels as well as to pressure lenders and other financial services companies to limit or curtail activities with companies similarly connected. If these efforts are successful, and if our business is primarily derived from transactions in which our revenue isdeemed to be sufficiently tied to the difference betweenuse of fossil fuels by such communities, our ability to access capital markets may be limited and our stock price may be negatively impacted.
Furthermore, institutional, individual, and other investors, proxy advisory services, regulatory authorities, consumers and other stakeholders continue to focus on sustainability practices with regard to the negotiatedoil and gas industry, including practices related to GHG emissions and climate change. As we respond to evolving standards for identifying, measuring, and reporting environmental, social and governance (“ESG”) metrics, our efforts may result in a significant increase in costs and may nevertheless not meet investor or other stakeholder expectations and evolving standards or regulatory requirements, which may negatively impact our financial results, our stock price, our reputation, our ability to attract or retain employees, our attractiveness as a service provider, investment, or business partner, or expose us to government enforcement actions, private litigation, and investor scrutiny.
Our failure to adapt to technological and industry changes and effectively implement new technology and products could materially affect our competitive position and our business.
WEX is a global commerce platform, and as such we must constantly adapt and respond to the technological advances offered by our competitors, the requirements of our partners, customers, and potential partners, regulatory requirements and evolving industry standards and trends, such as the fuelexpected integration of EVs into mixed fleets. Our ability to attract new customers, increase net revenue from the supplierexisting customers and create new, or replace existing, sources of revenue as technologies such as EVs develop, will depend in significant part on our ability to adapt to industry standards, anticipate trends and the price chargedmagnitude at which such trends affect the market, and continue to enhance our platform and introduce new products and capabilities on a timely and secure basis to keep pace with technological developments and customer expectations. If we are unable to provide enhancements and new products, develop new capabilities that achieve market acceptance, innovate quickly enough to keep pace with rapid technological developments, or experience unintended consequences with enhancements we provide, our competitive position and our business, financial condition, and operating results could be adversely affected. Furthermore, failing to retire legacy systems or modernize our platforms as planned could impact the fleet customer.stability and reliability of our products, impacting customer experience. In addition, customers may not adopt enhancements or new products we introduce or may not use them as intended. We may not be successful in developing modifications, enhancements, and improvements, in bringing them to market quickly or cost-effectively in response to market demands, or at modifying our platform to remain compliant with applicable legal and regulatory requirements. The merchant’sexpansion of our platform, technological capabilities and service offerings also carry risks, including cost overruns, delays in delivery, and performance problems, all of fuelwhich could materially affect our competitive position and the amount we charge to our fleet customer for fuel are dependent on several factors including,business.
We may not realize or sustain the factors described elsewhere in this Item 1A, “Risk Factors” affecting fuel prices. We experience fuel-price related revenue contraction when the merchant’sexpected benefits from our cost of fuel increases at a faster rate than the fuel price we charge to our fleet customers, or the fuel-price we charge to our fleet customers decreases at a faster rate than the merchant’s cost of fuel. If the foregoing scenarios exist or persist we would generate less revenue, whichand organizational operational efficiencies initiatives, and these efforts could have a material adverse effect on our business, financial condition, and operating results.
If we fail to adequately assessWe have been and monitor credit risks posed by our counterparties or there is fraudulent use of our payment cards or systems, we could experience an increase in credit losswill be undertaking certain cost and other adverse effects.
We are subject to credit risks posed by our counterparties, many oforganizational operational efficiencies, which are small-to mid-sized businesses. Becausedesigned to streamline our organization, improve internal collaboration models, processes and automation, and enhance customer experiences, while supporting our productivity and business results. Our expectation is to capture $100 million in run rate cost savings by the end of 2024. We expect to reinvest a portion of these cost savings in our business to enhance our capabilities, including digital products, technology and risk management capabilities. However, if we often fund a counterparty’s entire receivabledo not successfully manage and execute these initiatives, or payable, as the case may be, while our revenue is generated from only a small percentage of that amount, our risk of loss is amplified by a counterparty’s failure to pay. Although we use various formulas and models to screen potential counterparties and establish appropriate credit limits, these formulas and models cannot eliminate all potential credit risks and may not prevent us from approving applications thatif they are fraudulently completed. Moreover, businesses that are good credit risks at the time of application may deteriorate over time andinadequate or ineffective, we may fail to detect such changes. In addition, changesmeet our financial goals and achieve anticipated benefits, improvements may be delayed, not sustained or not realized and our business, operations and competitive position could be adversely affected. Even if we are able to achieve our policies onanticipated run rate of efficiencies we may be unsuccessful in our attempts to reinvest them or we may not achieve the types and profiles of businessesdesired results. These initiatives, or our failure to which we extend creditsuccessfully manage them, could also have an adverse impact on our credit losses. In times of economic slowdown, the numberresult in unintended consequences or unforeseen costs, including distraction of our counterparties who default on payments owedmanagement and employees, attrition, inability to us tends to increase. In particular, the effects of the COVID-19 global pandemic have affected,attract or retain key personnel, and may continue to affect for an unknown period of time, our counterparties and the risk that they default on amounts owed to us. Accordingly, if we fail to adequately manage our credit risks, or if economic conditions affect the businesses of our counterparties or of their customers, credit defaults could increase and our provision for credit losses on the income statement could be significantly higher, all ofreduced employee productivity, which could have a material adverse effect onadversely affect our business, financial condition and operating results.
When we fund transactions with counterparties, we may also bear the risk of substantial losses due to fraudulent use of our payment cards or payment systems. We are also subject to risk from fraudulent acts of employees or contractors. Although we maintain insurance for certain types of losses, the coverage may be insufficient or limited and may not fully protect against those losses. Additionally, criminals use sophisticated illegal activities to target us, including “skimming”, counterfeit cards and accounts, and identity theft. A single, significant incident oroperate in a series of incidents of fraud or theft could lead to, among other things, increased overall levels of fraud; direct financial losses as a result of fraudulent activity; reputational harm; decreased desirability of our services; greater regulation; increased compliance costs; the imposition of regulatory sanctions; or significant monetary fines. Accordingly, if material fraud, as described above or otherwise, were to occur, the result could be a material adverse effect on our operations,highly competitive business success, financial condition and results of operations.
Fluctuations in foreign currency exchange rates could affect our financial results.
We earn revenues, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar. Such currencies include, but are not limited to, the Australian dollar, the Canadian dollar, the Euro, British Pound sterling, and the New Zealand dollar. Because our consolidated financial statements are presented in U.S. dollars, we must translate revenues, income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Realized and unrealized gains and losses on foreign currency transactions as well as the re-measurement of our cash, receivable and payable balances that are denominated in foreign currencies, are recorded directly in the consolidated statements of operation. Therefore, increases or decreases in the value of the U.S. dollar against other major currencies that we use to conduct our business will affect our revenues, net income and the value of balance sheet items denominated in those currencies. Volatility in foreign currency exchange rates, particularly fluctuations in the U.S. dollar against other currencies, could have a material adverse effect on our business, financial condition, and operating results.
The payment solutions industry is highly competitive.environment. Such competition could adversely affect the fees we receive, our revenues and margins, and our ability to gain, maintain, or expand customer relationships, all on favorable terms.
We face and expect to continue to face competition in each of our segments from multiple companies that seekoffering or seeking to offer competing capabilities and services. Historically, we have been able to provide customers with a wide spectrum of services and capabilities and, therefore, we have not considered price to be the exclusive or even the primary basis on which we compete. As our competitors have continued to develop their service offerings, it has become increasingly more challenging for us to compete solely on the basis of superior capabilities, technology, customer integration or service and price has become an increasingly important decision factor for our customers. In some areas of our business, we have been forced to respond to competitive pressures by reducing our fees and our margins. WeAccordingly, the competitive landscape in which we operate could affect our revenues and margins and have seen erosion ofa material adverse effect on our historicalbusiness, financial condition, and operating results.
profit margins as we encourage existing strategic relationships to sign long-term contracts. If these trends continue and if competition intensifies, our profitability may be adversely impacted.
While we offer ourOur services to several sectors of the payments industry, with a focusare currently focused on the fleet,mobility, travel, and corporate payments, and health categories, somebenefits businesses. Some of our competitors are larger than we are and have successfully garnered significant share in particular categories of payments.these businesses. To the extent that our competitors are regarded as leaders in specific categories,businesses, they may have an advantage over us as we attempt to further penetrate these categories.
businesses.
We also face increased competition in our efforts to enter into new customer agreements or strategic relationships, renew or maintain existing agreements or relationships on similar or favorable terms, and grow volumes under existing relationships on favorable terms. For example, the termination of agreements with major oil companies, fuel retailers, and truck stop merchants, would reduce the number of locations where our payment processing services are accepted. As a result, we could lose our competitive advantage and our operating results could be adversely affected. While we regularly monitor these relationships, there can be no guarantee that we will be able to maintain them in the future.Infuture. In addition, we are also subject to risks as a result of changes in business habits of our vendors and customers as they adjust to the competitive marketplace. Because many of our standing arrangements and agreements with customers or other partners contain no minimum purchase, sale or volume obligations and may be terminable by either party upon no or relatively short notice, customers or other partners may not be required to use the services that we provide to a specific degree or at all, even though we are under contract with them. Accordingly, we are subject to significant risks associated with the loss or change in the business habits and financial condition of these key constituencies as they consider changes in the market or different or less expensive services from competitors or otherwise.
As set forth above,
Our ability to attract, motivate, and retain qualified employees is critical to our success and the competitive landscapefailure to do so may materially adversely affect our performance.
We believe our employees, including our executive leadership team, are our most important resource. The market for workers and leaders of all skill levels in the workplace today, but especially in fintech, technology and other specialized areas, and in the geographic areas in which our operations are centralized, is intensely competitive. We may be unable to attract highly qualified and diverse employees as we operategrow, retain the individuals we employ, or adapt to a remote working environment, particularly if we do not offer employment terms, benefits and conditions that are competitive with the rest of the labor market. Failure to attract, hire, develop, motivate, and retain highly qualified and diverse employee talent; to meet our goals related to fostering a diverse, equitable and inclusive business culture; to make successful hires to fill our leadership ranks and other positions; to maintain a corporate culture that fosters innovation and collaboration; or to design and successfully implement flexible work models that meet the expectations of today’s employees and prospective
employees, could affect our revenues and margins and have a material adverse effect ondisrupt our business, operations and operating results.performance and adversely affect our performance and ability to create stakeholder value.
Our failure to effectively implement new technology could jeopardize our position as a leader in our industry.
As a provider of information management and financial technology and payment services, we must constantly adapt and respond to the technological advances offered by our competitors and the informational requirements of our customers, including those related to the Internet and the cloud, in order to maintain and improve upon our competitive position. We may not be able to expand our technological capabilities and service offerings as rapidly as our competitors, which could jeopardize our position as a leader in our industry.
We may not be able to successfully execute on acquisitions as part of our growth strategy and may encounter difficulties realizing the anticipated benefits of growth through acquisitions.acquisitions we have completed or may undertake.
We have been an active asset acquirer of assets and businesses, and, as part of our growth strategy, we expect to seek to continue to acquireseek out growth through the acquisition of businesses, commercial account portfolios and other assets in the future. We have substantially expanded our overall business, operating segments, customer base, headcount and operations through acquisitions. Our future growth and profitability depend, in part, upon our continued successful expansion within the business segments in which we currently operate.operate and others that we may identify in the future. As part of our strategy to expand, we look for acquisition and investment opportunities and partnerships with other businesses that will allow us to increase our market penetration, technological capabilities, product offerings and distribution capabilities.
Any or all of the following risks could adversely affect our growth strategy, including that:
•we may not be able to identify suitable acquisition or investment candidates or acquire additional assets or businesses on favorable terms;
•we may compete with others to acquire assets or businesses or make certain investments, which competition may increase, and any level of competition could result in decreased availability or increased prices for acquisition candidates;
•we may compete with others for select acquisitions or investments and our competition may consist of larger, better-funded organizations with more resources and easier access to capital;
•we may experience difficulty in anticipating the timing and availability of acquisition or investment candidates;
•we may not be able to obtain the necessary funding, on favorable terms or at all, to finance any of our potential acquisitions; and
•we may not be able to generate cash necessary to execute our acquisition or investment strategy.
We may never realize the anticipated benefits of acquisitions we have completed or may undertake, and we may encounter difficulties in trying to integrate such acquisitions and incur significant expenses or charges as a result of an acquisition.
The acquisition and integration of a business involves a number of risks and may result in unforeseen operating difficulties in assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired business.
In evaluating and determining the purchase price for a prospective acquisition, we estimate, among other things, the future revenues and profits from that acquisition based largely on historical financial performance as well as any synergies that we believe we may benefit from as a result of the acquisition. Following an acquisition, we may not operate the acquired business as successfully as it was previously operated, or adequately address all of the risks uncovered during the due diligence process. Weoperated. For instance, we may also experience some attrition in the number of clients serviced by the acquired business, causing us to us not achieve the forecasted revenues and profits from an acquisition or to not achievingachieve the level of synergies that we anticipated when entering into an acquisition. Moreover, although we perform aour due diligence review of each of our acquisition partners, this review may not adequately uncover all of the contingent, undisclosed, or previously unknown liabilities or risks we may incur as a consequence of the proposed acquisition, exposing us to potentially significant, unanticipated costs, as well as potential impairment charges. An acquisition may also subject us to additional regulatory burdens that may significantly affect our business in unanticipated and negative ways.
Further, an acquisition may affect our financial condition in that it may require us to incur other charges, such as severance expenses, restructuring charges or change of control payments, and substantial debt or other liabilities. An acquisition may also cause adverse tax consequences or substantial depreciation and amortization or deferred compensation charges, may require the amortization, write-down or impairment of amounts related to deferred compensation, goodwill and other intangible assets, may include substantial contingent consideration payments or other compensation that could reduce our earnings during the quarter in which incurred, or may not generate sufficient financial return to offset acquisition costs. These expenses, charges or payments as well as the initial costs of integrating the personnel and facilities of an acquired business with those of our existing operations, may adversely affect our operating results.results.
In addition, the process of integrating and operating any acquired business, technology, service or product requires significant management attentionresources, and resources.integration may take longer than desired. If we fail to timely or effectively integrate an acquired business, its employees, its technology or other assets, this failure may lead to us not achieving certain or all of the desired benefits of the acquisition or may otherwise expose us to any shortcomings or risks of the acquired business, prior to their integration into our established systems. Thus, the integration may divert significant management attention from our ongoing business operations and could lead to a disruption of our ongoing business or inconsistencies in our services, standards, controls, procedures and policies, any of which could affect our ability to achieve the anticipated benefits of an acquisition or otherwise adversely affect our business and financial results.
For example, on December 15, 2020, we consummated the acquisition of Optal and eNett, acquiring travel focused electronic payments companies that were significantly impacted by the global COVID-19 pandemic after we entered into the definitive agreement for the acquisition. The global COVID-19 pandemic has had, and will likely continue to have, a large effect on the travel industry. There can be no guarantee that we will achieve any of the anticipated benefits from this acquisition or that we uncovered all of eNett and Optal’s the unknown or undisclosed liabilities or risks .
A decline in general economic conditions, and in particular, a decline in demand for fuel, travel related services or health care services, and other business related products and services would adversely affect our business, operating results and financial condition.
Our operating results are materially affected by general conditions in the economy, both in the U.S. and internationally. We generate a substantial part of our revenue based on the volume of purchase and other transactions we process. Our transaction volume is correlated with general economic conditions and the amount of business activity in the economies in which we operate, particularly in the U.S., Europe, the United Kingdom, Asia, Australia, and New Zealand. Downturns in these economies are generally characterized by reduced commercial activity and, consequently, reduced demand and use of fuel, travel related services, health care services, health savings accounts, and other business related products and services by our customers or partners and our customers' or partners' customers. The commercial payments industry in general, and our commercial payment solutions business specifically, depend heavily upon the overall level of spending. Unfavorable changes in economic conditions, including declining consumer confidence, increasing unemployment, inflation, recession, changes in the political climate or other changes, may lead to a reduction or plateau in spending by those whose spending directly or indirectly contributes to our revenues, resulting in reduced or stagnant demand for, or use of, our products and services. As a result, a sustained decline in general economic conditions in the U.S. or internationally could have a material adverse effect on our business, financial condition, and operating results.
We are subject to risks associated with our strategic minority equity investments, including a loss of all or part of our invested capital, which could adversely affect our results of operations or fail to enhance stockholder value.
We have begun to make minority investments in the equity securities of third parties in connection with our strategic initiatives. These investments are inherently risky because the companies are typically early-stage and markets for their technologies or products may never materialize to the levels we expect. Further, we may not realize the anticipated commercial benefits of such investments. In addition, such investments are non-marketable and illiquid at the time of our initial investment, and the financial success and appreciation of our investment may be dependent on a liquidity event, such as a public offering, acquisition or other favorable market event. If the companies in which we invest experience financial distress and are unable to raise additional financing, we could lose all or part of our investment.
Furthermore, we may be unable to direct or influence management, operational decisions, compliance and other policies of such companies, which could result in additional financial and reputation risks. Additionally, other investors in these entities may have business goals and interests that are not aligned with ours, or may exercise their rights in a manner in which we do not approve. These circumstances could lead to delayed decisions or disputes and litigation with those other investors, all of which could have an impact on our reputation, business, financial condition and results of operations. If these entities seek additional financing, such financing or other transactions may result in further dilution of our ownership stakes and such transactions may occur at lower valuations than the investment transactions through which we acquired such interests, which could significantly decrease the fair values of our investments in those entities.
We are exposed to risks associated with operations outside of the United States, which could harm both our U.S. and international operations.
In addition to our operations in the United States, we conduct operations and use contractors and vendors internationally in many foreign countries. On December 15, 2020, we consummated our acquisition of Optal and eNett, which substantially increased our Travel and Corporate Payment Solutions segment's exposure to the Asian, Australian, European, and United Kingdom markets. This acquisition and any further expansion of our international operations could impose substantial burdens on our resources, divert management’s attention from U.S. operations and otherwise harm our business. In addition, we are subject to risks from operating internationally, some of which we may not typically encounter in the United States, including:
•fluctuation in foreign currencies;
•changes in the relations between the United States and foreign countries;
•actions of foreign or United States governmental authoritiescountries, including those affecting trade and foreign investment;
•increased expense due to the introduction of our corporate policies and controls in our international operations;
•increased expense related to localization of our products and services, including language translation and creation of localized agreements;
•increased infrastructure costs, burdens and complexities with respect to legal, tax, accounting and information technology laws, matters, and treaties;
•interpretation and application of local laws and regulations, including, among others, those impacting anti-money laundering, bribery, financial transaction reporting, privacy, licensing, and positive balance or prepaid cards;
•enforceability of intellectual property and contract rights;
•potentially adverse tax consequences due to, but not limited to, the value added tax systems, the repatriation of cash, and any adverse consequences from changes in tax rates and changes or interpretations of tax laws;
•competitive pressure on products and services from companies based outside the U.S. that can leverage lower costs of operations;
•terrorist attacks and security concerns in general;
•increased expense to comply with U.S. laws that apply to foreign operations, including the FCPA and OFAC regulations;
•political, social, and economic instability;instability and war, including as a result of terrorist attacks and security concerns; and
•local labor conditions and regulations.
We cannot assure you that ourOur investments, businesses, or businessesoperations (including through third parties) outside the United States willmay not produce desired levels of revenue or costs may be disrupted or thataffected by one or more of the factors listed above will notabove. Any further expansion of our international operations could impose substantial burdens on our resources, divert management’s attention from U.S. operations and otherwise harm our business.
The United Kingdom’s departure from
Fluctuations in foreign currency exchange rates have affected and could continue to affect our financial results.
We earn revenues, pay expenses, own assets and incur liabilities in countries using currencies other than the EU, or Brexit,U.S. dollar. Such currencies (which currently number over 20 actively) include, but are not limited to, the Australian dollar, the Canadian dollar, the Euro, British Pound sterling, the Singapore dollar, and the resulting Trade Agreement could adversely affect us.New Zealand dollar. Because our consolidated financial statements are presented in U.S. dollars, we must translate revenues, income and expenses, as well
as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the U.K. held a referendumend of each reporting period. Realized and unrealized gains and losses on foreign currency transactions as well as the re-measurement of our cash, receivable and payable balances that are denominated in which voters approved an exit fromforeign currencies, are recorded directly in the European Union (the "EU"), commonly referred to as Brexit. On January 24, 2020, the U.K. Parliament approved a withdrawal agreement (the “Withdrawal Agreement”) between the U.K. and the EU. On December 24, 2020, after an eleven month transition period, the United Kingdom and the EU entered into a trade deal, effective January 1, 2021, in which they agreed upon many trade terms (the "Trade Agreement") as a resultconsolidated statements of Brexit.
The uncertainty with respect to the ultimate effect on the U.K.’s legal, political and economic relationship with the EU as a result of Brexit and the Trade Agreement could contribute to instability in global financial and foreign exchange markets, including volatilityoperation. Therefore, increases or decreases in the value of the British Pound Sterling and Euro, which in turn could adversely affect us or our customers and companiesU.S. dollar against other major currencies that do business with us. Such uncertainties could also trigger a general deterioration in credit conditions, a downturn in consumer sentiment and overall negative economic growth. Any of these scenarios could have an adverse effect onwe use to conduct our business or onhave in the past and will continue to affect our customers.
The long-term effects of Brexit will depend on the effects and implementation of the Trade Agreement. A withdrawal from the EU, such as Brexit, is unprecedented, and it currently remains unclear how the implementation of the Trade Agreementrevenues, net income and the U.K.’s access to the European single market for goods, capital, services and labor within the EU and the wider commercial, legal and regulatory environment, will impact our U.K. operations.
In addition, Brexit could lead to legal uncertainty and increased complexity as national laws and regulationsvalue of balance sheet items denominated in those currencies. Volatility in foreign currency exchange rates, particularly fluctuations in the U.K. start to diverge from EU laws and regulations. In particular, we may face new regulatory costs and challenges, including the following:
| | | | | |
• | weU.S. dollar against other currencies, could be required to comply with regulatory requirements in the U.K. that are in addition to, or inconsistent with, the regulatory requirements of the EU, leading to increased complexity and costs for our EU and U.K. operations; |
• | the implementation of limitations on the interchange fees we are allowed to charge our customers in either the U.K. or the EU; and |
• | adverse impacts on our ability to attract and retain the necessary human resources in appropriate locations to support the U.K. business and the EU business. |
These and other factors related to Brexit and the Trade Agreement could, individually or in the aggregate, have a material adverse impacteffect on our business, financial condition, and operating results.
As a non-bank custodian of HSA assets, WEX Inc.’s failure to adequately place and safeguard our custodial assets, or the failure of any of our depository partners, which include WEX Bank, could have a material adverse effect on our business.
As a non-bank custodian, WEX Inc. relies on various federally insured depository partners, including WEX Bank, to hold custodial cash assets. If any material adverse event were to affect one or more of these depository partners, including a significant decline in financial condition, a decline in the quality of service, loss of deposits, inability to comply with applicable banking and financial services regulatory requirements, systems failure, or its inability to return principal or pay interest thereon, our business, financial condition, or results of operations.operations could be materially and adversely affected. In addition, if WEX Inc. were required to change depository partners, we could not accurately predict the success of such change or that the terms of our agreements with such new depository partners would be on equal or better terms as the agreements we have with our current depository partners.
We have incurred, and may incur in the future, impairment charges on goodwill or other intangible assets.
Our goodwill resides in multiple reporting units. Theunits and the profitability of these individual reporting units may suffer periodically from downturns in customer demand the high level of competition existing within our industry, the level of overallor other economic activity and other factors. IndividualThese individual reporting units may be relatively more greatly impacted by these factors than the Company as a whole. As a result, demand forwhole, given the services of one or more of the reporting units could decline,different market sectors and geographies in which could adversely affect our operations and cash flow, and could result in an impairment of goodwill. Our reporting units are tested annually during the fourth fiscal quarter of each year, or on an interim basis if impairment indicators exist in order towe operate. If we determine whether their carrying value exceeds their fair value. We use a combination of discounted cash flow analyses and comparable company pricing multiples to determinethat the fair valuevalues of our reporting units and to determine the amount of any goodwill impairment. In addition, our definite-lived intangible assets are tested for impairment if an event occurs or circumstances change that would indicate the carrying value may not be recoverable.
If we determine the fair value of the reporting units is less than their respective carrying value as a result of the annual or interim goodwill tests,values, or the carrying valuevalues of our definite-livedother intangible asset exceedsassets exceed the undiscounted cash flows generated from the use of the asset, ansuch assets, a non-cash impairment loss may be recognized. Anyrecognized and any such write-down wouldcould adversely affect our results of operations. As a resultFor example, during the third quarter of our annual impairment analysis in 2020, the Company recorded a $53.4 million non-cash goodwill2022, we recognized an impairment charge relatedof $136.5 million to the WEX Fleet Europe reporting unit.
our Mobility segment. While we currently believe that the fair values of our other reporting units exceed their respective carrying values and that our goodwill will contribute indefinitely to the cash flows of the Company, materially different assumptions regardingunforeseen events, changes in circumstances and market conditions, and differences in estimated future performancecash flows could adversely affect the fair value of our reporting unitsassets and the weighted-average cost of capital used in the annual valuation could result in future impairment losses.charges. In addition, while we believe that the expected future cash flows to the Company resulting from the use of our definite-livedother intangible assets exceeds the carrying value of such assets, material changes in business strategy, customer attrition in excess of expectations, andor technological obsolescence could result in impairment losses and/or an acceleration of amortization expense.
Legislation and regulation of greenhouse gases ("GHG") and related divestment and other efforts could adversely affect our business.
We are aware of the increasing focus of local, state, regional, national and international regulatory bodies on GHG emissions and climate change issues. Legislation to regulate GHG emissions has periodically been introduced in the U.S. Congress, and there has been a wide-ranging policy debate, both in the U.S. and internationally, regarding the impact of these gases and possible means for their regulation. The Biden Administration has made climate change and the limitation of GHG emissions one of its initial and primary objectives. For example, in January 2021, U.S. President Biden signed a number of executive orders with respect to GHGs, including one recommitting the United States to the Paris Agreement, pursuant to which nearly 200 nations have committed to reduce global emissions. Several states and geographic regions in the U.S. have adopted legislation and regulations to reduce emissions of GHGs. Additional legislation or regulation by these states and regions, the U.S. Environmental Protection Agency, and/or any international agreements to which the U.S. may become a party, that control or limit GHG emissions or otherwise seek to address climate change could adversely affect our partners’, merchants’ and our operations. Finally, private businesses, including vehicle manufacturers, are increasingly taking proactive steps to control or limit GHG emissions. As an example, in January 2021, General Motors announced that
it aspired to have all of its global new light-duty vehicles be zero emission by 2035. Because our business is currently heavily reliant on the level of fossil fuels purchased and sold, existing or future laws or regulations or business actions related to GHGs and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if any of the same serve to reduce demand for fossil fuels.
In addition to the regulatory and private sector efforts described above, there have also been efforts in recent years aimed at the investment community, including investment advisors, sovereign wealth funds, public pension funds, universities and other groups, promoting the divestment of equities issued by companies connected to fossil fuels as well as to pressure lenders and other financial services companies to limit or curtail activities with companies similarly connected. If these efforts are successful, and if our business is deemed to be sufficiently tied to the use of fossil fuels by such communities, our ability to access capital markets may be limited and our stock price may be negatively impacted.
Members of the investment community have recently increased their focus on sustainability practices with regard to the oil and gas industry, including practices related to GHGs and climate change. An increasing percentage of the investment community considers sustainability factors in making investment decisions, and an increasing number of entities consider sustainability factors in awarding business. If we are unable to appropriately address sustainability enhancement, we may lose customers, partners, or merchants, our stock price may be negatively impacted, our reputation may be negatively affected, and it may be more difficult for us to effectively compete.
Unpredictable events, including natural catastrophes or public health crises, dangerous weather conditions, technology failure, political unrest, and terrorist attacks in the locations in which we or our customers operate, or elsewhere, may adversely affect our ability to conduct business and could impact our results.
In addition to public health crises, such as the COVID-19 global pandemic, other unpredictable events, such as political unrest, terrorist attacks, power failures, natural disasters (such as wildfires or hurricanes) and severe weather conditions could interrupt our operations by causing disruptions in global markets, economic conditions, fuel supply or demand, travel and tourism, and the use of health care services. Such events could also trigger large-scale technology failures, delays, or security lapses. Such events, if continuing or significant, could affect our revenues by reducing the demand for our products and services or by limiting our ability to provide our services or resulting in security or other issues to our technology systems and the information contained therein and could therefore cause a material adverse effect on our business, financial condition, and operating results.
The healthcare industry changes often and technology-enabled services used by consumers are relatively new and unproven.
The market for technology-enabled services for healthcare consumers changes rapidly and new products and services are consistently being introduced. Opportunities to gain market share are challenging due to the significant resources of our existing and potential competitors. It is uncertain whether or how fast this market will continue to grow. In order to remain competitive, we are continually involved in a number of projects to develop new services or compete with these new market entrants, including the development of mobile versions of our proprietary technology platform. These projects carry risks, such as cost overruns, delays in delivery, performance problems and lack of acceptance by our Health and Employee Benefit Solutions segment customers.
Based on our experience, consumers are still learning about HSAs and other similar tax-advantaged healthcare savings arrangements. The willingness of consumers to increase their use of technology platforms to manage their healthcare saving and spending tax advantaged benefits will impact our operating results.
Our ability to attract and retain qualified employees is critical to our success and the failure to do so may materially adversely affect our performance.
We believe our employees, including our executive management team, are our most important resource and, in our industry and geographic area, competition for qualified personnel is intense. If we were unable to retain and attract qualified employees, our performance could be materially adversely affected.
The Company is, and may in the future become, involved in various claims, investigations, and legal proceedings, some of which could have a material adverse effect on our business, financial condition or results of operations.
The Company is subject to legal proceedings and claims in the ordinary course of business and may become involved in legal proceedings that could be material. These proceedings may include, without limitation, commercial or contractual disputes, intellectual property matters, personal injury claims, stockholder claims, and employment matters. No assurances can be given that any suchSuch proceedings and claims will notcould have a material adverse impact on the Company’s
our financial statements. Legal proceedings are inherently uncertain and there is no guarantee that we will be successful in defending ourselves in any such proceedings, or that our assessment of the materiality of these matters and the likely outcome or potential losses and established reserves will be consistent with the ultimate outcome of such matters. The types of claims made in such proceedings may include claims for compensatory damages, punitive and consequential damages, specific performance and/or other injunctive or declaratory relief. We may incur significant expenses in defending ourselves in any proceedings and may be required to pay damage awards or settlements or become subject to equitable remedies that adversely affect our operations and financial statements. Moreover, any insurance or indemnification rights that we may have may be insufficient or unavailable to protect us against such losses. Responding to litigation, claims, proceedings, inquiries, and investigations, even those that are ultimately non-meritorious,we believe we have substantial defenses against, requires us to incur significant expense and devote significant resources, and may generate adverse publicity that damages our reputation, resulting in an adverse impact on our business, financial condition, and operating results.
If we fail to adequately protect our intellectual property and other proprietary rights, our competitive position could be impaired and we may lose valuable assets, generate reduced net revenue, and incur costly litigation to protect our rights.
Our success depends in part upon protecting our intellectual property and other proprietary information and technology. We rely on a combination of patents, copyrights, trademarks, service marks, trade secret laws, and contractual restrictions to establish and protect our intellectual property and other proprietary rights. The steps we take to protect these rights, however, may be inadequate. Our currently issued and pending or future patents and trademarks may not provide sufficiently broad protection, or they may not prove to be enforceable in actions against alleged infringers. We will not be able to protect our intellectual property and other proprietary information and technology if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property.
Despite our precautions, it may be possible for unauthorized third parties to copy our global commerce platform, or certain aspects of our platform, and use information that we regard as proprietary to create products that compete with our platform. Some license provisions protecting against unauthorized use, copying, transfer, and disclosure of our platform, or certain aspects of our platform, may be unenforceable under the laws of certain jurisdictions and foreign countries.
Risks relatedRelated to WEX Bank
The loss or suspension of WEX Bank's industrial loan company charter or changes in applicable regulatory requirements could be disruptive to certain of our operations, increase costs and increase costs.competition.
WEX Bank is a Utah industrial bank incorporated in 1998 that operates under an industrial loan charter (ILC).company (“ILC”) charter. WEX Bank is also an FDIC-insured depository institution. Deposits issued by WEX Bank are currently used to support and fund substantially all of the U.S. and Canadian operations in our Fleet SolutionsMobility segment and a substantial portion of the global operations of our Travel and Corporate SolutionsPayments segment. WEX Bank's ILC charter enables it to issue certificates of deposit, accept money market deposits and borrow on federal funds lines of credit from other banks, which we believe provides us access to lower cost funds than many of our competitors, thus helping us to offer competitive products to our customers.
WEX Bank operates under a uniform set of state lending laws, and its operations are subject to extensive state and federal regulation. The bank’sWEX Bank’s primary regulators are the Utah DFIUDFI and the FDIC.FDIC; however WEX Inc. is not currently subject to the Federal Bank Holding Company Act due to WEX Bank’s status as an industrial bank. Continued licensing and federal deposit insurance are subject to ongoing satisfaction of compliance and safety and soundness requirements. Adverse changes to its ILC charter could impact WEX Bank'sBank’s ability to operate and/or attract funds or limit our ability to provide competitive offerings to our customers. If industrial loanILC charters were eliminated or if changes to such charters limited or effectively prohibited us from operating as we currently operate, without our operations being "grandfathered"“grandfathered”, we would either need to outsource our credit support activities or perform these activities ourselves, which would subject us to the credit laws of each individual state in which we conduct business. In addition, WEX Inc. might then become subject to or affected by the Bank Holding Company Act. Furthermore, we could not be a MasterCardMastercard and/or Visa issuer and would have to work with another financial institution to issue the product or otherwise sell the portfolio. Any such changes would be disruptive to our operations and could result in significant incremental costs and reduce or eliminate any perceived or actual competitive advantage, resulting in a material adverse effect on our business, financial condition and operating results. In addition, changes in the bank regulatory environment, including the implementation of new or varying measures or interpretations by the State of Utah or the federal government, may significantly affect or restrict the manner in which we conduct business in the future, could subject us to greater regulatory oversight requirements or could create a default under our 2016Amended and Restated Credit Agreement.
WEX Bank is subject to extensive supervision and regulation that could restrict our activities and impose financial requirements or limitations on the conduct of our business and limit our ability to generate income.
WEX Bank is subject to extensive federal and state regulation and supervision, including that of the FDIC the CFPB, and the Utah DFI.UDFI. See Part I – Item 1 – Business – “Regulation and Supervision” above for examples of such regulations applicable to WEX Bank. Banking regulations are primarily intended to protect depositors, depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders or noteholders.shareholders. These regulations affect our payment operations, capital structure, investment practices, dividend policy, and growth, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, consent orders with regulatory agencies, damages, civil money penalties or reputational damage, or other written orders, any of which could have a material adverse effect on our business, financial condition and results of operations.operating results. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. For example, a consent order issued by the FDIC and the
UDFI on May 6, 2022 (the “2022 Order”), required WEX Bank to strengthen its Bank Secrecy Act/anti-money laundering compliance program and to address related matters, including with respect to controls. The 2022 Order was terminated by the UDFI and the FDIC on November 8, 2023 and November 21, 2023, respectively, after we adequately satisfied the requirements of the 2022 Order. WEX Bank is also subject to a consent order issued by the FDIC on September 20, 2023 (the “2023 Order”), which requires WEX Bank to make certain improvements, which include corrections of certain issues identified in the 2023 Order and general enhancements to WEX Bank’s compliance management program. The terms of the 2023 Order will remain in effect and be enforceable until they are modified, terminated, suspended or set aside by the FDIC. For additional information with respect to the 2022 Order and the 2023 Order please see Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Matters. The U.S. Congress, federal regulatory agencies and federalstate legislatures and regulatory agencies frequently revise banking and securities laws, regulations and policies. We cannot predict whether, or in what form, any other proposed regulations or statutes will be adopted or the extent to which our business may be affected by any new regulation or statute. Such changes could subject our business to additional costs, limit the types of financial services and products we may offer and increase the ability of non-banks to offer competing services and products, among other things.
Volatility or adverse conditions in the economy or credit or other financial markets may negativelyhave a negative impact on WEX Bank’s ability to attract and retain deposits.
Volatility or adverse conditions in the economy or credit or other financial markets may limit WEX Bank’s ability to attract and retain deposits at a time when it would like or need to do so. In addition, the FDIC's final rule regarding Parent
Companies of Industrial Banks and Industrial Loan Companies, which becomes effective April 1, 2021, could make it easier for some commercial companies to obtain an industrial loan company charter, which could increase competition and limit our ability to attract deposits. Aa significant credit rating downgrade, material capital market disruptions, significant reductions to or withdrawals of HSA cash assets, or significant withdrawals by depositors at WEX Bank, among other things, could impact our ability to maintain adequate liquidity and impact our ability to provide competitive offerings to our customers. Further, any such limitation on the availability of deposits to WEX Bank could have an impact on our ability to fund our customers'customers’ purchases, which could have a material adverse effect on the Company'sour business, financial condition, and operating results.
In an environment of increasing interest rates and changes in the brokered deposit market, WEX Bank'sBank’s cost of capital wouldhas increased and may continue to increase.
WEX Bank uses collectively brokered and non-brokered deposits, including certificates of deposit and interest-bearing money-market deposits, in addition to custodial HSA cash assets to finance its operations, which primarily involves financing payments on behalf of our customers. Certificates of deposit carry fixed interest rates from issuance to maturity, which vary and are relatively short term in duration. The interest-bearing money market deposits carryare issued at both fixed and variable rates. Upon maturity, the deposits will likely be replaced by issuing new deposits to the extent that they are needed. In a rising interest rate environment,environments, including those experienced recently, WEX Bank wouldhas not bebeen able to replace maturing deposits with deposits that carry the same or lower interest rates. Therefore, rising interest rates would result in reduced net income to the extent that certificates of deposit and interest-bearing money market deposits mature and are replaced with deposits that carry higher interest rates and we are otherwise unable to, or decide not to, increase the fees we otherwise receive under contracts.contracts or find or use alternative cost effective sources of funds, such as HSA cash depository assets. Rising interest rates could also therefore limit our ability to offer competitive product offerings to our customers. At December 31, 2020, WEX Bank had outstanding $354.8 million in certificates of deposit maturing within one year, $148.6 million in certificates of deposit maturing between one and 3 years, and $439.9 million in interest-bearing money market deposits, for an aggregate exposure of $943.3 million in brokered deposits at WEX Bank.
WEX Bank is subject to funding risks associated with its reliance on brokered deposits.
As of December 31, 2020,2023, the most recent FDIC exam report categorized WEX Bank as “well capitalized” under the regulatory framework for prompt corrective action. Under applicable regulations, however, if WEX Bank were to be no longer categorized as "well capitalized"“well capitalized” under such framework, it would not be able to finance its operations through the acceptance of brokered deposits without the approval of the FDIC. Moreover, in December 2020,FDIC and/or could be subject to rate cap on the FDIC amended its brokered deposits regulations, effective April 1, 2021, and may in the future change the definition of brokered deposits or extend the classification to deposits not currently classified as brokered deposits. WEX Bank’s inability to accept brokered deposits, or a loss of a significant amount of its brokered deposits, could adversely affect its liquidity and therefore its ability to support and fund the Company'sCompany’s operations that it currently supports and funds. Additionally, such circumstances could require WEX Bank to raise deposit rates in an attempt to attract new deposits, or to obtain funds through other sources at higher rates, which would affect the Company'sCompany’s ability to offer competitive products to our customers in our segments served by WEX Bank and would have a material adverse effect on our business, financial condition, and operating results.
WEX Bank is subject to regulatory capital requirements that have in the past, and may in the future, require us to make capital contributions to WEX Bank andor that may restrict WEX Bank'sBank’s ability to make cash available to us.WEX Inc.
WEX Bank is subject to a number of regulatory requirements and, among other requirements, must maintain minimum amounts of regulatory capital. If WEX Bank does not meet these regulatory requirements, including the capital requirements, its regulators have broad discretion to institute a number of corrective actions that could have a direct
material effect on our financial condition. WEX Bank, as an institution insured by the FDIC, must maintain certain capital ratios, paid-in capital minimums and adequate allowances for loan losses. Under the Dodd-Frank Act, we are also required to serve as a source of financial strength for WEX Bank. If WEX Bank were to fail to meet any of the capital requirements to which it is subject, or if required under Dodd-Frank’s source of strength requirements, we may be forced to provide WEX Bank with additional capital, which could impair our ability to service our indebtedness or may not be permitted under the terms of our 2016Amended and Restated Credit Agreement or Notes.Agreement. For example, in 2022, due to the unprecedented pace at which fuel prices increased, WEX Inc. provided WEX Bank with additional equity in order for WEX Bank to maintain its minimum required amounts of regulatory capital.
In addition,Moreover, substantially all of the transactions of, and therefore the revenues derived from, the U.S. and Canadian operations of our Fleet SolutionsMobility segment and the global operations of our Travel and Corporate SolutionsPayments segment flow through WEX Bank. Due to the applicable regulatory regime, WEX Bank is limited in the ways it can transfer its cash or other assets to WEX Inc. One of the primary methods by which funds are transferred to WEX Inc. is through the payment of a dividend by WEX Bank to us. The other primary method is through a Master Service Agreement between WEX Bank and WEX Inc., which establishes the parameters of services between them with respect to the operation of the following: (i) a fleet card business for regional fleets; (ii) a fleet card business for the over-the-road freight carrier fleets; (iii) a corporate payments business; and (iv) a factoring business (collectively, the “Programs”), with certain of these Programs funded by WEX Bank and others funded by WEX Inc. WEX Bank and WEX Inc. each receive monthly compensation for their respective services to the Programs funded by the other party.
However, WEX Bank is subject to various regulatory requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums.minimums, and other payments. Further, a banking regulator may determine that the payment of dividends or other payments, including payments under the Master Service Agreement, would be inappropriate and could impose other conditions on the payment of dividends or such other payments or even prohibit their payment. Accordingly, WEX Bank may be unable to make any, or may only be able to make limited amounts, of its cash or other assets available to us, which could affect our ability to service our indebtedness, make acquisitions, enhance product offerings, or fund corporate needs, among other things, any of which could have a material adverse effect on our business, operations, or financial condition.condition, and operating results. For a further discussion of certain regulatory matters affecting WEX Bank’s ability to make cash available to WEX Inc., see, Part I – Item 1 – Business – Regulation and Supervision – General Regulation, Supervision and Examination of WEX Bank; Restrictions on Intercompany Borrowings and Transactions; and Restrictions on Dividends.
If WEX Bank fails to meet certain criteria, weWEX Inc. may become subject to regulation under the Bank Holding Company Act, which could force us to divest WEX Bank or become a Bank Holding Company or cease all of our non-banking activities, which could have an adverse effect on our revenue and business or could create a default under our 2016Amended and Restated Credit Agreement.
WEX Bank currently meets the criteria for exemption of an industrial bank from the definition of “bank” under the Bank Holding Company Act. EliminationThe elimination of this exemption, the effects of any potential or pending legislation which could affect the exemption in general or as it applies to or affects WEX Bank, or WEX Bank’s failure to qualify for this exemption in the future, wouldcould cause us to become subject to regulation under the Bank Holding Company Act.Act or have other negative impacts. This, would require usin turn, could result in WEX Inc.’s need to divest WEX Bank or become a Bank Holding Company and to possibly cease certain non-banking activities whichthat may be impermissible for a Bank Holding Company and could create a default under our 2016Amended and Restated Credit Agreement. Alternatively, if we were to become a Bank Holding Company this could have other adverse effects including an increase to our compliance costs, or making WEX Inc. a less attractive investment. Failure to qualify for or the elimination of this exemption or the effects of any legislation affecting industrial banks could thus have an adverse effect on our revenue and business. For additional information of how the loss of our status as an industrial bank could affect our business, please see Part I – Item 1A – Risk Factors – “The loss or suspension of WEX Bank's industrial loan company charter or changes in applicable regulatory requirements could be disruptive to certain of our operations, increase costs and increase competition.”
We are subject to limitations on transactions with WEX Bank, which may limit our ability to engage in transactions with and obtain credit from it.
Sections 23A and 23B of the FRA and the implementing regulations limit the extent to which we can borrow or otherwise obtain credit from or engage in other “covered transactions” with WEX Bank. “Covered transactions” include loans or extensions of credit, purchases of or investments in securities, purchases of assets, including assets subject to an agreement to repurchase, acceptance of securities as collateral for a loan or extension of credit, or the issuance of a guarantee, acceptance, or letter of credit. Although the applicable rules do not serve as an outright ban on engaging in “covered transactions,” they do limit the amount of covered transactions WEX Bank may have with any one affiliate and with all affiliates in the aggregate. The applicable rules also require that we engage in such transactions with WEX Bank only on terms and under circumstances that are substantially the same, or at least as favorable to WEX Bank, as those
prevailing at the time for comparable transactions with nonaffiliated companies. Furthermore, with certain exceptions, each loan or extension of credit by WEX Bank to the Company or its other affiliates must be secured by collateral with a market value ranging from 100 percent to 130 percent of the amount of the loan or extension of credit, depending on the type of collateral. Accordingly, WEX Bank may be unable to provide credit or engage in transactions with us, including transactions intended to help us service our indebtedness.
WEX Bank’s results may be materially and adversely affected by market fluctuations and significant changes in the value of financial instruments.
In addition to the risk that we fail to adequately assess and monitor credit risks posed by our counterparties and the risk that volatility or adverse conditions in the economy or credit or other financial markets may negatively impact us, the value of WEX Bank’s investment of custodial cash assets in securities and other financial instruments can be materially affected by market and interest rate fluctuations, which could affect our business, financial position or results of operations.
Market volatility, including, but not limited to interest rate volatility, illiquid market conditions and other disruptions in the financial markets may make it extremely difficult to value certain financial instruments. Subsequent valuation of financial instruments in future periods, in light of factors then prevailing, may result in significant changes in the value of these instruments. Any of these factors could cause a decline in the value of WEX Bank’s financial instruments, which may have an adverse effect on WEX Bank’s business, financial condition, results of operations, cost of capital, capital requirements, and ability to fund a customer’s withdrawal of depository assets. In addition, at the time of any future disposition of these financial instruments, the price that WEX Bank ultimately realizes will depend on the demand and liquidity in the market at that time and may be materially lower than current fair value.
WEX Bank’s risk management and monitoring processes, including its stress testing framework, seek to quantify and control WEX Bank’s exposure to more extreme market moves. However, WEX Bank’s risk management strategies may not be effective, and we could incur significant losses, if extreme market events were to occur.
Risks Related to our Indebtedness
We currently have a substantial amount of indebtedness and may incur additional indebtedness, which could affect our flexibility in managing our business and could materially and adversely affect our ability to meet our debt service obligations.
At December 31, 2020,2023, we had approximately $3,026.8$3,868.6 million of debt outstanding, net of unamortized debt issuance costs and debt discount, including $152.7 million in current liabilities,discount. Such amount outstanding includes obligations under the Notes, the Convertible Notes(i) our Amended and our 2016Restated Credit Agreement, which consists of a tranche A term loan facility, a tranche B term loan facility, and a secured revolving credit facility.facility, and (ii) securitized and participation debt and borrowed federal funds. In addition to our outstanding debt, as of December 31, 2020,2023, we had outstanding letters of credit of $51.6 million issued under the 2016our Amended and Restated Credit Agreement. We have additional indebtedness in the form of deposits held by WEX Bank and other liabilities outstanding.
Our substantial indebtedness currently outstanding, or as may become outstanding if we incur additional indebtedness, and the terms and conditions of such indebtedness, could, among other things:
•lead to difficulty in our ability to generate enough cash flow to satisfy our indebtedness obligations under our credit facilities, and if we fail to satisfy these indebtedness obligations, an event of default could result;
•require us to dedicate a substantial portion of our cash flow to repaying our indebtedness, thus reducing the amount of funds available to execute on our corporate strategy, to fund working capital or capital expenditures or for other general corporate purposes;
•limit our ability to borrow additional funds necessary for working capital, capital expenditures or other general corporate purposes;
•increase our vulnerability to adverse general economic or industry conditions;
•place us at a competitive disadvantage relative to our competitors that have less indebtedness or better access to capital, by, for example, limiting our ability to enter into new markets, upgrade our assets or pursue acquisitions or other business opportunities; and
•limit our flexibility in planning for, or reacting to changes in, our business.
We may also incur substantial additional indebtedness in the future. The Convertible Notes were issued in July 2020, and consist of $310.0 million in initial aggregate principal amount in notesIn addition to an affiliate of Warburg Pincus in a private placement. Under the terms of the Convertible Notes, we may elect to satisfy our bi-annual interest payment
obligations through the payment of interest in cash or by increasing the principal amount of the Convertible Notes by an amount equal to any interest we elect to satisfy in kind. As a result, the outstanding principal amount of the Convertible Notes may increase over time. Finally, we had $818.4 million of available borrowing capacity remaining under the revolving credit facility of the 2016Revolving Credit AgreementFacility as of December 31, 2020. We2023, we are also are permitted under our credit facilities to incur additional indebtedness, subject to specified limitations, including compliance with covenants contained in our 2016Amended and Restated Credit Agreement. If new debt is incurred under any circumstance, the associated risks faced by the Company, such as those set forth above, could intensify.
Furthermore, the Convertible Notes are convertible by their holders at any time prior to maturity, or earlier redemption or repurchase, based upon an initial conversion price of $200 per share of common stock. We may settle conversions of Convertible Notes, at our election, in cash, shares of common stock, or a combination of cash and shares of common stock. If we are unable, or it is undesirable, due to market or other conditions, to issue shares of common stock to satisfy a conversion request, then we will be required to settle the conversion in cash, which could reduce our cash position to a point that would materially adversely affect our business, operations, and financial condition. Moreover, if we are unable to meet any of our principal, interest, or other payment or settlement obligations under any of our debt agreements, we could be forced to restructure or refinance our obligations, seek additional equity financing or sell assets, which we may not be able to do on satisfactory terms or at all. Our default on any of our debt agreements could have a material adverse effect on our business, financial condition and results of operations.
In addition, the 2016Amended and Restated Credit Agreement requires that we meet certain financial covenants, including a consolidatedConsolidated EBITDA to consolidated interest charge coverage ratio and a consolidated leverage ratio, as described in Part II – Item 8 – Note 16, Financing and Other Debt, 2016 Credit Agreement.Debt. The 2016Amended and Restated Credit Agreement also contains various affirmative and negative covenants that, subject to certain customary exceptions, restrict our ability to, among other things, create liens over our property, incur additional indebtedness, enter into sale and lease-back transactions, make loans, advances or other investments, make non-ordinary course asset sales, declare or pay dividends or make other distributions with respect to equity interests, change the nature of our business, enter into certain agreements which restrict our ability to pay dividends or other distributions or create liens on our property, transact business with affiliates and/or merge or consolidate with any other person.
Our ability to comply with these provisions may be affected by events beyond our control, including prevailing economic, financial, and industry conditions. Failure to comply with the financial covenants or any other non-financial or restrictive covenants in our 2016Amended and Restated Credit Agreement, for any reason, could create a default. Upon a default, our lenders could accelerate the indebtedness under the facilities (except only the requisite lenders under the revolving credit facility and the tranche A term loan facility may accelerate the revolving credit facility due to a breach of the financial covenants), foreclose against their collateral or seek other remedies, which could trigger a default under the Notes and the Convertible Notes and would jeopardize our ability to continue our current operations. The Notes
Fluctuations in interest rates could materially affect the interest expense incurred under our Amended and Restated Credit Agreement and any other payments subject to variable interest rates.
Because a significant portion of our debt under the Convertible Notes also contain customary negativeAmended and affirmative covenants, including, without limitation,Restated Credit Agreement bears interest at variable rates, increases in interest rates could materially increase our interest expense. In addition, the purchase agreement by which WEX Inc. purchased certain covenants placingcontractual rights to serve as custodian or sub-custodian to certain limitationsHSAs from HealthcareBank includes additional consideration payable annually that is calculated on our abilitya quarterly basis and is contingent, and based, upon any future increases in the Federal Funds rate. Due to significant increases in the Federal Funds rate, the Company expects that it will incur additional debt, and events of default that if breached could allow the requisite noteholdersmaximum remaining contingent consideration payable under the arrangement. A significant decrease in the Federal Funds rate prior to accelerate the maturityexpiration of the Notescontingency period could result in the Company incurring less than the full contingency amount, however, the Company is currently unable to determine or predict whether such decreases will occur. For more information, see Part II – Item 7 – Management’s Discussion and the Convertible Notes, as applicable,Analysis of Financial Condition and to exercise their rightsResults of Operations - Liquidity and remedies under the Notes and the Convertible Notes, and could also trigger a cross-default under the 2016 Credit Agreement.Capital Resources.
We may want or need to refinance a significant amount of indebtedness or otherwise require additional financings, but we cannot guarantee that we will be able to refinance or obtain additional financing on favorable terms or at all.
We may elect or need to refinance certain of our indebtedness to react to changing economic and business conditions, or for other reasons, even if not required to do so by the terms of such indebtedness. Moreover, we may need, or want, to raise substantial additional financing to replace maturing debt, or to fund working capital, capital expenditures, acquisitions or other general corporate requirements. Our ability to arrange additional financing or refinancing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. In addition, our access to lenders in the future is also dependent on, among other things, market conditions, which are variable and potentially volatile, and which could result in increased costs for obtaining and servicing our indebtedness. Accordingly, there can be no assurance that we will be able to obtain additional financing or refinancing on terms acceptable to us or at all, which could have a material adverse effect on us.
Fluctuations in interest rates could materially affect the interest expense on our 2016 Credit Agreement.
Because a significant portion of our debt under the 2016 Credit Agreement bears interest at variable rates, increases in interest rates could materially increase our interest expense. Under our 2016 Credit Agreement, we had $2.3 billion of indebtedness outstanding at December 31, 2020, of which approximately 40% was at variable interest rates for which we had not entered into interest rate swap agreements to fix the future interest payments. An increase in interest rates would increase the cost of borrowing under that portion of our 2016 Credit Agreement. As of December 31, 2020, 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 2016 Credit Agreement. These swap agreements expire at various points prior to the maturity of the 2016 Credit Agreement and may not be effective at mitigating the risk of increasing interest rates.
Further, our 2016 Credit Agreement uses LIBOR as a reference rate for our term loans and revolving credit facility, such that the interest due pursuant to such loans may be calculated using LIBOR (subject to a stated minimum value). On July 27, 2017, the United Kingdom’s Financial Conduct Authority (the "FCA"), which regulates LIBOR, announced that it intends to stop encouraging or compelling banks to submit rates for the calibration of LIBOR by the end of 2021. On November 30, 2020, ICE Benchmark Administration, the administrator of LIBOR, with the support of the United States Federal Reserve and the FCA, announced plans to consult on ceasing publication of LIBOR on December 31, 2021 for only the one week and two month LIBOR tenors, and on June 30, 2023 for all other LIBOR tenors. While this announcement extends the transition period to June 2023, the United States Federal Reserve concurrently issued a statement advising banks to stop new LIBOR issuances by the end of 2021. In light of these recent announcements, the future of LIBOR at this time is uncertain and any changes in the methods by which LIBOR is determined or regulatory activity related to LIBOR's phaseout could cause LIBOR to perform differently than in the past or cease to exist. In June 2017, the Alternative Reference Rates Committee selected the Secured Overnight Financing Rate (“SOFR”), a new index calculated by reference to short-term repurchase agreements backed by Treasury securities, as its preferred replacement for U.S. dollar LIBOR. Whether or not SOFR attains market acceptance as a LIBOR replacement tool remains in question. As such, the future of LIBOR and the potential alternatives at this time is uncertain. If the method for calculation of LIBOR changes, if LIBOR is no longer available or if lenders have increased costs due to changes in LIBOR or changes in law, we may suffer from potential increases in interest rate costs on our floating debt rate and our hedging arrangements may not perform as expected. Further, we may need to renegotiate our 2016 Credit Agreement and the variable rate loans thereunder to replace the interest rate calculated by reference to LIBOR with an interest rate calculated by reference to a new standard that is established.
Risks Related to Regulation
Our business is subject
Existing and new laws and regulations and enforcement activities, including those related to a wide variety of consumer protection laws, rules, regulations and government policiessuch as under the Dodd-Frank Act, which may have a significantFederal Trade Commission Act and state legislation, could negatively impact on our business and the markets in which we presently operate, limit our expansion opportunities and significantly impact our results of operations and financial condition.
Our operations are subject to substantial regulation both domestically and internationally. In addition, there are often new regulatory efforts, which could result in significant constraints and may impact our operations. These existing and emerging laws and regulations can make the Dodd-Frank Wall Street Reformexpansion or operations of our business very difficult and Consumer Protectionnegatively impact our revenue or increase our compliance costs. We also conduct business with other highly regulated businesses such as banks, payment card issuers, and health insurance providers. These industries are subject to significant potential new regulations, laws, or reforms that could negatively affect these businesses, their ability to maintain or expand their products and services, and the costs associated with doing so. Any such developments could also negatively impact our business and operations. If the exemption to the definition of “bank” for industrial banks under the Bank Holding Company Act of 2010,were eliminated without any grandfathering or theaccommodations for existing institutions, we could be required to become a bank holding company which could prompt us to either cease certain activities or divest WEX Bank. The Dodd-Frank Act, was enacted into law. Since enactment, the Dodd-Frank Act has generally resulted in increased government regulation and supervision and when fully implemented, will, among other things, result in substantial changesof our business, including in the regulation of derivatives, and capital market activities. The ultimate impact of the Dodd-Frank Act continuesactivities, consumer finances and certain requirements relating to evolve as regulations that are intended to implement the Dodd-Frank Act are adopted, and the text of the Dodd-Frank Act is analyzed by stakeholders and the courts.executive compensation. In particular, the Dodd-Frank Act establishesestablished federal oversight and regulation of the over-the-counter derivatives market and entities that participate in that market. Derivatives regulations have added costs to our business, and any additional requirements, such as future registration requirements or increased regulation of derivative contracts, may add additional costs or may require us to change any fuel price, currency and interest rate hedging practices we may then use to comply with new regulatory requirements. Potential changes could also include clearing and execution methodology of our derivatives transactions. Presently, we cannot assess the capital or margin requirements which might apply to our over-the-counter transactions. Once implemented, these changes could result in increased transaction costs. In summary, the Dodd-Frank Act and any new regulations could increase the cost of derivative contracts or modify the way in which we conduct those transactions. Additionally, we are required to pay to the lenders under the 2016Amended and Restated Credit Agreement, any increased costs associated with the Dodd-Frank Act and other changes in laws, rules or regulations, subject to the terms of the 2016Amended and Restated Credit Agreement.
The Dodd-Frank Act also created the Consumer Financial Protection Bureau, or the CFPB to regulate the offering of consumer financial products or services under the federal consumer financial laws. The CFPB assumed rulemaking authority under the existing federal consumer financial protection laws, and enforces those laws against and examines certain non-depository institutions and insured depository institutions with total assets greater than $10 billion and their affiliates. In addition, the CFPB was granted general authority to prevent covered persons or service providers from committing or engaging in unfair, deceptive or abusive acts or practices under federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The CFPB is also engaged inincluding rulemaking and regulation of the payments industry, in particular with respect to prepaid cards. The CFPB amended several aspects of its prepaid accounts rule, which became effective on April 1, 2019. The extensive nature of these types ofconsumer finance regulations and the implementation dates for any such additional rulemaking may result in additional compliance obligations and expense for our business and our customers. The CFPB also has broad rulemaking authority for a wide range of consumer protection laws, which it has exercised as described in Item 1 under the heading “Other Items“Regulation and Supervision – Regulation - United States–The Dodd Frank Act and the Consumer Financial Protection Bureau.Protection.” It is unclear what future
regulatory changes may be promulgated by the CFPB and what effect, if any, such changes would have on our business and operations.
As required under the Dodd-Frank Act, the Government Accountability Office issuedWEX Inc. and its study on the implications of any elimination of the exemptionU.S. subsidiaries are also subject to the definition of “bank” for industrial banks under the Bank Holding Company Act. The study did not make a recommendation regarding the elimination of this exemption. However, if this exemption were eliminated without any grandfathering or accommodations for existing institutions, we could be required to become a bank holding company which could prompt us to either cease certain activities or divest WEX Bank.
The Dodd-FrankFederal Trade Commission Act and any related legislation or regulations, or any repeal or replacement of such legislation or regulations, may have a material impact on our business, results of operations and financial condition. The full impact of the Dodd-Frank Act will not be known until all of the regulations implementing the statute are adopted and implemented. However, compliance with thesesimilar state laws and regulations, including any subsequent repealswhich prohibit unfair or amendments of them, may require us to make changes to our business, and, there is a significant possibility that the Dodd-Frank Act will, at a minimum, result in increased regulatory burden and compliance costs. We have invested significant management time and resources to address the various provisions of the Dodd-Frank Act and the numerous regulations that are required to be issued under it, and may have to invest significant additional time, including to address any changed business environment resulting from a repealdeceptive acts or replacement of all or part of the Dodd Frank Act and any related legislation or regulation.
Existing and new laws and regulations and enforcement activities could negatively impact our business and the markets we presently operatepractices in or could limit our expansion opportunities.
Our operations areaffecting commerce. The Federal Trade Commission Act applies to all businesses operating in the United States, and WEX Bank is subject to substantial regulation both domestically and internationally. In addition, there are often new regulatory efforts which could result in significant constraints and may impact our operations. These existing and emerging laws and regulations can makeFDIC jurisdiction as it relates to the expansion or operations of our business very difficult and negatively impact our revenue or increase our compliance costs. Federal Trade Commission Act.
Failure to comply with applicable laws or regulations may result, among other things, in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of services, and/or the imposition of civil and criminal penalties, including fines. For example, WEX Bank entered into the 2023 Order with the FDIC, which requires WEX Bank to make certain improvements, which include corrections of certain issues identified in the 2023 Order and general enhancements to WEX Bank’s compliance management program. For additional information regarding the 2023 Order please see Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Matters. Among the regulations that impact us or could impact us are those governing: interchange rates, interest rate and fee restrictions, credit access and disclosure requirements, collection and pricing requirements, compliance obligations, data security and data breach requirements, identity theft avoidance programs, health care mandates, the cost and scope of public and private health insurance coverage, and anti-money laundering compliance programs. We also often must obtain permission from government regulators to conduct business in new locations or in connection with the transfer of licenses for businesses that we acquire. Changes to these regulations, including expansion of consumer-oriented regulation to business-to-businessB2B transactions, could materially adversely affect our operations, financial condition and results of operations and could further increase our compliance costs and limit our ability to expand to new markets.
We also conduct business with other highly regulated businesses such as banks, payment card issuers, and health insurance providers. These industries are subject to significant potential new regulations, laws, or reforms that could negatively affect these businesses, their ability to maintain or expand their products and services, and the costs associated with doing so. These developments could also negatively impact our business.
Laws or regulations developed in one jurisdiction or for one product could result in new laws or regulations in other jurisdictions or for other products.
Regulators often monitor other approaches to the governance of the payment industry. As a result, a law or regulation enacted in one jurisdiction could result in similar developments in another. In addition, law and regulation involving one product could influence the extension of regulations to other product offerings.
The expansion of certain regulations could negatively impact our business in other geographies or for other products. Rules and regulations concerning interchange and business operations regulations, for example, may differ from country to country which adds complexity and expense to our operations.
These varying and increasingly complex regulations could limit our ability to globalize our products and could significantly and adversely affect our business, financial condition and operating results.
Regulations and industry standards intended to protect or limit access to personal information could adversely affect our ability to effectively provide our services.
Governmental bodies in the United States and abroad have adopted, or are considering the adoption of, laws and regulations restricting the transfer of, and requiring safeguarding of, non-public personal information. For example, in the
United States, all financial institutions must undertake certain steps to ensure the privacy and security of consumer financial information, and the California Consumer Privacy Act, or CCPA, which became effective on January 1, 2020, imposes additional restrictions on the collection, processing and disclosure of personally-identifiable data, including imposing breach reporting requirements and increased penalties on data privacy incidents. In Europe, the adoption of General Data Protection Regulation (commonly referred to as GDPR) also requires additional privacy protections and extends the scope of the EU data protection laws to all companies processing data of EU residents, regardless of the company’s location. In connection with providing services to our clients, we are required by regulations and arrangements with payment networks and certain clients to provide assurances regarding the confidentiality and security of non-public consumer information. These arrangements require periodic audits by independent companies regarding our compliance with industry standards such as payment card industry standards and also allow for similar audits regarding best practices established by regulatory guidelines. The compliance standards relate to our infrastructure and operational procedures designed to safeguard the confidentiality and security of non-public consumer personal information received from our customers. Our ability to maintain compliance with these standards and satisfy these audits will affect our ability to attract and maintain business in the future. If we fail to comply with these regulations, we could be exposed to suits for breach of contract or to governmental proceedings. In addition, our client relationships and reputation could be harmed, and we could be inhibited in our ability to obtain new clients. If more restrictive privacy laws or rules are adopted by authorities in the future on the federal or state level, our compliance costs may increase, our opportunities for growth may be curtailed by our compliance capabilities or reputational harm and our potential liability for security and data privacy breaches may increase, all of which could have a material adverse effect on our business, financial condition and operating results.
Changes in our tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities could affect our future results.
We are subject to taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our global provision for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis. Our future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation. Any of these changes could have a material adverse effect on our profitability. For example, the 2017 Tax Act enacted in December 2017 had a significant impact on our tax obligation and effective tax rate for the fourth quarter of 2017. We are also subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for taxes. There can be no assurance that the outcomes from these examinations will not materially adversely affect our financial condition and operating results.
We urge our stockholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.
Compliance with anti-money laundering, counter-terrorism and sanctions laws and regulations creates additional compliance costs and reputational risk.
The applicable laws and regulations in the various jurisdictions in which WEX operates impose significant anti-money laundering compliance and due diligence obligations on the local entities, including WEX Bank, WEX Europe UK Limited,Payments, OFEL, and WEX Europe (Netherlands) B.V.,OFL, as well as our other regulated subsidiaries. We must verify the identity of customers, monitor and report unusual or suspicious account activity, as well as transactions involving amounts in excess of prescribed limits, and refrain from transacting with designated persons or in designated regions, in each case as required by the applicable laws and regulations (such as the Bank Secrecy Act and regulations of the United States Treasury Department and the Internal Revenue Service regulations in the United States, and the Money Laundering and Terrorist Financing Regulations 2019 in the U.K.U.K). For example, WEX Bank entered into the 2022 Order with the FDIC and the ActUDFI, which required WEX Bank to strengthen its Bank Secrecy Act/anti-money laundering compliance program and to address related matters, including with respect to controls. The 2022 Order was terminated by the UDFI and the FDIC on November 8, 2023 and November
21, 2023, respectively. For additional information with respect to the 2022 Order please see Part II – Item 7. Management’s Discussion and Analysis of Financial SupervisionCondition and Results of Operations - Regulatory Matters.
We are also subject to certain economic and trade sanctions programs that are administered by OFAC, which prohibit or restrict transactions to or from or dealings with specified countries, their governments, and in certain circumstances, their nationals, and with individuals and entities that are specially designated nationals of those countries, narcotics traffickers, and terrorists or terrorist organizations. Similar anti-money laundering and counter-terrorist financing and proceeds of crime laws apply to movements of currency and payments through electronic transactions and to dealings with persons specified in lists maintained by the country equivalent to OFAC lists in several other countries and require specific data retention obligations to be observed by intermediaries in the Netherlands). payment process.
Financial regulators have issued various implementing regulations and have made enforcement a high priority. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could result in the imposition of fines or penalties, severe criminal or civil sanctions and other serious legal and reputational consequences, including restrictions on regulated subsidiaries’ ability to take on new business, which may impact our business, financial condition, and operating results. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing laws and regulations might be administered or interpreted.
Laws or regulations developed in one jurisdiction or for one product could result in new laws or regulations in other jurisdictions or for other products.
Regulators often monitor other approaches to the governance of the payment industry. As a result, a law or regulation enacted in one jurisdiction could result in similar developments in another. In addition, laws and regulations involving one product could influence the extension of regulations to other product offerings.
The expansion of certain regulations could negatively impact our business in other geographies or for other products. Rules and regulations concerning interchange and business operations regulations, for example, may differ from country to country, which adds complexity and expense to our operations. These varying and increasingly complex regulations could limit our ability to globalize our products and could significantly and adversely affect our business, financial condition and operating results.
Regulations and industry standards intended to protect or limit access to personal information could adversely affect our ability to effectively provide our services, impose significant compliance burdens, and expose us to liability for security incidents involving personal information.
Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the internet have recently come under increased public scrutiny. Governmental bodies in the United States and abroad have adopted, or are considering the adoption of, laws and regulations restricting the transfer of, and requiring safeguarding of, personal information. For example, in the United States, all financial institutions must undertake certain steps to ensure the privacy and security of consumer financial information. In April 2022, a final rule jointly issued by several U.S. federal banking regulators became effective that requires banking organizations to notify their primary federal regulators within 36 hours of certain computer security incidents. The CCPA, imposes additional restrictions on the collection, processing and disclosure of personal information. The Virginia Consumer Data Protection Act became effective on January 1, 2023, the Colorado and Connecticut privacy laws on July 1, 2023, and Utah’s new law on December 31, 2023. Florida, Montana, Oregon and Texas have also adopted privacy laws becoming effective in 2024, with Delaware, Iowa and a few other states already passing similar legislation that will become effective in 2025. Even more states are considering privacy legislation. In Europe and the United Kingdom, the GDPR and the UK GDPR also require additional privacy protections and applies to all companies processing data of EU/UK residents, regardless of the company’s location. If more restrictive privacy laws or rules are adopted by authorities in the future on the federal or state level, our compliance costs may increase, our opportunities for growth may be curtailed by our compliance capabilities or reputational harm and our potential liability for security and data privacy breaches may increase, all of which could have a material adverse effect on our business, financial condition and operating results.
Additionally, in connection with providing services to our clients, we are required by regulations and arrangements with payment networks and certain clients to provide assurances regarding the confidentiality and security of personal information and other confidential data. Pursuant to these arrangements, we are subject to periodic audits regarding payment card industry standards. Our ability to maintain compliance with these standards and satisfy these audits will affect our ability to attract and maintain business in the future. If we fail to comply with these standards, we could be exposed to suits for breach of contract or to governmental enforcement proceedings. In addition, our client relationships and reputation could be harmed.
Changes in our tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities could affect our future results.
We are subject to taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our global provision for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis. Forecasting our future effective tax rates is complex, subject to uncertainty and could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation. Changes in tax laws and regulations, as well as changes and conflicts in related interpretations and other tax guidance, could materially impact our tax receivables and liabilities and our deferred tax assets and deferred tax liabilities. Any of these changes could have a material adverse effect on our profitability. The 2017 Tax Act, CARES Act of 2020, and the Inflation Reduction Act of 2022 significantly changed the U.S. Internal Revenue Code, including taxation of U.S. corporations, by, among other things, reducing the federal corporate income tax rate, limiting interest deductions, altering the expensing of capital expenditures, imposing a 1 percent excise tax on share repurchases and enacting a new corporate alternative minimum tax. We are also subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for taxes. There can be no assurance that the outcomes from these examinations will not materially adversely affect our financial condition and operating results.
We urge our stockholders to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences of investing in or holding our common stock.
As a non-bank custodian WEX Inc. is subject to regulation and noncompliance could render it unable to maintain its non-bank custodian status.
WEX Inc. is a passive non-bank custodian, under designation by the U.S. Department of the Treasury, of HSA assets, a portion of which are in investment funds for individual HSA holders at a third-party brokerage firm, and the remaining portion of which are in cash and have been placed with various depository institutions.
As a non-bank custodian, WEX Inc. is required to comply with the provisions of the Treasury Regulations, including the net worth and administration of fiduciary duties requirements, among other requirements. If WEX Inc. should fail to comply with the Treasury Regulations, including the net worth and administration of fiduciary duties requirements, such failure would materially and adversely affect its ability to maintain its current custodial accounts and to grow by adding additional custodial accounts, and it could result in the institution of procedures for the revocation of its authorization to operate as a non-bank custodian, any or all of which could materially adversely affect our business, financial condition, or results of operations. Additionally, revocation of WEX Inc.’s status as a non-bank custodian would affect our ability to earn revenues from certain custodial assets, which could have a material adverse effect on our business, financial condition and operating results.
The healthcare regulatory and political framework is uncertain and evolving, and we cannot predict the effect that further healthcare reform and other changes in government programs may have on our business, results of operations or financial condition.
The products that WEX Health’s software and payment solutions support are subject to various state and federal laws, including the Health Care Reform laws, which have been subject to persistent political pressure to be modified or repealed. As a result, the U.S. healthcare laws and regulations are evolving and may change significantly in the future. For example, the 2017 Tax Act repealed certain provisions of Health Care Reform, including reducing to zero the tax penalty for individuals who decline to obtain Health Care Reform-compliant healthcare coverage and there could be additional challenges to Health Care Reform that may result in additional changes in the future. Such challenges and changes may lead to uncertainty and unpredictability in the U.S. health care market, which may materially affect the availability and cost of health coverage, the viability of health care providers and health benefit plans, and the proportion of persons in the U.S. who have health insurance, the distribution between privately funded and government funded health insurance, and the future demand for, and profitability of, the offerings of our health-related business under our current business model, which could adversely affect our business. The full impact of Health Care Reform and other changes in the healthcare industry and in healthcare spending is unknown, and therefore, we are unable to predict what effect healthcare reform measures will have on our business.
Evolution and expansion of our business may subject us to additional regulatory requirements and other risks, for which failure to comply or adapt could harm our operating results.
The evolution and expansion of our business may subject us to additional risks and regulatory requirements, including laws governing money transmission and payment processing services. These requirements vary throughout the markets in which we operate, and have increased over time as the geographic scope and complexity of our payments product
services have expanded. While we maintain a compliance program focused on applicable laws and regulations throughout the payments industry, there is no guarantee that we will not be subject to fines, criminal and civil lawsuits or other
regulatory enforcement actions in one or more jurisdictions, or be required to adjust business practices to accommodate future regulatory requirements.
In order to maintain flexibility in the growth and expansion of our payments operations, we have registered as a money service business with FinCEN and have obtained money transmitter licenses (or their equivalents) in most states and expect to continue the license application process in additional jurisdictions throughout the United States as needed to accommodate new product development. Additionally, we have obtained necessary licenses required for business in certain non-U.S. jurisdictions where we provide payment services, including but not limited to the European Union, Ireland, the United Kingdom, Singapore and Australia. Evaluation of our compliance efforts, as well as the questions of whether and to what extent our products and services are considered money transmission, are matters of regulatory interpretation and could change over time. Our efforts to acquire and maintain these licenses could result in significant management time, effort, and cost, and may still not guarantee compliance or our ability to maintain such licenses given the constant state of change in these regulatory frameworks. Accordingly, costs associated withand operational disruptions resulting from changes in compliance requirements, regulatory audits, enforcement actions, reputational harm, revocation of licenses or other regulatory limits on our ability to grow our payment processing business could adversely affect our financial results. For a further discussion of laws and regulations governing our money transmission operations, see, Part I - Item 1 – Business - Regulation and Supervision - Money Transmission and Payment Instrument Licensing Regulations.
Our increased presence in foreign jurisdictions increases the possibility of foreign law violations or violation of the FCPA and the United KingdomKingdom’s Bribery Act of 2010 (“UKBA”).2010.
We are subject to the FCPA and the UKBA, as we own subsidiaries organized under UK law, which serve as holding companies for other subsidiaries. The FCPA generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business. The UKBA is broader in its reach and prohibits bribery in purely commercial contexts in addition to bribery of government officials, and it does not allow certain exceptions that are permitted by the FCPA. Other countries in which we operate or have operated, including Brazil, and other countries where we intend to operate, also have anti-corruption laws, which we are, have been or will be subject to.
Our employees and agents interact with government officials on our behalf, including as necessary to obtain licenses and other regulatory approvals necessary to operate our business. We also have a number of contracts with third-parties that are owned or controlled by foreign governments. These interactions and contracts create a risk of unauthorized payments or offers of payments by one of our employees or agents that could be in violation of the FCPA, UKBA or other similar laws, and we could be held liable for such unauthorized actions taken by our employees or agents.
In recent years, there have been significant regulatory reviews and actions taken by the United States and other regulators related to anti-bribery laws, and the trend appears to be applying greater scrutiny onaround payments to, and relationships with, foreign entities and individuals,. and companies’ controls and procedures related to compliance with anti-bribery laws.
Although we have policies and procedures designed to ensure that we, our employees, agents and intermediaries comply with the FCPA and UKBA, such policies or procedures may not work effectively all of the time or protect us against liability for actions taken by our employees, agents and intermediaries with respect to our business or any businesses that we may acquire. In the event that we believe, or have reason to believe, that our employees, agents or intermediaries have or may have violated applicable anti-corruption laws, we may be required to investigate or have a third party investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. Our continued operation and expansion outside the United States could increase the risk of such violations in the future. Any violationViolations of the FCPA, the UKBA or similar laws and regulations, couldcan result in significant expenses, require implementation of new and additional controls and procedures, divert management attention, and otherwise have a negative impact on us. Any determination that we have violated the FCPA, UKBA or laws of any other jurisdiction couldcan subject us to, among other things, penalties and legal expenses that could harm our reputation and have a material adverse effect on our financial condition and results of operations. The possibility of violations of the FCPA, UKBA or other similar laws or regulations may increase as we expand globally and into countries with recognized corruption problems.
Risks Related
Legislation and regulation of, and private business actions related to the reduction of GHG emissions could adversely affect our Dependencebusiness.
In light of the increasing focus of local, state, regional, national and international regulatory bodies on Technology
IfGHG emissions and climate change issues, there has been a wide-ranging policy debate, both in the technologies we use in operating our businessU.S. and interacting with our customers fail, are unavailable, or do not operate to expectations, or we fail to successfully implement technology strategies and capabilities in connection with our outsourcing arrangements, our business and resultsinternationally, regarding the regulation of operations could be adversely impacted.
We utilize a combination of proprietary and third-party technologies, including third-party owned and operated “cloud” technologies or third-party managed technology platforms, data-centers, and processing systems, to conduct our business and interact with our customers, partners and suppliers, among others. This includes technology that we have developed, have contracted with others to develop, have outsourced to a single provider to operate or have obtained through third-parties by way of service agreements. To the extent that our proprietary technology or a third-party providers’ technology does not work as agreed to or as expected, or if we experience outages or unavailability resulting from their operationsGHG emissions. The Biden Administration has made climate change and the services they provide to us, our ability to efficientlylimitation of GHG emissions one of its initial and effectively deliver services could be adversely impacted and our business and results of operations could be adversely affected. Similarly, any failure by our customers orprimary objectives. For example, in January 2021, U.S. President Biden signed an executive order
recommitting the United States to the Paris Agreement, pursuant to which nearly 200 nations have committed to reduce global emissions. Additional legislation or regulation promulgated by states, geographic regions, the U.S. Environmental Protection Agency, and/or any international agreements to which the U.S. may become a party, that control or limit GHG emissions or otherwise seek to address climate change could adversely affect our partners’ and our merchants’ operations. Finally, private businesses, including vehicle manufacturers, are increasingly taking proactive steps to control or limit GHG emissions, including by producing and/or purchasing vehicles that operate fully using alternative fuels or hybrid EVs. Many auto and truck manufacturers have announced plans to electrify large portions of Contents
partnerstheir fleet over the next decade and the trend toward use of hybrid EVs continues to accessgrow. Because our business is currently heavily reliant on the technology that we develop internallylevel of transactions involving gasoline and diesel fuels, existing or future laws or regulations or business actions related to GHGs and climate change, including incentives to conserve energy or use alternative energy sources, could have an adverse effecta negative impact on our business resultsif any of operationsthe same serve to reduce demand for gasoline and financial condition. Althoughdiesel fuels and we make substantial investmentsdo not or are unable to develop products or relationships to adapt to such potential events. For further information on how the increase in technology, thereusage of alternative fuels in vehicles affects our business, please see Part I – Item 1A – Risk Factors – “A significant portion of our revenue is no guarantee that it will functiongenerated by the purchase and sale of gasoline and diesel fuel by or through our customers and from our fuel retailer partners, and, as intended once it is placed into operation. Lastly, given our reliance on technology, we regularly assess our technology plans, including both platforms and technology infrastructure. Toa result, a reduction in the extent that we conclude that certain technologies should be retired, that existing platforms should be consolidated,demand for or that we should change our technology strategies, we may be required to impair supply of gasoline and/or accelerate depreciation on certain assets. Any of these potential changes diesel fuel and/or failuresvolatility in our technology strategies may also divert management’s attention andsuch fuel prices could have a material adverse effect on our business, financial condition, and results of operations.operating results.”
Our business is
Risks Related to our Dependence on Technology
We regularly subject toexperience cyberattacks and attempted security and privacy breaches and weexpect they will continue in the future. We may not be able to adequately protect our information systems, including the data we collect, about our customers, which could subject us to, among other things, liability and damage to our reputation. Our efforts to implement robust security measures and comply with applicable data protection laws are costly and time-consuming and they cannot provide absolute security against cyberattacks, security breaches or unauthorized access.
Increased global cybersecurity vulnerabilities and threats and more sophisticated and targeted cyber-related attacks pose an ongoing risk to the security of our information systems and networks. We regularly experience cyberattacks and expect they will continue in the future. We have not experienced a material loss from such an attack to date but could suffer such a loss in the future.
We collect and store sensitive data about our customersindividuals, including health and their fleets, includinghealthcare related information, financial information (e.g., bank account information and spending data. Our customers expect us to keep this information in our confidence. In certain instances, the information we collect includespayment card information), government identification documents or numbers (e.g., social security numbers and tax identification numbers. As a result of applicable laws, wenumbers), information regarding protected categories and spending data. We are required to take commercially reasonable measures to prevent and mitigate the impact of cyberattacks, as well as the unauthorized access, acquisition, release and use of “personally identifiable information,” such as social security numbers. While social security numbers and tax identification numbers constitute only a part of the data we keep, inpersonal information. In the event of a security breach, we would beare required to determine the types of information compromised and determine corrective actions and next steps under applicable laws, which would requirerequires us to expend capital and other resources to address the security breach and protect against future breaches. In addition, as outsourcing, specialization of functions, third-party digital services and technology innovation within the payments industry increase (including with respect to mobile technologies, tokenization, big data and cloud storage solutions), more third parties are involved in processing card transactions andtransactions. Accordingly, there is a risk that the confidentiality, integrity, privacy and/or security of data held by, or accessible to, third parties, including merchants that accept our cards, payment processors and our business partners, may be materially compromised, which could lead to unauthorized transactions on our cards and costs associated with responding to such an incident. In addition, high profile data breaches could change consumer behaviors, impact our ability to access data to make product offers and credit decisions, result in legislation and additional regulatory requirements, and result in increases in our compliance and monitoring costs. An increasing number of organizations, including large on-line and off-line merchants and businesses, large Internet companies, financial institutions, and government institutions, have disclosed breaches of their information security systems, some of which have involved sophisticated and highly targeted attacks, including on portions of their websites or infrastructure. Like those companies, we too, are subject to regular and repeated attempts to breach our information security protections.
The techniques used in attempts to obtain unauthorized, improper or illegal access to our systems, our data or our customers’ data, to degrade service, or to sabotage our systems are constantly evolving, are difficult to detect quickly, and may not be recognized until after a successful penetration of our information security systems. Cyber threats include, but are not limited to: malicious software; destructive malware; ransomware; attempts to gain unauthorized access to systems or data; disruption to operations or critical systems; denial of service attacks; unauthorized release of confidential, personal or otherwise protected information (ours or that of our employees, customers or partners); corruption or encryption of data, networks or systems; harm to individuals; and loss of assets. Unauthorized parties attempt to gain access, and in some instances have gained access, to our systems or facilities through various means, including, among others, targeting our systems or facilities or our third-party vendors or customers, or attempting to fraudulently induce our employees, partners, customers or others into disclosing user names, passwords, payment card information, or other sensitive information, which may in turn be used to access our information technology systems. Certain efforts may be state-sponsored and supported by significant financial and technological resources, making them
even more difficult to detect. Like many companies, we are a target for such breachesdetect, prevent and attacks. Although wemitigate. Our security measures may also be breached due to employee error, malfeasance, system errors or vulnerabilities, or other irregularities. We have developed robust systems and processes that are designed to protect our data and customer data and to prevent data loss and other security breaches, and we will continue to expend significant additional resources to bolster these protections,protections. However, these security measures cannot provide absolute security. Our information technologysecurity and infrastructure may be vulnerable to successful cyberattacksinsufficient, circumvented or security breaches, and third parties may be able to access our customers’ personal or proprietary information and data that are stored on or accessible through those systems.become obsolete.
Our security measures may also be breached due to employee error, malfeasance, system errors or vulnerabilities, or other irregularities. Any actual or perceived breach of our security could interrupt our operations; result in our systems or services being unavailable; result in platform, information and network shutdowns; result in improper disclosure of data; materially harm our reputation and brand; result in significant legal and financial exposure; lead to loss of customer confidence in, or decreased use of, our products and services; and, adversely affect our business and results of operations. Any breaches of network or data security at our partners, some of whom maintain information about our customers, or breaches of our customers’ systems could have similar effects. In addition, our third party partners, customers or vendors could have vulnerabilities on their own computer systems that are entirely unrelated to our systems, but could mistakenly attribute their own vulnerabilities to us. While we take commercially appropriate steps to safeguard data used by and contained on the systems of our partners, customers and vendors, we cannot control all access to those systems and they are therefore subject to potentialthe risk of cyberattacks and fraud.
data, and compliance with these regulations could impose significant compliance burdens and failure to comply with such regulations could result in penalties, cause harm to our reputation and have a negative impact on our business. Furthermore, as we have increasedThe regulatory framework for privacy and data protection in the number of platformsU.S. and worldwide is currently in flux and is likely to remain so for the foreseeable future. Comprehensive state privacy laws in the U.S., including the CCPA, the Virginia Consumer Data Protection Act, the Colorado Privacy Act, the Connecticut Data Privacy Act and Utah Consumer Privacy Act, as well as the sizethose soon coming into effect, such as in Delaware, Florida, Iowa, Montana, Oregon and Texas, each require covered businesses to maintain data security programs, as well as to provide specific disclosures of our networksdata use to residents of such states and informationmaintain systems our reliance onthat enable us to receive and respond to requests from such state residents concerning their personal data, including requests to delete, correct, or obtain access to such data. If we are found to have violated any of these technologies have become increasingly important to our operating activities. The potential negative impact that a platform, network or information system shutdown may have on our operating activities has increased. Shutdownsrequirements, we may be caused by cyberattackssubject to civil penalties and, unexpected catastrophic events such as natural disasters or other unforeseen events, such as software or hardware defects or cyber-attacks by groups or individuals.in some cases, private litigation.
Under the Financial Services Modernization Act of 1999, also referred to as the Gramm-Leach-Bliley Act or GLBA, and some U.S. state laws, we and WEX Bank areis required to maintain a comprehensive written information security program that includes administrative, technical and physical safeguards relating to consumer information. This requirement generally does not extend to information about companies or about individuals who obtain financial products or services for business, commercial, or agricultural purposes.
The GLBA also requires us and WEX Bank to provide initial and annual privacy notices to customers that describe in general terms our information sharing practices. If we or WEX Bank intendintends to share nonpublic personal information about consumers with affiliates and/or nonaffiliated third parties, we and WEX Bank must provide customers with a notice and a reasonable period of time for each customer to “opt out” of any such disclosure. The GLBA also regulates certain activities of WEX Inc., with respect to privacy and information security practices. In addition to U.S. federal privacy laws with which we must comply, states also have adopted statutes, regulations and other measures, such as the CCPA, governing the collection and distribution of nonpublic personal information about customers.information. In some cases, these state measures are preemptedexempt certain data regulated by federal law, but if not,with respect to certain other categories of personal information we and WEX Bank must monitor and seek to comply with individual state privacy laws in the conduct of our businesses.
When we handle individually identifiableprotected health information, regulations issued under Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Health Information Technology for Economic and Clinical Health Act, or HITECH, Act, our contracts with our customers, and supplemental state laws require us to implement privacy and data security measures and to comply with breach notification requirements. We may be subject to contractual damages and civil or criminal penalties if we are found to violate these privacy, security and breach notification requirements. An amendment to the HITECH Act enacted in January 2021 will requirerequires consideration of a company'scompany’s implementation of recognized security standards in assessing administrative fines and penalties under the HIPAA security standards. This action will potentially heightenheightens enforcement risks if we fail to adequately implement the recognized security standards, while mitigating such risks if the recognized measures are successfully implemented.
Our efforts to comply with existing and future healthprivacy and financial data protection laws and regulations, both in the U.S. and abroad, isare costly and time-consuming. IncidentsIn addition, any cybersecurity incident, any incident involving our handling of this protected and sensitive information, may consume significant financial and managerial resources and may damage our reputation, which may discourage customers from using, renewing, or expanding their use of our services.
Any security breach, inadvertent transmission of information about our customers, failure to comply with applicable breach notification and reporting requirements, or any violation of international, federal or state privacy laws could consume significant financial and managerial resources, expose us to liability in excess of any applicable insurance policies, litigation, regulatory scrutiny, and/or cause damage to our reputation.reputation, which may discourage customers from using, renewing, or expanding their use of our services or cause us
to be in breach of our contracts with them. We may also be required to expend significant resources to implement additional data protection measures or to modify the features and functionality of our system offerings in a way that is less attractive to customers.
If the technologies we use in operating our business and interacting with our customers fail, are unavailable, or do not operate to expectations, or we fail to successfully implement technology strategies and capabilities in connection with our third-party technology arrangements, our business and results of operations could be adversely impacted.
We utilize a combination of proprietary and third-party technologies, including third-party owned and operated “cloud” technologies or third-party managed technology platforms, data-centers, and processing systems, to conduct our business and interact with our customers, partners and suppliers, among others. This includes technology that we have developed, have contracted with others to develop, have outsourced to a single provider to operate or have obtained through third-parties by way of service agreements. As we have increased the number of platforms as well as the size of our networks and information systems, our reliance on these technologies has become increasingly important to our operating activities.
The potential negative impact that a platform, network or information system shutdown may have on our operating activities has increased. To the extent that our proprietary technology or a third-party provider’s technology does not work as agreed to or as expected, or if we experience outages or unavailability resulting from ours or our third-party providers’ operations and the services provided, our ability to efficiently and effectively deliver services could be adversely impacted and our business and results of operations could be adversely affected. Shutdowns may be caused by a number of sources, many of which are beyond our control, including, without limitation: cyberattacks, unexpected catastrophic events such as natural disasters or acts of terrorism, software or hardware defects, network disruptions such as computer viruses or hacking, theft or vandalism of equipment, employee error and/or actions or events caused by or related to third party vendors. Any failure by our customers or partners to access the technology that we develop internally could have an adverse effect on our business, results of operations and financial condition. In addition, we and our customers could suffer harm if valuable business data or employee, customer and other proprietary information processed by such technology were corrupted, lost or accessed or misappropriated by third parties due to a security failure in our systems or those of our suppliers or service providers. Any such failure or breach could require significant expenditures to remediate, severely damage our reputation and our relationships with customers, including an obligation to notify individuals, regulatory authorities, the media and other stakeholders in connection with any such failure or breach, result in unwanted media attention and lost sales and expose us to risks of litigation and liability. Although we make substantial investments in technology, there is no guarantee that it will function as intended once it is placed into operation. Our Fleettechnology infrastructure, such as our cloud services, backup and recovery procedures, or active system monitoring may not function as intended and may negatively impact WEX’s business. We may conclude that certain technologies should be retired, that existing platforms should be consolidated, or that we should change our technology strategies, and we may be required to impair or accelerate depreciation on certain assets. Any of these potential changes or failures in our technology strategies may also divert management’s attention and have a material adverse effect on our business, financial condition and operating results.
Our business is dependent on technology systems and electronic communications networks managed by third parties, which could result in our inability to prevent service disruptions.
Our ability to process and authorize transactions electronically depends on our ability to electronically communicate with our fuel and vehicle maintenancethird party providers through point-of-sale devices and electronic networks that are owned and operated by third parties. The electronic communications networks upon which we depend are often subject to disruptions of various magnitudes and durations. Any severe disruption of one or more of these networks could impair our ability to authorize transactions or collect information about such transactions, which, in turn, could harm our reputation for dependable service and adversely affect our results of operations. In addition, our ability to collect enhanced data relating to our customers’ purchases may be limited by the use of older point-of-sale devices by fuel and vehicle maintenancecertain providers. To the extent that fuel and vehicle maintenancethese providers within our network are slow to adopt advanced point-of-sale devices, we may not be able to offer the latest services and capabilities that our customersdemand.
We use artificial intelligence in our business, and challenges with properly managing its use could result in harm to our brand, reputation, business or customers, and adversely affect our results of operations.
We use artificial intelligence (“AI”) solutions including machine learning and generative AI tools that collect, aggregate and analyze data to assist in the development of our platform, offerings, services, products and in the use of internal tools that support our business. These applications may become increasingly important in our operations over time. This emerging technology presents a number of risks inherent in its use, including risks related to cybersecurity and data privacy. Additionally, AI algorithms are based on machine learning and predictive analytics, which can create accuracy issues,
unintended biases and discriminatory outcomes that could harm our brand, reputation, business or customers. Additionally, no assurance can be made that the usage of AI will assist us in being more efficient. Further, our competitors or other third parties may incorporate AI into their business, services and products more rapidly or more successfully than us, which could hinder our ability to compete effectively and adversely affect our results of operations. Implementing the use of AI successfully, ethically and as intended, will require significant resources, including having the technical complexity and expertise required to develop, test and maintain our platform, offerings, services and products. In addition, the use of AI may increase cybersecurity risks and operational and technological risks. The technologies underlying AI and their use cases are rapidly developing, and it is not possible to predict all of the legal, operational or technological risks related to the use of AI. For example, we expect that there will continue to be new laws or regulations concerning the development and use of AI, such as the expected to be enacted European Union Artificial Intelligence Act and the U.S. issued Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence and associated guidelines. Moreover, how AI is used is the subject of evolving review by various U.S. regulatory agencies, including the SEC and the U.S. Federal Trade Commission. It is possible that governments may also seek to regulate, limit, or block the use of AI in our products and services or otherwise impose other restrictions that may hinder the usability or effectiveness of our products and services.
Risks Relating to Ownership of Our Common Stock
The failure to maintain effective systems of internal control over financial reporting and disclosure controls and procedures could result in the inability to accurately report our financial results or prevent material misstatement due to fraud, which could cause current and potential shareholders to lose confidence in our financial reporting, adversely
affect the trading price of our securities, harm our operating results, trigger a default under the 2016Amended and Restated Credit Agreement or result in regulatory proceedings against us.
Effective internal control over financial reporting and disclosure controls and procedures are necessary for us to provide reliable financial reports and effectively prevent fraud and operate successfully as a public company. The failure to develop or maintain effective internal control over financial reporting and disclosure controls and procedures could harm our reputation or operating results, or cause us to fail to meet our reporting obligations, or trigger a default under the 2016Amended and Restated Credit Agreement.
Our financial reporting and disclosure controls and procedures are reliant, in part, on information we receive from disparate internal financial reporting systems and third parties that supply information to us regarding transactions that we process. In addition, because our strategy includes pursuing growth through acquisitions of other businesses, which are at different levels of maturity and which may have underdeveloped financial reporting systems and processes, we depend on disperseddisparate financial systems to process, summarize and report financial transactions for our distributed operations.transactions. To the extent these systems do not properly transmit information to our financial ledgers, we could fail to properly summarize and report financial results.
As we expand our business operations domestically and internationally, and as we implement new accounting standards promulgated by the FASB, we will need to maintain effective internal control over financial reporting and disclosure controls and procedures. If we are unable to do so, our external auditors could issue a qualified opinion on the effectiveness of our internal control over financial reporting.
Ineffective internal control over financial reporting and disclosure controls and procedures could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our securities or affect our ability to access the capital markets and could result in regulatory proceedings against us by, among others, the SEC.
Currently, we are cooperating with an SEC investigation arising from the revision of our financial statements in 2019 due to issues involving our former Brazil subsidiary, including our financial and disclosure controls and procedures. At this time, it is not possible to predict the outcome of the SEC’s inquiry, including whether or not any proceeding will be initiated or, if so, when or how the matter will be resolved.
Material weaknesses in internal control over financial reporting have in the past and could in the future lead to deficiencies in the preparation of financial statements. Deficiencies in the preparation of financial statements, could lead to litigation claimsor regulatory investigations or proceedings against us. For example, in late 2021 we settled an investigation by the SEC with respect to the revision of WEX’s financial statements noted in its Annual Report on Form 10-K/A for the year ended December 31, 2018, due to issues involving WEX’s formal Brazil subsidiary. The defense of any such claims may cause the diversion of management’s attention and resources, and we may be required to pay damages if any such claims or proceedings are not resolved in our favor. Any litigation or regulatory investigations or proceeding, even if resolved in our favor, could cause us to incur significant legal and other expenses. Such events could also affect our ability to raise capital to fund future business initiatives.
Provisions in our charter documents, Delaware law and applicable banking law and the Convertible Noteslaws may delay or prevent our acquisition by a third party.
Our certificate of incorporation and by-laws contain several provisions that may make it more difficult for a third party to acquire control of us without the approval of our board of directors. These provisions include, among other things, a classified board of directors (which will be fully declassified commencing with the elimination2024 annual meeting of stockholders), the prohibition of stockholder action by written consent, advance notice requirements for raising business or making nominations at meetings of stockholders and “blank check” preferred stock. Blank check preferred stock enables our board of directors, without stockholder approval, to designate and issue additional series of preferred stock with such special dividend, liquidation, conversion, voting or other rights, including the right to issue convertible securities with no limitations on conversion, and rights to dividends and proceeds in a liquidation that are senior to the common stock, as our board of directors may determine. In addition, under the indenture for the Convertible Notes, upon the occurrence of a “fundamental change” (as defined in the indenture, and which includes, among other things, certain change of control transactions with respect to the Company), holders may require the Company to repurchase all or a portion of their Convertible Notes at a repurchase price equal to the sum of (i) 105% of then accreted principal amount of the Convertible Notes to be repurchased, plus accrued interest and (ii) the sum of the present values of the scheduled remaining payments of interest had such Convertible Notes remained outstanding through maturity. These provisions may make it more difficult or expensive for a third party to acquire a majority of our outstanding voting common stock.stock or change control of our board of directors. We also are subject to certain provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which could delay, deter or prevent us from entering into an acquisition, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in a business combination with an interested stockholder unless specific conditions are met.acquisition. These provisions may also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock.
In addition,1978, as ownersamended (“CIBC Act”) and the FDIC’s regulations thereunder, any person, either individually or acting through or in concert with one or more other persons, must provide notice to, and effectively receive prior approval from, the FDIC before acquiring “control” of us. Under the CIBC Act, control is conclusive if, among other things, a Utah industrial bank, we are subject to Utah banking regulations that requireperson or company acquires 25 percent or more of any entity that controlsclass of our voting stock. A rebuttable presumption of control arises if a person or company acquires 10 percent or more of any class of our common stock to obtainvoting stock.
Under the Utah Financial Institutions Act (“UFIA”), no person may acquire direct or indirect “control” of a depository institution without first receiving the formal written approval of Utah banking authorities prior to consummating any acquisition of shares. Federal law also prohibits a person or group of persons from acquiring “control” of us unless the FDIC has been notified and has not objected to the transaction.UDFI’s commissioner. Under the FDIC’s regulations,UFIA, control is defined to include having the acquisition of 10power to vote 25 percent or more of aany class of our voting stock would generally create asecurities. A rebuttable presumption of control.control arises if a person has the power, directly or indirectly, or through or in concert with one or more persons, to vote more than 10 percent but less than 25 percent of any class of our voting securities. Any person seeking to rebut a presumption of control is required to do so by submitting an application to the UDFI’s commissioner.
Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of our common stock in excess of the amount which can be acquired without regulatory approval. In addition,practice, the process for obtaining such approval is complicated and time-consuming, often taking longer than six months, and a proposed acquisition may be disapproved for a variety of factors, including, but not limited to, antitrust concerns, financial condition and managerial competence of the applicant, and failure of the applicant to furnish all required information.
Finally, our certificate of incorporation requires that if any stockholder fails to provide us with satisfactory evidence that any required approvals have been obtained, we may, or will if required by state or federal regulators, restrict such stockholder’s ability to vote such shares with respect to any matter subject to a vote of our stockholders. These regulatory requirements may preclude
Collectively, these provisions could delay or delayprevent a third party from acquiring us, despite the purchasepossible benefit to our stockholders, or otherwise adversely affect the market price of a relatively large ownership stake by potential investors.our common stock. Further, as a result of these regulatory requirements, certain existing and potential stockholders may choose not to invest in our stock at all or invest further in our stock. This could limit the number of potential investors and impact our ability to attract further funds.
The issuance by us of additional shares of common stock or equity-linked securities, including in connection with conversions of our outstanding Convertible Notes, may cause dilution to our stockholders.
To the extent that we issue additional shares of common stock or equity-linked securities, the ownership interests of our stockholders may be diluted. In July 2020, we issued $310.0 million in initial aggregate principal amount of the Convertible Notes and $90.0 million of our common stock to an affiliate of Warburg Pincus in a private placement. The Convertible Notes are convertible by the holders at any time prior to maturity, or earlier redemption or repurchase, based upon an initial conversion price of $200 per share of common stock. We may settle conversions of Convertible Notes, at our election, in cash, shares of common stock, or a combination of cash and shares of common stock. The number of shares issuable upon conversion of the Convertible Notes is subject to increase, including as a result of our ability to elect to satisfy interest obligations under the Convertible Notes by increasing the principal amount of the Convertible Notes rather than paying cash interest and as a result of adjustments to the conversion price under the Convertible Notes in connection with certain events. The conversion price is subject to adjustments customary for convertible debt securities and is also subject to 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 for underwritten offerings, Rule 144A offerings, private placements at discounts not exceeding a specified amount, issuances as acquisition consideration and equity compensation related issuances. To the extent we issue shares of our common stock in satisfaction of our conversion obligations under the Convertible Notes, our stockholders will experience dilution. Our ability to settle conversions of Convertible Notes in cash may be limited, including as a result of our available cash resources at the time of any conversions and as a result of restrictions in our then existing debt agreements on our ability to satisfy conversions in cash (for example, pursuant to restricted payment covenants similar to those contained in our existing debt agreements).
In addition to potential dilution that may result from the issuance of shares of common stock pursuant to the terms of the Convertible Notes, our stockholders may also experience additional dilution as a result of other future issuances by us of common stock or equity-linked securities, whether issued in financing transactions, in connection with acquisitions, pursuant to equity compensation plans or otherwise. Pursuant to the purchase agreement entered into with Warburg Pincus in connection with the issuance of the Convertible Notes, we provided Warburg Pincus with certain contractual preemptive rights allowing it to maintain its proportionate equity interest on an as-converted basis, subject to certain exceptions, in connection with certain future issuances by us of common stock or other equity-linked securities.
The sale or other dispositions of significant amounts of our outstanding common stock into the public market in the future, or the perception that sales or other dispositions could occur, could adversely impact the market price of our common stock.
In connection with our July 2020 private placement with Warburg Pincus, we filed a registration statement registering under the Securities Act of 1933, as amended, the Convertible Notes and the shares of common stock issued in the private placement and issuable pursuant to conversions of the Convertible Notes. The purchase agreement for the Convertible Notes provides that Warburg Pincus is restricted from transferring the Convertible Notes or shares of common stock issued in the private placement or upon conversion of the Convertible Notes until July 1, 2021, subject to certain exceptions (including, among other exceptions, transfers pursuant to pledge arrangements that may be entered into by Warburg Pincus in connection with certain financing arrangements). After July 1, 2021, transfers by Warburg Pincus generally will not be restricted, subject to certain limitations on transfers to certain categories of transferees. The Company also has the ability to waive the transfer restrictions under the purchase agreement prior to their expiration and may elect to do so in the future and, as noted above, certain transfers may be made by Warburg Pincus prior to July 1, 2021. The sale or other dispositions of a substantial number of our shares by Warburg Pincus or other holders of our common stock or the Convertible Notes, or the market perception that such sales or other dispositions may occur, could have an adverse impact on the price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Increased global cybersecurity vulnerabilities and threats and more sophisticated and targeted cyber-related attacks pose an ongoing risk to the security of our information systems and networks. We regularly experience cyberattacks aimed at our information systems and networks, including those that store sensitive data about third parties. We have established a Global Information Security Program, which is administered and overseen by the Company’s Chief Information Security Officer (“CISO”), that establishes minimum requirements we adhere to in order to provide a secure environment for developing, implementing, and supporting our information technology and systems. Our Global Information Security Program is designed to maintain compliance with various regulatory requirements and certification standards, including those under HIPAA, HITECH, PCI, ISO, SOC and SOX, as we aim to have world-wide, generally accepted, best practices.
Periodic assessments of the Global Information Security Program are conducted to ensure it is well-positioned to meet its objective of reducing the threat of known and emerging cybersecurity risks, as well to confirm ongoing compliance with legal and industry best practices and standards. Assessments of the program are continuously conducted by management
and by an independent third party at least annually or whenever there is a material change to a business practice that may implicate the security or integrity of records containing personal information, to ensure the continuing suitability, adequacy, and effectiveness of the organization's approach to managing information security. As part of the annual review process, the Company engages external auditors to assess compliance with SOC2/SOC1, SOX, PCI-DSS and HITRUST, in addition to engaging an independent third party to conduct penetration testing and an overall risk assessment. The results of these assessments are reviewed and discussed with senior members of Company management and the Technology and Cybersecurity Committee of the Board (the “Technology Committee”), which is comprised of individuals with cybersecurity experience from both a technical and governance perspective. The Technology Committee, pursuant to its charter, is responsible for the oversight of the Company’s management of risks regarding technology, data security, cybersecurity, disaster recovery and business continuity. To perform this function, the Technology Committee, in addition to annually receiving and reviewing the results of the Global Information Security Program assessment, receives quarterly reports from the Company’s CISO, who presents a threat matrix, an overall analysis of our cyber health, as well as any recent threat activity. The Technology Committee then, in turn, regularly reports out to the full Board and the Audit Committee as necessary during succeeding meetings to keep them informed. In addition, members of senior management, including the Chief Technology Officer (“CTO”), the CISO, and the Chief Legal Officer (“CLO”) correspond directly with, or present to, the full Board, the Audit Committee, and/or the Technology Committee, regarding issues or risks relating to cybersecurity matters as the case may be. We believe the members of our senior management responsible for assessing and managing material risks from cybersecurity threats and interfacing with the Board and Board Committees on such matters collectively possess the appropriate expertise and experience from both a technical and governance perspective to ensure that they are able to carry out these responsibilities effectively. In particular, our CISO has spent over 30 years in various information security roles, including serving as the CISO of WEX since March 2014. Additionally, he holds professional degrees in the areas of Computer and Information Systems Security and multiple ISACA and ISC2 certifications (CISM, CISA, CRISC, CISA and CISSP). Our CTO has spent over 25 years in various engineering and technology roles, including serving as Chief Technology Officer for two other companies prior to joining WEX. In his past roles he was responsible for implementing product and technology initiatives and gained extensive experience in payments technology, technology infrastructure, technical engineering, AI, and machine learning. Additionally, he holds a professional degree in Computer Science. Our CLO has been with WEX since 1996, serving as the Corporate Secretary and head of the Legal department since 2005. In this capacity, she has gained extensive experience coordinating with the Board on addressing numerous emerging risk areas and ensuring our governance processes are equipped to manage and mitigate such risks.
In addition to the processes we have put in place to ensure our information systems and networks continue to evolve and adapt to the ongoing cybersecurity threat environment, we have designed an enterprise security architecture system that deploys layers of security controls to continuously monitor for potential cybersecurity vulnerabilities and threats in a situation when a potential incident does arise. Our systems are configured to generate alerts in the event of any potential breach or intrusion with a team in place to receive and act upon such alerts. Additionally, all WEX systems that store, process, transmit, or could affect the security of confidential data are logged and monitored, with our information security team conducting a daily review of any such systems. If an alert is triggered automatically by our system or as a result of our team’s review and a potential cyber or information security incident is detected, the alert will be elevated within the information security incident response team and the CISO will become responsible for informing the crisis management team to facilitate the Company’s assessment and response to the potential incident. The crisis management team along with the CISO will inform and coordinate with members of senior management and when appropriate, the Technology Committee, to evaluate the incident and consider potential response actions, including with respect to mitigation and containment actions. Furthermore, the crisis management team, in conjunction with members of senior management will determine whether to engage third parties, including outside counsel, consultants, law enforcement and external forensic firms, to provide support in the assessment of and response to the incident.
Additionally, we have policies and procedures in place to help oversee and identify material risks from cybersecurity threats associated with third-party service providers. Prior to engaging vendors, specifically those involved in the processing, storage or transmission of certain data, the information security team completes a due diligence process, including requiring proof of the potential vendor’s PCI, HIPPA, HITRUST, and/or SOC 2 compliance, as applicable. During the due diligence process the information security team assigns a risk ranking as it relates to information security risk and may perform additional due diligence if appropriate based on such ranking. Further, we engage an external vendor risk monitoring and alert service to monitor the cyber health of our third-party vendors. If there is a change in the vendor’s risk profile, we review the risk and initiate an action plan in response, which could include additional monitoring, remediation requests or termination. If the vendor is a key technology vendor and/or a vendor with access to protected data, any action plan will be escalated to the CISO and require the CISO’s approval before proceeding.
We view our Global Information Security Program and the processes followed thereunder as just one part of our overall enterprise risk management strategy. As part of our annual enterprise risk management review, we identify and categorize risk areas across our business, including technology risks and those related to cybersecurity. We determine the magnitude
of such risks in the context of our overall business and how the technology risks, including cybersecurity specifically, may have an impact on other risks the Company faces and vice versa to help us inform our overall risk management strategy going forward. This allows us to continuously assess cybersecurity risks in alignment with our strategic objectives and operational needs.
As of the date of this report, we are not aware of any material risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, that have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations, or financial condition. However, there is no assurance that cybersecurity threats will not have a material impact on us, including our business strategy, results of operations or financial condition in the future. See Part I – Item 1A – Risk Factors – “We regularly experience cyberattacks and expect they will continue in the future. We may not be able to adequately protect our information systems, including the data we collect, which could subject us to, among other things, liability and damage to our reputation. Our efforts to implement robust security measures and comply with applicable data protection laws are costly and time-consuming and they cannot provide absolute security against cyberattacks, security breaches or unauthorized access.”
ITEM 2. PROPERTIES
All of our facilitiesOur global headquarters and principal executive offices are leased. Our corporate headquarters, located in Portland, Maine, consists of 90,000 square feet, pursuantsubject to a lease that expires in 2034. We2034 and our industrial banking operations at WEX Bank are located in Utah subject to a lease an additional 39,595 square feet of office spacethat expires in Portland, Maine. We lease 49,418 square feet and 179,144 square feet of space in Minnesota and North Dakota, respectively, primarily for WEX Health operations. These leases expire at various dates between 2021 and 2035.2032. We also lease facilitiescorporate and regional offices, as well as operations centers in variousnumerous other locations in the United States and around the world.world pursuant to leases that expire at various dates through 2032. We generally consider each of our current facilities to be suitable and adequate for the business that we currently conduct. However, we periodically review our space requirements and may lease new space to meet the needs of our business, or consolidate or exit facilities that are no longer required as we continue to optimize our global business operations and footprint.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this filing, we are not involved in any material legal proceedings. On May 11, 2020, the shareholders of eNett and Optal each initiated separate legal proceedings against the Company by filing claims in the High Court of Justice of England and Wales in the United Kingdom. The legal proceedings denied that there had been a Material Adverse Effect (as defined in the original purchase agreement between WEX, eNett and Optal, among others) and alleged that the Company has threatened to breach its obligations under the terms of the purchase agreement. The claimants sought a declaration that no Material Adverse Effect had occurred within the meaning of the purchase agreement and ordered for specific performance of WEX’s obligations under the purchase agreement. From September 21, 2020 through September 29, 2020, a London court held a trial ofInformation regarding certain preliminary issues, including, among other things, the determination of the industry in which eNett and Optal operate and of the other participants in such industry, in each case for purposes of interpreting the definition of Material Adverse Effect in the purchase agreement. On October 12, 2020, the Court handed down its judgment, which concluded, among other things, that Optal and eNett operate in the payments industry and the B2B payments industry and that, for the purpose of the definition of the Material Adverse Effect clause, the relevant industry is the B2B payments industry. The Court found that there was no travel payments industry, as argued for by eNett and Optal. This finding meant that when determining whether eNett or Optal have been disproportionately impacted by COVID-19, a comparison would be made against other B2B payments companies. 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”) with 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 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 claims arising under the amended purchase agreement. 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 adjustments) consisting entirely of cash, which the Company paid with cash on hand, and the closing of the acquisition occurring concurrent with the execution of the Settlement Deed, which occurred on December 15, 2020.
We were not involved in any other material legal proceedings that were terminated during the fourth quarter of 2020. However, from time to time,in which 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 misappropriationinvolved are incorporated 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 arisingreference herein from the revision of our financial statements as notedsection titled “Litigation and Regulatory Matters” 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 financialPart II – Item 8 – Note 20, Commitments 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 materialContingencies, to the Company’s consolidated financial position, results of operations, cash flows or liquidity.statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The principal market for the Company’s common stock is the NYSE and our ticker symbol is WEX. As of February 22, 2021,15, 2024, the closing price of our common stock was $226.82$224.14 per share, there were 44,190,99541.7 million shares of our common stock outstanding and there were 710 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers or nominees.
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 Boardboard of Directors of the Company;directors; 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 its revolving credit agreement,Amended and Restated Credit Agreement, including pro forma compliance with a consolidated leverage ratio, testing consolidated funded indebtedness (excludingless (i) an amount up to $400$400.0 million of consolidated funded indebtedness due to permitted securitization transactions, and (ii) the amount of consolidated funded indebtedness constituting the non-recourse portion of permitted factoring transactions, and netting(iii) an amount up to (x) with respect to calculating the consolidated leverage ratio for purposes of the periods ending prior to June 15, 2021, an unlimited amount, and (y) with respect to calculating the consolidated leverage ratio for purposes of the periods ending thereafter, $400.0 million of unrestricted cash and cash equivalents denominated in U.S. dollars or other lawful currencies (provided that such other currencies are readily convertible to, and deliverable in, U.S. dollars) held by the Company and its subsidiaries (other than bank regulated subsidiaries) to consolidatedConsolidated EBITDA of less than 2.50:2.75:1.00 for the most recent period of four fiscal quarters.
Share RepurchasesIssuer Purchases of Equity Securities
Under a share repurchase plan approved by our board of directors and announced on August 23, 2022, the Company was authorized to repurchase up to $150.0 million in shares of its common stock in the open market and through various other means pursuant to the share repurchase plan, through August 23, 2026. On September 20, 2017,October 27, 2022, the Company announced that our board of directors approved aan increase of $500.0 million to the share repurchase program authorizingplan, resulting in a total repurchase authorization of $650.0 million, and shortened the purchaseduration of upthe plan to $150 million of ourDecember 31, 2025. The following table presents the Company’s common stock expiringrepurchases during each month of the fourth quarter of 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Number of
Shares Purchased | | Average Price Paid per Share(1),(2) | | Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs | | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (3) |
| October 1 - October 31, 2023 | 145,301 | | | $ | 165.19 | | | 145,301 | | | $ | 339,457,234 | |
| November 1 - November 30, 2023 | 681,100 | | | $ | 173.43 | | | 681,100 | | | $ | 221,335,032 | |
| December 1 - December 31, 2023 | 43,718 | | | $ | 180.53 | | | 43,718 | | | $ | 213,442,771 | |
| Total | 870,119 | | | $ | 172.41 | | | 870,119 | | | |
(1)Includes commissions paid on stock repurchases.
(2)The Inflation Reduction Act of 2022, which was enacted into law on August 16, 2022, imposed a nondeductible one percent excise tax on the net value of certain stock repurchases made after December 31, 2022. All dollar amounts presented exclude such excise taxes, as applicable.
(3)Values based on the share repurchase plan authorization in September 2021. Shareplace as of December 31, 2023. See Part II – Item 8 – Note 28, Subsequent Events for information regarding an increase to the share repurchase plan authorization made during 2024.
The timing and amount of any transactions are subject to the discretion of WEX based upon, among other things, market conditions and other opportunities that the Company may have for the use or investment of its cash balances. In addition, repurchases are subject to the availability of shares of stock for purchase, prevailing market conditions, the trading price of the Company’s stock and the Company’s financial performance. The repurchase program does not obligate WEX to acquire any specific number of shares and may be made on the open market and can be commencedmodified, discontinued or suspended at any time.
We did not purchase any shares of our common stock during the year ended December 31, 2020. The dollar value of shares that were available to be purchased under our share repurchase program was $150 million as of December 31, 2020.
ITEM 6. RESERVED[RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below focuses on the factors affecting our consolidated results of operations for the years ended December 31, 2020 and 2019 and financial condition at December 31, 2020 and 2019 and, where appropriate, factors that may affect our future financial performance, unless stated otherwise. This discussion should be read in conjunction with the consolidated financial statements, notes to the consolidated financial statements and selected consolidated financial data. | | |
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The discussion below focuses on the factors affecting our consolidated results of operations for the years ended December 31, 2023 and 2022, financial condition at December 31, 2023 and 2022 and, when appropriate, factors that may affect our future financial performance, unless stated otherwise. This discussion should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements within Part II - Item 8 of this Annual Report on Form 10-K. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is presented in the following sections: •2023 Highlights and Year in Review •Our Segments •Results of Operations •Application of Critical Accounting Estimates •Recently Adopted and New Accounting Standards •Liquidity and Capital Resources |
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Our Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is presented in the following sections:
•2020 Highlights and Year in Review
•Subsequent Events
•Recent Events
•Segments
•Results of Operations
•Application of Critical Accounting Policies and Estimates
•Recently Adopted and New Accounting Standards
•Liquidity, Capital Resources and Cash Flows
20202023 Highlights and Year in Review
Company Highlights
Our Company’s management regularly monitors key performance indicatorsThe following graphs present a comparative, summarized view of selected results. The “Other Key Metric” included below is considered by Management to measure our current performance and project future performance. A recurring, comprehensive list is included by segment within the Resultsbe of Operations section of this Management's Discussion and Analysis. Management believes the following key performance indicators by segment were importantparticular importance to our overall performance in 20202023 as they provideit provides enhanced information and data underlying our financial results. See “COVID-19 Pandemic Response and Impact”A recurring, more extensive list of key performance indicators is included by segment within the Results of Operations includedsection later in “Recent Events” below for further information regarding how COVID-19 has impacted the Company’s segments.
Key Performance Indicators
Fleet Solutions
•Average number of vehicles serviced increased 9 percent from 2019 to 15.3 million for 2020, primarily related to growth in our worldwide customer base. As of December 31, 2020, vehicles serviced totaled 15.8 million.
•The average U.S. price per gallon of fuel was $2.29 during 2020, an 18 percent decrease as compared to 2019.
•Fuel transactions processed decreased 6 percent from 2019 to 576.0 million in 2020. We have seen strong over-the-road trucking volumes, with offsetting significant volume declines in small to mid-size North American and international fleets as a result of the impacts of COVID-19.
•Payment processing transactions, which represents the total number of purchases made by fleets that have a payment processing relationship with WEX, decreased 8 percent from 2019 to 463.9 million in 2020.
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 $20.9 billion in 2020, a 47 percent decrease from 2019, 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 volumes in our corporate payments portion of the segment.
Health and Employee Benefit Solutions
•Average number of SaaS accounts, which represents the number of active Consumer-Directed Health, COBRA, and billing accounts on our U.S. SaaS platforms, grew 12% to 14.5 million in 2020 from 12.9 million in 2019.this MD&A.
GAAP Measures (in millions except per share data):
Net income attributable to shareholders
Net income attributable to shareholders per diluted share
Net cash provided by (used for) operating activities
•Non-GAAP Measures Purchase volume, which represents the total US dollar value of all transactions where interchange is earned by WEX, decreased $400.9 million (in 2020, as compared to 2019, driven primarily by the impact of COVID-19 on the segment.millions except per share data):(1)
Other Performance MetricsAdjusted net income attributable to shareholders
•
Credit loss expense in the Fleet Solutions segment decreased 5 percent
Adjusted net income attributable to $56.6 million during 2020, as compared to $59.8 million during 2019. Our credit losses were 16.7 basis points of fuel expenditures for 2020, as compared to 15.1 basis points of fuel expenditures for 2019, an increase of 11 percent primarily due to higher losses in the small fleet over-the-road business as compared to 2019.shareholders per diluted share
Adjusted free cash flow
•We recorded an income tax benefit of $20.6 million for 2020 as compared to an income tax provision of $61.2 million for 2019. Our effective tax rate was a 6.8 percent benefit for 2020 as compared to a 28.3 percent provision for 2019. The Company's effective tax rate for the year ended December 31, 2020 was impacted by no income tax benefit being recorded for i) operating losses generated from WEX Latin America during the current year through the date of sale, ii) the loss on sale of WEX Latin America, and iii) the legal settlement. These losses were included as part of the current year loss and determined to be either non-deductible for income tax purposes or required a valuation allowance.
Subsequent Events
HSA Purchase AgreementOther Key Metric (in millions):
On February 11, 2021,Total volume processed across the Company entered into an asset purchase agreement with Bell Bank(2)
(1)Adjusted net income attributable 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. We believe the acquisition will allow the Company to better capture the economics from those HSAs, leverage our investments to provide customers with market-leading HSA solutions, and align with our growth strategy. The transaction is expected to close in the second quarter of 2021, subject to regulatory approvals and other customary closing conditions.
Pursuant to the purchase agreement, the Company will pay Bell Bank initial cash consideration of approximately $200 million, and two additional deferred cash payments of $25 million in July 2023 and January 2024, contingent upon closing of the transaction. 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 and will not adversely impact the Company’sshareholders, adjusted net income orattributable to shareholders per diluted share, and adjusted free cash flow are supplemental non-GAAP financial position as net revenues earned onmeasures of operating performance. Refer to the acquired HSA assets will increasesections titled Non-GAAP Financial Measures That Supplement GAAP Measures and Liquidity and Capital Resources later in the event the Federal Funds rate increases in the future.
Notes Redemption Notice
On February 11, 2021, the Company provided irrevocable notice to The Bank of New York Mellon Trust Company, N.A., the trusteethis MD&A for the Notes, of its intent to redeem its outstanding $400 million 4.75% Senior Secured Notes due February 1, 2023 on March 15, 2021. The redemption pricemore information and a reconciliation of the Notes is $400 million plus accrued and unpaid interest through the proposed redemption date. The redemption is expected to be funded from cash.
Recent Events
2020 Acquisition/Legal Settlement
On January 24, 2020, the Company entered into a purchase agreement to purchase eNett, a leading provider of B2B payment solutionsnon-GAAP financial measures to the travel industry, and Optal, a company that specializes in optimizing B2B payments transactions, subject to certain working capital and other adjustments as described in the purchase agreement. 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 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 original 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 purchase agreement. From September 21, 2020 through September 29, 2020, a London court held a trial of certain preliminary issues, and handed down its judgment 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”) with 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) amendment of the original 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 claims arising under the amended purchase agreement. 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 $615.4 million), which the Company paid entirely with cash on hand. The Company determined the aggregate purchase price represents consideration paid for the businesses acquired and for the legal settlement 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 legal settlement, which has been included in legal settlement expense in the consolidated statement of operations for the year ended December 31, 2020.
Private Placement
On July 1, 2020, the Company closed on a private placement with an affiliate of Warburg Pincus LLC, pursuant to which the Company issued $310 million in aggregate principal amount of its senior Convertible Notes due 2027 and 577,254 shares of the Company’s common stock, with gross proceeds in respect of the common stock of $90 million, reflecting a purchase price of $155.91 per share. The issuance of the Convertible Notes provided the Company with net proceeds of approximately $299 million after original issue discount.
The Convertible Notes, which are unsecured, have a seven-year term and mature on July 15, 2027, unless either converted, repurchased or redeemed. The Convertible Notes bear interest at a rate of 6.5% per annum, payable semi-annually in arrears, with the first interest payment due January 15, 2021. At WEX's option, interest is either payable in cash, through accretion to the principal amount of the Convertible Notes, or a combination of cash and accretion.
The Convertible Notes may be converted at any time at the option of holders of the Convertible Notes, based on an initial conversion price of $200 per share, subject to certain adjustments. Conversions of Convertible Notes may be settled in shares of WEX common stock, cash, or a combination thereof at WEX's election. WEX will have the right, at any time following the third anniversary of closing, to redeem the Convertible Notes in whole or in part if the closing price of WEX's common stock is at least 200% of the conversion price of the Convertible Notes for 20 out of 30 days prior to the time WEX delivers a redemption notice (including at least one of the five trading days immediately preceding the last day of such 30 day period), subject to the right of holders of the Convertible Notes to convert their Convertible Notes prior to the redemption date. In the event of certain fundamental change transactions, including certain change of control transactions and delisting events, holders of Convertible Notes will have the right to require WEX to repurchase its Convertible Notesmost directly comparable financial measures calculated in accordance with the terms of the Convertible Notes at a repurchase price equal to the sum of (i) 105% of then accreted principal amount of the Convertible Notes to be repurchased, plus accrued interest, and (ii) the sum of the present values of the scheduled remaining payments of interest had such notes remained outstanding through the maturity date of the Convertible Notes.GAAP.
The indenture includes a debt incurrence covenant that restricts(2)Total volume processed across the Company, from incurring certain indebtedness, including disqualified stock and preferred stock issued by the Company or its subsidiaries, subject to customary exceptions, including if, after giving effect to any such proposed incurrence or issuance, and the receipt and application of the proceeds therefrom, the ratio of (x) the Company’s consolidated EBITDA for the most recent four fiscal quarters for which financial statements are available, to (y) the Company’s consolidated fixed charges for such period would be greater than 1.5:1.0. The indenture contains other customary terms and covenants, including customary events of default. The Convertible Notes are the Company’s general senior unsecured obligations and rank equally with all of the Company’s existing and future senior indebtedness. The Convertible Notes are effectively subordinated to all of the Company’s secured indebtedness, including borrowings under the 2016 Credit Agreement, as amended, to the extent of the value of the collateral securing such indebtedness, and are structurally subordinated to all existing and future indebtedness and other liabilities of the Company’s subsidiaries.
Sale of Subsidiary
On September 30, 2020, the Company sold its wholly-owned subsidiary UNIK S.A. Under the conditions of the sale
agreement, the Company was required to make a payment to the buyer. The Company wrote-off the associated assets and liabilities of this entity as of the date of sale and recorded a pre-tax lossincludes purchases on sale of subsidiary of $46.4 million during the year ended December 31, 2020. The loss on sale of subsidiary is not deductible for tax purposes.
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. Additionally, in an effort to rescale the business and safeguard shareholder value in this unprecedented operating environment, we took certain measures to both permanently reduce headcount and furlough employees across our worldwide offices where necessary. Aside from the employee furloughs, which ended during the third quarter of 2020, the precautionary steps described above largely remain in force 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, had a negative impact on the Company’s businesses during the year ended December 31, 2020. While we have seen varying levels of improvement since the lowest volume levels, we expect a slow and steady volume recovery will continue across our business. Specific to our Travel and Corporate Solutions segment, which has been the most severely impacted, while volumes are slowly improving as leisure travel begins to slowly improve from its lowest levels, we believe that COVID-19 has structurally changed the travel market and we expect these disruptions to have a continuing impact on the Company’s Travel and Corporate Solutions segment operating results. However, the pace and breadth of the vaccine rolloutWEX-issued accounts as well as the potential for government stimulus will be critical factors in determining how quickly our existing customer activity across all three segments will rebound. Given the current pace of vaccine distribution as well as our own customer mix, we believe customer activity will increase in the second half of the year, but likely more fully in the fourth quarter. The following describes these impactspurchases issued by reportable segment:
Fleet Solutions — The Fleet Solutions segment has seen both positive and negative impacts asothers using a result of the world's response to COVID-19, with the negative impacts significantly outweighing the positive. Firstly, 2020 revenue has significantly decreased as a result of lower transaction prices driven by a decrease in the average U.S. price per gallon of fuel as compared to 2019. Volumes have also negatively impacted the segment's results during 2020 as compared to 2019 due to lower volumes in the North American fleet and international portions of the business. Partly offsetting these negatively impacted areas of the business were volume trends in our over-the-road trucking business, which have increased relative to prior year due to increased shipping to individuals during the U.S. lockdown, but represent a smaller portion of the overall segment.WEX platform.
Travel and Corporate Solutions — Of the Company's segments, Travel and Corporate Solutions has been the most severely impacted by the pandemic and the corresponding decline in worldwide travel and tourism. Purchase volume in the travel portion of the segment was significantly lower in 2020 as compared to 2019. In contrast, the corporate payments portion of the segment has seen an increase in purchase volumes during 2020, which is largely attributable to the ongoing migration of businesses to virtual payments and increasing usage of our accounts payable products. These improvements, however, represent a smaller percentage of the total segment.
Health and Employee Benefit Solutions — The Health and Employee Benefit Solutions' volume was most challenged by the pandemic during the second quarter of 2020 as a result of cardholders deferring non-essential medical treatments when U.S. lockdown restrictions were most severe. However, by the fourth quarter of 2020, the U.S. Health business saw a slight increase in purchase volumes relative to the same period in the prior year.
We are closely tracking and assessing the evolving effect of the pandemic and are actively managing our responses in collaboration with our employees, customers and suppliers.
Our Segments
WEX operates inhas three reportable segments: Fleet Solutions, TravelMobility, Corporate Payments, and Corporate Solutions, and Health and Employee Benefit Solutions. Our Fleet SolutionsBenefits. Within our Mobility segment, provideswe are a leader in fleet vehicle payment solutions, transaction processing, and information management services specifically designed for the needs of commercialfleets of all sizes from small businesses to federal and state government fleets.fleets and over-the-road carriers. Our Travel and Corporate SolutionsPayments segment focuses on the complex payment environment of business-to-businessglobal B2B payments, providingenabling customers to utilize our payments solutions to integrate into their own workflows and manage their accounts payable automation and spend management functions. Within our Benefits segment, we provide SaaS software with embedded payment processing solutions for their payment and transaction monitoring needs. Our Health and Employee Benefit Solutions segment provides a SaaS platformplan administration services for consumer directed healthcare payments,health benefits, COBRA accounts, and provided payrollbenefit enrollment and administration. Additionally, WEX Inc. and WEX Bank provide custodial and depository services, respectively, with respect to HSAs.
The Company’s segment-allocated operating expenses consist of the following:
Cost of Services
•Processing costs - The Company’s processing costs consist of expenses related to processing transactions, servicing customers and merchants and cost of goods sold related to hardware and other product sales.
•Service fees - The Company incurs costs from third-party networks utilized to deliver payment solutions. Additionally, other third-parties are utilized in performing services directly related to generating revenue.
•Provision for credit losses - Changes in the reserve for credit loss are the result of changes in management’s estimate of the losses in the Company’s outstanding portfolio of receivables, including losses from fraud.
•Operating interest - The Company incurs interest expense on operating debt and deposits, which provide liquidity to fund short-term receivables or are used to purchase fixed income securities.
•Depreciation and amortization - The Company has identified those tangible and intangible assets directly associated with providing a service that generates revenue and records the depreciation and amortization associated with those assets under this category. Such assets include processing platforms and related infrastructure, acquired developed technology intangible assets and other similar asset types.
Other Operating Expenses
•General and administrative- General and administrative includes compensation and related expenses for executive, finance and accounting, other information technology, human resources, legal, and other corporate functions. Also included are corporate facilities expenses, certain third-party professional service fees, and other corporate expenses.
•Sales and marketing - The Company’s sales and marketing expenses relate primarily to compensation, benefits, sales commissions, and related expenses for sales, marketing, and other related activities.
•Depreciation and amortization - The depreciation and amortization associated with tangible and intangible assets that are not considered to customersbe 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 Brazil until September 30, 2020, the datecost of saleservices.
•Impairment charges - Represents non-cash goodwill impairment charges. See Part II – Item 8 – Note 9, Goodwill and Other Intangible Assets, of our former subsidiary UNIK S.A.consolidated financial statements for more information.
The Company does not allocate foreign currency gains and losses, financing interest expense, net of financial instruments, change in fair value of contingent consideration, loss on debt extinguishments, other income, 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.
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, adjustments attributable to non-controlling interests and non-cash adjustments related to our tax receivable agreement 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.
Sources of Operating Expenses
The Company's operating expenses consist of the following:
Cost of Services
•Processing costs - The Company’s processing costs consist of expenses related to processing transactions, servicing customers and merchants and cost of goods sold related to hardware and other product sales.
•Service fees - The Company incurs costs from third-party networks utilized to deliver payment solutions. Additionally, other third-parties are utilized in performing services directly related to generating revenue.
•Provision for credit losses - Changes in the reserve for credit loss are the result of changes in management’s estimate of the losses in the Company’s outstanding portfolio of receivables, including losses from fraud.
•Operating interest - The Company incurs interest expense on the operating debt obtained to provide liquidity for its short-term receivables.
•Depreciation and amortization - The Company has identified those tangible and intangible assets directly associated with providing a service that generates revenue and records the depreciation and amortization associated with those assets under this category. Such assets include processing platforms and related infrastructure, acquired developed technology intangible assets and other similar asset types.
Other Operating Expenses
•General and administrative - General and administrative includes compensation and related expenses for executive, finance and accounting, other information technology, human resources, legal, and other corporate functions. Also included are corporate facilities expenses, certain third-party professional service fees, and other corporate expenses.
•Sales and marketing - The Company’s sales and marketing expenses relate primarily to compensation, benefits, sales commissions, and related expenses for sales, marketing, and other related activities.
•Depreciation and amortization - The depreciation and amortization associated with tangible and intangible assets that are not considered to be directly associated with providing a service that generates revenue are recorded as other operating expenses. Such assets include corporate facilities and information technology assets, and acquired intangible assets other than those included in cost of services.
•Legal settlement - Represents the consideration paid to the sellers of eNett and Optal in excess of the businesses' fair values. See Item 8 – Note 4, Acquisitions, of our consolidated financial statements for more information.
•Impairment charges - During our annual goodwill assessment completed in the fourth quarter of 2020, we recorded a non-cash goodwill impairment charge of $53.4 million for our WEX Fleet Europe reporting unit. See Item 8 – Note 9, Goodwill and Other Intangible Assets, of our consolidated financial statements for more information.
•Loss on sale of subsidiary - The loss on sale of subsidiary relates to the divestiture of the Company's former Brazilian subsidiary as of the date of sale, September 30, 2020, and the associated write-off of its assets and liabilities.
Year Ended December 31, 2020,2023, Compared to the Year Ended December 31, 20192022
Fleet SolutionsThe following includes information that our management believes is material to an understanding of our results of operations. Any significant changes, unusual or infrequent events or significant economic changes that materially affect our results of operations are discussed below.
Revenues
The following table reflects comparative revenue and key operating statistics within Fleet Solutions:Mobility:
| | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, | | Increase (Decrease) |
| (In thousands, except per transaction and per gallon data) | 2020 | | 2019 | | Amount | | Percent |
Revenues1 | | | | | | | |
| Payment processing revenue | $ | 404,843 | | | $ | 457,244 | | | $ | (52,401) | | | (11) | % |
| Account servicing revenue | 153,823 | | | 164,735 | | | (10,912) | | | (7) | % |
| Finance fee revenue | 197,307 | | | 245,082 | | | (47,775) | | | (19) | % |
| Other revenue | 162,337 | | | 171,334 | | | (8,997) | | | (5) | % |
| Total revenues | $ | 918,310 | | | $ | 1,038,395 | | | $ | (120,085) | | | (12) | % |
| | | | | | | |
| Key performance indicators | | | | | | | |
| Payment processing revenue: | | | | | | | |
Payment processing transactions2 | 463,864 | | | 505,292 | | | (41,428) | | | (8) | % |
| | | | | | | |
Payment processing fuel spend3 | $ | 29,924,535 | | | $ | 37,372,684 | | | $ | (7,448,149) | | | (20) | % |
Average price per gallon of fuel – Domestic – ($USD/gal) | $ | 2.29 | | | $ | 2.80 | | | $ | (0.51) | | | (18) | % |
Net payment processing rate4 | 1.35 | % | | 1.22 | % | | 0.13 | % | | 11 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, | | Increase (Decrease) |
| (in millions, except per transaction and per gallon data) | 2023 | | 2022 | | Amount | Percent |
Revenues(1),(2) | | | | | | |
| Payment processing revenue | $ | 695.0 | | | $ | 720.2 | | | $ | (25.3) | | (4) | % |
| Account servicing revenue | 168.6 | | | 169.2 | | | (0.6) | | — | % |
| Finance fee revenue | 312.9 | | | 359.7 | | | (46.7) | | (13) | % |
| Other revenue | 206.2 | | | 194.6 | | | 11.6 | | 6 | % |
| Total revenues | $ | 1,382.7 | | | $ | 1,443.7 | | | $ | (61.0) | | (4) | % |
| | | | | | |
| Key performance indicators | | | | | | |
| | | | | | |
| | | | | | |
| Total volume | $ | 84,721.2 | | | $ | 98,906.4 | | | $ | (14,185.2) | | (14) | % |
| Payment processing transactions | 562.6 | | | 560.2 | | | 2.4 | | — | % |
| | | | | | |
| Payment processing $ of fuel | $ | 56,683.6 | | | $ | 66,172.1 | | | $ | (9,488.5) | | (14) | % |
| Average U.S. fuel price (US$ / gal) | $ | 3.82 | | | $ | 4.46 | | | $ | (0.64) | | (14) | % |
Net payment processing rate(3) | 1.23 | % | | 1.09 | % | | 0.14 | % | 13 | % |
| | | | | | |
| Net late fee rate | 0.48 | % | | 0.46 | % | | 0.02 | % | 3 | % |
1(1)Foreign currency exchange rate fluctuations had an insignificantimmaterial impact on Fleet Solutions'Mobility revenue in 2020,for the twelve months ended December 31, 2023, as compared to the prior year.
2 (2)Payment processing transactions representsUnfavorable impact from lower domestic fuel prices resulted in a decrease of $108.4 million in revenue for the total number of purchases made by fleets that have a payment processing relationship with WEX.year ended December 31, 2023, as compared to 2022.
3 (3)Payment processing fuel spend represents the total dollar value of the fuel purchased by fleets that have a payment processing relationship with WEX.
4 NetOur net payment processing rate represents the percentage of the dollar value of each payment processing transaction that WEX records as revenuehas benefited from merchants less certain discounts given to customers and network fees.
Fleet Solutions revenue decreased $120.1 million for 2020, as compared to 2019. As discussed in the preceding “COVID-19 Pandemic Response and Impact” section, the business has been adversely impacted by lower average domestic fuel prices during 2020and the impact from interest rate escalator clauses contained in various merchant contracts.
Total Mobility revenue decreased $61.0 million for 2023, as compared to the prior year, and, to a lesser extent,2022. The decrease in total Mobility revenue was primarily driven by lower volumes. The decrease was partly offset by improvements in our over-the-road business, as long haul trucking has not seenfinance fee revenue and the same impacts to volume as other partsimpact of our Fleet Solutions segment.lower average fuel prices on stable levels of payment processing transactions year over year.
Finance fee revenue is comprised of the following components:
| | Twelve Months Ended December 31, | | Increase (Decrease) |
| (In thousands) | 2020 | | 2019 | | Amount | | Percent |
| Twelve Months Ended December 31, | | | Twelve Months Ended December 31, | | Increase (Decrease) |
| (in millions) | | (in millions) | 2023 | | 2022 | | Amount | Percent |
| Finance income | Finance income | $ | 159,944 | | | $ | 208,911 | | | $ | (48,967) | | | (23) | % | Finance income | $ | 271.8 | | | $ | | $ | 307.1 | | | $ | | $ | (35.3) | | (11) | (11) | % |
| Factoring fee revenue | Factoring fee revenue | 37,363 | | | 36,171 | | | 1,192 | | | 3 | % | Factoring fee revenue | 41.1 | | | 52.5 | | 52.5 | | | (11.4) | | (11.4) | | (22) | (22) | % |
| | Finance fee revenue | Finance fee revenue | $ | 197,307 | | | $ | 245,082 | | | $ | (47,775) | | | (19) | % |
| Finance fee revenue | |
| Finance fee revenue | | $ | 312.9 | | | $ | 359.7 | | | $ | (46.7) | | (13) | % |
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. Thisbalance, and to a lesser degree by finance charges earned on revolving portfolio balances. Late fee 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 areWe typically conductedconduct 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 decreased $49.0$35.3 million in 2020,2023 as compared to 2019,2022, primarily due to a reduction of outstanding balances as a result of decliningthe decline in average fuel prices and reduced volumes due to COVID-19, as well as lower delinquencies. This decrease was partly offset by an $8.7 million benefit during 2020 arising from higher weighted averagedriving down customer spend upon which late fees are earned, along with a decline in the number of late fee rates. For both 2020 and 2019, monthly late fee rates and minimum finance charges ranged up to 9.99 percent and $75, respectively. The weighted average late fee rate, netinstances, reflective of related charge-offs was 5.7 percent and 5.4 percent for 2020 and 2019, respectively, resulting from higher minimum finance charge instances relative to prior year.tighter credit policies we have put in place. Concessions to certain customers experiencing financial difficulties may be granted and are generally 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 20202023 or 2019. Going forward, we may see an increase in concessions granted to customers as a result of COVID-19.2022.
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 for 2020 was generally consistent with factoring fee revenue in 2019.
Other revenue2023 decreased $9.0$11.4 million in 2020, as compared to 2019, due primarily2022. Decreased shipping demand in the over-the-road market led to a decline in servicing revenue at our international fleet business due to lower levelssize and volume of spendfactored invoices during 2023 as a result of travel bans and restrictions as of result of the government's responsecompared to the COVID-19 pandemic.elevated demands in the prior 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:Mobility:
| | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, | | Increase (Decrease) |
| (in millions, except with respect to margin) | 2023 | | 2022 | | Amount | Percent |
| Cost of services | | | | | | |
| Processing costs | $ | 283.9 | | | $ | 254.1 | | | $ | 29.8 | | 12 | % |
| Service fees | $ | 7.6 | | | $ | 8.4 | | | $ | (0.8) | | (9) | % |
| Provision for credit losses | $ | 87.1 | | | $ | 172.7 | | | $ | (85.6) | | (50) | % |
| Operating interest | $ | 69.5 | | | $ | 13.9 | | | $ | 55.6 | | 399 | % |
| Depreciation and amortization | $ | 40.8 | | | $ | 46.1 | | | $ | (5.3) | | (12) | % |
| | | | | | |
| Other operating expenses | | | | | | |
| General and administrative | $ | 138.3 | | | $ | 110.2 | | | $ | 28.1 | | 25 | % |
| Sales and marketing | $ | 212.4 | | | $ | 203.3 | | | $ | 9.1 | | 4 | % |
| Depreciation and amortization | $ | 70.3 | | | $ | 72.5 | | | $ | (2.3) | | (3) | % |
| Impairment charges | $ | — | | | $ | 136.5 | | | $ | (136.5) | | NM |
| | | | | | |
| Operating income | $ | 472.8 | | | $ | 426.0 | | | $ | 46.8 | | 11 | % |
| | | | | | |
Segment adjusted operating income(1) | $ | 599.4 | | | $ | 693.4 | | | $ | (94.0) | | (14) | % |
Segment adjusted operating income margin(2) | 43.3 | % | | 48.0 | % | | (4.7) | % | (10) | % |
(1)Segment adjusted operating income excludes unallocated corporate expenses, acquisition-related intangible amortization, other acquisition and divestiture related items, debt restructuring costs, stock-based compensation, other costs and certain non-recurring or non-cash operating charges that are not core to our operations, as applicable depending on the period presented. See “Non-GAAP Financial Measures That Supplement GAAP Measures” later in this Item 7 for a reconciliation of total segment adjusted operating income to income before income taxes. See also Part II – Item 8 – Note 24, Segment Information, of our consolidated financial statements for more information regarding our segment determination.
| | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, | | Increase (Decrease) |
| (In thousands) | 2020 | | 2019 | | Amount | | Percent |
| Cost of services | | | | | | | |
| Processing costs | $ | 200,734 | | | $ | 205,034 | | | $ | (4,300) | | | (2) | % |
| Service fees | $ | 7,216 | | | $ | 7,208 | | | $ | 8 | | | — | % |
| Provision for credit losses | $ | 56,620 | | | $ | 59,816 | | | $ | (3,196) | | | (5) | % |
| Operating interest | $ | 18,360 | | | $ | 22,141 | | | $ | (3,781) | | | (17) | % |
| Depreciation and amortization | $ | 48,958 | | | $ | 43,570 | | | $ | 5,388 | | | 12 | % |
| | | | | | | |
| Other operating expenses | | | | | | | |
| General and administrative | $ | 92,268 | | | $ | 79,717 | | | $ | 12,551 | | | 16 | % |
| Sales and marketing | $ | 148,478 | | | $ | 168,155 | | | $ | (19,677) | | | (12) | % |
| Depreciation and amortization | $ | 89,642 | | | $ | 86,865 | | | $ | 2,777 | | | 3 | % |
| Impairment charges | $ | 53,378 | | | $ | — | | | $ | 53,378 | | | NM |
| | | | | | | |
| Operating income | $ | 202,656 | | | $ | 365,889 | | | $ | (163,233) | | | (45) | % |
NM - Not meaningful
Cost of servicesServices
Processing costs decreased $4.3increased $29.8 million for 2020, as compareddue in part to 2019, due to a reduction in transactions relative to the prior year, primarily as a result of the corresponding reduction in payment processing revenuehigher employee compensation and charges incurred during the three months ended March 31, 2019 to on-board significant customers.other business support costs incurred.
Service fees for 2020 were generally consistent with service fees in 2019.
Provision for credit losses, which includes estimates for both credit and fraud losses, decreased $3.2$85.6 million for 2020,2023, as compared to 2019.2022. The reduction is primarilyhigher credit and fraud loss rates experienced during 2022 improved during 2023 due in part to tighter credit policies put in place to reduce such losses. In addition, the elevated loss rates seen in the over-the-road trucking business in past quarters moderated as the trucking market stabilized. Lower fuel prices additionally led to a reductiondecline in fraud losses during 2020 as comparedoverall accounts receivable balances, which contributed to the prior year. The adoption of the new credit loss accounting standard, Topic 326, coupled with an increasedecrease in expected credit losses as a result of COVID-19, increased the provision for credit losses through the first half of 2020. However, reductions in credit losses resulting from changes in customer payment behavior and increased collection efforts substantially offset those increases during the latter half of 2020. 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 changes in transportation activity as a result of the COVID-19 pandemic.estimated provision. 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 provision for credit losses was 16.715.4 basis points of fuel expenditures for 2020,2023, as compared to 15.126.0 basis points of fuel expenditures for 2019.2022.
Operating interest expense decreased $3.8increased $55.6 million in 2020,2023, as compared to 2019.2022. The decreaseincrease is due to lowerprimarily reflective of higher interest rates and a decreaseincreased operating debt balances in deposits.support of working capital needs.
Depreciation and amortization increased $5.4decreased $5.3 million in 2020, asduring 2023 compared to 2019,the prior year due primarily to the amortization of merchant network access agreements obtained in the Go Fuel Card acquisition in July 2019.certain assets becoming fully depreciated during 2022.
Other operating expenses
General and administrative expenses increased $12.6$28.1 million in 2020,2023 as compared to 2019,2022 due primarilyin part to increased compensation and professional services cost increasesexpense in 2020 assupport of increasing operating efficiencies and business growth along with a resultthird quarter 2023 write-off of the July 2019 acquisition of Go Fuel Card.
Sales and marketing expenses decreased $19.7 million in 2020, as compared to 2019, due primarily to a decline in our discretionary spending as a result of COVID-19 as well as lower relative commission payments to partners.
Depreciation and amortization increased $2.8 million in 2020, as compared to 2019, due primarily to the amortization of the Chevron customer portfolio intangible asset and customer relationships obtained in the Go Fuel Card acquisition in July 2019.certain costs associated with an abandoned IT development project.
Impairment charges consistsduring 2022 consisted of a non-cash goodwill impairment chargecharges of $53.4$136.5 million for two of our WEX Fleet Europeinternational Mobility reporting unit, whichunits. No impairment to any of our reporting units was identified during the annual goodwill assessment completed in the fourth quarter of 2020.year ended December 31, 2023. See Part II – Item 8 – Note 9, Goodwill and Other Intangible Assets, of our 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:Payments:
| | Twelve Months Ended December 31, | | Increase (Decrease) |
| (In thousands) | 2020 | | 2019 | | Amount | | Percent |
Revenues1 | | | | | |
| Twelve Months Ended December 31, | | | Twelve Months Ended December 31, | | Increase (Decrease) |
| (in millions, except per transaction data) | | (in millions, except per transaction data) | 2023 | | 2022 | | Amount | Percent |
Revenues(1) | |
| Payment processing revenue | |
| Payment processing revenue | |
| Payment processing revenue | Payment processing revenue | $ | 229,144 | | | $ | 303,385 | | | $ | (74,241) | | | (24) | % | $ | 428.0 | | | $ | | $ | 353.7 | | | $ | | $ | 74.2 | | 21 | 21 | % |
| Account servicing revenue | Account servicing revenue | 41,927 | | | 43,293 | | | (1,366) | | | (3) | % | Account servicing revenue | 42.1 | | | 42.9 | | 42.9 | | | (0.8) | | (0.8) | | (2) | (2) | % |
| Finance fee revenue | Finance fee revenue | 1,079 | | | 2,086 | | | (1,007) | | | (48) | % | Finance fee revenue | 1.0 | | | 0.6 | | 0.6 | | | 0.3 | | 0.3 | | 53 | 53 | % |
| Other revenue | Other revenue | 5,690 | | | 19,062 | | | (13,372) | | | (70) | % | Other revenue | 25.8 | | | 5.1 | | 5.1 | | | 20.8 | | 20.8 | | 410 | 410 | % |
| Total revenues | Total revenues | $ | 277,840 | | | $ | 367,826 | | | $ | (89,986) | | | (24) | % | Total revenues | $ | 496.9 | | | $ | | $ | 402.3 | | | $ | | $ | 94.6 | | 24 | 24 | % |
| | | Key performance indicators | Key performance indicators | |
| Payment processing revenue: | |
Payment solutions purchase volume2 | $ | 20,877,234 | | | $ | 39,632,411 | | | $ | (18,755,177) | | | (47) | % |
| | | Key performance indicators | |
| | Key performance indicators | |
| Total volume | |
| Total volume | |
| Total volume | | $ | 128,167.8 | | | $ | 101,616.0 | | | $ | 26,551.8 | | 26 | % |
| Purchase volume | | Purchase volume | $ | 92,196.9 | | | $ | 66,671.5 | | | $ | 25,525.4 | | 38 | % |
Net interchange rate(2) | | Net interchange rate(2) | 0.46 | % | | 0.53 | % | | (0.07) | % | (13) | % |
|
1 (1)Foreign currency exchange rate fluctuations had an insignificanta $3.3 million favorable impact on Travel and Corporate SolutionsPayments revenues in 2020,2023, compared to the prior year.
2 (2)Payment solutionsChanges in customer and product mix, including the significant growth in travel-related 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 “COVID-19 Pandemic Response and Impact” section,volumes, has reduced our current travel-related transaction volumes have been impacted by the decline in worldwide travel and tourism as a result of COVID-19 and we expect themnet interchange rate from 2022 to continue to be impacted.2023.
Travel and Corporate SolutionsPayments total revenue decreased $90.0increased $94.6 million for 2020,2023, as compared to 2019,2022. The increase was primarily driven by continued strength in global consumer travel demand. Additionally, other revenue increased significantly due to the impact of the pandemichigher interest revenue earned on restricted cash balances, due to a rise in interest rates, and average balances coinciding with increased travel volumes, with revenue down 53 percent in that portion of the business. This unfavorable factor was partly offset by benefits realized as part of a contract amendment executed during the second quarter of 2020 and 13 percent revenue growth in the corporate payments portion of the business as a result of ongoing migration to virtual payments and increasing usage of our accounts payable products.volumes.
Finance fee revenue was not material to Travel and Corporate Solutions’ operations in 2020 or 2019. Concessions to certain customers experiencing financial difficulties may be granted and are generally limited to extending the time to pay, placing a customer on a payment plan or granting waivers of late fees. During the second quarter of 2020, WEX Latin America placed certain delinquent customers, with accounts receivable balances of $11.0 million, on payment plans ranging up to three years in length. As part of the sale of WEX Latin America, the Company retained one of these delinquent, fully reserved customer balances. No late fee income has been recognized associated with these payment plans during 2020. There were no material
concessions to customers experiencing financial difficulties during either 20202023 or 2019. Going forward, we may see an increase in concessions granted to customers as a result of the continuing impact that COVID-19 has on their businesses.2022.
Operating Expenses
The following table compares line items within operating income and presents segment adjusted operating income and segment adjusted operating income margin for TravelCorporate Payments:
| | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, | | Increase (Decrease) |
| (in millions, except with respect to margin) | 2023 | | 2022 | | Amount | Percent |
| Cost of services | | | | | | |
| Processing costs | $ | 76.7 | | | $ | 72.9 | | | $ | 3.8 | | 5 | % |
| Service fees | $ | 12.6 | | | $ | 13.2 | | | $ | (0.6) | | (4) | % |
| Provision for credit losses | $ | (4.7) | | | $ | 6.5 | | | $ | (11.2) | | (173) | % |
| Operating interest | $ | 9.4 | | | $ | 5.8 | | | $ | 3.6 | | 62 | % |
| Depreciation and amortization | $ | 24.1 | | | $ | 21.6 | | | $ | 2.5 | | 12 | % |
| | | | | | |
| Other operating expenses | | | | | | |
| General and administrative | $ | 76.9 | | | $ | 67.8 | | | $ | 9.0 | | 13 | % |
| Sales and marketing | $ | 56.6 | | | $ | 56.3 | | | $ | 0.3 | | 1 | % |
| Depreciation and amortization | $ | 26.2 | | | $ | 24.4 | | | $ | 1.8 | | 7 | % |
| | | | | | |
| | | | | | |
| | | | | | |
| Operating income | $ | 219.1 | | | $ | 133.9 | | | $ | 85.3 | | 64 | % |
| | | | | | |
Segment adjusted operating income(1) | $ | 277.2 | | | $ | 192.7 | | | $ | 84.5 | | 44 | % |
Segment adjusted operating income margin(2) | 55.8 | % | | 47.9 | % | | 7.9 | % | 16 | % |
(1)Segment adjusted operating income excludes unallocated corporate expenses, acquisition-related intangible amortization, other acquisition and Corporate Solutions:divestiture related items, debt restructuring costs, stock-based compensation, other costs and certain non-recurring or non-cash operating charges that are not core to our operations, as applicable depending on the period presented. See “Non-GAAP Financial Measures That Supplement GAAP Measures” later in this Item 7 for a reconciliation of total segment adjusted operating income to income before income taxes. See also Part II – Item 8 – Note 24, Segment Information, of our consolidated financial statements for more information regarding our segment determination.
| | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, | | Increase (Decrease) |
| (In thousands) | 2020 | | 2019 | | Amount | | Percent |
| Cost of services | | | | | | | |
| Processing costs | $ | 57,735 | | | $ | 62,179 | | | $ | (4,444) | | | (7) | % |
| Service fees | $ | 17,442 | | | $ | 27,654 | | | $ | (10,212) | | | (37) | % |
| Provision for credit losses | $ | 21,610 | | | $ | 5,914 | | | $ | 15,696 | | | 265 | % |
| Operating interest | $ | 5,331 | | | $ | 17,496 | | | $ | (12,165) | | | (70) | % |
| Depreciation and amortization | $ | 20,271 | | | $ | 17,044 | | | $ | 3,227 | | | 19 | % |
| | | | | | | |
| Other operating expenses | | | | | | | |
| General and administrative | $ | 31,534 | | | $ | 36,164 | | | $ | (4,630) | | | (13) | % |
| Sales and marketing | $ | 81,958 | | | $ | 58,927 | | | $ | 23,031 | | | 39 | % |
| Depreciation and amortization | $ | 23,341 | | | $ | 18,144 | | | $ | 5,197 | | | 29 | % |
| | | | | | | |
| Legal settlement | $ | 162,500 | | | $ | — | | | $ | 162,500 | | | NM |
| | | | | | | |
| Operating (loss) income | $ | (143,882) | | | $ | 124,304 | | | $ | (268,186) | | | (216) | % |
NM - Not meaningfulAs a result of owning all of our technology and issuing capabilities, our Corporate Payments segment has a highly scalable and relatively fixed cost base resulting in largely comparable expenses year to year. As a result, the significant increase in 2023 revenues has also significantly increased operating income, segment adjusted operating income, and segment adjusted operating income margin in 2023. Instances in which our expenses in 2023 did not remain comparable to those of 2022 are described hereafter.
Cost of services
Processing costsThe decreased $4.4 million in 2020,provision for credit losses for 2023, as compared to 2019, due primarily to volume related decreases.
Service fees decreased $10.2 million in 2020, as compared to 2019, due to lower processing volumes and the conversion to an internal transaction processing platform.
Provision for credit losses increased $15.7 million in 2020, as compared to 2019, resulting primarily from an increase in expected credit losses as a result of COVID-19 and a specific reserve taken on a customer in Brazil prior to the sale of WEX Latin America. The impactyear comparable period, reflects our best estimate for losses that we expect 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. We will continue to actively monitor the impact of the COVID-19 pandemic on expected credit losses.a reduction in forecasted losses internationally.
Operating interest decreased $12.2 million in 2020, as compared to 2019, as a result of lower interest rates and lower overall deposit balances.
Depreciation and amortization expenses increased $3.2 million in 2020, as compared to 2019, due primarily to the amortization of software obtained in the Noventis acquisition.
Other operating expenses
General and administrative expenses decreased $4.6increased $9.0 million in 2020, as compared to 2019, primarily due to theincreased professional services expense incurred to accelerate vestingin support of option awards as part of the Noventis acquisition during 2019.
Salesincreasing operating efficiencies and marketing expenses increased $23.0 million in 2020, as compared to 2019, primarily due to higher relative commission payments to partners in the corporate payments business partly offset by a decrease in our discretionary spending as a result of COVID-19.
Depreciation and amortization increased $5.2 million in 2020, as compared to 2019, due primarily to higher amortization on customer relationships acquired as part of the Noventis acquisition.growth.
Legal settlement expenses were $162.5 million in 2020 due to the settlement of legal proceedings, and represents the consideration paid to the sellers of eNett and Optal in excess of the businesses' fair values, as further described in Recent Developments.Health and Employee Benefit SolutionsRevenues
The following table reflects comparative revenue and key operating statistics within Health and Employee Benefit Solutions:Benefits:
| | Twelve Months Ended December 31, | | Increase (Decrease) |
| (In thousands) | 2020 | | 2019 | | Amount | | Percent |
Revenues1 | | | | | |
| Twelve Months Ended December 31, | | | Twelve Months Ended December 31, | | Increase (Decrease) |
| (in millions) | | (in millions) | 2023 | | 2022 | | Amount | Percent |
| Revenues | |
| Payment processing revenue | |
| Payment processing revenue | |
| Payment processing revenue | Payment processing revenue | $ | 64,904 | | | $ | 64,963 | | | $ | (59) | | | — | % | $ | 90.7 | | | $ | | $ | 81.9 | | | $ | | $ | 8.8 | | 11 | 11 | % |
| Account servicing revenue | Account servicing revenue | 253,706 | | | 205,524 | | | 48,182 | | | 23 | % | Account servicing revenue | 435.7 | | | 357.3 | | 357.3 | | | 78.5 | | 78.5 | | 22 | 22 | % |
| Finance fee revenue | Finance fee revenue | 137 | | | 150 | | | (13) | | | (9) | % | Finance fee revenue | 0.3 | | | 0.1 | | 0.1 | | | 0.1 | | 0.1 | | 81 | 81 | % |
| Other revenue | Other revenue | 44,972 | | | 46,833 | | | (1,861) | | | (4) | % | Other revenue | 141.7 | | | 65.2 | | 65.2 | | | 76.5 | | 76.5 | | 117 | 117 | % |
| Total revenues | Total revenues | $ | 363,719 | | | $ | 317,470 | | | $ | 46,249 | | | 15 | % | Total revenues | $ | 668.4 | | | $ | | $ | 504.5 | | | $ | | $ | 163.9 | | 32 | 32 | % |
| | Key performance indicators | Key performance indicators | |
| Payment processing revenue: | |
Purchase volume2 | $ | 4,805,395 | | | $ | 5,206,275 | | | $ | (400,879) | | | (8) | % |
| Account servicing revenue: | |
Average number of SaaS accounts3 | 14,512 | | | 12,926 | | | 1,586 | | | 12 | % |
| Key performance indicators | |
| Key performance indicators | |
| | Total volume | |
| | Total volume | |
| | Total volume | | $ | 12,441.8 | | | $ | 11,205.3 | | | $ | 1,236.5 | | 11 | % |
| Purchase volume | | Purchase volume | $ | 6,655.6 | | | $ | 5,869.1 | | | $ | 786.5 | | 13 | % |
| | Average number of SaaS accounts | |
| Average number of SaaS accounts | |
| Average number of SaaS accounts | | 19.9 | | | 18.0 | | | 1.9 | | 11 | % |
| Average HSA custodial cash assets | | Average HSA custodial cash assets | $ | 3,868.9 | | | $ | 3,176.8 | | | $ | 692.1 | | 22 | % |
|
1 Foreign currency exchange rate fluctuations decreased Health and Employee Benefit Solutions'Total Benefits revenue by $1.6increased $163.9 million in 2020,during 2023 as compared to the prior year.
2 Purchase volume represents the total U.S. dollar value of all transactions where interchange is The increase was due primarily to an increase in program fees 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 revenues in 2020 were generally consistent with 2019custodial services, as a result of a decline in the U.S. Health business customer spend on elective healthcare procedures in connection with COVID-19 restrictions, offset by the acquisition of Discovery Benefits.
Accountreflected within account servicing revenue (such fees are variable and based in part on a benchmark reference rate), and a rise in average balances and interest rates earned on the investment of HSA deposit balances held by WEX Bank, as reflected within other revenue. To a lesser extent, increased $48.2 million for 2020, as compared to 2019, primarily duespend volume driven by cardholder growth and increased SaaS participants also contributed to the acquisition of Discovery Benefits and existing WEX Health customer growth, which resultedincrease in a higher number of participants using our SaaS healthcare technology platform.
Finance fee revenue was not material to Health and Employee Benefit Solutions’ operations in either 2020 or 2019. Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time to pay, placing a customer on a payment plan or granting waivers of late fees.
Other revenue decreased $1.9 million in 2020 as compared to 2019, which was primarily attributable to lower revenues from the Company's former WEX Latin America business, partly offset by professional services revenue and growth in ancillary services to cardholders associated with the increased number of SaaS platform participants of our U.S. Health Business.
Operating Expenses
The following table compares line items within operating income and presents segment adjusted operating income and segment adjusted operating income margin for HealthBenefits: | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, | | Increase (Decrease) |
| (in millions) | 2023 | | 2022 | | Amount | Percent |
| Cost of services | | | | | | |
| Processing costs | $ | 261.0 | | | $ | 231.9 | | | $ | 29.1 | | 13 | % |
| Service fees | $ | 53.0 | | | $ | 43.6 | | | $ | 9.4 | | 22 | % |
| Provision for credit losses | $ | 7.4 | | | $ | 0.8 | | | $ | 6.7 | | NM |
| Operating interest | $ | 5.3 | | | $ | 0.9 | | | $ | 4.4 | | NM |
| Depreciation and amortization | $ | 39.5 | | | $ | 38.2 | | | $ | 1.3 | | 3 | % |
| | | | | | |
| Other operating expenses | | | | | | |
| General and administrative | $ | 55.7 | | | $ | 41.2 | | | $ | 14.6 | | 35 | % |
| Sales and marketing | $ | 58.7 | | | $ | 52.2 | | | $ | 6.5 | | 13 | % |
| Depreciation and amortization | $ | 72.8 | | | $ | 59.1 | | | $ | 13.7 | | 23 | % |
| | | | | | |
| Operating income | $ | 114.8 | | | $ | 36.7 | | | $ | 78.1 | | 213 | % |
| | | | | | |
Segment adjusted operating income(1) | $ | 241.8 | | | $ | 133.7 | | | $ | 108.1 | | 81 | % |
Segment adjusted operating income margin(2) | 36.2 | % | | 26.5 | % | | 9.7 | % | 37 | % |
(1)Segment adjusted operating income excludes unallocated corporate expenses, acquisition-related intangible amortization, other acquisition and Employee Benefit Solutions:
| | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, | | Increase (Decrease) |
| (In thousands) | 2020 | | 2019 | | Amount | | Percent |
| Cost of services | | | | | | | |
| Processing costs | $ | 160,572 | | | $ | 133,226 | | | $ | 27,346 | | | 21 | % |
| Service fees | $ | 22,631 | | | $ | 22,165 | | | $ | 466 | | | 2 | % |
| Provision for credit losses | $ | 213 | | | $ | (66) | | | $ | 279 | | | NM |
| Operating interest | $ | 119 | | | $ | 2,278 | | | $ | (2,159) | | | (95) | % |
| Depreciation and amortization | $ | 35,363 | | | $ | 34,111 | | | $ | 1,252 | | | 4 | % |
| | | | | | | |
| Other operating expenses | | | | | | | |
| General and administrative | $ | 34,599 | | | $ | 35,739 | | | $ | (1,140) | | | (3) | % |
| Sales and marketing | $ | 36,248 | | | $ | 32,788 | | | $ | 3,460 | | | 11 | % |
| Depreciation and amortization | $ | 42,008 | | | $ | 34,975 | | | $ | 7,033 | | | 20 | % |
| | | | | | | |
| Operating income | $ | 31,966 | | | $ | 22,254 | | | $ | 9,712 | | | 44 | % |
NM - Not meaningful(2)Segment adjusted operating income margin is calculated by dividing segment adjusted operating income by segment revenue. The revenues earned on HSA assets is highly accretive to earnings and as a result, segment adjusted operating income margin for 2023 increased significantly from 2022.
Cost of services Services
Processing costs increased $27.3$29.1 million in 2020,2023, as compared to 2019.2022. The increase was partly driven by higher personnel-related costsprimarily resulted from an increase in employee compensation, including the impact from the Ascensus Acquisition.
Service fees increased $9.4 million in 2023, as compared to support account servicing revenue growth. The acquisition of Discovery Benefits contributed to the majority of the increase.2022. This increase was partly offsetprimarily driven by increased fees incurred on higher HSA deposits, as compared with the sale of WEX Latin America.same period in the prior year.
Service fees in 2020 were generally consistent with service fees in 2019.
Provision for credit losses was not materialincreased $6.7 million primarily due to Health and Employee Benefit Solutions’ operations in either 2020 or 2019.
Operating interest decreased $2.2 million in 2020, as compared to 2019, due primarily to a decrease in operating debt balances at WEX Latin America prior to completing the sale of WEX Latin America during the third quarter of 2020.
Depreciation and amortization expenses increased $1.3 million in 2020, as compared to 2019, resulting primarily from higher depreciation expense on internally developed software as we continued to invest in WEX Health technology, partly offset by lower depreciation and amortization expenses as compared to 2019 as a result of the sale of WEX Latin America during the third quarter of 2020.an expected loss associated with one customer’s outstanding receivable balance.
Other operating expensesOperating Expenses
General and administrative expenses decreased $1.1increased $14.6 million in 2020,for 2023 as compared to 2019,with the same period in the prior year primarily due to a decrease inincreased professional services expenses incurredexpense in 2019 as a resultsupport of the Discovery Benefit acquisition.increasing operating efficiencies and business growth.
Sales and marketing expenses increased $3.5$6.5 million in 2020,2023, as compared to 2019,2022, due primarily to expenses in connection with the acquisitionexpansion of Discovery Benefits, partly offset by the COVID-related cancellationsales and marketing team, including the impacts of our annual healthcare payments technology conference and COVID-related travel and entertainment decreases.the Ascensus Acquisition.
Depreciation and amortization increased $7.0$13.7 million in 2020,for 2023, as compared to 2019,the prior year period, primarily due primarily to higher relative amortization of customer relationship intangible assets obtained in the Discovery Benefits acquisition.on HSA contractual rights.
Unallocated corporate expensesCorporate 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:
| | Twelve Months Ended December 31, | | Increase (Decrease) |
| (In thousands) | 2020 | | 2019 | | Amount | | Percent |
| Twelve Months Ended December 31, | | | Twelve Months Ended December 31, | | Increase (Decrease) |
| (in millions) | | (in millions) | 2023 | | 2022 | | Amount | | Percent |
| Other operating expenses | Other operating expenses | | | | | |
| General and administrative | General and administrative | $ | 133,708 | | | $ | 124,187 | | | $ | 9,521 | | | 8 | % |
| General and administrative | |
| General and administrative | | $ | 157.1 | | | $ | 124.7 | | | $ | 32.4 | | | 26 | % |
| Depreciation and amortization | Depreciation and amortization | $ | 2,343 | | | $ | 2,420 | | | $ | (77) | | | (3) | % | Depreciation and amortization | $ | 2.6 | | | $ | | $ | 2.0 | | | $ | | $ | 0.6 | | | 29 | | 29 | % |
| Loss on sale of subsidiary | $ | 46,362 | | | $ | — | | | $ | 46,362 | | | NM |
|
General and administrative expenses increased $9.5$32.4 million for 2020during 2023 as compared to 2019,the prior year, primarily due to increased headcount and related compensation expense, including stock compensation, coupled with an increase in costs incurred in connection with the acquisition of eNettbusiness acquisitions.
Non-Operating Income and Optal and personnel-related cost increases including stock-based compensation. The increase was partly offset by a decline in debt restructuring costs incurred in conjunction with our 2019 credit agreement amendments and costs incurred to remediate material weaknesses from 2018 during the prior year, and decreases in employee travel as a result of the Company's current response to the COVID-19 pandemic.Expense
Loss on sale of subsidiary relates to the write-off of the associated assets and liabilities of the Company's former WEX Latin America subsidiary as of the September 30, 2020 sale date.
Other unallocated corporate expenses were not material to the Company’s operations in either 2020 or 2019.
Non-operating income and expense
The following table reflects comparative results for certain amounts excluded from operating income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, | | Increase (Decrease) |
| (In thousands) | 2020 | | 2019 | | Amount | | Percent |
| Financing interest expense | $ | (157,080) | | | $ | (134,677) | | | $ | 22,403 | | | 17 | % |
| Net foreign currency loss | $ | (25,783) | | | $ | (926) | | | $ | 24,857 | | | NM |
| Net unrealized loss on financial instruments | $ | (27,036) | | | $ | (34,654) | | | $ | (7,618) | | | 22 | % |
| Non-cash adjustments related to tax receivable agreement | $ | 491 | | | $ | 932 | | | $ | (441) | | | (47) | % |
| Income tax (benefit) provision | $ | (20,597) | | | $ | 61,223 | | | $ | (81,820) | | | NM |
| Net income (loss) from non-controlling interests | $ | 3,466 | | | $ | (1,030) | | | $ | (4,496) | | | NM |
| Change in value of redeemable non-controlling interest | $ | 40,312 | | | $ | (57,317) | | | $ | 97,629 | | | NM |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, | | Absolute Dollar Change | | | | Effect of Change on Net Income |
| (in millions) | 2023 | | 2022 | | | | |
| Financing interest expense, net of financial instruments | $ | (204.6) | | | $ | (47.5) | | | $ | 157.1 | | | | | Reduction |
| Change in fair value of contingent consideration | $ | (8.5) | | | $ | (139.1) | | | $ | 130.6 | | | | | Increase |
| Loss on extinguishment of Convertible Notes | $ | (70.1) | | | $ | — | | | $ | 70.1 | | | | | Reduction |
| Net foreign currency gain (loss) | $ | 4.9 | | | $ | (22.7) | | | $ | 27.6 | | | | | Increase |
| | | | | | | | | |
| Income tax provision | $ | 102.2 | | | $ | 93.1 | | | $ | 9.1 | | | | | Reduction |
| Net income from non-controlling interests | $ | — | | | $ | 0.3 | | | $ | 0.3 | | | | | NM |
| Change in value of redeemable non-controlling interest | $ | — | | | $ | 34.2 | | | $ | 34.2 | | | | | NM |
NM - Not meaningful
FinancingDue primarily to substantial increases in the LIBOR forward yield curve during 2022, we recognized significant unrealized gains on our interest rate swap financial instruments during 2022, which reduced financing interest expense, increased $22.4 million in 2020, as compared to 2019, due primarily to financing fees incurred in connection with the eNett and Optal acquisition andnet of financial instruments for that year. Higher net variable interest incurredrates on our term loans during 2023 further increased 2023 financing interest expense, relative to 2022.
Due to the rising rate environment since we completed the acquisition of certain contractual rights from Bell Bank in April 2021, the Company’s contingent consideration derivative liability has been effectively reflected at the maximum contingent consideration payable under the purchase agreement since 2022. As a result, absent a significant decline in the Federal Funds futures curve, changes in the fair value of contingent consideration are expected to generally be limited to annual cash payments and present value adjustments due to the passage of time. See Part II – Item 8 – Note 18, Fair Value of our consolidated financial statements for further information on the valuation of this derivative liability.
During August 2023, we repurchased all of the outstanding aggregate principal amount of the Company’s Convertible Notes issued during July 2020, partly offset by lower average interest rates.at a premium, resulting in a loss on extinguishment of $70.1 million. See Part II – Item 8 – Note 16, Financing and Other Debt of our consolidated financial statements for further information on the repurchase of the Convertible Notes.
Our foreign currency exchange exposure is primarily related to the remeasurement of our cash, accounts receivable and accounts payable balances, including intercompany transactions that are denominated in foreign currencies. In 2020,During 2023, net foreign currency lossgain was $25.8$4.9 million, as compared to $0.9a loss of $22.7 million in 2019.2022. The lossgain in 2020 is the result of the remeasurement of assets and liabilities and losses on intercompany transactions, resulting2023 resulted from the U.S. dollar strengthening relative to numerous majorof certain foreign currencies in which we transact, including the Australian dollarEuro and the British pound. The majority of these losses were recorded during the three months ended March 31, 2020, as a result of the weakening of foreign currenciesPound sterling, relative to the U.S. dollar arising from the COVID-19 pandemic.dollar.
Net unrealized loss on financial instruments decreased $7.6 millionThe increase in 2020,income tax provision for 2023 as compared to 2019,the prior year comparable period is due primarily to a decreasean increase in income before income taxes, offset in part due to the change in the LIBOR forward yield curve.
Non-cash adjustments related to tax receivable agreement were not material to operations in 2020 or 2019.
We recorded an income tax benefit of $20.6 million for 2020 as compared to an income tax provision of $61.2 million for 2019. OurCompany’s effective tax rate was a 6.8 percent benefit for 2020 as compared to a 28.3 percent provision for 2019.rates. The Company'sCompany’s effective tax rate for 2023 was 27.7 percent compared to 35.7 percent for 2022. See Part II – Item 8 – Note 14, Income Taxes of our consolidated financial statements for more information regarding the year ended December 31, 2020 was impacted by no incomedrivers behind our effective tax benefit being recorded for i) operating losses generated by WEX Latin America duringrates.
During March 2022, the current year throughCompany purchased the date of sale, ii) loss on sale of WEX
Latin America, and iii) legal settlement. These losses were included as partremaining non-controlling interest in PO Holding from SBI, reducing the carrying value of the current year loss and have been determined to be either non-deductible for income tax purposes or required a valuation allowance.
Net income (loss) 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 2020 or 2019.
The Company's redeemable non-controlling interest to zero. The transaction resulted in the U.S. Health business decreased by $40.3a $34.2 million during 2020. The decrease was due substantiallygain, net of tax expense. See Part II – Item 8 – Note 4, Acquisitions, to a second quarter change in the redemption value resulting from a decline in revenue multiples of peer companies due to the COVID-19 pandemic.our consolidated financial statements for further information.
Year Ended December 31, 2019,2022, Compared to the Year Ended December 31, 20182021
Discussion and analysis of the year ended December 31, 20192022 compared to the year ended December 31, 20182021 is included under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10–K for the year ended December 31, 2019,2022, as filed with the SEC on February 28, 2020.2023 and is incorporated by reference herein.
Non-GAAP Financial Measures That Supplement GAAP Measures
TheIn addition to evaluating the Company’s performance on a GAAP basis, Company management uses particular non-GAAP financial measures, which exclude the impact of certain costs, expenses, gains and losses, to evaluate our overall operating performance, including comparison across periods and with competitors. Our management team believes these non-GAAP measures are integral to our reporting and planning processes and uses them to assess operating performance because they generally exclude financial results that are outside the normal course of our business operations or management’s control. These measures are also used to allocate resources among our operating segments and for internal budgeting and forecasting purposes for both short- and long-term operating plans.
Segment Adjusted Operating Income and Adjusted Net Income
Segment adjusted operating income excludes unallocated corporate expenses, acquisition-related intangible amortization, other acquisition and divestiture related items, debt restructuring costs, stock-based compensation, other costs and certain non-recurring or non-cash operating charges that are not core to our operations, as applicable depending on the period presented.
Adjusted net income, which similarly excludes the impact of all items excluded in segment adjusted operating income except unallocated corporate expenses, further excludes unrealized gains and losses on financial instruments, net foreign currency remeasurement gains and losses, acquisition-related intangible amortization, other acquisition and divestiture related items, loss on sale of subsidiary, stock-based compensation, restructuring and other costs, legal settlement, impairment charges, debt restructuring and debt issuance cost amortization, non-cash adjustmentstax related to tax receivable agreement, similar adjustments attributable to our non-controlling interestsitems, and certain tax related items.other non-operating items, as applicable depending on the period presented.
Although adjusted net income is not calculatedFor the periods presented herein, the following items have been excluded in accordance with GAAP, thisdetermining one or more non-GAAP measure is integral tomeasures for the Company’s reporting and planning processes and the chief operating decision maker of the Company uses segment adjusted operating income to allocate resources among our operating segments. The Company considers this measure integral because it excludes the above-specified items that the Company’s management excludes in evaluating the Company’s performance. Specifically, in addition to evaluating the Company’s performance on a GAAP basis, management evaluates the Company’s performance on a basis that excludes the above items because:following reasons:
•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.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.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 ofon divestitures facilitates the comparison of our financial results to the Company’s historical operating results and to other companies in our industry.industry;
•Legal settlement represents the consideration paid to the sellers of eNett and Optal in excess of the businesses' fair values. Management has elected to exclude this item as the charge is nonrecurring and does not reflect future operating expenses resulting from this acquisition.
•The loss on sale of subsidiary relates to the divestiture of our former Brazilian subsidiary as of the date of sale, September 30, 2020, and the associated write-off of its assets and liabilities. As previously discussed, gains and losses from divestitures are considered by us to be unpredictable and dependent on factors that may be outside of our control. The exclusion of these gains and losses are consistent with our practice of excluding other non-recurring items associated with strategic transactions.
•Stock-based compensation is different from other forms of compensation, as it is a non-cash expense. For example, a cash salary generally has a fixed and unvarying cash cost. In contrast, the expense associated with an equity-based award is generally unrelated to the amount of cash ultimately received by the employee, and the cost to the Company is based on a stock-based compensation valuation methodology and underlying assumptions that may vary over time.time;
•We exclude restructuring and otherOther costs when evaluating our continuing business performance as such items are not consistently occurring and do not reflect expected future operating expense, nor do they provide insight into the fundamentals of current or past operations of our business. This also includes non-recurring professional service costs, costs related to certain identified initiatives, including restructuring and technology initiatives, to further streamline the business, improve the Company’s efficiency, create synergies and globalize the Company’s operations, and remediate the prior year material weaknesses, all with an objective to improve scale and efficiency and increase profitability going forward. For the year ended December 31, 2020, restructuring and2021, other costs additionally include certain costsa penalty incurred in association with COVID-19, including the cost of providing additional health, welfare and technological support to our employees as they work remotely.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.industry;
•Debt restructuring and debt issuance cost amortization, which for the year ended December 31, 2023 includes the loss on extinguishment of Convertible Notes, 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.industry;
•The adjustments attributable to non-controlling interests, including adjustments to the redemption value of a non-controlling interest, and non-cash adjustments related to the tax receivable agreement have no significant impact on the ongoing operations of the business.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.provision; and
For the same reasons, WEX believes that•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.
Segment adjusted operating income and adjusted net income may also be useful to investors as onea means of evaluating our performance. However, because segment adjusted operating income and adjusted net income is aare non-GAAP measure, itmeasures, they should not be considered as a substitute for, or superior to, net income, operating income or cash flows from operating activitiesnet income as determined in accordance with GAAP. In addition,Segment adjusted operating income and 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:shareholders and related per share data:
| | | | Year ended December 31, |
| (In thousands) | 2020 | | 2019 | | 2018 |
| Net (loss) income attributable to shareholders | $ | (243,638) | | | $ | 99,006 | | | $ | 168,295 | |
| | |
| | |
| (in millions) | |
| (in millions) | |
| (in millions) | |
| Net income attributable to shareholders | |
| Net income attributable to shareholders | |
| Net income attributable to shareholders | |
| Unrealized loss (gain) on financial instruments | Unrealized loss (gain) on financial instruments | 27,036 | | | 34,654 | | | (2,579) | |
| Net foreign currency remeasurement loss (gain) | 25,783 | | | 926 | | | 38,800 | |
| Unrealized loss (gain) on financial instruments | |
| Unrealized loss (gain) on financial instruments | |
| Net foreign currency (gain) loss | |
| Net foreign currency (gain) loss | |
| Net foreign currency (gain) loss | |
| Change in fair value of contingent consideration | |
| Change in fair value of contingent consideration | |
| Change in fair value of contingent consideration | |
| Acquisition-related intangible amortization | |
| Acquisition-related intangible amortization | |
| Acquisition-related intangible amortization | Acquisition-related intangible amortization | 171,144 | | | 159,431 | | | 138,186 | |
| Other acquisition and divestiture related items | Other acquisition and divestiture related items | 57,787 | | | 37,675 | | | 4,143 | |
| Legal settlement | 162,500 | | | — | | | — | |
| Loss on sale of subsidiary | 46,362 | | | — | | | — | |
| Other acquisition and divestiture related items | |
| Other acquisition and divestiture related items | |
| Stock-based compensation | |
| Stock-based compensation | |
| Stock-based compensation | Stock-based compensation | 65,841 | | | 47,511 | | | 35,103 | |
| Other costs | Other costs | 13,555 | | | 25,106 | | | 13,717 | |
| Other costs | |
| Other costs | |
| Impairment charges | |
| Impairment charges | |
| Impairment charges | Impairment charges | 53,378 | | | — | | | 5,649 | |
| Debt restructuring and debt issuance cost amortization | Debt restructuring and debt issuance cost amortization | 40,063 | | | 21,004 | | | 14,101 | |
| Non-cash adjustments related to tax receivable agreement | (491) | | | (932) | | | 775 | |
| Debt restructuring and debt issuance cost amortization | |
| Debt restructuring and debt issuance cost amortization | |
| | ANI adjustments attributable to non-controlling interests | |
| | ANI adjustments attributable to non-controlling interests | |
| | ANI adjustments attributable to non-controlling interests | ANI adjustments attributable to non-controlling interests | (42,910) | | | 53,035 | | | (1,370) | |
| Tax related items | Tax related items | (108,086) | | | (74,743) | | | (53,918) | |
| Tax related items | |
| Tax related items | |
| Dilutive impact of convertible debt(1) | |
| Dilutive impact of convertible debt(1) | |
| Dilutive impact of convertible debt(1) | |
| Adjusted net income attributable to shareholders | Adjusted net income attributable to shareholders | $ | 268,324 | | | $ | 402,673 | | | $ | 360,902 | |
| Adjusted net income attributable to shareholders | |
| Adjusted net income attributable to shareholders | |
(1)The dilutive impact of the Convertible Notes has been calculated under the ‘if-converted’ method for the periods through which they were outstanding. Under the ‘if-converted’ method, $9.5 million and $15.1 million of interest expense, net of tax, associated with the Convertible Notes was added back to adjusted net income for the years ended December 31, 2023 and 2022, respectively. Approximately 0.9 million shares of the Company’s common stock associated with the assumed conversion of the Convertible Notes (prior to repurchase and cancellation) was included in the calculation of adjusted net income per diluted share for the year ended December 31, 2023, as the effect of including such adjustments was dilutive. For the year ended December 31, 2022, approximately 1.6 million shares of the Company’s common stock associated with the assumed conversion of the Convertible Notes as of the beginning of the period was included in the calculation of adjusted net income per diluted share, as the effect of including such adjustments was dilutive.
GAAP operating income was $647.1 million, $469.8 million and $342.0 million for the years ended December 31, 2023, 2022 and 2021, respectively. For a reconciliation of Contents
GAAP operating income to total segment adjusted operating income, please see the following table:Application | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (in millions) | 2023 | | 2022 | | 2021 |
| Segment adjusted operating income | | | | | |
| Mobility | $ | 599.4 | | | $ | 693.4 | | | $ | 557.1 | |
| Corporate Payments | 277.2 | | | 192.7 | | | 86.9 | |
| Benefits | 241.8 | | | 133.7 | | | 104.4 | |
| Total segment adjusted operating income | $ | 1,118.4 | | | $ | 1,019.8 | | | $ | 748.4 | |
| | | | | |
| Reconciliation: | | | | | |
| Total segment adjusted operating income | $ | 1,118.4 | | | $ | 1,019.8 | | | $ | 748.4 | |
| Less: | | | | | |
| Unallocated corporate expenses | 103.0 | | | 84.5 | | | 78.2 | |
| Acquisition-related intangible amortization | 184.0 | | | 170.5 | | | 181.7 | |
| Other acquisition and divestiture related items | 6.6 | | | 17.9 | | | 40.5 | |
| Impairment charges | — | | | 136.5 | | | — | |
| Debt restructuring costs | — | | | — | | | 6.2 | |
| Stock-based compensation | 131.6 | | | 100.7 | | | 76.6 | |
| Other costs | 46.1 | | | 39.9 | | | 23.2 | |
| Operating income | $ | 647.1 | | | $ | 469.8 | | | $ | 342.0 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Adjusted Free Cash Flow
Adjusted free cash flow is calculated as cash flows from operating activities, adjusted for net purchases of Critical Accounting Policiescurrent investment securities, capital expenditures, the change in net deposits, changes in borrowings under the BTFP and Estimates
Our discussionborrowed federal funds and analysiscertain other adjustments which, for the year ended December 31, 2023, reflects an adjustment for contingent consideration paid to sellers in excess of acquisition-date fair value, an adjustment for proceeds received of $76.0 million from the return of a collateral deposit, and an adjustment for proceeds received of $50.0 million on the termination of our financial condition andinterest rate swap agreements. Although non-GAAP adjusted free cash flow is not calculated in accordance with GAAP, WEX believes that adjusted free cash flow is a useful measure for investors to further evaluate our results of operations because (i) adjusted free cash flow indicates the level of cash generated by the operations of the business, which excludes certain non-recurring transactions, after appropriate reinvestment for recurring investments in property, equipment and capitalized software that are based uponrequired to operate the business; (ii) changes in net deposits occur on a daily basis as a regular part of operations; (iii) borrowings under the BTFP and borrowed federal funds are primarily used as a replacement for brokered deposits as part of our consolidated financial statements, which have been preparedaccounts receivable funding strategy; and (iv) purchases of current investment securities are made as a result of deposits gathered operationally. However, because adjusted free cash flow is a non-GAAP measure, it should not be considered as a substitute for, or superior to, operating cash flow as determined in accordance with GAAP. PreparationIn addition, adjusted free cash flow as used by WEX may not be comparable to similarly titled measures employed by other companies.
The following table reconciles GAAP operating cash flow to adjusted free cash flow for the years ended December 31, 2023, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (in millions) | | | | 2023 | | 2022 | | 2021 |
| Operating cash flow, as reported | | | | $ | 907.9 | | | $ | 679.4 | | | $ | (42.6) | |
| Adjustments to cash flows from operating activities: | | | | | | | | |
| Other | | | | (124.5) | | | — | | | — | |
| Adjusted for certain investing and financing activities: | | | | | | | | |
| Increases in net deposits | | | | 593.1 | | | 801.6 | | | 1,620.3 | |
| Increases in borrowings under the BTFP | | | | 775.0 | | | — | | | — | |
| Increases in borrowed federal funds | | | | 70.0 | | | — | | | — | |
| Less: Purchases of current investment securities, net of sales and maturities | | | | (1,561.0) | | | (585.8) | | | (956.2) | |
| Less: Capital expenditures | | | | (143.6) | | | (112.9) | | | (86.0) | |
| Adjusted free cash flow | | | | $ | 516.9 | | | $ | 782.4 | | | $ | 535.4 | |
Critical Accounting Estimates
The preparation of these financial statements in accordance with GAAP requires us to make estimates and judgments about certain items and future events that affect reported amounts of assets and liabilities, revenue and expenses and related disclosure of contingent assets and liabilities at the date of ourthe financial statements. We continually evaluate our judgmentsOur significant accounting policies are described in Part II – Item 8 – Note 1, Basis of Presentation and estimates in determinationSummary of our financial condition and operating results. We base our estimates on historical experience and on various other assumptionsSignificant Accounting Policies. The accounting policies that we believe to be reasonable underare most dependent on the circumstances, the resultsapplication of which form the basis for making judgments about the carrying values of assetscritical accounting estimates and liabilities that are not readily apparent from other sources. Estimates are based on information available as of the date of the financial statements and, accordingly, actual results could differ from these estimates, sometimes materially. Critical accounting policies and estimates are defined asassumptions, or those that are both most important to the portrayal of our financial condition and operating results and require management’s most subjective judgments. Ourjudgments, are related to the determination of:
•Credit loss reserves;
•The valuation of the Company’s contingent consideration derivative liability;
•The valuation of the Company’s business combinations and asset acquisitions;
•Goodwill impairment; and
•Income taxes, in particular the recoverability of our deferred tax assets.
These accounting policies require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial condition, results of operations and cash flows could be materially affected.
Credit Loss Reserves
The allowance for expected credit losses is primarily calculated by analytical models using actual loss-rate experience and management discretion. Receivables exhibiting elevated credit risk characteristics from homogenous pools are assessed and reserved on an individual basis for expected credit losses. We assess these receivables for individual expected credit loss estimates utilizing credit scoring and other information including the occurrence of disputes, conversations with customers, or other significant credit loss events. Management monitors the credit quality of accounts receivable in making judgments necessary to estimate expected credit losses by analyzing delinquency reports, loss-rate trends, changes in customer payment patterns, economic indicators and recent trends in competitive, legal, and regulatory environments. When such indicators are forecasted to deviate from historical actual results, the Company qualitatively assesses what impact, if any, the trends are expected to have on the reserve for credit losses. 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.
To the extent calculated expected credit losses are not indicative of future performance, actual loss experience and our results of operations could differ significantly from management’s judgments and expectations, resulting in either higher or lower future provisions for credit losses, as applicable. As of December 31, 2023, we have an estimated reserve for credit losses that is 2.6 percent of the total gross accounts receivable balance as compared to December 31, 2022, when our
estimated reserve for credit losses was 3.2 percent of gross accounts receivable. An increase or decrease to the 2023 reserve by 0.5 percent of the total gross accounts receivable balance would increase or decrease the provision for credit losses by $17.6 million.
For additional information on credit losses, see Note 1, Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Contingent Consideration Derivative Liability
In April 2021, we completed the acquisition of certain contractual rights to serve as custodian or sub-custodian to certain HSA assets. In addition to cash consideration paid by WEX upon closing, the purchase agreement also included additional consideration that is contingent upon any future increases in the Federal Funds rate post closing. The contingent payment period began on July 1, 2021 and extends until the earlier of (i) the year ending December 31, 2030, or (ii) the date when the cumulative amount paid as contingent consideration equals $225.0 million. Contingent payments are calculated quarterly and are paid and settled annually.
Given the agreement’s term extends through the end of 2030, there is not sufficient, observable market data in Federal Funds futures contracts to use Level 1 or Level 2 input-based methodologies for determining the fair value. Accordingly, we have determined the fair value of our contingent consideration liability using a mathematical method of modeling the movement of interest rates, which is considered a Level 3 (unobservable) input-based methodology, to estimate a future Federal Funds rate curve, which is used in a discounted cash flow model to determine the present value of our expected payment obligations.
The fair value of our contingent consideration liability is highly sensitive to current and future changes in the Federal Funds rate and increases or decreases in such rate could have a significant effect on our results of operations. However, any changes in the Federal Funds rate will only affect future calculable payments. While the final amount to be paid by WEX through 2030 could change significantly from our estimations, given the $225.0 million payment ceiling, the actual liability cannot exceed our current estimate as of December 31, 2023 by more than $10.0 million. As of December 31, 2023, the fair value of our contingent liability includes $64.5 million of liability related to calendar 2023, no longer subject to estimation and payable during January 2024.
For additional information on the contingent consideration derivative liability, see Part II – Item 8 – Note 18, Fair Value.
Business Combinations and Asset Acquisitions
The accounting for business combinations and asset acquisitions requires estimates and judgment as to expectations for future cash flows of the acquired business or assets, and the allocation of those cash flows to identifiable assets, including intangible assets and goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including projected financial information, effective income tax rates, present value discount factors and long-term growth expectations. The determined fair value of intangible assets and the selectionrespective useful lives assigned thereto impacts the amount and applicationtiming of criticalfuture amortization expense. Further, a significant difference in the estimated useful life, which is based on the term over which we expect to benefit from the underlying assets, versus the actual period over which we benefit from the assets, could lead to future impairments.
The significance of management’s estimates and assumptions are relative to the size of each individual acquisition. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. For additional information regarding the accounting policiesfor our acquisitions, see Note 4, Acquisitions, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Goodwill Impairment
Our quantitative goodwill impairment test is performed at least annually as of October 1, or more frequently, if events or conditions indicate the carrying amount of goodwill may not be recoverable. The test consists of a comparison of the carrying value of each reporting unit with assigned goodwill to its estimated fair value. The fair value of each reporting unit is estimated using a combination of an income-based DCFM valuation model and estimates,a market-based GPCM valuation model.
The key assumptions that drive fair value of our reporting units are the most significantWACC and projected financial information (i.e. growth rates and the amount and timing of expected future cash flows) within the DCFM and relevant comparable company earnings multiples within the GPCM, all of which are included inrequire significant management judgment. In the tables below.DCFM, as the
| | | | | | | | | | | | | | |
| | Assumptions/Approach Used | | Effect if Actual Results Differ from
Assumptions |
The majority of the Company’s revenues are comprised of transaction-based fees, which are generally calculated based on measures such as: (i) percentage of dollar value of volume processed; (ii) number of transactions processed; or (iii) some combination thereof.
Interchange income, a fee paid by a merchant bank to the card-issuing bank (the Company) through the interchange network, is earned from the Company’s suite of card products. Interchange fees are set by the credit card providers.
The Company has entered into agreements with major oil companies, fuel retailers and vehicle maintenance providers, online travel agencies and health partners, which provide products and/or services to the Company’s customers. These agreements specify that a transaction is deemed to be captured when the Company has validated that the transaction has no errors and has accepted and posted the data to the Company’s records.
Account servicing revenue is primarily comprised of monthly fees charged to cardholders. The Company also recognizes SaaS based service fees in the healthcare market and licensing fees for use of our accounts receivable and accounts payable SaaS platforms.
The Company earns revenue on overdue accounts, 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.
The Company assesses fees for providing ancillary services, such as information products and services, software development projects and other services sold subsequent to the core offerings. Other revenues also include international settlement fees, fees for overnight shipping, certain customized electronic reporting and customer contact services provided on behalf of certain of the Company’s customers.
| | The Company’s primary performance obligation to merchants is a stand-ready commitment to provide payment and transaction processing services as the merchant requires, which is satisfied over time in daily increments.
Within our Travel and Corporate Solutions and Health and Employee Benefit Solutions segments, we provide SaaS services and support, which is satisfied over time in a series of daily increments. Revenue is recognized based on an output method using days elapsed to measure progress as the Company transfers control evenly over each monthly subscription period.
The Company enters into contracts with certain large customers or strategic cardholders that provide for fee rebates tied to performance milestones. When such rebates constitute consideration payable to a customer or other parties that purchase services from the customer, they are considered variable consideration and are recorded as a reduction in payment processing revenue in the same period that related interchange income is recognized. Fee rebates made to certain other partners were determined to be costs to obtain a contract and are recorded as sales and marketing expenses.
The Company earns revenue on overdue accounts, which is recognized as revenue at the time the fees are assessed.
The Company generally records revenue net, equal to consideration retained, based upon its conclusion that the Company is the agent in its principal versus agent relationships.
| | In preparing the financial statements, management must make estimates related to contractual terms, customer performance and sales volumes to determine the total amounts recorded as deductions, such as rebates and incentives, from revenue. Rebates and incentives are calculated based on estimated performance and the terms of the related business agreements. Management also considers historical results in making such estimates. The actual amounts ultimately paid to the customer may be different from our estimates. Such differences are recorded once they have been determined and have historically not been significant.
PART II |
return. Therefore, for example, if the current economic environment were to deteriorate, and as a result the WACC were to increase, the fair value of our reporting units would decrease. Additionally, the profitability of individual reporting units may suffer periodically from downturns in customer demand or other economic factors. Individual reporting units may be more greatly impacted than the Company as a whole, given the different market sectors and geographies in which we operate. As a result, demand for the services of one or more of the reporting units could decline, which could adversely affect the key inputs to our estimated fair value of the Company’s reporting units. If actual reporting unit growth rates were to fall short of previous estimates or delays in the timing of future cash flows were to occur, the fair value of a reporting unit could be negatively impacted. The GPCM requires us to identify a population of publicly traded companies with similar operations and key attributes to those of our reporting units (“GPCs”), which involves a certain degree of judgment as no two companies are entirely alike. Various revenue and earnings based multiples from these GPCs are then used in our fair value calculation. In selecting appropriate multiples to apply to each reporting unit, we perform a comparative analysis between the reporting units and GPCs, considering revenue growth, profitability and the size of the reporting unit compared to the GPCs. Significant increases or decreases in these multiples would result in an increase or decrease, respectively, in the fair value of the reporting unit.
ReserveFor additional information on the accounting for Credit Losses
| | | | | | | | | | | | | | |
Description | | Assumptions/Approach Used | | Effect if Actual Results Differ from
Assumptions |
The allowance for expected credit losses reflects management’s estimate of uncollectible balances as of the reporting date resulting from credit risk and including fraud losses. The reserve for credit losses reduces the Company’s accounts receivable balances, as reported in the consolidated financial statements, to the net realizable value. | | The allowance for expected credit losses is primarily calculated by analytical models using actual loss-rate experience, and adjustments, where necessary, for current conditions and forecasts of leading economic indicators correlated to loss-rate trends. Management monitors the credit quality of accounts receivable in making judgments necessary to estimate expected credit losses by analyzing delinquency reports, loss-rate trends, changes in customer payment patterns, economic indicators, recent trends and forecasts, and competitive, legal, and regulatory environments. When such indicators are forecasted to deviate from the current or historical median, the Company qualitatively assesses what impact, if any, the trends are expected to have on the reserve for credit losses. 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.
Receivables exhibiting elevated credit risk characteristics from homogeneous pools are assessed on an individual basis for expected credit losses. These receivables are assessed individual expected credit loss estimates based on the occurrence of bankruptcies, disputes, conversations with customers, or other significant credit loss events.
Additionally, the allowance for expected credit losses includes fraud losses. Management monitors known and suspected fraudulent activity identified by the Company, as well as fraudulent claims reported by customers, in estimating the reserve for expected fraud losses.
Lastly, the allowance includes reserves for waived late fees. 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 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.
| | To the extent calculated expected credit losses are not indicative of future performance, actual loss experience could differ significantly from management’s judgments and expectations, resulting in either higher or lower future provisions for credit losses, as applicable. As of December 31, 2020, we have an estimated reserve for credit losses, including fraud losses, that is 2.9 percent of the total gross accounts receivable balance.
An increase or decrease to this reserve by 0.5 percent of the total gross accounts receivable balance would increase or decrease the provision for credit losses for the year by $10.3 million.
|
Business Combinations, AcquiredPresentation and Summary of Significant Accounting Policies and Note 9, Goodwill and Other Intangible Assets, and Goodwill
| | | | | | | | | | | | | | |
Description | | Assumptions/Approach Used | | Effect if Actual Results Differ from
Assumptions |
Business combinations are accounted for at fair value. The accounting for business combinations requires estimates and judgment as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair value for assets and liabilities acquired.
An acquisition not meeting the criteria to be accounted for as a business combination is accounted for as an asset acquisition. Asset acquisitions are recorded at purchase price, allocated based on the relative fair value of identifiable assets and liabilities. No goodwill is recorded in an asset acquisition.
Goodwill is comprised of the cost of business acquisitions in excess of the fair value assigned to the net tangible and identifiable intangible assets acquired. Acquired intangible assets result from the allocation of the cost of an acquisition.
Goodwill is not amortized but is reviewed for impairment annually, or when events or changes in the business environment indicate that the carrying value of the reporting units may exceed their fair value. The annual review of goodwill is performed as of October 1 of each year.
The Company tests definite-lived intangible assets for impairment if conditions exist that indicate the carrying value may not be recoverable.
Such circumstances would include, but are not limited to, a significant decrease in the perceived market price of the intangible, a significant adverse change in the way the asset is being used, or a history of operating or cash flow losses associated with the use of the intangible. | | The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including projected financial information, effective income tax rates, present value discount factors, and long-term growth expectations. The Company utilizes third-party specialists to assist management with the identification and valuation of intangible assets using customary valuation procedures and techniques.
During 2020, the Company used a discounted cash flow analysis and guideline transaction method to determine the fair value of the eNett and Optal businesses acquired on December 15, 2020.
The Company’s annual goodwill impairment test is quantitative. For the reporting units that carry goodwill balances, our impairment test consists of a comparison of each reporting unit’s carrying value to its estimated fair value. A reporting unit, for the purpose of the impairment test, is one level below the operating segment level. We have three reporting segments that are further broken into several reporting units for the impairment review. The estimated fair value for the majority of our reporting units is estimated using a combination of discounted estimated future cash flows and prices for comparable businesses. An appropriate discount rate is used, as well as risk premium for specific business units, based on the Company’s cost of capital or reporting unit-specific economic factors. We generally validate the model through a reconciliation of the fair value of all our reporting units to our overall market capitalization. The assumptions used to estimate the discounted cash flows are based on our best estimates about payment processing fees/interchange rates, sales volumes, costs (including fuel prices), future growth rates, working capital needs, capital expenditures and market conditions over an estimate of the remaining operating period at the reporting unit level. The discount rate at each reporting unit is based on the weighted average cost of capital that is determined by evaluating the risk free rate of return, cost of debt, and expected equity premiums.
The Company evaluates its definite-lived intangible assets for impairment under certain circumstances. Such assessment includes considering any negative financial performance, legal, regulatory, contractual or other factors that could affect significant inputs used to determine the fair value of the asset and other relevant entity-specific events such as changes in strategy or customers that could affect significant inputs used in determining fair value. If the Company determines that it is not more likely than not that the asset is impaired, then the Company does not perform a quantitative impairment test. If the Company determines that the asset is more likely than not impaired, then a quantitative test is performed comparing the fair value of the asset with its carrying amount and impairment is measured as the amount by which the carrying amount of the asset group exceeds its fair value. Fair value measurements under FASB Accounting Standards Codification (“ASC”) 820 – Fair Value Measurements and Disclosures, are based on the assumptions of market participants. When determining the fair value of the asset group, entities must consider the highest and best use of the assets from a market-participant perspective.
If the Company incorrectly estimates the useful lives of its intangible assets, it would result in inaccurate amortization expense, which may lead to future impairment.
| | Our goodwill resides in multiple reporting units. The profitability of individual reporting units may suffer periodically from downturns in customer demand or other economic factors. Individual reporting units may be more impacted than the Company as a whole. Specifically, during times of economic slowdown, our customers may reduce their expenditures. As a result, demand for the services of one or more of the reporting units could decline, which could adversely affect our operations, cash flow, and liquidity and could result in an impairment of goodwill or intangible assets.
During our annual goodwill impairment test performed as of October 1, 2020, we determined that the reduced volumes attributable in part to COVID-19, had a significant impact on the fair value of the WEX Fleet Europe reporting unit (the 2019 Go Fuel Card acquisition). Based on the carrying value of this reporting unit exceeding its fair value, the Company recorded a $53.4 million goodwill impairment charge during the year ended December 31, 2020. There is $65.8 million remaining goodwill associated with this reporting unit.
For our other reporting units with goodwill, our 2020 goodwill impairment test indicated excesses of estimated fair value over the respective carrying amounts by amounts ranging from approximately $10 million to $2.3 billion.
Although no reporting units are deemed at risk of impairment as of December 31, 2020, subsequent to the impairment loss taken by WEX Fleet Europe as of October 1, 2020, there exists the potential for future impairment should actual results deteriorate versus our current expectations. As of December 31, 2020, the Company had approximately $4.2 billion on its consolidated balance sheet related to goodwill and intangible assets of acquired entities.
The Company did not record any goodwill impairments during the year ended December 31, 2019.
The Company did not record any intangible asset impairments during the years ended December 31, 2020 and 2019.
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Income Taxes
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Description | | Assumptions/Approach Used | | Effect if Actual Results Differ from
Assumptions |
In preparing the consolidated financial statements, we calculate income tax expense (benefit) based on our interpretation of the tax laws in the various jurisdictions where we conduct business. This requires us to estimate current tax obligations and to assess temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. These differences result in long-term deferred tax assets and liabilities, the net amount of which we show as a line item on the consolidated balance sheet. All or a portion of the benefit of income tax positions is recognized only when we have made a determination that it is more likely than not that the tax position will be sustained upon examination, based upon the technical merits of the position and other factors. For tax positions that are determined to be more likely than not sustained upon examination, the tax benefit recognized is the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We must also assess the likelihood that the deferred tax assets will be realized.
To the extent we believe that realization is not more likely than not, we establish a valuation allowance. When we establish a valuationValuation allowance or increase this allowance, we generally record a corresponding income tax expense in the consolidated statement of operations in the period of the change. Conversely, to the extent circumstances indicate that realization is more likely than not, the valuation allowance is decreased to the amount realizable, which generates an income tax benefit.
| | Management must make judgments to determine income tax expense (benefit), deferred tax assets and liabilities and any valuation allowance to be recorded against deferred tax assets. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Changes in our estimates occur periodically due to changes in tax rates, changes in business operations, implementation of tax planning strategies, the expiration of relevant statutes of limitations, resolution with taxing authorities of uncertain tax positions and newly enacted statutory, judicial and regulatory guidance. We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized.
Significant judgment is required in determining valuation allowances. In evaluating the ability to recover deferred tax assets, we consider all available positive and negative evidence including past operating results, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. In establishing a liability for unrecognized tax benefits, assumptions are made in determining whether, and to what extent, a tax position may be sustained. It requires significant management judgment regarding applicable statutes and their related interpretation as they apply to our particular facts and circumstances.
| | Although we believe that our income tax related judgments and estimates are reasonable, it is possible that our actual results could be different than what we expected, and we may be exposed to a material change in our total income tax expense, tax-related balances, or valuation allowances. Upon income tax audit, any unfavorable tax settlement may require use of our cash and result in an increase in our effective tax rate in the period of settlement. A favorable tax settlement could be recognized as a reduction in our effective tax rate in the period of settlement.
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Recently Adopted and New Accounting Standards
We adopted Topic 326record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized, the determination of which requires significant judgment. In evaluating the ability to recover deferred tax assets, we consider all available positive and negative evidence including past operating results, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. Our valuation allowance at December 31, 2023 decreased to $100.7 million from $131.4 million at December 31, 2022, resulting in deferred tax liabilities, net, of $115.8 million as of December 31, 2023. Changes in the expectations regarding the realization of deferred tax assets and liabilities could materially impact income tax expense in future periods.
For additional information on January 1, 2020, utilizing the modified-retrospective approach. Under the modified-retrospective approach, prior period comparable financial information is not adjusted. See Item 8 –income taxes, see Note 1, Basis of Presentation and Summary of Significant Accounting Policies, and Note 14, Income Taxes, to the consolidated financial statements included in Part II, Item 8- Note 2, Recent Accounting Pronouncements, in this report for further discussion of the impact from the adoption8 of this new accounting standard. We use a loss-rate methodology to calculate our general allowance for accounts receivable. This methodology considers historical loss experience to calculate actual loss-ratesAnnual Report on Form 10-K.
Recently Adopted and analyzes trends in the calculated loss-rates against trends in economic indicators. Analyzing trends in loss-rates against trends in economic indicators allows us to identify correlations between economic environments and loss experience. Strong correlations identified from that analysis are factored into the current and expected conditions of the overall credit loss reserve methodology. The expense we recognized in the quarter is the amount necessary to bring the reserve to its required level based on this methodology. When individual accounts receivable exhibit elevated credit risk characteristics as a result of bankruptcies, disputes, conversations with customers, or other significant credit loss events, they are assessed individual credit loss estimates. Assumptions regarding expected credit losses are reviewed each reporting period and may be impacted by actual performance of accounts receivable and changes in any of the factors discussed above. New Accounting Standards
See Part II – Item 8 – Note 2, Recent Accounting Pronouncements, for a complete discussion of recently issued accounting standards that haveadopted and not yet been adopted.
Liquidity and Capital Resources
We fund our business operations primarily via cash on hand, cash generated from operations, the issuance of deposits, and borrowings under our Amended and Restated Credit Agreement. As of December 31, 2023, we had cash and cash equivalents of $975.8 million, including Corporate Cash Flowsof $171.9 million, and remaining borrowing availability of $731.2 million under the Revolving Credit Facility along with access to various sources of funds, including uncommitted federal funds lines of credit from other banks.
Our short-term cash requirements consist primarily of funding the working capital needs of our business, payments on maturities of deposits, current principal and interest payments on the credit facilities under our Amended and Restated Credit Agreement, and payments on other short-term debt. Our long-term cash requirements consist primarily of amounts owed under our Amended and Restated Credit Agreement and various facilities lease agreements. For more information on our debt and deposit commitments refer to Part II – Item 8 – Note 16, Financing and Other Debt and Note 11, Deposits, respectively, in this report. For more information on our future lease payments, including our minimum lease payment schedule as of December 31, 2023, refer to Part II – Item 8 – Note 15, Leases.
We believe that our current cash and cash equivalents, cash generating capability,capabilities, financial condition and operations, together with theand access to available funding sources of cash listed below, will be adequate to fund our cash needs for at least the next 12 months.months and the foreseeable future. The table below summarizes our primary short-termincludes a more comprehensive list of frequent sources and uses of cash:
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| Sources of cash | | UseUses of cash1
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•Borrowings on our 2016 Credit AgreementCash generated from operations •Convertible NotesBorrowings and availability on our Amended and Restated Credit Agreement1 •Deposits •Borrowed federal funds2
•Participation debt and borrowed federal funds3 •Accounts receivable factoring and securitization arrangements
| | •Payments on our 2016Amended and Restated Credit Agreement •Payments on maturities and withdrawals of certificates of deposit and brokered money market deposits •Payments on borrowed federal funds and other short-term borrowings •Working capital needs of the business •Capital expenditures •Purchases of shares of treasury stock •Merger and acquisition activity |
1(1) Our long-term cash requirements consist primarilyUnder our Amended and Restated Credit Agreement, as of amounts owedDecember 31, 2023, we had outstanding term loan principal borrowings of $2,246.2 million, borrowings of $662.0 million on the Revolving Credit Facility and letters of credit of $36.8 million drawn against the Revolving Credit Facility. The letters of credit are issued on our 2016behalf in favor of third-party beneficiaries and primarily collateralize Corporate Payments processing activity. Subject to the terms of the Amended and Restated Credit Agreement, these irrevocable letters of credit are secured and are renewed on an annual basis unless the Company chooses not to renew them. The Tranche A Term Loans and Tranche B Term Loans require scheduled quarterly payments through the April 1, 2026 and April 1, 2028 respective maturity dates. See Part II – Item 8 – Note 16, Financing and Other Debt, in this report for more information regarding our applicable interest rates on our Amended and Restated Credit Agreement.
(2)WEX Bank’s regulatory status enables it to raise capital to fund the Company’s working capital requirements by issuing deposits, subject to various regulatory capital requirements administered by the FDIC and the UDFI. WEX Bank accepts its deposits through certain customers as required collateral for credit that has been extended (“customer deposits”) and contractual arrangements for brokered and non-brokered certificate of deposit and money market deposit products. Additionally, WEX Bank holds deposits for the benefit of WEX Inc.’s HSA customers subject to the terms of a deposit agreement. Customer deposits are generally non-interest bearing, certificates of deposit are issued at fixed rates, money market deposits are issued at both fixed and variable rates based on the Federal Funds rate and HSA deposits are issued at rates as defined within the consumer account agreements. Certificates of deposit and certain fixed term money market deposit products have fixed contractual maturities. Money market deposits without fixed terms may be withdrawn by the holder at any time, although 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. HSA funds can be withdrawn by the account holders at any time. We believe that our deposits are paying competitive yields and that the brokered deposit market remains liquid. As of December 31, 2023, we had $4.1 billion in deposits. See Part II – Item 8 – Note 11, Deposits, in this report for more information regarding our deposits.
(3)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 $39.1 million borrowed against these participation agreements as of December 31, 2023. WEX Bank also borrows from uncommitted federal funds lines from time to time to supplement the financing of the Company’s accounts receivable. There were $70.0 million in outstanding borrowings under these lines of credit as of December 31, 2023. See Part II – Item 8 – Note 16, Financing and Other Debt, in this report for more information regarding these facilities.
(4)The Company utilizes securitized debt agreements to finance a portion of our receivables, lower our cost of borrowing and more efficiently utilize capital. The Company had $101.9 million of securitized debt under these facilities as of December 31, 2023. See Part II – Item 8 – Note 16, Financing and Other Debt, in this report for more information regarding these facilities. We also utilize off-balance sheet factoring and receivable securitization facilities 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. Available capacity is generally dependent on the level of our trade accounts receivable eligible to be sold and the financial institution’s willingness to purchase such receivables. However, the Company is not dependent on them to maintain its liquidity and capital resources. See Part II – Item 8 – Note 16, Financing and Other Debt and Note 13, Off-Balance Sheet Arrangements, in this report for further information about the Company’s securitized debt and off-balance sheet arrangements.
Additional Sources of Cash Available
On March 12, 2023, the Federal Reserve Board announced the BTFP, which provides liquidity to U.S. depository institutions. This program allows bank loans for up to one year in length, collateralized by the par value of qualifying assets, including U.S. treasuries and mortgage-backed securities. Advances will be available until March 11, 2024, or longer if the program is extended. At any time under the BTFP, WEX Bank is able to refinance without penalty in order to obtain the most advantageous rate. WEX Bank has accessed $775.0 million of temporary, low-cost capital under the BTFP as of December 31, 2023, pledging securities with a par value of $775.7 million and market value of $704.1 million as collateral.
On August 11, 2023, the Company repurchased all of its outstanding Convertible Notes for a total purchase price of $370.4 million, inclusive of accrued and unpaid interest from and including July 15, 2023, to, but excluding August 11, 2023. Subsequently, on September 26, 2023, the Company entered into the Third Amendment to Amended and Restated Credit Agreement (the “Third Amendment”), which increased the revolving credit commitments under the Company’s Revolving Credit Facility by $500.0 million. Pursuant to the terms of the Third Amendment, the revolving commitments under our Amended and Restated Credit Agreement were increased, which created capacity sufficient to restore amounts borrowed to repurchase the Convertible Notes and various facilities lease agreements.to consummate the Ascensus Acquisition. See Part II – Item 8 – Note 16, Financing and Other Debt and Note 4, Acquisitions, in this report for more information regarding the Convertible Notes repurchase, the Third Amendment and the Ascensus Acquisition.
WEX Bank has the ability to borrow funds from the Federal Reserve Bank Discount Window. Borrowing limits fluctuate based on pledged assets, and as of December 31, 2023, the Company could borrow up to a maximum amount of $151.8 million. WEX Bank had no borrowings outstanding on this line of credit as of December 31, 2023. See Part II – Item 8 – Note 16, Financing and Other Debt, in this report for more information regarding this borrowing arrangement.
Cash Flows
The table below summarizes our cash activities: activities and adjusted free cash flow:
| | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (In thousands) | 2020 | | 2019 | | 2018 |
| Net cash provided by operating activities | $ | 857,019 | | | $ | 663,171 | | | $ | 400,229 | |
| Net cash used for investing activities | $ | (329,086) | | | $ | (990,614) | | | $ | (254,175) | |
| Net cash (used for) provided by financing activities | $ | (179,256) | | | $ | 749,773 | | | $ | (102,728) | |
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (in millions) | 2023 | | 2022 | | 2021 |
| Net cash provided by (used for): | | | | | |
| Operating activities | $ | 907.9 | | | $ | 679.4 | | | $ | (42.6) | |
| Investing activities | $ | (2,138.3) | | | $ | (716.7) | | | $ | (1,601.1) | |
| Financing activities | $ | 1,573.3 | | | $ | 681.3 | | | $ | 1,596.2 | |
| Non-GAAP financial measure: | | | | | |
Adjusted free cash flow(1) | $ | 516.9 | | | $ | 782.4 | | | $ | 535.4 | |
(1)The Company’s non-GAAP adjusted free cash flow is calculated as cash generated from operations, less net purchases of current investment securities, capital expenditures, the change in net deposits, changes in borrowings under the BTFP and borrowed federal funds and certain other adjustments. For a reconciliation to net cash provided by operating activities, the most closely comparable GAAP measure, and the reasons why we believe this is an important financial measure, please refer to the section titled Non-GAAP Financial Measures That Supplement GAAP Measures.
Operating Activities
We fund a customer’s entire receivable in the majority of our Mobility and Corporate Payments 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 and purchase volumes, driving changes in accounts receivable and accounts payable balances, which directly impact our capital resource requirements.
The majority of the Company’s trade receivables provide for payment terms of 30 days or less and receivables not paid within the terms of the agreement are generally subject to late fees based upon the outstanding receivable balance. The Company also extends revolving credit to certain small fleets. Such accounts are also subject to late fees and interest
charges based on a revolving balance. The Company had approximately $133.3 million and $157.8 million of receivables with revolving credit balances as of December 31, 2023 and 2022, respectively.
The receivables portfolio consists of a large group of homogeneous smaller balances across a wide range of industries. No one customer receivable balance represented 10 percent or more of the outstanding receivables balance at December 31, 2023 or December 31, 2022. At December 31, 2023, approximately 98 percent and 99 percent of the outstanding balance of total trade accounts receivable was less than 30 days and 60 days past due, respectively.
•CashNet cash provided by operating activities for 20202023 increased $193.8$228.5 million as compared to the prior year, primarily attributable to the favorable impact on working capital resulting from increased collections on accounts receivable offseta decrease in part by a reduction in payables.fuel prices during 2023 relative to the prior year.
•CashNet cash provided by operating activities for 20192022 increased $262.9$722.0 million as compared to the prior year, resulting from an increaseprimarily attributable to a decreased change in accounts receivable, net of a corresponding increased change in accounts payable, and decrease in accounts receivable primarily due toas well as higher net income adjusted for non-cash items.
For the year ended December 31, 2023, net cash provided by operating activities includes a factoring arrangement in$76.0 million receipt from the return of a collateral deposit as well as the $50.0 million receipt of proceeds upon the termination of all of the Company’s outstanding swaps with a collective notional amount of $1.1 billion, which the Company retainshad used to manage the merchant payable and sells the related accounts receivable. This arrangement was in place during the twelve months ended December 31, 2019, but not in place until August of 2018.interest rate risk associated with its outstanding variable-interest rate borrowings.
Investing Activities
Investing cash flows generally consist of capital expenditures, cash used for acquisitions and investment of eligible custodial cash assets.
•CashNet cash used for investing activities for 2020 decreased $661.5 million as compared to the prior year. The Company completed one acquisition during 2020 with associated payments of $220.7 million, net of cash acquired, as compared to four acquisitions completed during 2019.
•Cash used for investing activities for 20192023 increased $736.4 million as compared to the prior year, resulting from $882.4 million of payments made associated with the four acquisitions completed during 2019.
Financing Activities
•Cash used for financing activities during 2020 was $179.3 million as compared to cash provided by financing activities during 2019 of $749.8 million. The decrease of $929.0 million is substantially due to a reduction in overall borrowing needs year over year for the funding of acquisitions.
•Cash used for financing activities for 2019 increased $852.5$1,421.6 million as compared to the prior year, primarily dueresulting from an increase in net purchases of available-for-sale debt securities and cash paid for acquisitions. See Part II – Item 8 – Note 4, Acquisitions, in this report for more information regarding the Ascensus and Payzer acquisitions.
•Net cash used for investing activities for 2022 decreased $884.5 million as compared to higher overall borrowingsthe prior year, primarily resulting from a reduction in connection with funding thepayments made for acquisitions and raising depositsas well as a reduction in order to fund asset growth.net purchases of available-for-sale debt securities.
LiquidityFinancing Activities
In general, the Company’s trade receivables provide for payment terms of 30 days or less. Receivables not paid within the termsFinancing cash flows generally consist of the agreement are generallyissuance and repayment of debt, deposits and proceeds from employee exercises of stock options, changes in restricted cash payable and purchases of our common stock. Repurchases of our common stock may vary based on management’s evaluation of market and economic conditions and other factors.
•Net cash provided by financing activities during 2023 increased $892.0 million as compared to the prior year, due primarily to net borrowings under the newly available BTFP and under our Revolving Credit Facility, offset in part by the repurchase of our Convertible Notes.
•Net cash provided by financing activities during 2022 decreased $915.0 million as compared to the prior year, primarily resulting from lower relative deposit issuances and purchases of our common stock.
During 2023 the Company repurchased approximately 1.7 million shares of our common stock subject to late fees based upon thean authorized and outstanding receivable balance. 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 a revolving balance. The Company had approximately $60.2 million and $62.4 million of receivables with revolving credit balances asshare repurchase plan. Cash payments for share repurchases totaled $303.4 million. As of December 31, 20202023, there was $213.4 million worth of common stock shares available to be purchased pursuant to the repurchase plan authorization. For information regarding an increase to such share repurchase plan authorization made during 2024, see Part II – Item 8 – Note 28, Subsequent Events.
Adjusted Free Cash Flow
The definition of adjusted free cash flow, and 2019, respectively.the reasons why we believe it to be an important financial measure, can be found in the section titled Non-GAAP Financial Measures That Supplement GAAP Measures.
•Adjusted free cash flow decreased $265.5 million during 2023 from 2022 reflecting an increase in net purchases of available-for-sale debt securities, partially offset by borrowings under the BTFP and increasing cash inflows from operating activities.
•Adjusted free cash flow increased $246.9 million during 2022 from 2021 reflecting a significant increase in operating cash flows and decrease in purchases of current investment securities, offset in part by the reduction in cash provided by net deposits as compared to the prior year.
At December 31, 2020, approximately 97 percent of the outstanding balance of $2.0 billion of total trade accounts receivable was 29 days or less past due and approximately 98 percent of the outstanding balance of total trade accounts receivable was 59 days or less past due. The receivables portfolio consists of a large group of homogeneous smaller balances across a wide range of industries. No one customer receivable balance represented 10 percent or more of the outstanding receivables balance at December 31, 2020 or December 31, 2019. Our short-term cash requirements consist primarily of funding the working capital needs of our business, payments on maturities and withdrawals of certificates of deposit and brokered money market deposits, payments on borrowed federal funds, required capital expenditures, repayments on our credit facility, interest payments on our credit facility and other operating expenses. WEX Bank can fund our short-term domestic cash requirements through the issuance of brokered deposits and borrowed federal funds. Any remaining cash needs are primarily funded through operations, our borrowings under our 2016 Credit Agreement, our participation debt and our accounts receivable factoring and securitization arrangements. Our long-term cash requirements consist primarily of amounts owed on our 2016 Credit Agreement and Notes and various facilities lease agreements.Undistributed Earnings
Undistributed earnings of certain foreign subsidiaries of the Company amounted to $58.5 million and $77.4$231.6 million at December 31, 2020 and 2019, respectively. The Company had historically asserted that the undistributed earnings of foreign subsidiaries were considered indefinitely reinvested outside the United States. The Company reevaluated its historic indefinite reinvestment assertion and determined that any historical undistributed earnings as well as the future earnings for WEX Australia are no longer considered to be indefinitely reinvested.2023. The Company continues to maintain its indefinite reinvestment assertion for its remaininginvestments in foreign subsidiaries. The deferred tax liability related to the foreignsubsidiaries except for any historical undistributed earnings and state tax costs associated with this change in assertion was immaterial.future earnings for WEX Australia. Upon distribution of the foreign subsidiariessubsidiaries’ earnings in which the Company continues to assert indefinite reinvestment, which approximates $203.5 million at December 31, 2023, the Company would be subject to withholding taxes payable to foreign countries, where applicable, but would generally have no further federal income tax liability.
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 currency exchange rate changes nor the degree to which we will be able to manage the impact of currency exchange rate changes.
DepositsFinancial Covenants
The Amended and Borrowed Federal Funds
WEX Bank has issued certificates of deposit in various maturities ranging between 1 year and 5 years, with interest rates ranging from 1.35 percent to 3.52 percent as of December 31, 2020, as compared to maturities ranging between 4 months and 5 years and interest rates ranging from 1.80 percent to 3.52 percent as of December 31, 2019. As of December 31, 2020, we had approximately $503.4 million of certificates of deposit outstanding at a weighted average interest rate of 1.81 percent, compared to $979.4 million of certificates of deposit outstanding at a weighted average interest rate of 2.57 percent as of December 31, 2019.
WEX Bank also issues interest-bearing brokered money market deposits with variable interest rates ranging from 0.12 percent to 0.30 percent as of December 31, 2020, as compared to variable interest rates ranging from 1.63 percent to 1.90 percent as of December 31, 2019. As of December 31, 2020, we had approximately $439.9 million of interest-bearing brokered money market deposits at a weighted average interest rate of 0.27 percent, as compared to $362.2 million of interest-bearing brokered money market deposits at a weighted average interest rate of 1.88 percent as of December 31, 2019.
WEX Bank may issue additional brokered deposits without limitation, subject to FDIC rules governing minimum financial ratios, which include risk-based asset and capital requirements. As of December 31, 2020, all brokered deposits were in denominations of $250 thousand or less, corresponding to FDIC deposit insurance limits. Interest-bearing money market funds may be withdrawn at any time. We believe that our brokered deposits are paying competitive yields and that there continues to be consumer demand for these instruments.
We also carry non-interest bearing deposits that are required for certain customers as collateral for their credit accounts. We had $116.7 million and $112.6 million of these deposits at December 31, 2020 and 2019, respectively.
In accordance with regulatory requirements, WEX Bank maintains reserves against a percentage of certain customer deposits by keeping balances with the Federal Reserve Bank. There was no required reserve at December 31, 2020 due to temporarily relaxed Federal Reserve requirements enacted in response to the COVID-19 pandemic. The required reserve based on the outstanding customer deposits was $24.9 million at December 31, 2019.
WEX Bank also borrows from uncommitted federal funds lines of credit to supplement the financing of our accounts receivable. Our federal funds lines of credit were $376.0 million and $355.0 million as of December 31, 2020 and 2019, respectively, with $20.0 million and $35.0 million of borrowings as of December 31, 2020 and 2019, respectively.
WEX Bank participates in the ICS service offered by Promontory Interfinancial Network, which allows WEX Bank to purchase brokered money market demand accounts and demand deposit accounts in an amount not to exceed $125.0 million as part of a one-way buy program. At December 31, 2020 and 2019 there was no outstanding balance for ICS purchases.
2016 Credit Agreement
On July 1, 2016, we entered into the 2016Restated Credit Agreement in order to permit the additional financing necessary to facilitate the EFS acquisition. The 2016 Credit Agreement initially provided for secured tranche A and tranche B term loan facilities in original principal amounts equal to $455.0 million and $1,200.0 million, respectively, and a $470.0 million secured revolving credit facility. As of December 31, 2020, after giving effect to amendments prior to such date, we had an outstanding principal amount of $873.8 million on our secured tranche A term loan, an outstanding principal amount of $1,442.4 million on our secured tranche B term loan and outstanding letters of credit of $51.6 million drawn against our $870.0 million secured revolving credit facility, with a $250.0 million sublimit for letters of credit and $20.0 million sublimit for swingline loans. The tranche B term loans mature during May 2026 while the revolving credit facility and tranche A term loans mature during July 2023, subject to earlier maturity in August 2022 in certain circumstances. The revolving credit loans and 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, which is calculated using consolidated funded indebtedness (excluding (i) up to $350.0 million of consolidated funded indebtedness due to permitted securitization transactions and (ii) the amount of consolidated funded indebtedness constituting the non-recourse portion of permitted factoring transactions, and netting up to (x) with respect to calculating the consolidated leverage ratio for purposes of the periods ending prior to June 15, 2021, an unlimited amount and (y) with respect to calculating the consolidated leverage ratio for purposes of the periods ending thereafter, $400.0 million, of unrestricted cash and cash equivalents denominated in U.S. dollars or other lawful currencies (provided that such other currencies are readily convertible to, and deliverable in, U.S. dollars) held by the Company and its subsidiaries) to consolidated EBITDA.
Incremental loans of up to (i) the greater of (x) $375.0 million and (y) 50% of consolidated EBITDA of the Company, plus (ii) the amount of certain voluntary prepayments of the loans, plus (iii) an unlimited amount subject to satisfaction of the Company’s consolidated secured leverage ratio, testing consolidated funded indebtedness that is secured by a lien on the assets of the Company or any of its subsidiaries (excluding (a) up to $400.0 million of consolidated funded indebtedness due to permitted securitization transactions and (b) the amount of consolidated funded indebtedness constituting the non-recourse portion of permitted factoring transactions, and netting up to (x) with respect to calculating the consolidated secured leverage ratio for purposes of the periods ending prior to June 15, 2021, an unlimited amount, and (y) with respect to calculating the consolidated secured leverage ratio for purposes of the periods ending thereafter, $400.0 million, of unrestricted cash and cash equivalents denominated in U.S. dollars or other lawful currencies (provided that such other currencies are readily convertible to, and deliverable in, U.S. dollars) held by the Company and its subsidiaries), minus (iv) the aggregate amount of incremental loans incurred in reliance of clause (i) above since August 24, 2018, could be made available under the 2016 Credit Agreement upon the request of the Company subject to specified terms and conditions, including receipt of lender commitments.
Debt Covenants
The 2016 Credit Agreement and the indenture governing the Notes containcontains various affirmative and negative covenants that, subject to certain customary exceptions, limit the Company and its subsidiaries’ including,(including, in certain limited circumstances, WEX Bank and the Company’s other regulated subsidiaries,subsidiaries) ability to, among other things (i) incur additional debt, (ii) pay dividends or make other distributions on, redeem or repurchase capital stock, or make investments or other restricted payments, (iii) enter into transactions with affiliates, (iv) dispose of assets or issue stock of restricted subsidiaries or regulated subsidiaries, (v) create liens on assets, or (vi) effect a consolidation or merger or sell all, or substantially all, of the Company’s assets. Additionally, the indenture governing the Convertible Notes contains customary negative and affirmative covenants that, subject to certain customary exceptions, limit the Company and its subsidiaries', but excluding WEX Bank and the Company's other regulated subsidiaries, ability to, among other things, incur additional debt. These covenants are subject to important exceptions and qualifications. At any time that the Notes are rated investment grade, which is not currently the case, and subject to certain conditions, certain covenants will be suspended with respect to the Notes. WEX Bank and the Company’s other regulated subsidiaries will not be subject to some of the restrictive covenants in the Indenture that place limitations on the Company and its restricted subsidiaries’ actions, and where WEX Bank and the Company’s regulated subsidiaries are subject to covenants, there are significant exceptions and limitations on the application of those covenants to WEX Bank and the Company’s regulated subsidiaries.
The 2016Amended and Restated Credit Agreement also requires, solely for the benefit of the lenders of the Tranche A Term Loan and lenders under the Revolving Credit Facility, that the Company maintain at the end of each fiscal quarter the following financial ratios:
•a Consolidated Interest Coverageconsolidated interest coverage ratio (as defined in the 2016Amended and Restated Credit Agreement) of no less than 2.75 to 1.00 at December 31, 2020 and through March 31, 2021, after which the ratio reverts back to no less than 3.00 to 1.00; and
•a Consolidated Leverage Ratioconsolidated leverage ratio (as defined in the 2016Amended and Restated Credit Agreement) of no more than 7.504.75 to 1.00 through March 31, 2021, 7.00 to 1.00 for the quarter ending June 30, 2021, 6.50 to 1.00 for the quarter ending September 30, 2021, 6.00 to 1.00 for the quarters endingas of December 31, 2021 through September 30, 2022,2023 and 5.00 to 1.00 thereafter.
We were in compliance with all materialthese covenants and restrictions at December 31, 2020.2023.
During 2020, the Company entered into an eighth, ninth, tenthCommitments and eleventh amendmentContingencies
Commitments to the 2016Extend Credit Agreement. For a description of the Eighth Amendment, Ninth Amendment, Tenth Amendment and Eleventh Amendment to the 2016 Credit Agreement, see Other Liquidity Matters below.
As of December 31, 2020, we had no outstanding borrowings against our $870.0 million revolving credit facility. The combined outstanding debt under our tranche A term loan facility and our tranche B term loan facility totaled $2.3 billion at December 31, 2020. As of December 31, 2020, amounts outstanding under the 2016 Credit Agreement bore a weighted average effective interest rate of 2.3 percent.
See Item 8 – Note 16, Financing and Other Debt, for further information regarding interest rates, voluntary prepayments rights and principal payments required under the 2016 Credit Agreement.
Notes Outstanding
On January 30, 2013, the Company completed an offering in an aggregate principal amount of $400.0 million of 4.750 percent senior notes. Such Notes mature on February 1, 2023. The Notes can be redeemed at the option of WEX without penalty. On February 11, 2020, the Company provided irrevocable notice to The Bank of New York Mellon Trust Company, N.A., the trustee for the Notes, of its intent to redeem the Notes on March 15, 2021. We have elected to redeem for cash all of the $400.0 million aggregate principal amount of the Notes in accordance with the terms of the indenture governing the Notes. The redemption date for the Notes will be March 15, 2021 (the “Redemption Date”). The Notes will be redeemed at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest thereon, if any, to, but excluding, the Redemption Date.
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% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, with the first interest payment due 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.
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.
WEX Latin America Debt
The Company sold its WEX Latin America subsidiary on September 30, 2020. WEX Latin America had debt of approximately $2.7 million as of December 30, 2019, which was comprised of credit facilities held in Brazil and loan arrangements related to our accounts receivable, with various maturity dates, and an effective interest rate of 35.04%. The Company sold its WEX Latin America subsidiary on September 30, 2020 and the Company no longer has this debt obligation.
Participation Debt
From time to time, WEX Bank enters into participation agreements with third-party banks to fund customer balances that exceed WEX Bank’s lending limit to individual customers. Associated unsecured borrowings carry a variable interest rate of 1 month to 3 month LIBOR plus a margin of 225 basis points.
The following table provides the amounts available and outstanding and the remaining funding capacity under the participation debt agreements in place:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| (In thousands) | | Amounts Available1 | | Amounts Outstanding | | Remaining Funding Capacity | | Amounts Available | | Amounts Outstanding2 | | Remaining Funding Capacity |
| Participation debt | | $ | 60,000 | | | — | | | 60,000 | | | $ | 80,000 | | | 50,000 | | | $ | 30,000 | |
| | | | | | | | | | | | |
| Average interest rate on participation debt | | | | Not applicable | | | | | | 4.17 | % | | |
1 Amounts available includes up to $60 million under an agreement that terminates on December 31, 2021.
2 Amounts outstanding are recorded in short-term debt, net in our financial statements.
Australian Securitization Facility
The Company maintains a securitized debt agreement with the Bank of Tokyo-Mitsubishi UFJ, Ltd., which currently extends through April 2021. 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. The Australian Securitization Subsidiary, in turn, uses the receivables as collateral to issue asset-backed commercial paper (“securitized debt”) for approximately 85 percent of the securitized receivables. 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 0.97 percent and 1.80 percent as of December 31, 2020 and 2019, respectively. The Company had securitized debt under this facility of approximately $62.6 million and $78.6 million as of December 31, 2020 and 2019, respectively.
European Securitization Facility
On April 7, 2016, the Company entered into a five-year securitized debt agreement with the Bank of Tokyo-Mitsubishi UFJ, Ltd, which expires in April 2021. Under the terms of the agreement, the Company sells certain of its receivables from selected European countries to our European Securitization Subsidiary. The European Securitization Subsidiary, 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. The interest rate was 0.98 percent and 0.63 percent as of December 31, 2020 and December 31, 2019, respectively. The Company had $23.4 million and $25.7 million of securitized debt under this facility as of December 31, 2020 and December 31, 2019, respectively.
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 is managed by an unrelated third-party. During the year ended December 31, 2020, the Company received an insignificant distribution from the investment fund and did not make equity contributions to the investment fund during the year ended December 31, 2019. During the year ended December 31, 2018, the Company’s equity contributions to the investment fund totaled $2.8 million. The securitization arrangement met the derecognition conditions under GAAP and transfers beginning July 1, 2018 under this arrangement were treated as sales and accounted for as a reduction of trade receivables. During the year ended December 31, 2018, the Company recognized operating interest expense of $4.4 million under this financing arrangement. During the years ended December 31, 2020 and 2019, the Company recognized a gain on sale of $6.5 million and $16.1 million, respectively. 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 consolidated statements of cash flows.
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 accounts receivable under non-recourse transactions through July 31, 2021. The purchase 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 a negotiated discount rate and are accounted for as a reduction in trade receivables because the agreements transfer effective control of the receivables to the buyer.
The Company sold approximately $4.1 billion and $14.8 billion of trade accounts receivable under this arrangement during the years ended December 31, 2020 and 2019, respectively. Proceeds from the sale, which are reported net of a negotiated discount rate, are recorded in operating activities within our consolidated statement of cash flows. The loss on factoring was insignificant and $3.7 million for the years ended December 31, 2020 and 2019, respectively.
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 through December 31, 2020 in order to accelerate the collection of the Company’s cash and reduce internal costs, thereby improving liquidity. 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. The Company continues to service these receivables post-transfer with no participating interest. 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.
This factoring arrangement is accounted for as a sale and accordingly the Company records the receivables sold as a reduction of accounts receivable and proceeds as cash provided by operating activities. The Company sold approximately $452.2 million and $630.3 million of receivables under this arrangement during years ended December 31, 2020 and December 31, 2019, respectively. Charge-backs on balances in excess of the credit limit during the years ended December 31, 2020 and December 31, 2019 were insignificant.
WEX Bank
WEX Bank, is subject to various regulatory capital requirements administered by the FDIC and the Utah DFI. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, WEX Bank must meet specific capital guidelines that involve quantitative measures of WEX Bank’s assets, liabilities and certain off-balance sheet items. WEX Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could limit our business activities and have a material adverse effect on our business, results of operations and financial condition. Qualitative measures established by regulation to ensure capital adequacy require WEX Bank to maintain minimum amounts and ratios as defined in the regulations. As of December
31, 2020, WEX Bank met all the requirements to be deemed “well-capitalized” pursuant to FDIC regulation and for purposes of the Federal Deposit Insurance Act.
Other Liquidity Matters
At December 31, 2020, we had variable-rate borrowings of $2.3 billion under our 2016 Credit Agreement. We periodically review our projected borrowings under our 2016 Credit Agreement and the current interest rate environment in order to ascertain whether interest rate swaps should be used to reduce our exposure to interest rate volatility. As of December 31, 2020, we maintained six interest rate swap contracts that mature at various times through December 2023. Collectively, these derivative contracts are intended to fix the future interest payments associated with $1.4 billion of our variable rate borrowings at between 0.743 percent to 2.413 percent. See Item 8 – Note 12, Derivative Instruments, Item 8 – Note 19, Fair Value, for more information.
On January 24, 2020, the Company entered into a purchase agreement to purchase eNett and Optal for an aggregate purchase price comprised of approximately $1.3 billion in cash and 2.0 million shares of the Company’s common stock and subject to certain working capital and other adjustments as described in the purchase agreement. On December 15, 2020, the Company entered into a Deed of Settlement with eNett, Optal and the other parties thereto dismissing the legal proceedings and appeals relating to the acquisition and purchase agreement, described more fully in Item 3 of Part I of the Annual Report on Form 10-K, and amending the purchase agreement to provide a reduction of the aggregate purchase price for the acquisition to $577.5 million (subject to certain adjustments) consisting entirely of cash, which the Company paid with cash on hand. The closing of the acquisition occurred concurrent with the execution of the Deed of Settlement on December 15, 2020.
In connection with the purchase agreement, the Company entered into a commitment letter with Bank of America, N.A. and BofA Securities, Inc. on January 24, 2020 (the “Original Commitment Letter”) for senior secured and unsecured credit facilities in the aggregate amount of up to $3.1 billion, inclusive of backstops totaling $1.7 billion that reduced to zero under the terms of the Eighth Amendment to the 2016 Credit Agreement. The Third Amended and Restated Commitment Letter most recently amended and restated the Original Commitment Letter to among other things, reallocate $600.0 million of aggregate credit commitments from a senior secured bridge facility to a 364-day unsecured credit facility and to extend this portion of the commitment by six months to April 22, 2021. The remaining $752.0 million consisted of a seven-year term loan B facility commitment (the “TLB Commitment”) that was not affected by the Third Amended and Restated Commitment Letter. The TLB Commitment terminated in October 2020 and the Third Amended and Restated Commitment Letter terminated concurrently with the closing of the acquisition on December 15, 2020, without the funding of any loans pursuant thereto.
In connection with the Original Commitment Letter, on February 10, 2020, the Company entered into an eighth amendment (the “Eighth Amendment”) to the 2016 Credit Agreement. The Eighth Amendment, among other things, effectuated financial covenant amendments contemplated by the Original Commitment Letter and increased the Company’s capacity to incur additional incremental loan facilities up to $1.4 billion The amendments set forth in the Eighth Amendment would have become effective concurrently with the closing of the pending acquisition of eNett and Optal, but were superseded by the amendments set forth in the Ninth Amendment to the 2016 Credit Agreement.
On June 26, 2020, the Company entered into a Ninth Amendment, which made certain changes to the 2016 Credit Agreement, including among other things, increasing the maximum consolidated leverage ratio following the closing of the eNett and Optal acquisition to 7.5X at December 31, 2020 and March 31, 2021, with step-downs thereafter, tested using consolidated funded indebtedness (excluding (i) up to, for the purpose of determining the applicable pricing tier, $350.0 million and, for any other purpose, $400.0 million, of consolidated funded indebtedness due to permitted securitization transactions and (ii) the amount of consolidated funded indebtedness constituting the non-recourse portion of permitted factoring transactions, and netting up to (x) with respect to calculating the consolidated leverage ratio for purposes of the periods ending prior to June 15, 2021, for the purpose of determining the applicable pricing tier, $287.6 million and, for any other purpose, an unlimited amount, and (y) with respect to calculating the consolidated leverage ratio for purposes of the periods ending thereafter, $400.0 million, of unrestricted cash and cash equivalents denominated in U.S. dollars or other lawful currencies (provided that such other currencies are readily convertible to, and deliverable in, U.S. dollars) held by the Company and its subsidiaries) to consolidated EBITDA, adding a fourth pricing tier and limits certain investment and restricted payment covenants in the case that the consolidated leverage ratio equals or exceeds 5.5X and introducing a LIBOR floor on revolving credit facility borrowings of 75 basis points.
On July 29, 2020, the Company entered into a Tenth Amendment to the 2016 Credit Agreement, which increased commitments under the Company's secured revolving credit facility from $820.0 million to $870.0 million. On August 20, 2020, the Company entered into an eleventh amendment (the “ Eleventh Amendment") to the 2016 Credit Agreement, which limited the borrowing conditions for a $752 million portion of the revolving credit facility solely with respect to any borrowing for the purpose of consummating the acquisition of eNett and Optal on or prior to April 22, 2021. Upon the closing of the
acquisition of eNett and Optal on December 15, 2020, as described above, and the payment of the purchase price with cash, the foregoing ability to borrow a $752 million portion of the revolving credit facility with limited conditions terminated.
The Company’s long-term cash requirements consist primarily of amounts owed on the 2016 Credit Agreement, the Notes and various facility lease agreements.
As of December 31, 2020, we had $51.6 million in letters of credit outstanding and $818.4 million in remaining borrowing capacity under the 2016 Credit Agreement, subject to the covenants as described above.
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 December 31, 2020. The program is funded either through our future cash flows or through borrowings on our 2016 Credit Agreement. Share repurchases are 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.
Contractual Obligations
The table below summarizes the estimated amounts of payments under contractual obligations as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due By Period |
| (In thousands) | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
Operating Lease Obligations(1) | $ | 124,951 | | | $ | 20,942 | | | $ | 29,460 | | | $ | 17,369 | | | $ | 57,180 | |
| Debt Obligations: | | | | | | | | | |
| Term loans | 2,316,145 | | | 64,611 | | | 853,208 | | | 29,361 | | | 1,368,965 | |
Interest payments on term loans(2) | 228,535 | | | 52,616 | | | 93,189 | | | 66,325 | | | 16,405 | |
$400 million notes(6) | 400,000 | | | — | | | 400,000 | | | — | | | — | |
| Interest on $400 million notes | 47,500 | | | 19,000 | | | 28,500 | | | — | | | — | |
| Interest of certificates of deposit | 6,091 | | | 5,318 | | | 773 | | | — | | | — | |
| Convertible Notes | 310,000 | | | — | | | — | | | — | | | 310,000 | |
Interest payments on Convertible Notes(3) | 141,834 | | | 20,934 | | | 40,300 | | | 40,300 | | | 40,300 | |
| Borrowed federal funds | 20,000 | | | 20,000 | | | — | | | — | | | — | |
Securitization facility(4) | 85,945 | | | 85,945 | | | — | | | — | | | — | |
| Other Commitments: | | | | | | | | | |
| Certificates of deposit | 503,398 | | | 354,807 | | | 148,591 | | | — | | | — | |
| Interest-bearing money market deposits | 439,894 | | | 439,894 | | | — | | | — | | | — | |
Minimum volume purchase commitments(5) | 49,602 | | | 12,035 | | | 24,795 | | | 12,772 | | | — | |
| Other | 17,663 | | | 10,227 | | | 7,436 | | | — | | | — | |
| Total | $ | 4,691,558 | | | $ | 1,106,329 | | | $ | 1,626,252 | | | $ | 166,127 | | | $ | 1,792,850 | |
(1)Operating lease obligations – Primarily represents undiscounted cash flows for remaining lease payments under long-term operating leases for office space. See Item 8 – Note 15, Leases, for more information regarding our leases.
(2)Interest payments on term loans – Interest payments are based on effective rates and credit spreads in effect as of December 31, 2020. See Item 8 – Note 16, Financing and Other Debt, for more information.
(3)Interest payments on Convertible Notes – Interest payments are based on the coupon rate and assuming that the Company will elect to settle all interest payments in cash. See Item 8 – Note 16, Financing and Other Debt, for more information.
(4)Securitization facility – Interest payments due on the securitization facility are not included as the amount was not material.
(5)Minimum volume purchase commitments – Two 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 table above represents the Company’s annual penalty assuming we purchase no fuel under these commitments after December 31, 2020.
(6) Notes – Included within 1-3 year column due to contractual maturity date of February 2023, however, as discussed in Item 8 – Note 28, Subsequent Events, the Company intends to early redeem the Notes in full during March 2021.
Off-balance Sheet Arrangements
In addition to the operating leases included in the table above, we have the following off-balance sheet arrangements as of December 31, 2020:
•Extension of credit to customers – We have entered into commitments to extend credit in the ordinary course of business. We had approximately $6.6$9.4 billion of unused commitments to extend credit at December 31, 2020,2023, as part of established customer agreements.agreements, which are off-balance sheet arrangements. These amounts may increase or decrease during 20212024 as we increase or decrease credit to customers, subject to appropriate credit reviews, as part of our lending product agreements. Many of these commitments are not expected to be utilized. We can adjust most of our customers’ credit lines at our discretion at any time. Therefore, we do not believe total unused credit available to customers and customers of strategic relationships represents future cash requirements. We believe that we can adequately fund actual cash requirements related to these credit commitments through the issuancesources of certificatescash described above.
Deferred Payments on Acquisition
We have deferred cash payments and additional consideration owed pursuant to previously completed acquisitions. In association with the March 2022 acquisition of deposit, borrowed federal fundsSBI’s remaining interest in PO Holding, the Company owes SBI a purchase price of $234.0 million, payable in the amount of $76.7 million in each of March 2024 and other debt facilities.2025 and $80.6 million in March 2026, along with interest payable in accordance with the terms of the purchase agreement. For additional information with respect to interest owed on these deferred payments, see Part II – Item 8 – Note 4, Acquisitions. In addition, the Company is required to make a cash payment to Bell Bank of $12.5 million in January 2024 in association with the April 2021 acquisition of certain contractual rights to serve as custodian or sub-custodian to over $3 billion of HSAs. The asset purchase agreement with Bell Bank also includes the potential for additional consideration payable annually by WEX that is calculated on a quarterly basis and is contingent, and based, upon any future changes in the Federal Funds rate. The
contingent payment period extends through the earlier of credit – December 31, 2030, or the date when the cumulative amount paid as contingent consideration equals $225.0 million. Through December 31, 2023, $93.2 million of consideration has been incurred, $64.5 million of which is unpaid as of December 31, 2023 and is payable during the first quarter of 2024. Assuming no further changes to the Federal Funds rate as of December 31, 2023, however, the Company expects that it will incur the full $225.0 million in contingent consideration, the remainder of which is payable over the next two years in average annual increments of approximately $66 million based on the Federal Funds rate in effect as of December 31, 2023.
Other Contractual Commitments
We have purchase obligations that include agreements and purchase orders to acquire goods or services that are contractually enforceable and that specify all significant terms, including fixed or minimum quantities, pricing, and approximate timing of purchases. As of December 31, 2020,2023, we had $51.6approximately $27.4 million outstanding in irrevocable lettersmaterial cash requirements under purchase obligations due in 2024. Our material cash requirements under purchase obligations due beyond 2024 are approximately $26.7 million. These purchase obligations do not include amounts recorded on our consolidated balance sheet as of credit issued by us in favorDecember 31, 2023. The expected timing of third-party beneficiaries, primarily relatedpayments of our purchase obligations is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to facility lease agreements and virtual card andagreed-upon amounts for some obligations.
Under existing contractual arrangements, the Company is required to purchase a minimum amount of fuel payment processing activity at our foreign subsidiaries. These irrevocable letters of credit are unsecured and are renewedfrom certain fuel suppliers on an annual basis unlessbasis. Upon failing to meet these minimum commitments, a penalty is assessed as defined under the contracts. If the Company chooseswere not to renew them.
•Accounts receivable factoringpurchase any fuel under these commitments after December 31, 2023, it would pay penalties of approximately $4.3 million during 2024 and securitizationapproximately $14.5 million after 2024. See Part II –See Item 8 – Note 20, Commitments and Contingencies, for more information.
In addition to these contractual commitments, the Company has unfunded commitments to provide loans of up to $11.3 million under a nonprofit community development program and to invest up to $10.0 million in certain limited partnership funds under subscription and limited partnership agreements. For more information on these unfunded commitments as of December 31, 2023 and the term over which funding can be expected, see Part II – Item 8 – Note 20, Commitments and Contingencies.
Regulatory Matters
A consent order issued by the FDIC and the UDFI on May 6, 2022 (the “2022 Order”), which required WEX Bank to strengthen its Bank Secrecy Act/anti-money laundering compliance program and to address related matters, including with respect to controls was terminated by the UDFI and the FDIC on November 8, 2023 and November 21, 2023, respectively– Note 13, Off-Balance Sheet Arrangements, for further information., after we adequately satisfied the requirements of the 2022 Order.
WEX Bank is also subject to a consent order issued by the FDIC on September 20, 2023 (the “2023 Order”), which requires WEX Bank to make certain improvements, which include corrections of certain issues identified in the 2023 Order and general enhancements to WEX Bank’s compliance management program. Customer impact and any resulting harm from the violations detailed in the 2023 Order have been identified and steps have been taken to remediate any such impact and harm. The terms of the 2023 Order will remain in effect and be enforceable until they are modified, terminated, suspended or set aside by the FDIC. Neither the matters identified in the 2022 Order nor the 2023 Order have had nor are expected to have a material effect on WEX Bank’s operations or the Company’s results of operations, financial condition or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company isWe are exposed to market risk, relatedincluding changes to interest rates, foreign currency exchange rates and commodity prices. From time to time, the Company enters into derivative instrument arrangements to manage these risks.
Commodity Price Risk
Customers and fuel retailer partners in our Mobility segment primarily purchase or sell fuel. Accordingly, a significant part of our overall revenue is derived from fuel purchases, making our revenues in this segment subject to historically volatile fuel prices. As of December 31, 2023, the Company is not hedged for changes in fuel prices, though Management continually monitors the market and our alternatives to hedge these fluctuations. We estimate that each one cent decline in average domestic fuel prices below our assumed average U.S. retail fuel price per gallon during 2024 would result in a $2.0 million decline in 2024 revenue.
Foreign Currency Risk
Our exposure to foreign currency fluctuation is due to our financial statements being presented in U.S. dollars and our foreign subsidiaries transacting in currencies other than the U.S. dollar, which results in gains and losses that are reflected in our consolidated statements of operations. The majority of the Company’s foreign exchange exposure is related to the U.S. Dollar versus the Euro, Australian dollar, Canadian dollar and British pound sterling. Our results of operations can be materially affected depending on the volatility and magnitude of foreign exchange rate changes. If all currencies in which we earned revenue had weakened or strengthened by 10 percent against the U.S. dollar, the Company’s 2023 revenues and operating income would each have correspondingly decreased or increased by approximately 2 percent or less. We currently do not utilize hedging instruments to mitigate these risks. However, growth in our international operations increases this exposure and we may initiate strategies to hedge certain foreign currency risks in the future.
Interest Rate Risk
2016 Credit AgreementIn the ordinary course of our operations, we have interest rate risk from the possibility that changes in interest rates will impact our operating and debt costs, however, the income earned on HSA custodial cash balances, allows us to help offset that risk.
Interest-Earning Assets
WEX Inc. and WEX Bank provide custodial and depository services, respectively, with respect to HSAs. As a non-bank custodian, WEX Inc. contracts with our depository partners, which currently include WEX Bank, to hold custodial cash assets on behalf of individual account holders. Income earned on HSA assets is impacted by fluctuations in the prevailing interest rate environment. A sustained decline in prevailing interest rates may negatively affect our business by reducing the yield earned on HSA assets. Conversely, a sustained increase in prevailing interest rates can increase the yield on HSA assets. However, we may be required to increase the interest retained by account holders or fees paid to our partners in a rising prevailing interest rate environment, though caps exist within most of our current partner contracts. Changes in prevailing interest rates are driven by macroeconomic trends and government policies over which we have no control.
The HSA funds over which WEX Inc. serves as custodian that are deposited with, managed and invested by WEX Bank are generally invested in fixed income securities. We attempt to limit our exposure to credit risk by establishing strict investment policies as to minimum investment ratings, diversification of our portfolio and setting risk tolerance levels. As of December 31, 2020,2023, we had variable-rate borrowings of $2.3$3.0 billion under the 2016 Credit Agreement. Asinvested in current available-for-sale debt securities at fair value. The weighted-average coupon rate on these securities was 4.1 percent as of December 31, 2020, outstanding2023. Assuming a hypothetical increase in interest rates of 25 basis points, the resulting potential decrease in fair value of our portfolio of securities as of December 31, 2023 would be less than 2 percent. Conversely, a corresponding decrease in interest rates would result in a comparable increase in fair value.
Interest-Bearing Liabilities
From time to time, the Company is party to interest rate swap contracts are intended to fixmanage interest rate risk and economically hedge the applicable reference rate component of future interest payments associated with $1.4 billion ofoutstanding variable-interest rate borrowings under the $2.3 billion of outstanding variable-rate borrowings.Company’s Amended and Restated Credit Agreement. We periodically review the projected borrowings under our 2016Amended and Restated Credit Agreement and the current interest rate environment in order to ascertain whether interest rate swaps should be used to reduce our exposure to interest rate volatility. On December 12, 2023, the Company unwound and terminated all of its outstanding swap agreements. See Part II – Item 8 – Note 12, Derivative Instruments, for more information.
Deposits
At December 31, 2020, WEX Bank2023, the Company had approximately $1.1 billion of outstanding deposits (including certificatesthat were used to fund working capital needs in our Mobility and Corporate Payment businesses where we fund a customer’s entire receivable in the majority of deposits and interest-bearing brokered money market deposits) outstanding of $1.1 billion.our processing transactions. The deposits are generally short-term in nature, though theycertain certificates of deposit and fixed term money market deposits are issued in up to five-year maturities. Upon maturity, the deposits will likelymay be replaced by issuing new deposits to the extent they are needed. See Part II – Item 8 – Note 11, Deposits, for more information.
Sensitivity AnalysisThe Company has deferred payments on acquisition of $234.0 million, plus any interest accruing pursuant to the terms of the Share Purchase Agreement, related to the purchase of SBI’s remaining 4.53 percent interest in PO Holding. Such interest is benchmarked to the 12-month SOFR, determined at future dates, plus a stated interest rate spread. See Part II – Item 8 – Note 4, Acquisitions for more information.
The following table presents the effect of a sensitivity analysis of the impact of changes1 percent hypothetical increase or decrease in interest rates on our corporate debt, deposits and corporate debt,deferred acquisition liabilities, assuming amountsthat borrowings and deferred acquisition liabilities outstanding the notional amounts of our interest rate swap agreements, and certificate ofcontractual deposit maturities in place as of December 31, 20202023 remain the same.same during 2024. Actual results may differ materially.from estimates due to actual fluctuations in interest rates, debt levels, and our deposit portfolios during the year.
| | | | | |
| (in millions) | 2021 impact of 1.00% increase in interest ratesEstimated Impact on Interest Expense |
2016Amended and Restated Credit Agreement | $ | 8,81128.8 | |
Securitized debtContractual deposits(1)
| $ | 8594.4 | |
Federal funds | $ | 200 | |
Certificates of deposits | $ | 3,052 | |
| Money market deposits | $ | 4,3992.3 | |
| Deferred acquisition liabilities | $ | 1.3 | |
Short term debt(2) | $ | 2.1 | |
We have excluded HSA deposits from the table above as consumer interest rates paid thereon are based on stated rates per the account agreements and are not significantly impacted by changes in market interest rates. As of December 31, 2023, consumer interest rates payable on HSA deposits ranged from 0.05 percent to 0.40 percent while the average rate payable during 2023 and 2022 was 0.11 percent and 0.04 percent, respectively. Accordingly, it is unlikely that the interest rate could change by 1 percent over the next twelve months.
Foreign Currency Risk
Our exposure to foreign currency fluctuation is due to our financial statements being presented in U.S. dollars and our foreign subsidiaries transacting in currencies other than the U.S. dollar, which results in gains and losses that are reflected in our consolidated statements of operations. We currently do not utilize hedging instruments to mitigate these risks. However, growth in our international operations increases this exposure and we may initiate strategies to hedge certain foreign currency risks in the future.
Commodity Price Risk
The Company is not hedged for changes in fuel prices. Management will continue to monitor the fuel price market and evaluate its alternatives as it relates to a hedging program.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the ShareholdersStockholders and the Board of Directors of WEX Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of WEX Inc. and subsidiaries (the "Company") as of December 31, 20202023 and 2019,2022, the related consolidated statements of operations, comprehensive (loss) income shareholders'(loss), stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2020,2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20202023 and 2019,2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020,2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020,2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2021,February 23, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit mattersmatter communicated below are mattersis a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.
Revenue — Refer to Notes 1 and 3 to the financial statements
Critical Audit Matter Description
The Company’s revenue is comprised of transaction-based fees made up of a significant volume of low-dollar transactions, sourced from multiple systems, databases, and other tools. The processing and recording of revenue is highly automated and is based on contractual terms with merchants, customers and other parties. Because of the nature of the Company’s transaction-based fees, the Company uses automated systems to process and record its revenue transactions.
Given the Company’s systems to process and record revenue are highly automated, auditing revenue is complex and challenging due to the extent of audit effort required and involvement of professionals with expertise in information technology (IT) necessary to identify, test, and evaluate the Company’s systems, software applications, and automated controls.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s systems to process revenue transactions included the following procedures, among others:
•With the assistance of our IT specialists, we:
–Identified the significant systems used to process revenue transactions and tested the effectiveness of general IT controls over each of these systems, including testing of user access controls, change management controls, and IT operations controls.
–Performed testing of the effectiveness of system interface controls and automated controls within the relevant revenue streams, as well as the controls designed to ensure the accuracy and completeness of revenue.
•We tested the effectiveness of controls over the Company’s relevant revenue business processes, including those in place to reconcile the various systems to the Company’s general ledger.
•With the assistance of our data specialists, we created data visualizations to evaluate recorded revenue and evaluate trends in the transactional revenue data.
•For a sample of revenue transactions, we performed detail transaction testing by agreeing the amounts recognized to source documents and testing the mathematical accuracy of the recorded revenue.
Convertible Notes — Refer to Note 16 to the financial statements
Critical Audit Matter Description
In July 2020,The Company’s revenue is comprised primarily of transaction-based fees made up of a significant volume of low-dollar transactions, sourced from multiple systems, databases, and other tools. The processing and recording of revenue is highly automated and is based on contractual terms with merchants, customers and other parties. Because of the Company issued sharesnature of the Company’s common stocktransaction-based fees, the Company uses automated systems to process and convertible notes (“Convertible Notes”) for an aggregate purchase price of $389.2 million. The Company allocatedrecord its revenue transactions.
Given the total proceeds on a relative fair value basisCompany’s systems to process and record revenue are highly automated, auditing revenue is complex and challenging due to the saleextent of audit effort required and involvement of professionals with expertise in information technology (IT) necessary to identify, test, and evaluate the Company’s common stocksystems, software applications, and the Convertible Notes. Next, as the Convertible Notes permit the Company to settle the conversion in cash, the Company allocated the Convertible Notes into liability and equity components. The fair value of the liability component was determined 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 was determined by deducting the fair value of the liability component from the total proceeds allocated to the Convertible Notes.automated controls.
Given (a) the complexity of applying the accounting framework for the Convertible Notes, and (b) the determination of the fair value of the liability component requires the Company to make significant estimates and assumptions relating to the implied credit spread, expected volatility, and the risk-free rate, performing audit procedures to (a) evaluate the appropriateness of the accounting framework and (b) the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the accounting for the Convertible Notes, including the Company’s judgments and calculations relatedsystems to the fair value of the liability component,process revenue transactions included the following procedures, among others:
- Identified the significant systems used to process revenue transactions and tested the effectiveness of general IT controls over each of these systems, including testing of user access controls, change management controls, and IT operations controls.
- Performed testing of the effectiveness of system interface controls and automated controls within the relevant revenue streams, as well as the controls designed to ensure the accuracy and completeness of revenue.
•We tested the effectiveness of controls over the Company’s accounting forrelevant revenue business processes, including those in place to reconcile the Convertible Notes, and over the determination of the fair value of the liability component.
•With the assistance of professionals in our firm having expertise in debt issuance accounting, we evaluatedvarious systems to the Company’s conclusions regarding the accounting treatment applied to the Convertible Notes.
•With the assistance of our fair valuedata specialists, we evaluated the reasonableness of the valuation methodology and the significant assumptions used to determine the fair value of the liability component, by:
–Testing the source information underlying the fair value of the liability component and the mathematical accuracy of the calculations.
–Developing an independent expectation of certain of the significant assumptions, including the implied credit spread and expected volatility, and comparing our estimate to the Company’s estimate.
Acquisitions— Refer to Note 4 to the financial statements
Critical Audit Matter Description
On December 15, 2020, the Company entered into a settlement agreement dismissing the legal proceedings and appeals between the Company and the shareholders of eNett, Optal and other parties thereto and closed on the acquisition of the eNett and Optal businesses for an aggregate purchase price of $577.5 million.
The Company determined the aggregate purchase price represents consideration paid for two separate elements, the businesses acquired and the settlement of litigation and allocated $415 million of the purchase price to the acquired businesses based on their estimated fair value with the residual value of $162.5 million allocated to the legal settlement.
Management has estimated the provisional fair value of the acquired businesses utilizing a discounted cash flow method and guideline transaction method that required the Company to make significant estimates and assumptions related to future cash flows and the selection of the discount rate.
We identified the fair value of the business as a critical audit matter because of the significant estimates and assumptions the Company makes to calculate fair value of the businesses for purposes of recording the acquisition and the legal settlement. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedurescreated data visualizations to evaluate the reasonableness of the Company’s forecasts of future cash flows as well as the selection of the discount rate, including the need to involve our internal fair value specialists.
How the Critical Audit Matter Was Addressedrecorded revenue and evaluate trends in the Audit
Our audit procedures related to the forecasts of future cash flows and the selection of the discount rate for the acquired businesses included the following, among others:
•We tested the effectivenessperformed testing of controls over the valuationrevenue recorded with a combination of the acquired businesses, including management’s control over the forecastssubstantive analytical procedures, which compares our independent expectation of future cash flows and selection of the discount rate.
•We evaluated the Company’s conclusions regarding the accounting treatment appliedrevenue we developed to the acquisitionamount of revenue recorded by management, and legal settlement.
•We assessedby performing detail testing of transactions, which compares the reasonableness of management’s forecasts of future cash flows by comparing the projectionsrecorded revenue for sample transactions to historical results, certain peer companies and industry data.
•We also held various discussions with accounting and operations management regarding the business assumptions utilized in the valuation models and, on a test basis, obtained audit support to substantiate the assumptions therein.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodologies and (2) discount rate used by:
–Evaluating the valuation models to ensure consistency with generally accepted valuation practices.
–Testing the source information underlying the determination of the discount ratedocuments and testing the mathematical accuracy of the calculations.
–Developing a range of independent estimates and comparing those to the discount rate selected by management.
•We evaluated whether the estimated future cash flows were consistent with evidence obtained in other areas of the audit.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 1, 2021
We have served as the Company's auditor since 2003.
WEX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2020 | | 2019 | | 2018 |
| Revenues | | | | | |
| Payment processing revenue | $ | 698,891 | | | $ | 825,592 | | | $ | 723,991 | |
| Account servicing revenue | 449,456 | | | 413,552 | | | 308,096 | |
| Finance fee revenue | 198,523 | | | 247,318 | | | 208,627 | |
| Other revenue | 212,999 | | | 237,229 | | | 251,925 | |
| Total revenues | 1,559,869 | | | 1,723,691 | | | 1,492,639 | |
| Cost of services | | | | | |
| Processing costs | 419,041 | | | 400,439 | | | 309,450 | |
| Service fees | 47,289 | | | 57,027 | | | 53,655 | |
| Provision for credit losses | 78,443 | | | 65,664 | | | 66,482 | |
| Operating interest | 23,810 | | | 41,915 | | | 38,407 | |
| Depreciation and amortization | 104,592 | | | 94,725 | | | 79,935 | |
| Total cost of services | 673,175 | | | 659,770 | | | 547,929 | |
| General and administrative | 292,109 | | | 275,807 | | | 209,319 | |
| Sales and marketing | 266,684 | | | 259,869 | | | 229,234 | |
| Depreciation and amortization | 157,334 | | | 142,404 | | | 119,870 | |
| Legal settlement | 162,500 | | | 0 | | | 0 | |
| Impairment charges | 53,378 | | | 0 | | | 5,649 | |
| Loss on sale of subsidiary | 46,362 | | | 0 | | | 0 | |
| Operating (loss) income | (91,673) | | | 385,841 | | | 380,638 | |
| Financing interest expense | (157,080) | | | (134,677) | | | (105,023) | |
| Net foreign currency loss | (25,783) | | | (926) | | | (38,800) | |
| | | | | |
| Non-cash adjustments related to tax receivable agreement | 491 | | | 932 | | | (775) | |
| Net unrealized (loss) gain on financial instruments | (27,036) | | | (34,654) | | | 2,579 | |
| (Loss) income before income taxes | (301,081) | | | 216,516 | | | 238,619 | |
| Income tax (benefit) provision | (20,597) | | | 61,223 | | | 68,843 | |
| Net (loss) income | (280,484) | | | 155,293 | | | 169,776 | |
| Less: Net income (loss) from non-controlling interests | 3,466 | | | (1,030) | | | 1,481 | |
| Net (loss) income attributable to WEX Inc. | (283,950) | | | 156,323 | | | 168,295 | |
| Change in value of redeemable non-controlling interest | 40,312 | | | (57,317) | | | 0 | |
| Net (loss) income attributable to shareholders | $ | (243,638) | | | $ | 99,006 | | | $ | 168,295 | |
| | | | | |
| Net (loss) income attributable to shareholders per share: | | | | | |
| Basic | $ | (5.56) | | | $ | 2.29 | | | $ | 3.90 | |
| Diluted | $ | (5.56) | | | $ | 2.26 | | | $ | 3.86 | |
| Weighted average common shares outstanding: | | | | | |
| Basic | 43,842 | | | 43,316 | | | 43,156 | |
| Diluted | 43,842 | | | 43,769 | | | 43,574 | |
See notes to consolidated financial statements.
WEX INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2020 | | 2019 | | 2018 |
| Net (loss) income | $ | (280,484) | | | $ | 155,293 | | | $ | 169,776 | |
| Foreign currency translation | 27,864 | | | 1,784 | | | (28,535) | |
| Comprehensive (loss) income | (252,620) | | | 157,077 | | | 141,241 | |
| Less: Comprehensive income (loss) attributable to non-controlling interest | 4,289 | | | (1,088) | | | 1,007 | |
| Comprehensive (loss) income attributable to WEX Inc. | $ | (256,909) | | | $ | 158,165 | | | $ | 140,234 | |
See notes to consolidated financial statements.
WEX INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| Assets | | | |
| Cash and cash equivalents | $ | 852,033 | | | $ | 810,932 | |
| Restricted cash | 477,620 | | | 170,449 | |
| Accounts receivable (net of allowances of $59,147 in 2020 and $52,274 in 2019) | 1,993,329 | | | 2,661,108 | |
| Securitized accounts receivable, restricted | 93,236 | | | 112,192 | |
| Prepaid expenses and other current assets | 86,629 | | | 87,694 | |
| Total current assets | 3,502,847 | | | 3,842,375 | |
| Property, equipment and capitalized software (net of accumulated depreciation of $402,406 in 2020 and $344,212 in 2019) | 188,340 | | | 212,475 | |
| Goodwill | 2,688,138 | | | 2,441,201 | |
| Other intangible assets (net of accumulated amortization of $835,163 in 2020 and $666,793 in 2019) | 1,552,012 | | | 1,575,050 | |
| Investment securities | 37,273 | | | 30,460 | |
| Deferred income taxes, net | 17,524 | | | 12,833 | |
| Other assets | 197,227 | | | 184,024 | |
| Total assets | $ | 8,183,361 | | | $ | 8,298,418 | |
| Liabilities and Stockholders’ Equity | | | |
| Accounts payable | $ | 778,207 | | | $ | 969,816 | |
| Accrued expenses | 362,472 | | | 315,642 | |
| Restricted cash payable | 477,620 | | | 170,449 | |
| Short-term deposits | 911,395 | | | 1,310,813 | |
| Short-term debt, net | 152,730 | | | 248,531 | |
| Other current liabilities | 58,429 | | | 34,692 | |
| Total current liabilities | 2,740,853 | | | 3,049,943 | |
| Long-term debt, net | 2,874,113 | | | 2,686,513 | |
| Long-term deposits | 148,591 | | | 143,399 | |
| Deferred income taxes, net | 220,122 | | | 218,740 | |
| Other liabilities | 164,546 | | | 106,422 | |
| Total liabilities | 6,148,225 | | | 6,205,017 | |
| Commitments and contingencies (Note 21) | 0 | | 0 |
| Redeemable non-controlling interest | 117,219 | | | 156,879 | |
| Stockholders’ Equity | | | |
| Common stock $0.01 par value; 175,000 shares authorized; 48,616 shares issued in 2020 and 47,749 in 2019; 44,188 shares outstanding in 2020 and 43,321 in 2019 | 485 | | | 477 | |
| Additional paid-in capital | 872,711 | | | 675,060 | |
| Retained earnings | 1,286,976 | | | 1,539,201 | |
| Accumulated other comprehensive loss | (82,935) | | | (115,449) | |
| Treasury stock at cost; 4,428 shares in 2020 and 2019 | (172,342) | | | (172,342) | |
| Total WEX Inc. stockholders’ equity | 1,904,895 | | | 1,926,947 | |
| Non-controlling interest | 13,022 | | | 9,575 | |
| Total stockholders’ equity | 1,917,917 | | | 1,936,522 | |
| Total liabilities and stockholders’ equity | $ | 8,183,361 | | | $ | 8,298,418 | |
See notes to consolidated financial statements.
WEX Inc. Consolidated Statements of Contents
WEX INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2018 | 47,352 | | | $ | 473 | | | $ | 569,319 | | | $ | (89,230) | | | $ | (172,342) | | | $ | 1,313,298 | | | $ | 9,220 | | | $ | 1,630,738 | |
| Stock issued under share-based compensation plans | 205 | | | 2 | | | 2,428 | | | — | | | — | | | — | | | — | | | 2,430 | |
| Share repurchases for tax withholdings | — | | | — | | | (12,372) | | | — | | | — | | | — | | | — | | | (12,372) | |
| Stock-based compensation expense | — | | | — | | | 33,887 | | | — | | | — | | | — | | | — | | | 33,887 | |
| Foreign currency translation | — | | | — | | | — | | | (28,061) | | | — | | | — | | | (474) | | | (28,535) | |
| Net income (loss) | — | | | — | | | — | | | — | | | — | | | 168,295 | | | 1,481 | | | 169,776 | |
| Balance at January 1, 2019 | 47,557 | | | $ | 475 | | | $ | 593,262 | | | $ | (117,291) | | | $ | (172,342) | | | $ | 1,481,593 | | | $ | 10,227 | | | $ | 1,795,924 | |
| Stock issued under share-based compensation plans | 192 | | | 2 | | | 4,939 | | | — | | | — | | | — | | | — | | | 4,941 | |
| Share repurchases for tax withholdings | — | | | — | | | (10,352) | | | — | | | — | | | — | | | — | | | (10,352) | |
| Stock-based compensation expense | — | | | — | | | 45,811 | | | — | | | — | | | — | | | — | | | 45,811 | |
| Adjustments of redeemable non-controlling interest | — | | | — | | | 41,400 | | | — | | | — | | | (98,715) | | | — | | | (57,315) | |
| Foreign currency translation | — | | | — | | | — | | | 1,842 | | | — | | | | | (58) | | | 1,784 | |
| Net income | — | | | — | | | — | | | — | | | — | | | 156,323 | | | (594) | | | 155,729 | |
| Balance at December 31, 2019 | 47,749 | | | 477 | | | 675,060 | | | (115,449) | | | (172,342) | | | 1,539,201 | | | 9,575 | | | 1,936,522 | |
| Cumulative effect adjustment (Note 2) | | | | | | | | | | | (8,587) | | | (190) | | | (8,777) | |
| Balance at January 1, 2020 | 47,749 | | | $ | 477 | | | $ | 675,060 | | | $ | (115,449) | | | $ | (172,342) | | | $ | 1,530,614 | | | $ | 9,385 | | | $ | 1,927,745 | |
| Stock issued under share-based compensation plans | 290 | | | 2 | | | 9,271 | | | — | | | — | | | — | | | — | | | 9,273 | |
| Fair value of stock issued through private placement, net of issuance costs of $968 (Note 16) | 577 | | | 6 | | | 92,970 | | | — | | | — | | | — | | | — | | | 92,976 | |
| Share repurchases for tax withholdings | — | | | — | | | (9,519) | | | — | | | — | | | — | | | — | | | (9,519) | |
| Equity component of the convertible notes, net of allocated issuance costs of $570 and taxes of $13,623 (Note 16) | — | | | — | | | 41,066 | | | — | | | — | | | — | | | — | | | 41,066 | |
| Stock-based compensation expense | — | | | — | | | 63,863 | | | — | | | — | | | — | | | — | | | 63,863 | |
| Change in value of redeemable non-controlling interest | — | | | — | | | — | | | — | | | — | | | 40,312 | | | — | | | 40,312 | |
| Foreign currency translation | — | | | — | | | — | | | 27,041 | | | — | | | — | | | 823 | | | 27,864 | |
| Transfer of cumulative translation adjustment on the sale of subsidiary | — | | | — | | | — | | | 5,473 | | | — | | | — | | | — | | | 5,473 | |
| Net (loss) income | — | | | — | | | — | | | — | | | — | | | (283,950) | | | 2,814 | | | (281,136) | |
| Balance at December 31, 2020 | 48,616 | | | $ | 485 | | | $ | 872,711 | | | $ | (82,935) | | | $ | (172,342) | | | $ | 1,286,976 | | | $ | 13,022 | | | $ | 1,917,917 | |
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2023 | | 2022 | | 2021 |
| Revenues | | | | | |
| Payment processing revenue | $ | 1,213.7 | | | $ | 1,155.9 | | | $ | 859.0 | |
| Account servicing revenue | 646.4 | | | 569.3 | | | 526.9 | |
| Finance fee revenue | 314.2 | | | 360.5 | | | 255.3 | |
| Other revenue | 373.7 | | | 264.9 | | | 209.4 | |
| Total revenues | 2,548.0 | | | 2,350.5 | | | 1,850.5 | |
| Cost of services | | | | | |
| Processing costs | 621.6 | | | 558.9 | | | 482.9 | |
| Service fees | 73.3 | | | 65.2 | | | 52.8 | |
| Provision for credit losses | 89.8 | | | 179.9 | | | 45.1 | |
| Operating interest | 84.2 | | | 20.6 | | | 9.2 | |
| Depreciation and amortization | 104.4 | | | 105.9 | | | 112.2 | |
| Total cost of services | 973.3 | | | 930.5 | | | 702.1 | |
| General and administrative | 428.0 | | | 343.9 | | | 326.9 | |
| Sales and marketing | 327.8 | | | 311.8 | | | 319.1 | |
| Depreciation and amortization | 171.8 | | | 158.0 | | | 160.5 | |
| | | | | |
| Impairment charges | — | | | 136.5 | | | — | |
| | | | | |
| Operating income | 647.1 | | | 469.8 | | | 342.0 | |
| Financing interest expense, net of financial instruments | (204.6) | | | (47.5) | | | (89.2) | |
| Net foreign currency gain (loss) | 4.9 | | | (22.7) | | | (12.3) | |
| Change in fair value of contingent consideration | (8.5) | | | (139.1) | | | (40.1) | |
| Loss on extinguishment of Convertible Notes | (70.1) | | | — | | | — | |
| Other income | — | | | — | | | 3.6 | |
| | | | | |
| | | | | |
| Income before income taxes | 368.8 | | | 260.5 | | | 203.9 | |
| Income tax provision | 102.2 | | | 93.1 | | | 67.8 | |
| Net income | 266.6 | | | 167.5 | | | 136.1 | |
| Less: Net income from non-controlling interests | — | | | 0.3 | | | 0.8 | |
| Net income attributable to WEX Inc. | 266.6 | | | 167.2 | | | 135.3 | |
| Change in value of redeemable non-controlling interest | — | | | 34.2 | | | (135.2) | |
| Net income attributable to shareholders | $ | 266.6 | | | $ | 201.4 | | | $ | 0.1 | |
| | | | | |
| Net income attributable to shareholders per share: | | | | | |
| Basic | $ | 6.23 | | | $ | 4.54 | | | $ | — | |
| Diluted | $ | 6.16 | | | $ | 4.50 | | | $ | — | |
| Weighted average common shares outstanding: | | | | | |
| Basic | 42.8 | | | 44.4 | | | 44.7 | |
| Diluted | 43.3 | | | 44.7 | | | 45.3 | |
See notes to consolidated financial statements.
WEX INC.Inc. Consolidated Statements of Comprehensive Income (Loss)
(in millions)
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Net income | $ | 266.6 | | | $ | 167.5 | | | $ | 136.1 | |
| | | | | |
| Other comprehensive income (loss), net of tax: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Unrealized gains (losses) on available-for-sale debt securities | 61.5 | | | (135.4) | | | (6.1) | |
| Foreign currency translation adjustments | 15.6 | | | (48.4) | | | (31.5) | |
| Other comprehensive income (loss), net of tax | 77.1 | | | (183.8) | | | (37.6) | |
| | | | | |
| Comprehensive income (loss) | 343.7 | | | (16.3) | | | 98.5 | |
| Less: Comprehensive income attributable to non-controlling interest | — | | | 0.3 | | | 0.5 | |
| Comprehensive income (loss) attributable to WEX Inc. | $ | 343.7 | | | $ | (16.6) | | | $ | 98.0 | |
See notes to consolidated financial statements.
WEX INC. CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| Assets | | | |
| Cash and cash equivalents | $ | 975.8 | | | $ | 922.0 | |
| Restricted cash | 1,254.2 | | | 937.8 | |
| Accounts receivable, net | 3,428.5 | | | 3,275.7 | |
| Investment securities | 3,022.1 | | | 1,395.3 | |
| Securitized accounts receivable, restricted | 129.4 | | | 143.2 | |
| Prepaid expenses and other current assets | 125.3 | | | 143.3 | |
| Total current assets | 8,935.3 | | | 6,817.1 | |
| Property, equipment and capitalized software | 242.9 | | | 202.2 | |
| Goodwill | 3,015.7 | | | 2,728.9 | |
| Other intangible assets | 1,458.7 | | | 1,473.6 | |
| Investment securities | 66.8 | | | 48.0 | |
| Deferred income taxes, net | 13.7 | | | 13.4 | |
| Other assets | 149.0 | | | 246.0 | |
| Total assets | $ | 13,882.1 | | | $ | 11,529.2 | |
| Liabilities and Stockholders’ Equity | | | |
| Accounts payable | $ | 1,479.1 | | | $ | 1,365.8 | |
| Accrued expenses and other current liabilities | 802.7 | | | 643.9 | |
| Restricted cash payable | 1,253.5 | | | 937.1 | |
| Short-term deposits | 3,942.8 | | | 3,144.6 | |
| Short-term debt, net | 1,041.1 | | | 202.6 | |
| | | |
| Total current liabilities | 8,519.2 | | | 6,294.1 | |
| Long-term debt, net | 2,827.5 | | | 2,522.2 | |
| Long-term deposits | 129.8 | | | 334.2 | |
| Deferred income taxes, net | 129.5 | | | 142.2 | |
| Other liabilities | 455.5 | | | 587.1 | |
| Total liabilities | 12,061.5 | | | 9,879.7 | |
| Commitments and contingencies (Note 20) | | | |
| | | |
| Stockholders’ Equity | | | |
| Common stock $0.01 par value; 175.0 shares authorized; 49.9 shares issued in 2023 and 49.6 in 2022; 41.9 shares outstanding in 2023 and 43.2 in 2022 | 0.5 | | | 0.5 | |
| Additional paid-in capital | 1,053.0 | | | 928.0 | |
| Retained earnings | 1,757.1 | | | 1,490.5 | |
| Accumulated other comprehensive loss | (229.2) | | | (306.3) | |
| Treasury stock at cost; 8.0 and 6.3 shares in 2023 and 2022, respectively | (760.8) | | | (463.2) | |
| | | |
| | | |
| Total stockholders’ equity | 1,820.6 | | | 1,649.5 | |
| Total liabilities and stockholders’ equity | $ | 13,882.1 | | | $ | 11,529.2 | |
See notes to consolidated financial statements.
WEX INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock Issued | | Additional
Paid-in
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Loss | | Treasury
Stock | | Non-Controlling Interest | | Total
Stockholders’
Equity |
| | Shares | | Amount | | | | | | |
| Balance at January 1, 2021 | 48.6 | | | $ | 0.5 | | | $ | 830.7 | | | $ | 1,289.0 | | | $ | (82.9) | | | $ | (172.3) | | | $ | 13.0 | | | $ | 1,877.9 | |
| Stock issued under share-based compensation plans | 0.6 | | | — | | | 44.2 | | | — | | | — | | | — | | | — | | | 44.2 | |
| Share repurchases for tax withholdings | — | | | — | | | (23.5) | | | — | | | — | | | — | | | — | | | (23.5) | |
| Stock-based compensation expense | — | | | — | | | 74.8 | | | — | | | — | | | — | | | — | | | 74.8 | |
| Acquisition of non-controlling interest, net of $0.5 million in acquisition costs (Note 4) | — | | | — | | | (82.2) | | | — | | | (2.3) | | | — | | | (13.1) | | | (97.6) | |
| Unrealized loss on available-for-sale debt securities | — | | | — | | | — | | | — | | | (6.1) | | | — | | | — | | | (6.1) | |
| Change in value of redeemable non-controlling interest | — | | | — | | | — | | | (135.2) | | | — | | | — | | | — | | | (135.2) | |
| Foreign currency translation | — | | | — | | | — | | | — | | | (31.2) | | | — | | | (0.3) | | | (31.5) | |
| Net income | — | | | — | | | — | | | 135.3 | | | — | | | — | | | 0.4 | | | 135.7 | |
| Balance at December 31, 2021 | 49.3 | | | $ | 0.5 | | | $ | 844.1 | | | $ | 1,289.1 | | | $ | (122.5) | | | $ | (172.3) | | | $ | — | | | $ | 1,838.8 | |
| Stock issued under share-based compensation plans | 0.3 | | | — | | | 4.9 | | | — | | | — | | | — | | | — | | | 4.9 | |
| Share repurchases for tax withholdings | — | | | — | | | (18.9) | | | — | | | — | | | — | | | — | | | (18.9) | |
| Purchase of shares of treasury stock | — | | | — | | | — | | | — | | | — | | | (290.8) | | | — | | | (290.8) | |
| Stock-based compensation expense | — | | | — | | | 97.9 | | | — | | | — | | | — | | | — | | | 97.9 | |
| Unrealized loss on available-for-sale debt securities | — | | | — | | | — | | | — | | | (135.4) | | | — | | | — | | | (135.4) | |
| Change in value of redeemable non-controlling interest | — | | | — | | | — | | | 34.2 | | | — | | | — | | | — | | | 34.2 | |
| Foreign currency translation | — | | | — | | | — | | | — | | | (48.4) | | | — | | | — | | | (48.4) | |
| Net income | — | | | — | | | — | | | 167.2 | | | — | | | — | | | — | | | 167.2 | |
| Balance at December 31, 2022 | 49.6 | | | $ | 0.5 | | | $ | 928.0 | | | $ | 1,490.5 | | | $ | (306.3) | | | $ | (463.2) | | | $ | — | | | $ | 1,649.5 | |
| Stock issued under share-based compensation plans | 0.3 | | | — | | | 16.1 | | | — | | | — | | | — | | | — | | | 16.1 | |
| Share repurchases for tax withholdings | — | | | — | | | (18.1) | | | — | | | — | | | — | | | — | | | (18.1) | |
| Purchase of shares of treasury stock | — | | | — | | | — | | | — | | | — | | | (297.6) | | | — | | | (297.6) | |
| Stock-based compensation expense | — | | | — | | | 127.0 | | | — | | | — | | | — | | | — | | | 127.0 | |
| Unrealized gain on available-for-sale debt securities | — | | | — | | | — | | | — | | | 61.5 | | | — | | | — | | | 61.5 | |
| | | | | | | | | | | | | | | |
| Foreign currency translation | — | | | — | | | — | | | — | | | 15.6 | | | — | | | — | | | 15.6 | |
| Net income | — | | | — | | | — | | | 266.6 | | | — | | | — | | | — | | | 266.6 | |
| Balance at December 31, 2023 | 49.9 | | | $ | 0.5 | | | $ | 1,053.0 | | | $ | 1,757.1 | | | $ | (229.2) | | | $ | (760.8) | | | $ | — | | | $ | 1,820.6 | |
See notes to consolidated financial statements.
WEX INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)millions)
| | Year ended December 31, | | | Year ended December 31, |
| | | | 2023 | | 2022 | | 2021 |
| Cash flows from operating activities | |
| Net income | |
| Net income | |
| Net income | |
| Adjustments to reconcile net income to net cash provided by (used for) operating activities: | |
| | Change in fair value of contingent consideration | |
| | Change in fair value of contingent consideration | |
| | Change in fair value of contingent consideration | |
| Stock-based compensation | |
| Depreciation and amortization | |
| | | Year ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities | | | | | |
| Net (loss) income | $ | (280,484) | | | $ | 155,293 | | | $ | 169,776 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | |
| Net unrealized loss | 48,042 | | | 29,792 | | | 21,924 | |
| Stock-based compensation | 63,863 | | | 45,811 | | | 33,887 | |
| Depreciation and amortization | 261,926 | | | 237,129 | | | 199,805 | |
| | Loss on sale of subsidiary | 46,362 | | | 0 | | | 0 | |
| Debt restructuring and debt issuance cost amortization | 26,196 | | | 9,942 | | | 9,674 | |
| (Benefit) provision for deferred taxes | (29,342) | | | 19,667 | | | 31,334 | |
| Debt restructuring and debt issuance cost amortization and accretion expense | |
| | Debt restructuring and debt issuance cost amortization and accretion expense | |
| | Debt restructuring and debt issuance cost amortization and accretion expense | |
| Deferred tax (benefit) provision | |
| Provision for credit losses | Provision for credit losses | 78,443 | | | 65,664 | | | 66,482 | |
| Impairment charges | Impairment charges | 53,378 | | | 0 | | | 5,649 | |
| Non-cash adjustments related to tax receivable agreement | (491) | | | (932) | | | 775 | |
| Changes in operating assets and liabilities, net of effects of acquisitions: | |
| | Loss on extinguishment of Convertible Notes | |
| Loss on extinguishment of Convertible Notes | |
| Loss on extinguishment of Convertible Notes | |
| | Unrealized loss (gain) on interest rate swaps | |
| | Unrealized loss (gain) on interest rate swaps | |
| | Unrealized loss (gain) on interest rate swaps | |
| Other non-cash adjustments | |
| Changes in operating assets and liabilities, net of effects of business acquisitions: | |
| Accounts receivable and securitized accounts receivable | |
| Accounts receivable and securitized accounts receivable | |
| Accounts receivable and securitized accounts receivable | Accounts receivable and securitized accounts receivable | 592,947 | | | (67,645) | | | (201,637) | |
| Prepaid expenses and other current and other long-term assets | Prepaid expenses and other current and other long-term assets | 6,514 | | | 31,337 | | | 68,014 | |
| Accounts payable | Accounts payable | (183,708) | | | 139,187 | | | (3,588) | |
| Accrued expenses and restricted cash payable | 151,236 | | | 31,627 | | | 8,654 | |
| Accrued expenses and other current and long-term liabilities | |
| | Income taxes | Income taxes | 15,083 | | | (12,266) | | | (2,107) | |
| Other current and other long-term liabilities | 7,054 | | | (21,435) | | | (8,413) | |
| Income taxes | |
| Income taxes | |
| | Net cash provided by operating activities | 857,019 | | | 663,171 | | | 400,229 | |
| | Net cash provided by (used for) operating activities | |
| | Net cash provided by (used for) operating activities | |
| | Net cash provided by (used for) operating activities | |
| Cash flows from investing activities | Cash flows from investing activities | |
| Purchases of property, equipment and capitalized software | Purchases of property, equipment and capitalized software | (80,471) | | | (102,860) | | | (87,152) | |
| Cash paid on sale of subsidiary | (22,470) | | | 0 | | | 0 | |
| Distribution (contribution) of equity investment | 837 | | | 0 | | | (2,771) | |
| Purchases of investment securities | (6,459) | | | (5,567) | | | (1,768) | |
| Maturities of investment securities | 181 | | | 230 | | | 266 | |
| Purchases of property, equipment and capitalized software | |
| Purchases of property, equipment and capitalized software | |
| | Cash proceeds from sale, redemption or distribution of other investments | |
| Cash proceeds from sale, redemption or distribution of other investments | |
| Cash proceeds from sale, redemption or distribution of other investments | |
| Purchases of equity securities and other investments | |
| | Purchases of available-for-sale debt securities | |
| | Purchases of available-for-sale debt securities | |
| | Purchases of available-for-sale debt securities | |
| Sales and maturities of available-for-sale debt securities | |
| Acquisition of intangible assets | |
| Acquisitions, net of cash and restricted cash acquired | Acquisitions, net of cash and restricted cash acquired | (220,704) | | | (882,417) | | | (162,750) | |
| Net cash used for investing activities | Net cash used for investing activities | (329,086) | | | (990,614) | | | (254,175) | |
| Cash flows from financing activities | Cash flows from financing activities | |
| Repurchase of share-based awards to satisfy tax withholdings | Repurchase of share-based awards to satisfy tax withholdings | (9,519) | | | (10,352) | | | (12,372) | |
| Repurchase of share-based awards to satisfy tax withholdings | |
| Repurchase of share-based awards to satisfy tax withholdings | |
| Purchase of treasury shares | |
| Proceeds from stock option exercises | Proceeds from stock option exercises | 9,273 | | | 4,941 | | | 2,430 | |
| Net change in restricted cash payable | |
| Net change in deposits | Net change in deposits | (396,065) | | | 176,603 | | | (20,360) | |
| Net activity on other debt | (66,915) | | | (43,148) | | | (62,290) | |
| Net activity on other short-term debt | |
| Borrowings on revolving credit facility | Borrowings on revolving credit facility | 300,000 | | | 1,267,704 | | | 1,570,983 | |
| Repayments on revolving credit facility | Repayments on revolving credit facility | (300,000) | | | (1,265,251) | | | (1,707,478) | |
| Borrowings on term loans | Borrowings on term loans | 0 | | | 688,990 | | | 178,000 | |
| Repayments on term loans | Repayments on term loans | (64,611) | | | (64,329) | | | (35,791) | |
| Proceeds from issuance of convertible notes | 299,150 | | | 0 | | | 0 | |
| Proceeds from issuance of common stock | 90,000 | | | 0 | | | 0 | |
| Issuance costs | (17,048) | | | (3,442) | | | (5,841) | |
| Net change in securitized debt | (23,521) | | | (1,943) | | | (10,009) | |
| Borrowings on BTFP | |
| Repayments on BTFP | |
| Repurchase of Convertible Notes | |
| Redemption of Notes | |
| Payments of deferred and contingent consideration | |
| Debt issuance costs | |
| | Net cash (used for) provided by financing activities | (179,256) | | | 749,773 | | | (102,728) | |
| | Net cash provided by financing activities | |
| | Net cash provided by financing activities | |
| | Net cash provided by financing activities | |
| Effect of exchange rates on cash, cash equivalents and restricted cash | Effect of exchange rates on cash, cash equivalents and restricted cash | (405) | | | 4,020 | | | (10,680) | |
| Net change in cash, cash equivalents and restricted cash | Net change in cash, cash equivalents and restricted cash | 348,272 | | | 426,350 | | | 32,646 | |
Cash, cash equivalents and restricted cash, beginning of year(a) | Cash, cash equivalents and restricted cash, beginning of year(a) | 981,381 | | | 555,031 | | | 522,385 | |
Cash, cash equivalents and restricted cash, end of year(a) | Cash, cash equivalents and restricted cash, end of year(a) | $ | 1,329,653 | | | $ | 981,381 | | | $ | 555,031 | |
| | | | | | | | | | | | | | | | | |
| Supplemental cash flow information | 2023 | | 2022 | | 2021 |
Interest paid(1) | $ | 247.9 | | | $ | 129.4 | | | $ | 132.2 | |
| Income taxes paid | 130.3 | | | 142.8 | | | 50.6 | |
| Supplemental disclosure of non-cash investing and financing activities | | | | | |
| Capital expenditures incurred but not paid | $ | 9.6 | | | $ | 8.1 | | | $ | 5.1 | |
| Initial deferred liability from acquisition of remaining interest in PO Holding | — | | | 216.6 | | | — | |
| Purchase of treasury shares, unsettled as of period-end | — | | | 8.1 | | | — | |
| Non-cash contribution from non-controlling interest | — | | | — | | | 12.5 | |
| Deferred cash consideration as part of asset acquisition | — | | | — | | | 47.4 | |
| Contingent/deferred consideration resulting from a business combination or asset acquisition | 8.6 | | | — | | | 27.2 | |
| | | | | |
| | | | | |
(1) The 2023 amount reported excludes the impact from $50.0 million of Contents
| | | | | | | | | | | | | | | | | |
| Supplemental cash flow information | 2020 | | 2019 | | 2018 |
| Interest paid | $ | 163,292 | | | $ | 175,993 | | | $ | 141,476 | |
| Income taxes (refunded) paid | $ | (8,444) | | | $ | 50,964 | | | $ | 39,225 | |
| Supplemental disclosure of non-cash investing and financing activities | | | | | |
| Capital expenditures incurred but not paid | $ | 3,179 | | | $ | 4,771 | | | $ | 8,569 | |
| | | | | |
(a)The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within our consolidated balance sheets to amounts within our consolidated statements of cash flows for the years ended December 31, 2020, 20192023, 2022, and 2018:2021:
| | | | December 31, | | December 31, |
| | | 2020 | | 2019 | | 2018 | | 2023 | | 2022 | | 2021 |
| Cash and cash equivalents at beginning of year | Cash and cash equivalents at beginning of year | $ | 810,932 | | | $ | 541,498 | | | $ | 503,519 | |
| Restricted cash at beginning of year | Restricted cash at beginning of year | 170,449 | | | 13,533 | | | 18,866 | |
| Cash, cash equivalents and restricted cash at beginning of year | Cash, cash equivalents and restricted cash at beginning of year | $ | 981,381 | | | $ | 555,031 | | | $ | 522,385 | |
| | Cash and cash equivalents at end of year | Cash and cash equivalents at end of year | $ | 852,033 | | | $ | 810,932 | | | $ | 541,498 | |
| Cash and cash equivalents at end of year | |
| Cash and cash equivalents at end of year | |
| Restricted cash at end of year | Restricted cash at end of year | 477,620 | | | 170,449 | | | 13,533 | |
| Cash, cash equivalents and restricted cash at end of year | Cash, cash equivalents and restricted cash at end of year | $ | 1,329,653 | | | $ | 981,381 | | | $ | 555,031 | |
See notes to consolidated financial statements.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
| 1. | Basis of Presentation and Summary of Significant Accounting Policies |
Business Description
WEX Inc. (“Company”, “we” or “our”) is the global commerce platform that simplifies the business of running a leading financial technology service provider having simplifiedbusiness. In connection with a rebranding initiative, during the complexitiesfirst quarter of payment systems across continents and industries.2023 the Company renamed its existing reportable segments. The Company provides products and services that meet the needs of businesses in various geographic regions including North America, Asia Pacific and Europe. The Company’s Fleet Solutions segment was renamed to Mobility, the Travel and Corporate Solutions segment was renamed to Corporate Payments, and the Health and Employee BenefitBenefits Solutions segment was renamed to Benefits. These notes to the consolidated financial statements reflect these changes. There were no changes to the composition of our reportable segments, provide our customers with security and control for complex payments across a wide spectrum of business sectors.which are described in more detail in Note 24, Segment Information.
Basis of Presentation and Use of Estimates and Assumptions
The accompanying consolidated financial statements for the years ended December 31, 2020, 20192023, 2022, and 2018,2021, include the accounts of the Company and its wholly and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The Company prepares its consolidated financial statements in conformity with GAAP and with the Rules and Regulations of the SEC, specifically Regulation S–S–X and the instructions to Form 10–10–K. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates and those differences may be material.
The Company rounds amounts in the consolidated financial statements to thousandsmillions within tables and millions within text (unless otherwise specified), and calculates all percentages and 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 ResponseChange in Reporting Presentation
Historically, realized gains and Impact
A novel strainlosses from periodic settlements on our interest rate swap contracts have been included within financing interest expense, while the quarterly unrealized gains and losses from the noncash mark-to-market of coronavirus (COVID-19) was first identified in Wuhan, China in January 2020, and subsequently declared a global pandemic byour swaps have been separately presented on the World Health Organization on March 11, 2020.
face of the consolidated statement of operations. During the firstfourth quarter of 2020,2023, the Company tookmade a number of precautionary stepsvoluntary change in accounting presentation to safeguard its businessreflect the unrealized gains and employeeslosses from the effects of COVID-19 including restricting business travel, temporarily closing offices and canceling participation in various industry events. Additionally, in an effort to rescale the business and safeguard shareholder value in this unprecedented operating environment, we took certain measures to both permanently reduce headcount and furlough employees across our worldwide offices where necessary. Aside from the employee furloughs, which ended during the third quarter of 2020, the precautionary steps described above largely remain in force 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, had a negative impact on the Company’s businesses duringvalue of our swaps within financing interest expense, net of financial instruments. Prior period amounts have been reclassified to conform to the current year presentation.
For the year ended December 31, 2020. The following describes these impacts by reportable segment:
Fleet Solutions — The Fleet Solutions segment2023, the Company has seen both positiveaggregated and negative impacts as a resultreflected certain non-cash gains and losses within one line, and separately presented unrealized gains and losses on interest rate swaps within cash flows from operating activities on the consolidated statement of the world's responsecash flows. Prior period amounts have been reclassified to COVID-19, with the negative impacts significantly outweighing the positive. Firstly, 2020 revenue has significantly decreased as a result of lower transaction prices driven by a decrease in the average U.S. price per gallon of fuel as compared to 2019. Volumes have also negatively impacted the segment's results during 2020 as compared to 2019 due to lower volumes in the North American fleet and international portions of the business. Partly offsetting these negatively impacted areas of the business were volume trends in our over-the-road trucking business, which have increased relative to prior year due to increased shipping to individuals during the U.S. lockdown, but represent a smaller portion of the overall segment.
Travel and Corporate Solutions — Of the Company's segments, Travel and Corporate Solutions has been the most severely impacted by the pandemic and the corresponding decline in worldwide travel and tourism. Purchase volume in the travel portion of the segment was significantly lower in 2020 as compared to 2019. In contrast, the corporate payments portion of the segment has seen an increase in purchase volumes during 2020, which is largely attributableconform to the ongoing migration of businesses to virtual payments and increasing usage of our accounts payable products. These improvements, however, represent a smaller percentage of the total segment.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Health and Employee Benefit Solutions — The Health and Employee Benefit Solutions' volume was most challenged by the pandemic during the second quarter of 2020 as a result of cardholders deferring non-essential medical treatments when U.S. lockdown restrictions were most severe. However, by the fourth quarter of 2020, the U.S. Health business saw a slight increase in purchase volumes relative to the same period in the prior year.current year presentation.
Significant Accounting Policies
Cash and Cash Equivalents
Highly liquid investments with original maturities at the time of purchase of three months or less (that are readily convertible to cash) are considered to be cash equivalents and are stated at cost, which approximates fair value. Cash and cash equivalents include Eurodollar time deposits and money market funds, which are unsecured short-term investments entered into with financial institutions.
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
Restricted Cash
Restricted cash represents funds collected from individuals or employers on behalf of our customers that are to be remitted to third parties, or funds required to be maintained under certain vendor agreements. With the acquisition of eNettagreements, and Optal, restricted cash as of December 31, 2020 also includes amounts received from online travel agenciesOTAs held in segregated accounts until a transaction is settled. Restricted cash is not available to fund the Company’s operations. Additionally, weWe generally maintain an offsetting liability against the restricted cash.
Accounts Receivable, Net of Allowances
Accounts receivable consists of amounts billed and unbilled amounts due from customers across a wide range of industries and other third parties. WeThe Company often extendextends short-term credit to cardholders and paypays the merchant or payment network, as applicable, for the purchase price, less the fees we retainit retains and recordrecords as revenue. WeThe Company subsequently collectcollects 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 adopted Topic 326discontinues late fee and interest income accruals on January 1, 2020, utilizingoutstanding receivables once customers are 90 and 120 days past the modified-retrospective approach, under which prior period comparable financial information wasinvoice 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 invoice origination date 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 adjusted. Topic 326 amends the impairment model by requiring entitiespaid in full are subject to use a forward-looking approachinterest charges based on expected losses rather than incurred losses to estimatethe revolving balance. The Company had approximately $133.3 million and $157.8 million in receivables with revolving credit losses on certain typesbalances as of financial instruments, including trade receivablesDecember 31, 2023 and off-balance sheet credit exposures.2022, respectively.
The following table illustrates the adoption impact of Topic 326:
| | | | | | | | | | | | | | | | | |
| January 1, 2020 |
| (In thousands) | Prior to Adoption | | Impact of
Topic 326 | | As Reported |
Allowance for accounts receivable1 | $ | 52,274 | | | $ | 11,577 | | | $ | 63,851 | |
| Deferred income taxes, net (within total assets) | $ | 12,833 | | | $ | 570 | | | $ | 13,403 | |
| Deferred income taxes, net (within total liabilities) | $ | 218,740 | | | $ | (2,230) | | | $ | 216,510 | |
| Retained earnings | $ | 1,539,201 | | | $ | (8,587) | | | $ | 1,530,614 | |
| Non-controlling interest | $ | 9,575 | | | $ | (190) | | | $ | 9,385 | |
| | | | | |
1 This impact does not reflect the economic disruption resulting from the COVID-19 pandemic since it occurred subsequent to January 1, 2020.
Allowance for Accounts ReceivableALLOWANCE FOR ACCOUNTS RECEIVABLE
The allowance for accounts receivable reflects management’s current estimate of uncollectible balances on its accounts receivable and consists primarily of reserves for credit losses. As a result ofThe reserve for credit losses reduces the adoption of Topic 326,Company’s accounts receivable balances, as reported in the consolidated financial statements, to the net realizable value. 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 deviate from the current or historical median, the Company qualitatively assesses what impact, if any, the trends are expected to have on the reserve for credit losses. Economic indicators include
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
consumer price indices, business bankruptcy trends, consumer spending and unemployment trends,housing starts, among others. See Note 6, Allowance for Accounts Receivable for discussion regardingchanges in the adjustments madeaccounts receivable allowances by portfolio segment during the yearyears ended December 31, 20202023 and 2022 as a result of these assessments.
Accounts receivable are evaluated for credit losses 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 SolutionsMobility - 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 SolutionsMobility 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 Manufacturing Purchasing Managers Index and the U.S. VolatilityBusiness Sentiment Index.
•Travel and Corporate SolutionsPayments - The customer base is comprised of businesses operating in a wide range ofmultiple industries including large online travel agencies.OTAs. With the exception of the eNett and NoventisWEX Payments portfolios, which have minimal credit risk due to their respective business models and collection terms, the associated credit losses are sporadic and closely correlate with trends in consumer metrics, including consumer spending and the consumer price index.
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WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
•Health and Employee Benefit SolutionsBenefits - The customer base includes third-party administrators, individual employers and employees. The associated credit losses are generally low. Prior to the sale of WEX Latin America, the Company maintained credit exposure on certain associated receivables not sold to the securitization fund and accordingly established an allowance for credit losses, which was included in the Health and Employee Benefit Solutions balance.
When 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 account level 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.
Prior to the adoption of Topic 326 on January 1, 2020, the accounts receivable allowance reflected management’s estimate of uncollectible balances resulting from credit losses and based on the determination of the amount of expected losses inherent in the accounts receivable as of the reporting date.
The allowance for accounts receivable also includes reserves for waived finance fees, which are used to maintain customer goodwill and recorded against the late fee revenue recognized, as well as reserves for fraud losses, which are recorded as credit losses. Management monitorsThe reserve for fraud losses is determined by monitoring pending fraud cases, customer-identified fraudulent activity, known and suspected fraudulent activity identified by the Company, as well as fraudulent claims reported by customers,unconfirmed suspicious activity in estimating the reserve for expectedorder to make judgments as to probable fraud losses.
Off-Balance Sheet Arrangements
The Company has various off-balance sheet commitments, including the extension of credit to customers, accounts receivable factoring and accounts receivable securitization, which carry credit risk exposure. Such arrangements are described in Note 21,20, Commitments and Contingencies, and Note 13, Off-Balance Sheet Arrangements. These items were not significantly impacted by the adoption of Topic 326 as of December 31, 2020.
Investment Securities
Changes in the fair value of investment securities are included in net unrealized (loss) gain on financial instruments within our consolidated statements of operations. Realized gains and losses and declines in fair value determined to be other-than-temporary are included in non-operating expenses. The cost basis of securities is based on the specific identification method. Investment securities held by the Company wereconsist primarily of (i) HSA assets managed and invested by WEX Bank, which are reflected within current assets on our consolidated balance sheets and (ii) securities purchased and are held by WEX Bank primarily in order to meet the requirements of the Community Reinvestment Act.Act, which are reflected within non-current assets on our consolidated balance sheets. Investment securities consist primarily of available-for-sale debt securities, including U.S. treasury notes and bonds, corporate debt securities and asset or mortgage-backed securities, and equity securities with readily determinable fair values. Available-for-sale debt securities and equity securities with a readily determinable fair value are reflected in the consolidated balance sheets at fair value and are classified as current or long-term based on Management’s determination of whether such securities are available for use in current operations, regardless of the securities’ stated maturity dates. The cost basis of investment securities is based on the specific identification method. Purchases and sales of securities are recorded on a trade date basis. Accrued interest on investment securities is recorded within prepaid expenses and other current assets on the consolidated balance sheets. As of December 31, 2023 and 2022, accrued interest on investment securities was $24.7 million and $9.3 million, respectively.
Available-for-sale debt securities are considered impaired if the fair value of the investment is less than its amortized cost. If it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis, the security is written down to its fair value and the difference is recognized in operating income. If the Company deems it is not likely to sell such security before recovery of its amortized cost basis, the Company bifurcates the impairment into credit-related and non-credit-related components. In evaluating whether a credit-related loss exists, the Company considers a variety of factors including: the extent to which the fair value is less than the amortized cost basis; adverse conditions specifically related to the issuer of a security; the failure of the issuer of the security to make scheduled interest or principal payments; and any changes to the rating of the security by a rating agency. A loss on available-for-sale securities attributed to a credit-related component is determined by comparing the present value of cash flows expected to be collected from the security with the amortized cost basis of the security and is recorded within the provision for credit losses on our consolidated statements of operations. To the extent this expected credit loss decreases in future periods, the charge to the provision for credit losses is reversed. The portion of the loss attributed to non-credit-related components is reflected within accumulated other comprehensive loss on the consolidated balance sheets, net of applicable taxes. To the extent this loss decreases in future periods, the Company records a reduction to accumulated other comprehensive loss, net of applicable taxes.
Realized gains and losses on available-for sale debt securities are recorded within other revenue on the consolidated statements of operations.
Other Investments
From time-to-time the Company makes minority equity or other investments in early-stage companies for which there is no readily determinable fair value and over which we do not exert significant influence. Due to the lack of a readily
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WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
determinable fair value, these investments are measured at cost less any impairment until a specific remeasurement event occurs. The investments are recorded within other assets on our consolidated balance sheets. At December 31, 2023 and 2022, we had $7.5 million and $2.5 million, respectively, of such investments.
Other investments additionally consist of Federal Home Loan Bank (“FHLB”) stock. Members of the FHLB are required to own a certain amount of membership stock, based on the member’s total assets, and activity stock, based on outstanding borrowings with the FHLB. There is no secondary market for this stock as it is issued and repurchased at par by the FHLB and is generally restricted as to redemption. It is not practicable to determine the fair value of this stock and accordingly, at December 31, 2023, the Company carries the stock at cost of $4.2 million, recorded within other assets on the consolidated balance sheets.
Derivatives
From time to time, the Company utilizes derivative instruments as part of its overall strategy, including to reduce the impact of interest and foreign currency exchange rate volatility. In addition, we have a contingent consideration derivative liability associated with our asset acquisition from Bell Bank. The Company’s derivative instruments are recorded at fair value on the consolidated balance sheets. The Company’s derivative instruments outstanding at December 31, 2020Gains and 2019 consist entirely oflosses on interest rate swap agreements that have not been designated as hedges. Realized and unrealized gains and losses on the derivatives are recognized in financing interest and unrealized gains and lossesexpense, net of financial instruments. The change in the estimated fair value of the contingent consideration liability is recognized separately on financial instruments, respectively.the consolidated statement of operations. For
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the purposes of cash flow presentation, realized and unrealized gains or losses on interest rate swaps are included within cash flows from operating activities. Cash payments for contingent consideration are included within cash flows from financing activities, up to the initial liability balance at acquisition. Any contingent consideration paid in excess of the initial liability balance is included within cash flows from operating activities.
Leases
Effective January 1, 2019, the Company'sThe Company’s real estate leases are accounted for using a right-of-use model, which recognizes that at the date of commencement, a lessee has a financial obligation to make lease payments to the lessor for the right to use the underlying asset during the lease term. The lesseeterm and recognizes a corresponding right-of-use asset related to this right. Some of our leases include options to extend the term of the lease. When it is reasonably certain that we will exercise the option, we include the impact of the option in the lease term for purposes of determining future lease payments. The Company made an accounting policy election to not recognize assets or liabilities for leases with a term of less than twelve months and to account for all components in a lease arrangement as a single combined lease component. Short-term lease payments are generally recognized on a straight-line basis. Certain of our lease agreements include variable rent payments, consisting primarily of rental payments adjusted periodically for inflation and amounts paid to the lessor based on cost or consumption, such as maintenance and utilities. These costs are expensed asrecognized in the period in which the obligation is incurred. As the Company’s leases do not specify an implicit rate, the Company uses an incremental borrowing rate based on information available at the lease commencement date to determine the present value of the lease payments.
The Company evaluates right-of-use assets for impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Specifically, the Company may choose to exit a lease prior to the end of the lease term. In circumstances when the Company has made the decision to exit the lease and does not have the ability and intent to sublease such exited facility, the Company adjusts the estimated useful life of the right-of-use asset so that it ends on the cease use date. The accelerated lease expense is recognized on a straight-line basis through the end of the useful life.
See Note 15, Leases, for further information.
Property, Equipment and Capitalized Software
Property, equipment and capitalized software are stated at cost, net of accumulated depreciation and amortization. Replacements, renewals and improvements are capitalized and costs for repair and maintenance are expensed as incurred. Leasehold improvements are depreciated using the straight-line method over the shorter of the remaining lease term or the useful life of the improvement. Depreciation and amortization for all other property, equipment and capitalized software is primarily computed using the straight-line method over the estimated useful lives shown below.below as of December 31, 2023.
| | | | | |
| Estimated Useful Lives |
| Furniture, fixtures and equipment | 3 to 5 years |
| Internal-use computer software | 1.5 to 5 years
| Computer software, including internal use computer software | 3 years |
| |
The Company’s developed internal-use software is used to provide processing and information management services to customers. A significant portion of the Company’s capital expenditures is devoted to the development of such internal-use computer software. Costs incurred during the preliminary project stage are expensed as incurred. Software development costs are capitalized during the application development stage. Capitalization begins when the preliminary project stage is complete, as well as when management authorizes and commits to the funding of the project. Capitalization of costs
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WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
ceases when the software is ready for its intended use. Costs related to maintenance of internal-use software are expensed as incurred.
Below are the amounts of internal-use computer software capitalized within property, equipment and capitalized software and the related amortization expense incurred on all internal-use computer software during the years ended December 31:
| | (in thousands) | 2020 | | 2019 | | 2018 |
| (in millions) | | (in millions) | 2023 | | 2022 | | 2021 |
| Gross amounts capitalized for internal-use computer software (including construction-in-process) | Gross amounts capitalized for internal-use computer software (including construction-in-process) | $ | 58,881 | | | $ | 74,432 | | | $ | 46,382 | |
| Amounts expensed for amortization of internal-use computer software | Amounts expensed for amortization of internal-use computer software | $ | 72,363 | | | $ | 57,821 | | | $ | 38,632 | |
Cloud Computing Arrangements
The Company capitalizes implementation costs in cloud computing arrangements, including development costs on third partythird-party technology platforms. Such amounts are amortized to the consolidated statements of operations, when ready for intended use, over the lesser of the term of the hosting arrangement or the useful life of the underlying software.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, 2020, theThe Company had the following costs capitalized with respect to cloud computing arrangements on the consolidated balance sheet:sheets as of December 31:
| | | | | |
(in thousands) | 2020 |
Gross cloud computing costs (inclusive of in-process amounts) | $ | 6,360 | |
Accumulated amortization | 387 | |
Net cloud computing costs | $ | 5,973 | |
| |
Included in prepaid expenses and other current assets | $ | 4,570 | |
Included in other assets | $ | 1,403 | |
The Company had no cloud computing costs capitalized prior to 2020. | | | | | | | | | | | |
| (in millions) | 2023 | | 2022 |
| Gross cloud computing costs (inclusive of in-process amounts) | $ | 54.2 | | | $ | 21.7 | |
| Accumulated amortization | 16.6 | | | 7.2 | |
| Net cloud computing costs | $ | 37.6 | | | $ | 14.5 | |
| | | |
| Included in prepaid expenses and other current assets | $ | 23.8 | | | $ | 9.3 | |
| Included in other assets | $ | 13.8 | | | $ | 5.2 | |
Acquisitions
For acquisitions that meet the definition of a business combination, the Company applies the acquisition method of accounting where assets acquired and liabilities assumed are recorded at fair value at the date of each acquisition. Any excess of the consideration transferred by the Company over the amounts recognized for assets acquired and liabilities assumed is recorded as goodwill. The Company continues to evaluate acquisitions for a period not to exceed one year after the acquisition date of each transaction to determine whether any additional adjustments are needed to the allocation of the purchase price. The acquiree’s results of operations are included in consolidated results of the Company from the date of the respective acquisition.
All other acquisitions are accounted for as asset acquisitions and the purchase price is allocated to the net assets acquired with no recognition of goodwill. Following the acquisition date, the purchase price of asset acquisitions is not subsequently adjusted.
The fair value of assets acquired and liabilities assumed is based on management’s estimates and assumptions, as well as other information compiled by management. Fair values are typically determined using a discounted cash flow valuation method, though the Company utilizes alternative valuation methods when deemed appropriate. Significant acquisition valuation assumptions typically include timing and amount of future cash flows, effective income tax rates, discount rates, long-term growth expectations and customer attrition rates.
Goodwill and Other Intangible Assets
The Company tests goodwillGoodwill is assigned to reporting units, which is at, or one level below, the Company’s operating segments. Goodwill is not amortized but is reviewed for impairment at least annually on October 1 at the reporting unit level, or more frequently if facts or circumstances indicate that the goodwill might be impaired. Goodwill is assigned to reporting units, which are one level below the Company’s operating segments. The Company performs goodwill impairment tests at the reporting unit level annually as of October 1. Such impairment tests include comparing the fair value of the respective reporting units with their carrying values, including goodwill. The Company uses both discounted cash flow analyses and comparable company pricing multiples to determine the fair value of its reporting units. Such analyses are corroborated using market analytics. Certain assumptions are used in determining the fair value, including assumptions about future cash flows and terminal values. When appropriate, theThe Company considers the assumptions that it believes hypothetical marketplace participants would use in estimating future cash flows. In addition, an appropriate discount rate
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WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
is used, based on the Company’s cost of capital or reporting unit-specific economic factors. When the fair value of a reporting unit is less than its carrying value, a goodwill impairment charge is recorded equal to the amount by which the carrying value of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.
During our annual goodwill impairment test performed as of October 1, 2020, we determined that the reduced volumes attributable in part to COVID-19, had a significant negative impact on the fair value of the WEX Fleet Europe reporting unit (the 2019 Go Fuel Card acquisition). Based on the carrying value of this reporting unit exceeding its fair value, the Company recorded a $53.4 million goodwill impairment charge during the year ended December 31, 2020. There is $65.8 million remaining goodwill associated with this reporting unit. See Note 9, Goodwill and Other Intangible Assets, and Note 24, Impairment Charges, for further information regarding the outcome of the Company’s annual goodwill impairment test performed as of October 1, 2020, 2019,tests during 2023, 2022 and 2018.2021.
Intangible assets that are deemed to have definite lives are generally amortized using a method reflective of the pattern in which the economic benefits of the assets are expected to be consumed. If that pattern cannot be reliably determined, the assets are amortized using a straight-line method over their useful lives, which is the period of time that the asset is expected to contribute directly or indirectly to future cash flows. The Company determines the useful lives of its identifiable intangible
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
assets after considering the specific facts and circumstances related to each intangible asset. The factors that management considers when determining useful lives include the contractual term of agreements, the history of the asset, the Company’s long-term strategy for the use of the asset, any laws or other local regulations which could impact the useful life of the asset and other economic factors, including competition and specific market conditions. The Company performs an evaluation of the remaining useful lives of the definite-lived intangible assets periodically to determine if any change is warranted.
The Company assesses the realizability of intangible assets other than goodwill whenever conditions exist that indicate the carrying value may not be recoverable. Such conditions may include a reduction in operating cash flow or a dramatic change in the manner in which the asset is intended to be used.
Impairment of Long-Lived Assets
The Company’s long-lived assets primarily include property, plant and equipment, capitalized software, right-of-use assets and intangible assets. The carrying values of long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be recoverable. Such conditions may include a reduction in operating cash flow or a significant adverse change in the manner in which, or term over which, the asset is intended to be used, including when a decision has been made to exit a lease prior to the contractual term or to sublease leased space.
To test for impairment of long-lived assets, the Company generally uses a probability-weightedan estimate of the future undiscounted net cash flows of the assets over their remaining lives to determine if the value of the asset is recoverable. Long-lived assets are grouped with other assets and liabilities at the lowest level for which independent identifiable cash flows are determinable.
determinable, which is generally at the reporting unit level. An asset impairment is recognized when the carrying value of the asset is not recoverable based on the analysis described above, in which case the asset is written down to its fair value. If the asset does not have a readily determinable market value, generally determined using a discounted cash flow model may be used to determineanalysis.
Debt Issuance Costs
Debt issuance costs incurred and capitalized are amortized into interest expense over the fair valueremaining term of the asset. In circumstances when an asset does not have separate identifiable cash flows, an impairment charge is recorded whenrespective debt arrangements using the Company no longer intends to use the asset.effective interest method.
Financial Instruments – Fair Value of Financial Instruments
The Company holds mortgage-backed securities, fixed-incomeU.S. treasury notes, corporate debt securities, mutual funds, money market funds, derivatives (see Note 12, Derivative Instruments) and certain other financial instruments that are carried 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,financial instruments, including: closing exchange or over-the-counter market price quotations; benchmark interest rates; 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.
Additionally, the Company holds certain investments that are measured at their NAV as a practical expedient, which are excluded from the fair value hierarchy.
Assets and liabilities measured at fair value are classified within the fair value hierarchy 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
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WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company holds certain investments that are measured at their NAV as a practical expedient, which are excluded from the above fair value hierarchy.
Financial Instruments – Concentrations of Credit Risk
The Company’s cash and cash equivalents and restricted cash are transacted and maintained with financial institutions with high credit standing. Cash balances at many of these institutions regularly exceed FDIC insured limits; however, management regularly monitors the financial institutions and the composition of the Company’s accounts. We have not experienced any losses in such accounts and management believes that the financial institutions at which the Company’s cash is held are stable. We attempt to limit our exposure to credit risk with our investment securities by establishing strict investment policies as to minimum investment ratings, diversification of our portfolio and setting risk tolerance levels.
Revenue Recognition
The Company generally accounts for the majority of its revenue under Topic 606 or ASC 310, Receivables (“ASC 310”). See Note 3, Revenue, for rights or obligations associated with financial instruments. Thea description of the major components of revenue.
Under Topic 606, the Company generally records revenue net, equal to consideration retained, based upon its conclusion that the Company is the agent in its principal versus agent relationships. TheWhen making this determination, the Company evaluated the nature of its
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
promise to the customer and determined that it does not control a promised good or service before transferring that good or service to the customer, but rather arranges for another entity to provide the goods or services.
The vast majority of the Company’s Topic 606 revenue is derived from stand-ready obligations to provide payment processing, transaction processing and SaaS services and support. As such, we view these services as comprising a series of distinct days of service that are substantially the same and have the same pattern of transfer to the customer. Accordingly, the promise to stand ready is accounted for as a single-series performance obligation. The transaction-based fees are generally calculated based on measures such as (i) percentage of dollar value of volume processed; (ii) number of transactions processed; or (iii) some combination thereof. The Company has entered into agreements with major oil companies, fuel retailers, vehicle maintenance providers, online travel agenciesOTAs and health partners, which provide services and limited products to the Company’s customers. These agreements specify that a transaction is deemed to be captured when the Company has validated that the transaction has no errors and has accepted and posted the data to the Company’s records. Revenue is recognized based on the value of services transferred to date using a time elapsed output method. See Note 3, Revenue, for a description of the major components of revenue.
The Company enters into contracts with certain large customers or partners that provide for fee rebates tied to performance milestones. Such rebates and incentives are calculated based on estimated performance and the terms of the related business agreements and are typically recorded as a reduction ofwithin revenue. Amounts paid to certain partners in our Fleet Solutions and TravelMobility and Corporate SolutionsPayments segments are recorded within sales and marketing expense on our consolidated statements of operations.
Under ASC 310, we record revenue on overdue accounts and certain other fees assessed to cardholders as part of the lending relationship, net of a provision for estimated uncollectible amounts, at the time the charges are assessed.
Stock-Based Compensation
The Company recognizes the fair value of all stock-based payments to employees and directors in its consolidated financial statements. The Company estimates the fair value of service-based stock option awards on the grant date using a Black-Scholes-Merton valuation model. The Company estimates the fair value of awards granted with market conditions (including market performance-based stock option awards and TSR performance awards) on the grant date using a Monte Carlo simulation model. The fair value of DSUs, RSUs, includingand PBRSUs based on Company performance goals, iswithout a market condition are determined and fixed on the grant date based on the closing price of the Company’s stock.stock as reported by the NYSE. The Company estimates the grant date fair value of service-based stock option awards using a Black-Scholes-Merton valuation model and awards granted with market conditions (including market performance-based stock option awards, TSR performance awards, and PBRSUs with a TSR performance condition) using a Monte Carlo simulation model.
Stock-based compensation expense is recorded net of estimated forfeitures over each award’s requisite service period. The Company uses the straight-line methodology for recognizing the expense associated with service-based stock options and RSU grants and a graded-vesting methodology for the expense recognition of market performance-based stock options and PBRSUs.
See Note 23,22, Stock-Based Compensation, for further information.
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WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
Advertising Costs
Advertising and marketing costs are expensed in the period incurred. During the years ended December 31, 2020, 20192023, 2022 and 2018,2021, advertising expense was $17.4$27.1 million, $17.9$23.4 million and $16.3$20.6 million, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences become deductible. A valuation allowance is established for those jurisdictions in which the realization of deferred tax assets is not deemed to be more likely than not. The Company has elected to treat the GILTI tax as a current period expense in the year incurred.
Accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This accounting guidance also provides guidance on derecognition, classification, interest and penalties, accounting in the interim periods, disclosure, and transition. Penalties and interest related to uncertain tax positions are recognized as a component of income tax expense. To the
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
extent penalties and interest are not assessed with respect to uncertain tax positions, amounts accrued are reduced and reflected as a reduction of the overall income tax provision.
Earnings per Share
Basic earnings per share is computed by dividing net 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 diluted earnings per share includes the numerator is increased for tax effected interest expense associated with our Convertible Notes and the denominator is increased for the assumed issuanceimpact of common shares issuable on convertible securities under the "if converted"“if-converted” method unlessif the effect is anti-dilutive. Also, diluted earnings per shareof such securities would be dilutive and includes the assumed exercise of dilutive options, and the assumed issuance of unvested RSUs, and performance-based awards for which the performance condition has been met as of the date of determination, and contingently issuable shares that would be issuable if the end of the reporting period was the end of the contingency period, 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) income attributable to shareholders and reconciles basic and diluted shares outstanding used in the earnings per share computations:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (In thousands) | 2020 | | 2019 | | 2018 |
| Net (loss) income attributable to shareholders | $ | (243,638) | | | $ | 99,006 | | | $ | 168,295 | |
| | | | | |
| Weighted average common shares outstanding – Basic | 43,842 | | | 43,316 | | | 43,156 | |
Dilutive impact of share-based compensation awards1 | 0 | | | 453 | | | 418 | |
| Weighted average common shares outstanding – Diluted | 43,842 | | | 43,769 | | | 43,574 | |
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (in millions) | 2023 | | 2022 | | 2021 |
| Net income attributable to shareholders | $ | 266.6 | | | $ | 201.4 | | | $ | 0.1 | |
| | | | | |
| Weighted average common shares outstanding – Basic | 42.8 | | | 44.4 | | | 44.7 | |
| Dilutive impact of share-based compensation awards | 0.5 | | | 0.3 | | | 0.6 | |
| Weighted average common shares outstanding – Diluted | 43.3 | | | 44.7 | | | 45.3 | |
1 Due to the Company’s net loss position for the year ended December 31, 2020, 0.5 million incremental shares, are excluded from the table above as the effect of including those shares would be anti-dilutive. For the years ended December 31, 20192023 and 2018, an immaterial number of2022, 0.4 million and 0.6 million outstanding share-based compensation awards, respectively, were excluded from the computation of diluted earnings per share under the treasury stock method, as the effect of including these awards would be anti-dilutive. Share-based compensation awards excluded from the computation of diluted earnings per share were immaterial for the year ended December 31, 2021.
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"“if-converted” method, approximately 1.6 million shares of the Company'sCompany’s common stock associated with the assumed conversion of thesethe Convertible Notes as of the beginning of the period have beenwere excluded from diluted shares outstanding forincluded in the year ended December 31, 2020table above as the effect of including such shares would behave been anti-dilutive. During August 2023, the Company repurchased all of the
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| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
Company’s outstanding Convertible Notes. For further information regarding the Convertible Notes and their repurchase and cancellation, see Note 16, Financing and Other Debt.
Foreign Currency Movement
The financial statements of the Company’s foreign subsidiaries, where the local currency is the functional currency, are translated to U.S. dollars using year-end spot exchange rates for assets and liabilities, average exchange rates for revenue and expenses and historical exchange rates for equity transactions. The resulting foreign currency translation adjustment is recorded as a component of accumulated other comprehensive loss.
Gains and losses on foreign currency transactions as well as the remeasurement of the Company’s cash, receivable and payable balances that are denominated in foreign currencies, are recorded directly in net foreign currency gain (loss) gain in the consolidated statements of income.operations. However, gains or losses resulting from intercompany transactions where repayment is not anticipated for the foreseeable future are not recognized in the consolidated statements of income.operations. In these situations, the gains or losses are deferred and included as a component of accumulated other comprehensive loss. In addition, gains and losses associated with the Company’s foreign currency exchange derivatives are recorded in net foreign currency (loss) gain in the consolidated statements of income.
Accumulated Other Comprehensive Loss (“AOCL”)
For the years ended December 31, 2020, 2019 and 2018, AOCL consisted entirelyAccumulated other comprehensive loss (“AOCL”) consists of unrealized gains and losses on debt securities and foreign currency translation adjustments pertaining to the net investment in foreign operations. The Company has a full valuation allowance recorded against its deferred tax assets on unrealized losses on debt securities included within AOCL. In addition, unrealized gains and losses on foreign currency translation adjustments within AOCL are substantially considered indefinitely reinvested outside the United States. Accordingly, there were no material deferred taxes recorded on such unrealized losses on debt securities and foreign currency translation adjustments for the years ended December 31, 2023, 2022 and 2021. As of December 31, 2023 and 2022, the components of AOCL were as follows:
| | | | | | | | | | | |
| | December 31, |
| (in millions) | 2023 | | 2022 |
| Unrealized losses on available-for sale debt securities | $ | (80.0) | | | $ | (141.5) | |
| Foreign currency translation adjustments | (149.2) | | | (164.8) | |
| Total accumulated other comprehensive loss | $ | (229.2) | | | $ | (306.3) | |
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
| | | | | |
| 2. | Recent Accounting Pronouncements |
The Company evaluates all ASUs recently issued by the FASB for consideration of their applicability. Any recently issued ASUs not listed in the following table provides a brief description of recent accounting pronouncements thatwere assessed and determined to either not be applicable, or have not had, or couldare not expected to have, a material effectimpact on our consolidated financial statements:statements. The Company did not adopt any accounting standards during the year ended December 31, 2023.
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Standard | | Description | | Date/Method of Adoption | | Effect on financial statements or other significant matters |
| Adopted During the Year Ended December 31, 2020
| | | | | | |
|
ASU 2016–13, Financial Instruments–Credit Losses: Measurement of Credit Losses on Financial Instruments2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures | | This standard amends the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial instruments, including trade receivables and off-balance sheet credit exposures. The standard requires entities to consider a broader range of information to estimate expected credit losses, including historical experience, current conditions and reasonable and supportable forecasts that impact the collectability of the reported amount. | | The Company adoptedamendments in this ASU 2016–13 effective January 1, 2020 usingrequire enhanced disclosures about significant segment expenses that are regularly provided to the modified-retrospective approach.CODM and included within each reported measure of segment profit or loss. In addition, this ASU expands certain annual disclosures about a reportable segment’s profit or loss and assets to interim periods. | | The amendments of this new standard were applied through a cumulative-effect adjustment to total stockholders’ equity of $8.8 million, net of a $2.8 million income tax benefit, as of January 1, 2020. This adjustment was driven by the incorporation of economic forecasts into the Company’s expected credit loss reserve methodology. The consolidated financial statements for the year ended December 31, 2020 are presented under the new standard. Comparative periods presented have not been adjusted. Refer to Note 1, Basis of Presentation and Significant Accounting Policies, for discussion of the Company’s credit loss methodology. |
| | | | | | |
Not Yet Adopted as of December 31, 2020 |
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. |
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. | | Effectiveeffective for fiscal years beginning after December 15, 20212023, and may be early adopted for theinterim periods within fiscal yearyears beginning after December 15, 2020 using a modified retrospective or fully retrospective method of transition.31, 2024. Early adoption is permitted. The amendments should be applied retrospectively to all prior periods presented in the financial statements. | | The Company will early adoptis currently evaluating this ASU effective January 1, 2021. Adoption will eliminateto determine its impact on the bifurcation of the equity component associated with our Convertible Notes, which was originally recorded within equity. Going forward, this equity component will be included as part of the carrying value of the Convertible Notes. Additionally, interest expense is expected to decline approximately $6 million during the year ended December 31, 2021 as result of theCompany’s disclosures. The adoption of this ASU. ASU is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows. |
| | Updates income tax disclosures related to the rate reconciliation and requires disclosure of income taxes paid by jurisdiction. | | The amendments are effective for annual periods beginning after December 31, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments should be applied on a prospective basis, however, retrospective application is permitted. | | The Company is currently evaluating this ASU to determine its impact on the Company’s disclosures. The adoption of this ASU is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows. |
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
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 our consolidated revenue:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| Topic 606 revenues | | | | | | | |
| Payment processing revenue | $ | 404,843 | | | $ | 229,144 | | | $ | 64,904 | | | $ | 698,891 | |
| Account servicing revenue | 17,512 | | | 41,927 | | | 253,706 | | | 313,145 | |
| Other revenue | 78,620 | | | 2,559 | | | 35,734 | | | 116,913 | |
| Topic 606 revenues | $ | 500,975 | | | $ | 273,630 | | | $ | 354,344 | | | $ | 1,128,949 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Non-Topic 606 revenues | $ | 417,335 | | | $ | 4,210 | | | $ | 9,375 | | | $ | 430,920 | |
| Total revenues | $ | 918,310 | | | $ | 277,840 | | | $ | 363,719 | | | $ | 1,559,869 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| Topic 606 revenues | | | | | | | |
| Payment processing revenue | $ | 457,244 | | | $ | 303,385 | | | $ | 64,963 | | | $ | 825,592 | |
| Account servicing revenue | 17,709 | | | 43,293 | | | 205,524 | | | 266,526 | |
| Other revenue | 83,765 | | | 3,340 | | | 28,225 | | | 115,330 | |
| Topic 606 revenues | $ | 558,718 | | | $ | 350,018 | | | $ | 298,712 | | | $ | 1,207,448 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Non-Topic 606 revenues | $ | 479,677 | | | $ | 17,808 | | | $ | 18,758 | | | $ | 516,243 | |
| Total revenues | $ | 1,038,395 | | | $ | 367,826 | | | $ | 317,470 | | | $ | 1,723,691 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2018 |
| (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| Topic 606 revenues | | | | | | | |
| Payment processing revenue | $ | 464,980 | | | $ | 203,289 | | | $ | 55,722 | | | $ | 723,991 | |
| Account servicing revenue | 30,385 | | | 37,262 | | | 108,172 | | | 175,819 | |
| Other revenue | 66,379 | | | 4,906 | | | 25,668 | | | 96,953 | |
| Topic 606 revenues | $ | 561,744 | | | $ | 245,457 | | | $ | 189,562 | | | $ | 996,763 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Non-Topic 606 revenues | $ | 413,396 | | | $ | 57,887 | | | $ | 24,593 | | | $ | 495,876 | |
| Total revenues | $ | 975,140 | | | $ | 303,344 | | | $ | 214,155 | | | $ | 1,492,639 | |
The vast majorityrevenues, substantially all of the above revenue relateswhich relate to services transferred to the customer over time. Point-in-time revenue recognized was immaterial during the years ended December 31, 2020, 2019, and 2018.time:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2023 |
| (in millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| Topic 606 revenues | | | | | | | |
| Payment processing revenue | $ | 695.0 | | | $ | 428.0 | | | $ | 90.7 | | | $ | 1,213.7 | |
| Account servicing revenue | 22.2 | | | 42.1 | | | 435.7 | | | 500.0 | |
| Other revenue | 92.1 | | | — | | | 32.6 | | | 124.7 | |
| Topic 606 revenues | 809.3 | | | 470.1 | | | 559.0 | | | 1,838.4 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Non-Topic 606 revenues | 573.4 | | | 26.8 | | | 109.4 | | | 709.6 | |
| Total revenues | $ | 1,382.7 | | | $ | 496.9 | | | $ | 668.4 | | | $ | 2,548.0 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| (in millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| Topic 606 revenues | | | | | | | |
| Payment processing revenue | $ | 720.2 | | | $ | 353.7 | | | $ | 81.9 | | | $ | 1,155.9 | |
| Account servicing revenue | 18.3 | | | 42.9 | | | 357.3 | | | 418.4 | |
| Other revenue | 84.1 | | | 0.3 | | | 31.0 | | | 115.3 | |
| Topic 606 revenues | 822.6 | | | 396.9 | | | 470.2 | | | 1,689.7 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Non-Topic 606 revenues | 621.1 | | | 5.4 | | | 34.4 | | | 660.8 | |
| Total revenues | $ | 1,443.7 | | | $ | 402.3 | | | $ | 504.5 | | | $ | 2,350.5 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| (in millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| Topic 606 revenues | | | | | | | |
| Payment processing revenue | $ | 513.4 | | | $ | 274.1 | | | $ | 71.5 | | | $ | 859.0 | |
| Account servicing revenue | 17.6 | | | 44.2 | | | 314.4 | | | 376.1 | |
| Other revenue | 81.5 | | | 3.6 | | | 25.5 | | | 110.7 | |
| Topic 606 revenues | 612.5 | | | 321.9 | | | 411.4 | | | 1,345.8 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Non-Topic 606 revenues | 498.9 | | | 3.0 | | | 2.8 | | | 504.7 | |
| Total revenues | $ | 1,111.4 | | | $ | 324.9 | | | $ | 414.2 | | | $ | 1,850.5 | |
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
Payment Processing Revenue
Payment processing revenue consists primarily of interchange income. Interchange income is a fee paid by a merchant bank (“merchant”) to the card-issuing bank (generally the Company) in exchange for the Company facilitating and processing transactions with cardholders. Interchange fees are set by the card network.network in open loop transactions and by the Company in closed loop transactions. WEX processes transactions through both closed-loop and open-loop networks.
•Fleet SolutionsMobility segment interchange income primarily relates to revenue earned on transactions processed through the Company’s proprietary closed-loop fuel networks. In closed-loop fuel network arrangements, written contracts are entered into between the Company and merchants, which determine the interchange fee charged on transactions. The
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Company extends short-term credit to the fleet cardholder and pays the merchant the purchase price for the cardholder’s transaction, less the interchange fees the Company retains. The Company collects the total purchase price from the fleet cardholder. In Europe, interchange income is specifically derived from the difference between the negotiated price of fuel from the supplier and the agreed upon price paid by fleet cardholders.
•Interchange income in our TravelCorporate Payments and Corporate Solutions and Health and Employee Benefit SolutionsBenefits segments relates to revenue earned on transactions processed through open-loop networks. In open-loop network arrangements, there are several intermediaries involved between the merchant and the cardholder and written contracts between all parties involved in the process do not exist. Rather, the transaction is governed by the rates determined by the card network at the point-of-sale. This framework dictates the interchange rate, the risk of loss, dispute procedures and timing of payment. For these transactions, there is an implied contract between the Company and the merchant. In our Travel and Corporate SolutionsPayments segment, the Company remits payment to the card network for the purchase price of the cardholder transaction, less the interchange fees the Company earns. The Company collects the total purchase price from the cardholder. In our Health and Employee Benefit SolutionsBenefits segment, funding of transactions and collections from cardholders is performed by third-party sponsor banks, who remit a portion of the interchange fee to us.
The Company has determined that the merchant is the customer as it relates to interchange income, regardless of the type of network through which transactions are processed. The Company’s primary performance obligation to merchants is a stand-ready commitment to provide payment and transaction processing services as the merchant requires, which is satisfied over time in daily increments. Since the timing and quantity of transactions to be processed by us is not determinable, the total consideration is determined to be usage-based variable consideration. The variable consideration for our payment and transaction processing service is usage-based and therefore specifically relates to our efforts to satisfy our obligation. The variability is satisfied each day the service is provided to the customer. We directly ascribe variable fees to the distinct day of service to which it relates,customer and we consider the services performed each day in order to ascribe the appropriate amount of total fees to that day. Therefore, weWe measure interchange incomerevenue on a daily basis based on the services that are performed on that day.
In determining the amount of consideration received related to these services, the Company applied the principal-agent guidance in Topic 606 and assessed whether it controls services performed by other intermediaries. Based on this assessment, theThe Company determined that WEX does not control the services performed by merchant acquirers, card networks and sponsor banks as each of these parties is the primary obligor for their portion of payment and transaction processing services performed. Therefore, interchange income is recognized net of any fees owed to these intermediaries. Conversely, the Company determined that services performed by third-party payment processors are controlled by the Company as it is responsible for directing how the third-party payment processor authorizes and processes transactions. Therefore, such fees paid to third-party payment processors are recorded as service fees within cost of services.
Additionally, theThe Company additionally enters into contracts with certain large customers or strategic cardholders that provide for fee rebates tied to performance milestones. When such fee rebates constitute consideration payable to a customer or other party that purchases services from the customer, they are considered variable consideration and are recorded as a reduction in payment processing revenue in the same period that related interchange income is recognized. For the years ended December 31, 2020, 2019,2023, 2022, and 2018, such2021, variable consideration, including fee rebates determined to be variable consideration, totaled $537.7 million, $891.0 million,$2.1 billion, $1.5 billion, and $858.9 million$0.9 billion, respectively. Fee rebates made to certain other partners were determined to be costs to obtain a contractin exchange for customer referrals are not considered variable consideration and are recorded as sales and marketing expenses.
Account Servicing Revenue
In our Fleet SolutionsMobility segment, account servicing revenue is primarily comprised of monthly fees charged to cardholders based on the number of vehicles serviced. These fees are primarily in return for providing monthly vehicle data reports and are recognized on a monthly basis as the service is provided. The Company also recognizes account servicing revenue related to reporting services on telematics hardware placements, and permit sales to our over-the-road customers, both of which are within the scope of Topic 606. Additionally, account servicing revenue includes606, and other fees recognized as revenue when assessed to the cardholder as part of the lending relationship, which are outside the scope of Topic 606.
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| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
In our Travel and Corporate SolutionsPayments segment, account servicing reflects licensing fees earned for use of our accounts receivable and accounts payable SaaS platforms, all of which is within the scope of Topic 606.
In our Health and Employee Benefit SolutionsBenefits segment, we recognize account servicing fees for the per-participant per-month fee charged per consumer on our SaaS healthcare technology platform.platform and a program fee for custodial services performed on behalf of our HSA account holders. Customers including health plans, third-party
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
administrators, financial institutions and payroll companies typically enter into three to five-year contracts, which contain significant termination penalties. This revenue is within the scope of Topic 606.
Our TravelCorporate Payments and Corporate Solutions and Health and Employee Benefit SolutionsBenefits segments provide SaaS services and support, which are stand-ready commitments and are satisfied over time in a series of daily increments. Revenue is recognized based on an output method using days elapsed to measure progress as the Company transfers control evenly over each monthly subscription period.
Finance Fee Revenue
The Company earns revenue on overdue accounts, which is recognized when 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 goodwill. The established reserve for such waived amounts is estimated and offset against the late fee revenue recognized. Finance fee revenue also includes amounts earned by the Company’s factoring business, which purchases accounts receivable from third-parties at a discount. This revenue is outside the scope of Topic 606.
Other Revenue
In our Fleet SolutionsMobility segment, other revenue primarily consists of transaction processing revenue, other fees charged to the merchants, professional services, including software development projects and other services sold subsequent to the core offerings, and the salessale of telematics hardware, and permit sales to our over-the-road customers, all of which are within the scope of Topic 606. Revenue is recognized when control of the services or hardware is transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those services. We also recognize fees charged to cardholders in other revenue, which are outside the scope of Topic 606.
In our Travel and Corporate SolutionsPayments segment, the majority of other revenue reflects international settlement fees,interest income earned on restricted cash balances, which is outside the scope of Topic 606. In our Benefits segment, other revenue includes interest income earned on the investment of HSA deposit balances held by WEX Bank, which is outside the scope of Topic 606 and recognized as the service is performed. In our Healthaccounted for under Topic 320 and Employee Benefit Solutions segment, other revenue primarily consists of professional services revenue, which is within the scope of Topic 606, and is recognized as the services are performed in the amount we expect to receive from these services. Prior to the sale of the WEX Latin America business, other revenue in our Health and Employee Benefit Solutions segment also included the gain on sale of WEX Latin America receivables, which was outside the scope of Topic 606 and is recognized on the sale date of the receivables.
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 our customer as it relates to interchange income or from revenues earned outside of the scope of Topic 606.606, and are therefore excluded from the table below. The Company’s contract assets consist of upfront payments made to customers under long-term contracts and are recorded upon paymentthe later of when the Company recognizes revenue for the transfer of the related goods or services or when due.the Company pays or promises to pay the consideration. The resulting asset is amortized against revenue as the Company performssatisfies its performance 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.
obligations. The following table provides information about these contract balances:
| | (In thousands) | |
| (in millions) | |
| Contract balance | |
| Contract balance | |
| Contract balance | Contract balance | | Location on the consolidated balance sheets | | December 31, 2020 | | December 31, 2019 | | Location on the consolidated balance sheets | | December 31, 2023 | | December 31, 2022 |
| Receivables | Receivables | | Accounts receivable, net | | $ | 43,541 | | | $ | 43,092 | |
| Contract assets | Contract assets | | Prepaid expenses and other current assets | | $ | 5,495 | | | $ | 4,593 | |
| Contract assets | Contract assets | | Other assets | | $ | 19,927 | | | $ | 20,496 | |
| Contract liabilities | Contract liabilities | | Other current liabilities | | $ | 8,530 | | | $ | 5,171 | |
| Contract liabilities | Contract liabilities | | Other liabilities | | $ | 24,614 | | | $ | 0 | |
| Refund liabilities | | Accrued expenses | | $ | 5,265 | | | $ | 0 | |
|
Impairment losses recognized on our contract assets were immaterial for the years ended December 31, 2020, 20192023, 2022 and 2018.2021. In the years ended December 31, 20202023 and 2019,2022, we recognized revenue of $5.2$7.8 million and $7.2$28.5 million included in the opening contract liabilities balances, respectively.
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Remaining Performance Obligations
The Company’s unsatisfied, or partially unsatisfied performance obligations as of December 31, 20202023 represent the remaining minimum monthly fees on a portion of contracts across the lines of business, deferred revenue associated with stand ready payment processing obligations and contractually obligated professional services yet to be provided by the Company. The remaining performance obligations also includes payments to the Company for providing payment processing services and facilitating transactions under certain long-term noncancellable contracts for which the Company has not satisfied its performance obligations. The total remaining performance obligations below isare not indicative of the Company’s future revenue, as it relatesthey relate to an insignificant portion of the Company’s operations.
The following table includes revenue expected to be recognized related to remaining performance obligations at the end of the reporting period.
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| (In thousands) | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Total | | |
Minimum monthly fees1 | $ | 46,657 | | | $ | 31,879 | | | $ | 17,766 | | | $ | 7,340 | | | $ | 2,404 | | | $ | 36 | | | $ | 106,082 | | | |
Professional services2 | 3,679 | | | 60 | | | 0 | | | 0 | | | 0 | | | 0 | | | 3,739 | | | |
Other3 | 2,771 | | | 3,302 | | | 3,349 | | | 3,770 | | | 4,321 | | | 9,301 | | | 26,814 | | | |
| Total remaining performance obligations | $ | 53,107 | | | $ | 35,241 | | | $ | 21,115 | | | $ | 11,110 | | | $ | 6,725 | | | $ | 9,337 | | | $ | 136,635 | | | |
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| (in millions) | 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter | | Total | | |
Minimum monthly fees(1) | $ | 54.2 | | | $ | 23.9 | | | $ | 9.4 | | | $ | 5.4 | | | $ | 3.1 | | | $ | 0.8 | | | $ | 96.8 | | | |
| | | | | | | | | | | | | | | |
Other(2) | 13.1 | | | 28.0 | | | 50.4 | | | 22.5 | | | 5.9 | | | — | | | 119.9 | | | |
| Total remaining performance obligations | $ | 67.3 | | | $ | 51.9 | | | $ | 59.8 | | | $ | 27.9 | | | $ | 9.0 | | | $ | 0.8 | | | $ | 216.7 | | | |
1 (1)The transactiontransaction 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. These obligations will be recognized within account servicing revenue.
2 Includes software development projects and other services sold subsequent to the core offerings, to which the customer is contractually obligated.
3 (2)Represents deferred revenue and contractual minimums associated with remaining payment processing service obligations. Consideration associated with certain relationships is variable and the measurement and estimation of contract consideration is contingent upon payment processing volumes and maintaining volume shares, among others.
Business Combinations
The Company incurred and expensed costs directly related to completed acquisitionsbusiness combinations of $97.9 million, $13.0$4.6 million and $2.5$2.4 million in 2020, 20192023 and 2018,2021, respectively. AcquisitionThe Company did not incur any costs incurred and expenseddirectly related to completed business combinations during 2020 include financing fees, investment banker success fees and other legal and professional fees incurred in conjunction with the 2020 acquisition.year ended December 31, 2022. Costs incurred and expensed related to acquisitions in processbusiness combinations in-process were immaterial as offor the years ended December 31, 20202023, 2022, and $4.8 million as of December 31, 2019.2021. Acquisition-related costs for all years presented are included within general and administrative expenses, exceptexpenses.
2023 Payzer Acquisition
On November 1, 2023, the Company closed on the acquisition of Payzer Holdings, Inc. (“Payzer”), a cloud-based, field service management software provider (the “Payzer Acquisition”). The acquisition is expected to advance WEX’s growth strategy of expanding its product suite and creating additional cross-sell opportunities by providing a new, scalable SaaS solution for its Mobility segment customers that operate field service management companies. Pursuant to the terms of the agreement, total consideration for the financing fees incurred in 2020, that are presented in financing interest expense in the consolidated statements of operations.
Asset Acquisition
During October 2018, the Company entered into a definitive asset purchase agreement to acquire Chevron’s existing trade accounts receivable and customer portfolio from a third-party for $223.4 million. During 2018, the consideration paid consisted of $162.8acquisition approximated $250.0 million to acquire the customer portfolio and a deposit of $38.9 million was paid into escrow for a portion of the outstanding accounts receivable at the date of the agreement. The actual amount of accounts receivable purchased from the third party during the second quarter of 2019 was less than the amount deposited in escrow, resulting in the Company receiving the excess funds of approximately $27 million from the escrow agent in January 2020. During the second quarter of 2019, the Company determined that it obtained control of the customer portfolio and accounted for this transaction under the asset acquisition method of accounting. At that time, we allocated approximately $168.0($5.5 million of which is deferred), with additional contingent consideration paidof up to a customer relationship intangible asset and established the accounts receivable at fair value. This customer relationship intangible asset is being amortized over the 13 year term of the Chevron agreement, which has been determined to be the period of anticipated benefit, which began when the Company took possession of the customer portfolio during the second quarter of 2019. Transaction costs related to the acquisition were insignificant and expensed as incurred.
Business Acquisitions
2020 Acquisition/Legal Settlement
On January 24, 2020, the Company entered into a purchase agreement (the "Original Purchase Agreement") to purchase eNett and Optal for an aggregate purchase price comprised of $1.3 billion in cash and 2.0$11.0 million shares of the Company’s common stock andbased on certain performance metrics, subject to certain working capital and other adjustments as described in the purchase agreement. The parties’ obligations to consummate the acquisition were subject to customary closing conditions, including the absence of aadjustments.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. From September 21, 2020 through September 29, 2020, a London court held a trial of certain preliminary issues, 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.
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 $615.4 million). The Company purchased these businesses to complement its existing Travel and Corporate Solutions segment and expand its international footprint.
The Company determined the aggregate purchase price represents consideration paid for the businesses acquired and for the settlement of 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 legal proceedings settlement, which has been included in legal settlement expense in the consolidated statement of operations for the year ended December 31, 2020.
This acquisition has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed be recognized at their respective fair values on the acquisition date. The table below summarizes the preliminary estimatedallocation of fair values ofvalue to the assets acquired and liabilities assumed on the date of acquisition date.under the acquisition method of accounting. These preliminary estimates willfair values may continue to be revised during the measurement period as third-party valuations on the intangible assets are received and finalized, further information becomes available and additional analyses are performed, and thesethose adjustments could have a material impact on the preliminary purchase price allocation.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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:
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
| | | | | | | | |
(In thousands)in millions) | | |
Cash consideration transferred, net of $232,155 of $4.5 million in cash and restricted cash acquired | | $ | 383,204244.0 | |
Less: legal settlement | | (162,500) | |
Total consideration, net | | $ | 220,704 | |
| Less: | | |
| Accounts receivable | | 14,4492.4 | |
Prepaid and other current assets | | 11,660 | |
Property and equipment | | 876 | |
Customer relationships(a)(d)(1)(5) | | 79,92340.4 | |
Developed technologiestechnology(b)(d)(2)(5) | | 63,12517.2 | |
License agreementsStrategic partner relationships(c)(d)(3)(5)
| | 4,2084.5 | |
Deferred income tax assetTrademark(4)(5)
| | 9,4241.4 | |
Other assets | | 4,945 | |
Accounts payable | | (16,244) | |
Accrued expenses | | (21,898) | |
Restricted cash payable | | (186,956) | |
| Other current and long-term assets | | 1.4 | |
| Accrued expenses and other current liabilities | | (11,376)(1.8) | |
| | |
Deferred income tax liability | | (20,152)(6.5) | |
| Contingent/deferred consideration | | (7.1) | |
| Other liabilities | | (3,164)(0.9) | |
| Recorded goodwill | | $ | 291,884193.0 | |
(a)(1)Weighted average useful life - 5 years.4.7 years
(b)(2)Weighted average useful life - 2.4 years
(3)Weighted average useful life - 2.5 years.years
(c) (4)Weighted average useful life - 6.5 years.2.8 years
(d)(5)The weighted average useful life of the $147.3 million ofall amortizable intangible assets acquired in this business combination is 4.03.9 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.business. The majoritygoodwill recognized as a result of the Payzer Acquisition is not expected to be deductible for tax purposes.
From the acquisition date through December 31, 2023, the Payzer Acquisition has contributed $4.3 million to the Mobility segment’s total revenues and $2.5 million of losses before taxes. No pro forma information has been included in these financial statements, as the operations of Payzer for the period that it was not part of the Company is not material to the Company’s revenues, net income or earnings per share.
2023 Ascensus Acquisition
On September 1, 2023, WEX Health completed the acquisition from Ascensus, LLC (the “Ascensus Acquisition”) of certain entities (the “Ascensus Acquired Entities”), which comprised the health and benefits business of Ascensus and are technology-enabled providers of employee health benefit accounts including HSAs, FSAs, and other benefit accounts. The Ascensus Acquisition expands WEX’s current footprint in the Benefits segment, while also enhancing and expanding Affordable Care Act compliance and verification capabilities. Pursuant to the terms of the agreement, WEX Health consummated the acquisition for total consideration of approximately $184.6 million, subject to certain working capital and other adjustments.
The table below summarizes the preliminary allocation of fair value to the assets acquired and liabilities assumed on the date of acquisition under the acquisition method of accounting. 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 those adjustments could have a material impact on the purchase price allocation.
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
| | | | | | | | | |
| (in millions) | | | | | As Reported
December 31, 2023 |
| Cash consideration transferred, net of $26.7 million in cash and restricted cash acquired | | | | | $ | 158.0 | |
| Less: | | | | | |
| Accounts receivable | | | | | 7.3 | |
Customer relationships(1)(5) | | | | | 52.1 | |
Developed technology(2)(5) | | | | | 6.6 | |
Strategic partner relationships(3)(5) | | | | | 14.0 | |
Custodial rights(4)(5) | | | | | 23.2 | |
| Other assets | | | | | 3.8 | |
| Accrued expenses and other current liabilities | | | | | (6.5) | |
| | | | | |
| Restricted cash payable | | | | | (25.7) | |
| Other liabilities | | | | | (2.7) | |
| Recorded goodwill | | | | | $ | 85.9 | |
(1)Weighted average useful life - 5.4 years
(2)Weighted average useful life - 2.2 years
(3)Weighted average useful life - 1.2 years
(4)Weighted average useful life - 4.9 years
(5)The weighted average useful life of all amortizable intangible assets acquired in this business combination is 4.4 years.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring the business. The goodwill recognized as a result of the acquisition is not expected to be deductible for tax purposes. Given the timing of the acquisition, the Company utilized a benchmarking approach based on the Company's prior acquisitions and similar industry acquisitions to determine the preliminary fair values for intangible assets. See Note 9, Goodwill and Other Intangible Assets, for additional information.
SinceFrom the acquisition date and through December 31, 2020, eNett and Optal2023, the Ascensus Acquired Entities have contributed immaterial$14.0 million to the Benefits segment’s total revenues and loss$3.5 million of losses before income taxes.
The No pro forma information below gives effecthas been included in these financial statements, as the operations of the Ascensus Acquired Entities for the period that they were not part of the Company are not material to the Company’s revenues, net income or earnings per share.
2021 benefitexpress Acquisition
On June 1, 2021, WEX Inc.’s subsidiary, WEX Health, completed the acquisition as if it had been completed on January 1, 2019. These pro forma results have been calculated after applyingof benefitexpress. Pursuant to the Company’s accounting policies, adjustmentsterms of the definitive purchase agreement, WEX Health consummated the benefitexpress Acquisition for total consideration of approximately $275 million, subject to reflect amortization associated with intangibles acquiredcertain working capital and related income tax results. Additionally, nonrecurring pro-forma adjustments of $162.5 million in legal settlement costs and transaction-related costs incurred inother adjustments. During the fourthsecond quarter of 2020 have been reflected in the proforma results for the year ended December 31, 2019. The pro forma financial information is presented for 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:
| | | | | | | | | | | |
| Year Ended December 31, |
(In thousands, except per share data) | 2020 | | 2019 |
| Total revenues | $ | 1,610,216 | | | $ | 1,876,494 | |
| Net loss attributable to shareholders | $ | (63,595) | | | $ | (71,788) | |
| Net loss attributable to shareholders per share: | | | |
| Basic | $ | (1.45) | | | $ | (1.66) | |
| Diluted | $ | (1.45) | | | $ | (1.66) | |
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2019 Business Acquisitions
As of December 31, 2020,2022, the purchase accounting is final for our 2019 business acquisitions.the acquisition became final. No adjustments to the purchase accounting were made during the year ended December 31, 2020.
Discovery Benefits
On March 5, 2019, the Company acquired Discovery Benefits, an employee benefits administrator, for a total purchase price of $526.1 million, of which $50.0 million was paid during the fourth quarter of 2019. The acquisition was primarily funded with cash and through borrowings under the 2016 Credit Agreement. The seller of Discovery Benefits obtained a 4.9 percent equity interest in the newly formed parent company of WEX Health and Discovery Benefits, which constitutes the U.S. Health business. The fair value of the equity interest was determined to be $100.0 million on the acquisition date. See Note 20, Redeemable Non-Controlling Interest, for further information.
The purpose of this acquisition was to obtain the comprehensive suite of products and services for our partners and customers and to open go-to-market channels to include consulting firms and brokers in our Health and Employee Benefit Solutions segment. This acquisition has been accounted for as a business combination, resulting in the recording of goodwill. The majority of the associated goodwill is deductible for tax purposes.
The following is a summary of the final allocation of the purchase price to the assets and liabilities acquired, based on the fair value at the date of acquisition:
| | | | | | | | |
(In thousands) | | |
Cash consideration, net of $125,865 in cash and restricted cash acquired | | $ | 300,191 | |
Fair value of redeemable non-controlling interest | | 100,000 | |
Total consideration, net of cash and restricted cash acquired | | $ | 400,191 | |
Less: | | |
Accounts receivable | | 10,722 | |
Property and equipment | | 4,904 | |
Customer relationships(a)(d)
| | 213,600 | |
Developed technologies(b)(d)
| | 38,900 | |
Trademarks and trade names(c)(d)
| | 13,800 | |
Other assets | | 13,601 | |
Accounts payable | | (3,071) | |
Accrued expenses | | (7,563) | |
Restricted cash payable | | (125,346) | |
Deferred income taxes | | (21,941) | |
Other liabilities | | (9,814) | |
Recorded goodwill | | $ | 272,399 | |
(a) Weighted average life - 7.3 years.
(b) Weighted average life - 5.4 years.
(c) Weighted average life - 7.3 years.
(d) The weighted average life of the $266.3 million of amortizable intangible assets acquired in this business combination is 7.0 years.
2022. From the acquisition date tothrough December 31, 2019, Discovery Benefits2021, benefitexpress contributed $94.7$24.2 million in total revenues and income$2.1 million of losses before income taxes of $0.3 million.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Noventis
On January 24, 2019, the Company acquired Noventis, a long-time customer and electronic payments network focused on optimizing payment delivery for bills and invoices to commercial entities, for $338.7 million, which was primarily funded with cash and through borrowings under the 2016 Credit Agreement. Excluded from the consideration is $5.5 million paid to certain Noventis shareholders who held unvested option awards at the acquisition date. The modification of these awards to accelerate the vesting resulted in the Company recording this expense as general and administrative expense on our consolidated income statement. The Company purchased Noventis to expand our reach as a corporate payments supplier and provide more channels to billing aggregators and financial institutions in our Travel and Corporate Solutions segment. This acquisition was accounted for as a business combination, resulting in the recording of goodwill. The goodwill associated with this acquisition is not deductible for tax purposes.
The following is a summary of the final allocation of the purchase price to the assets and liabilities acquired, based on the fair value at the date of acquisition:
| | | | | | | | |
(In thousands) | | |
Total consideration, net of $44,947 in cash acquired | | $ | 293,767 | |
| | |
Less: | | |
Accounts receivable | | 22,134 | |
Property and equipment | | 549 | |
Network relationships(a) (c)
| | 100,900 | |
Developed technologies(b) (c)
| | 15,000 | |
Other assets | | 2,379 | |
Accounts payable | | (33,521) | |
Deferred income taxes | | (21,194) | |
Other liabilities | | (2,367) | |
Recorded goodwill | | $ | 209,887 | |
(a) Weighted average life - 8.3 years.
(b) Weighted average life - 2.9 years.
(c) The weighted average life of the $115.9 million of amortizable intangible assets acquired in this business combination is 7.6 years.
From the acquisition date to December 31, 2019, Noventis contributed $43.8 million in total revenues and income before income taxes of $8.2 million.
Pavestone Capital, LLC
On February 14, 2019, the Company acquired Pavestone Capital, a recourse factoring company that provides working capital to businesses, for a purchase price of $28.0 million, net of cash acquired. This acquisition, which was funded with cash, has been accounted for as a business combination. The Company purchased Pavestone Capital to complement its existing factoring business. As a result, the purchase price is primarily allocated to goodwill, accounts receivable and customer relationships in amounts of $9.5 million, $14.9 million and $3.9 million, respectively. The goodwill associated with this acquisition is deductible for tax purposes. The customer relationships intangible asset has a weighted-average amortization period of 6.5 years.
From the acquisition date to December 31, 2019, Pavestone Capital revenues and income before income taxes, which are recorded in our Fleet Solutions segment, were not material to Company operations. No pro forma or current information has been included in these financial statements, as the operations of Pavestone Capitalbenefitexpress for the period that they were not part of the Company are not material to the Company’s revenues, net income and earnings per share.
Go Fuel CardAcquisitions
2023 Asset Acquisition
On July 1, 2019,January 3, 2023, the Company completed its acquisition of 100 percent of the equity of a newly formed Indian entity, created to carve out the workforce of an existing computer software design and development business. In exchange for total consideration of $6.0 million, the Company acquired Go Fuel Card, a European fuel card business, for a totalan assembled workforce of approximately 180 employees and miscellaneous other assets. This assembled workforce represents additional resources to advance our technological capabilities and service offerings to our customers. Consideration of $4.5 million was payable upon the closing date, with up to $1.5 million payable within eighteen months following the acquisition date, dependent on the calculation of employee attrition as defined per the share purchase price of €235.0 million (equivalent of $266.0 million on date of purchase).agreement. This acquisition which was funded with cash, washas been accounted for as a business combination. The purpose of thean asset acquisition, was to strengthen our position in the European market, grow our existing customer base and reduce our sensitivity to retail fuel prices, resulting in the recordingcapitalization of goodwill. The goodwill associated witha workforce intangible asset of $8.1 million, inclusive of a $2.1 million gross up resulting from the recognition of a deferred tax liability related to the acquisition date difference between the assigned value of Go Fuel Card is deductible for tax purposes.the
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following is a summary of the final allocation of the purchase price to the assets and liabilities acquired, based on the fair value at the date of acquisition:
| | | | | | | | |
| | |
Total consideration, net of $5,589 in cash acquired | | $PART II | 260,455 | |
| | |
Less: | | |
Network relationships(a) (d)WEX INC.
| | 112,893 | |
Customer relationships(b)(d)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | 33,963 | |
Brand name(c) (d)
| | 442 | |
Deposits | | (5,169) | |
Accrued expenses | | (420) | |
Recorded goodwill | | $ | 118,746 | |
(a) Weighted average life - 10.1 years.
(b) Weighted average life - 5.0 years.
(c) Weighted average life - 1.0 year.
(d)intangible asset and its tax basis. The weighted averageworkforce intangible asset has an estimated useful life of the $147.3 million of amortizable intangible assets acquired in this business combination is 8.94.0 years. Acquisition costs were immaterial.
From the acquisition date to December 31, 2019, Go Fuel Card contributed $10.5 million in total revenues and loss before income taxes of $9.1 million. No pro forma information has been included in these financial statements as the operations of Go Fuel Card for the period that they were not part of the Company are not material to the Company’s revenues, net income and earnings per share.2022 Asset Acquisition
During the Company's annual goodwill assessment completed as of October 1, 2020, management determined that the carrying value of this reporting unit exceeded its fair value and the Company recorded a non-cash goodwill impairment charge of $53.4 million, reducing the Go Fuel Card goodwill to $65.8 million. See Note 9, Goodwill and Other Intangible Assets, for further information.
Pro Forma Supplemental Information (Discovery Benefits and Noventis)
The pro forma information below gives effect to the Discovery Benefits and Noventis acquisitions as if they had been completed on January 1, 2018. These pro forma results have been calculated after applying the Company’s accounting policies, adjustments to reflect amortization associated with intangibles acquired and interest expense associated with the incremental borrowings under the 2016 Credit Agreement used to fund the acquisitions and related income tax results. The pro forma financial information is presented for 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, 2018.
The following represents unaudited pro forma operational results:
| | | | | | | | | | | |
| Year Ended December 31, |
(In thousands, except per share data) | 2019 | | 2018 |
| Total revenues | $ | 1,742,797 | | | $ | 1,604,165 | |
| Net income attributable to shareholders | $ | 113,851 | | | $ | 134,564 | |
| Net income attributable to shareholders per share: | | | |
| Basic | $ | 2.63 | | | $ | 3.12 | |
| Diluted | $ | 2.60 | | | $ | 3.09 | |
On September 30, 2020, the Company sold its wholly-owned subsidiary UNIK S.A, (the "WEX Latin America" business). The operations of UNIK S.A., were included in the Health and Employee Benefit Solutions and Travel and Corporate Solutions segments through the date of sale. The Company does not view this sale of subsidiary as a strategic shift in its operations and therefore it did not meet the criteria of discontinued operations. Under the conditions of the sale agreement, the Company was required to make a payment to the buyer, which has been reflected as fair value of consideration transferred to
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the buyer in the table below. As part of the divestiture,June 2022, the Company entered into a transition servicesdefinitive agreement to purchase a portfolio of certain assets from a third-party, consisting primarily of branded commercial fleet card customer accounts with respect to participating Exxon and Mobil locations within the buyerU.S. and Canada. During September 2022, the Company closed on the acquisition of up to six months post-closing related to various operational and support services. The Company believesthese receivables, paying the transition services agreement isseller a preliminary purchase price of nominal value. The Company wrote-off$45.1 million, consisting of the associated assets and liabilitiesface value of this entitythe account balances as of the valuation date, plus certain customary adjustments, as defined in the purchase agreement. The actual amount of saleaccounts receivable purchased was less than the balances as of the valuation date, resulting in a credit due back to WEX, which was collected during the fourth quarter of 2022. We accounted for this transaction under the asset acquisition method of accounting and recordedallocated $38.3 million of the total cost of the acquisition to accounts receivable, net of allowance and $3.3 million to a pre-tax loss on sale of subsidiary of $46.4 million, which has been reflectedcustomer relationship intangible asset with a three-year life. The consideration paid for the accounts receivable was included within operating activities in the consolidated statement of operationscash flows.
2022 Acquisition of Remaining Interest in PO Holding
On March 7, 2022, WEX Inc. and SBI entered into a share purchase agreement (the “Share Purchase Agreement”) whereby SBI sold, and 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. This transaction makes PO Holding, the direct parent of WEX Health, a wholly owned subsidiary of WEX Inc. to which the Company is solely entitled to the economic benefits. See Note 19, Redeemable Non-Controlling Interest for more information.
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 also 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 (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 (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. Using a discount rate of 3.4 percent, the Company recorded the initial deferred liability under this Share Purchase Agreement at its net present value of $216.6 million within other liabilities on the consolidated balance sheet. The associated discount relative to the purchase price will be amortized as interest expense using the effective interest method over the repayment term.
2021 Asset Acquisition
On April 1, 2021, WEX Inc. completed the acquisition of certain contractual rights to serve as custodian or sub-custodian to over $3 billion of HSAs from the HealthcareBank division of Bell Bank, a subsidiary of SBI. On the closing of the acquisition, WEX Inc. paid Bell Bank initial cash consideration of $200.0 million. The Company is required to make two additional cash payments to Bell Bank in association with this acquisition, $25.0 million, which was paid in July 2023 and $12.5 million payable in January 2024. The purchase agreement also includes potential additional consideration payable to Bell Bank annually that is calculated on a quarterly basis and is contingent, and based, upon any future increases in the Federal Funds rate. The contingent payment period began on July 1, 2021 and extends until the earlier of (i) the year ending December 31, 2030, or (ii) the date when the cumulative amount paid as contingent consideration equals $225.0 million. Refer to Note 18, Fair Value, for further information on the valuation of this derivative liability.
As more fully described in Note 19, Redeemable Non-Controlling Interest, as part of this acquisition WEX Inc. allocated $11.2 million of the initial cash consideration to the repurchase of SBI’s non-controlling interest in the U.S. Benefits business, reducing SBI’s ownership percentage as of the acquisition date to 4.53 percent. Transaction costs related to the acquisition were immaterial and expensed as incurred.
2021 Acquisition of Remaining Interest in WEX Europe Services
On April 13, 2021, the Company acquired the remaining interest in WEX Europe Services, which consisted of 25 percent of the issued ordinary share capital, for a purchase price of $97.0 million. Given the Company had a controlling interest in WEX Europe Services prior to the transaction, the acquisition was accounted for as an equity transaction, resulting in a reduction of additional paid-in capital by $81.6 million, a $13.1 million elimination of the 25 percent non-controlling interest in WEX Europe Services and a reduction of accumulated other comprehensive income by $2.3 million. In conjunction with the acquisition, the Company incurred $0.5 million in acquisition costs, which further reduced additional paid-in capital.
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
| | | | | |
| 5. | Repurchases of Common Stock |
Under share repurchase plans, which may be authorized by our board of directors from time to time, the Company may repurchase up to specified dollar values of shares of its common stock through open market purchases, privately negotiated transactions, block trades or other methods approved by our board of directors.
During the years ended December 31, 2020.2023 and 2022, the Company repurchased approximately 1.7 million and 1.9 million shares, respectively, pursuant to a previously approved and announced repurchase program. The pre-tax loss related tototal repurchases were recorded as treasury stock in our consolidated balance sheets of $297.6 million and $290.8 million, respectively, during 2023 and 2022. Such cost reflects the saleapplicable one percent excise tax imposed by the Inflation Reduction Act of this subsidiary is not deductible for income tax purposes.2022 on the net value of certain stock repurchases made after December 31, 2022.
The following summarizes the loss on sale of subsidiary:
| | | | | |
(In thousands) | |
| |
| |
| |
Fair value of consideration transferred to the buyer | $ | 7,415 | |
Plus: expenses associated with the sale | 2,806 | |
Plus: UNIK.S.A. net assets and liabilities, including $12,249 of cash and cash equivalents | 36,141 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Loss on sale of subsidiary | $ | 46,362 | |
| | | | | |
| 6. | Allowance for 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.
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 $60.2 million and $62.4 million in receivables with revolving credit balances as of December 31, 2020 and 2019, respectively.
Allowance for Accounts Receivable
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 allowance for accounts receivable consists of reserves for both credit and fraud losses. The reserve for credit losses, is primarily calculated using historical loss-rates applied at the portfolio level and specific customer balance collectability basedreflecting management’s current estimate of uncollectible balances on a review of past dueits accounts receivable balances, changes in payment patterns, and other customer-specific available information. Management further takes into account qualitative factors, such as leading economic and market indicator trends, to the extent they deviate from historical loss-rate trends when determining the need for additional qualitative reserves. The reserve for fraud losses is determined by monitoring pending fraud cases, customer-identified fraudulent activity and unconfirmed suspicious activity in order to make judgments as to probable fraud losses.
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.receivable. See Note 1, Basis of Presentation and Summary of Significant Accounting Policies, for more information.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
information regarding our policies and procedures for determining the allowance for accounts receivable. The following tables present changes in the accounts receivable allowances by portfolio segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| | 2020 | | 2019 | | 2018 |
| (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total | | Total | | Total |
| Balance, prior to Topic 326 adoption | $ | 40,620 | | | $ | 3,578 | | | $ | 8,076 | | | $ | 52,274 | | | $ | 46,948 | | | $ | 33,387 | |
Impact of Topic 326 adoption1 | 9,390 | | | 2,187 | | | 0 | | | 11,577 | | | — | | | — | |
| Balance, beginning of year | $ | 50,010 | | | $ | 5,765 | | | $ | 8,076 | | | $ | 63,851 | | | $ | 46,948 | | | $ | 33,387 | |
Provision for credit losses1 | 56,620 | | | 21,610 | | | 213 | | | 78,443 | | | 65,664 | | | 66,482 | |
Other2 | 19,019 | | | 0 | | | 0 | | | 19,019 | | | 22,746 | | | 19,067 | |
Charge-offs3 | (88,091) | | | (18,787) | | | (5,419) | | | (112,297) | | | (92,638) | | | (78,323) | |
| Recoveries of amounts previously charged-off | 10,421 | | | 175 | | | 17 | | | 10,613 | | | 9,781 | | | 6,854 | |
| Currency translation | 1,288 | | | 847 | | | (2,617) | | | (482) | | | (227) | | | (519) | |
| Balance, end of year | $ | 49,267 | | | $ | 9,610 | | | $ | 270 | | | $ | 59,147 | | | $ | 52,274 | | | $ | 46,948 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2023 | | | | |
| (in millions) | Mobility | | Corporate Payments | | Benefits | | Total | | | | |
| Balance, beginning of year | $ | 94.6 | | | $ | 14.4 | | | $ | 0.8 | | | $ | 109.9 | | | | | |
Provision for credit losses(1) | 87.1 | | | (4.7) | | | 7.4 | | | 89.8 | | | | | |
Other(2) | 27.6 | | | — | | | — | | | 27.6 | | | | | |
| Charge-offs | (155.0) | | | (2.6) | | | (0.1) | | | (157.7) | | | | | |
| Recoveries of amounts previously charged-off | 18.3 | | | 1.9 | | | — | | | 20.2 | | | | | |
| Currency translation | 0.2 | | | 0.2 | | | — | | | 0.4 | | | | | |
| Balance, end of year | $ | 72.8 | | | $ | 9.2 | | | $ | 8.1 | | | $ | 90.1 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 |
| (in millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| | | | | | | |
| | | | | | | |
| Balance, beginning of year | $ | 55.8 | | | $ | 9.9 | | | $ | 0.6 | | | $ | 66.3 | |
Provision for credit losses(1) | 172.7 | | | 6.5 | | | 0.8 | | | 179.9 | |
Other(2) | 37.6 | | | 0.2 | | | (0.1) | | | 37.7 | |
| Charge-offs | (183.5) | | | (1.4) | | | (0.4) | | | (185.4) | |
| Recoveries of amounts previously charged-off | 12.8 | | | — | | | — | | | 12.8 | |
| Currency translation | (0.7) | | | (0.7) | | | — | | | (1.4) | |
| Balance, end of year | $ | 94.6 | | | $ | 14.4 | | | $ | 0.8 | | | $ | 109.9 | |
1(1)The provision is comprised of estimated credit losses based on the Company’s loss-rate experience and effective January 1, 2020, also includes adjustments required for forecasted credit loss information. The provision for credit losses for the year ended December 31, 2020, includes estimates of expected credit losses over the contractual life of receivables as the markets in which the Company operates are experiencing a decline, primarily due to the impact of COVID-19. The provision for credit losses reported within this table also includes the provision for fraud losses.
2(2)Consists primarily of charges to other accounts. 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 relationship goodwill. Charges to other accounts representssubstantially represent the offset against the late fee revenue recognized when the Company establishes a reserve for such waived amounts.
3 For the year ended December 31, 2020, the majority of the Travel and Corporate Solutions segment charge-offs is associated with the sale of the WEX Latin America business. Refer to Note 5, Sale of Subsidiary, for further information.
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
Concentration of Credit Risk
The receivables portfolio primarily consists of a large group of homogeneous smaller balances across a wide range of industries, which are collectively evaluated for impairment. No oneindividual customer had a receivable balance representedrepresenting 10 percent or more of the outstanding receivables balance at December 31, 20202023 or 2019.2022. The following table presents the outstanding balance of trade accounts receivable that are less than 30 and 60 days past due, shown in each case as a percentage of total trade accounts receivable:
| | | | | | | | | | | |
| December 31, |
| Delinquency Status | 2020 | | 2019 |
| 29 days or less past due | 97 | % | | 96 | % |
| 59 days or less past due | 98 | % | | 97 | % |
| | | | | | | | | | | |
| December 31, |
| Delinquency Status | 2023 | | 2022 |
| Less than 30 days past due | 98 | % | | 98 | % |
| Less than 60 days past due | 99 | % | | 99 | % |
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
The Company’s amortized cost and estimated fair value of investment securities as of December 31, 20202023 and 2019,2022 are presented below:
| | (In thousands) | Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value(a) |
| 2020 | | | | | | | |
| Fixed income securities: | |
| (in millions) | | (in millions) | Amortized Cost | | Total
Unrealized
Gains | | Total
Unrealized
Losses | | Fair Value(1) |
| Balances as of December 31, 2023: | |
| Current: | |
| Current: | |
| Current: | |
Debt securities(2): | |
Debt securities(2): | |
Debt securities(2): | |
| U.S. treasury notes | |
| U.S. treasury notes | |
| U.S. treasury notes | |
| Corporate and sovereign debt securities | |
| Municipal bonds | |
| Asset-backed securities | |
| Mortgage-backed securities | Mortgage-backed securities | $ | 133 | | | $ | 5 | | | $ | 0 | | | $ | 138 | |
| Asset-backed securities | 211 | | | 0 | | | 1 | | | 210 | |
| Municipal bonds | 195 | | | 2 | | | 0 | | | 197 | |
| | Total | |
| Total | |
| Total | |
| | Non-current: | |
| Non-current: | |
| Non-current: | |
Debt securities(3) | |
Debt securities(3) | |
Debt securities(3) | |
| | Mutual fund | |
| | Mutual fund | |
| | Mutual fund | Mutual fund | 27,680 | | | 48 | | | 0 | | | 27,728 | |
| Pooled investment fund | Pooled investment fund | 9,000 | | | 0 | | | 0 | | | 9,000 | |
Total investment securities(b)(c) | $ | 37,219 | | | $ | 55 | | | $ | 1 | | | $ | 37,273 | |
| 2019 | | | | | | | |
| Fixed income securities: | |
| Total | |
Total investment securities(4) | |
| | Balances as of December 31, 2022: | |
| | Balances as of December 31, 2022: | |
| | Balances as of December 31, 2022: | |
| Current: | |
| Current: | |
| Current: | |
| Debt securities: | |
| Debt securities: | |
| Debt securities: | |
| U.S. treasury notes | |
| U.S. treasury notes | |
| U.S. treasury notes | |
| Corporate debt securities | |
| Municipal bonds | |
| Asset-backed securities | |
| Mortgage-backed securities | Mortgage-backed securities | $ | 164 | | | $ | 10 | | | $ | 0 | | | $ | 174 | |
| Asset-backed securities | 248 | | | 0 | | | 1 | | | 247 | |
| Municipal bonds | 306 | | | 0 | | | 4 | | | 302 | |
| Total | |
| | Non-current: | |
| Non-current: | |
| Non-current: | |
Debt securities(3) | |
Debt securities(3) | |
Debt securities(3) | |
| | Mutual fund | |
| | Mutual fund | |
| | Mutual fund | Mutual fund | 25,221 | | | 0 | | | 484 | | | 24,737 | |
| Pooled investment fund | Pooled investment fund | 5,000 | | | 0 | | | 0 | | | 5,000 | |
Total investment securities(b)(c) | $ | 30,939 | | | $ | 10 | | | $ | 489 | | | $ | 30,460 | |
| Total | |
Total investment securities(4) | |
(1)
(a)The Company’s techniques used to measuremethods for measuring the fair value of its investmentsinvestment securities are discussed in Note 19,18, Fair Value.
(b)(2) The Company’s investmentAs of December 31, 2023, the Company has pledged debt securities are not deemed available for current operationswith a fair value of $83.6 million as collateral against recurring settlement obligations owed in conjunction with its transactions processed through licensed card networks and have been classified$704.1 million as non-current oncollateral against borrowings under the consolidated balance sheets.BTFP as further discussed in Note 16, Financing and Other Debt.
(c)(3)Substantially comprised of municipal bonds.
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
(4)Excludes $9.6$13.7 million and $8.0$11.1 million in equity securities designated as trading as of December 31, 20202023 and 2019,2022, respectively, included in prepaid expenses and other current assets and other assets on the consolidated balance sheets. See Note 18,17, Employee Benefit Plans, for additional information.
The Company reviews its investments to identify and evaluate indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which thefollowing tables present estimated fair value has been less than the cost basis, the financial condition and near-term prospectsgross unrealized losses of the investee, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Substantially all of the Company’s fixed incomedebt securities are rated investment grade or better. The Company’s fixed-income mutual fund and certain other insignificant fixed income security positions have been in an unrealized loss position for greater than 12 months aswhich an allowance for credit losses has not been recorded, aggregated by security category and length of December 31, 2020 and 2019. The amount by which these investmenttime such securities have been in a continuous unrealized loss position is insignificant. position. There were no expected credit losses that have been recorded against our investment securities as of December 31, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2023 | | | | | | | | |
| | Less Than One Year | | One Year or Longer | | Total | | | | |
| (in millions) | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Investment-grade rated debt securities: | | | | | | | | | | | | | | | | | | | |
| U.S. treasury notes | $ | — | | | $ | — | | | $ | 358.6 | | | $ | 32.3 | | | $ | 358.6 | | | $ | 32.3 | | | | | | | | | |
| Corporate debt securities | 132.7 | | | 2.3 | | | 482.9 | | | 29.3 | | | 615.6 | | | 31.6 | | | | | | | | | |
| Municipal bonds | 25.3 | | | 0.2 | | | 42.5 | | | 6.0 | | | 67.8 | | | 6.2 | | | | | | | | | |
| Asset-backed securities | 55.0 | | | 0.2 | | | 131.1 | | | 4.0 | | | 186.1 | | | 4.2 | | | | | | | | | |
| Mortgage-backed securities | 374.5 | | | 4.7 | | | 262.4 | | | 25.3 | | | 636.9 | | | 30.0 | | | | | | | | | |
| Total debt securities | $ | 587.5 | | | $ | 7.4 | | | $ | 1,277.5 | | | $ | 96.9 | | | $ | 1,865.0 | | | $ | 104.3 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 | | | | |
| Less than One Year | | One Year or Longer | | Total | | | | |
| Investment-grade rated debt securities: | | | | | | | | | | | | | | | | | | | |
| U.S. treasury notes | $ | 123.7 | | | $ | 12.5 | | | $ | 240.4 | | | $ | 29.2 | | | $ | 364.1 | | | $ | 41.7 | | | | | | | | | |
| Corporate debt securities | 196.9 | | | 15.1 | | | 289.9 | | | 34.4 | | | 486.8 | | | 49.5 | | | | | | | | | |
| Municipal bonds | 28.1 | | | 3.8 | | | 19.1 | | | 5.0 | | | 47.2 | | | 8.8 | | | | | | | | | |
| Asset-backed securities | 117.7 | | | 4.3 | | | 70.2 | | | 4.8 | | | 187.9 | | | 9.1 | | | | | | | | | |
| Mortgage-backed securities | 198.1 | | | 16.4 | | | 96.5 | | | 16.3 | | | 294.6 | | | 32.7 | | | | | | | | | |
| Total debt securities | $ | 664.4 | | | $ | 52.2 | | | $ | 716.1 | | | $ | 89.7 | | | $ | 1,380.5 | | | $ | 141.8 | | | | | | | | | |
The Company’s management has determined that these gross unrealized lossesabove table includes 429 securities at December 31, 20202023 where the current fair value is less than the related amortized cost. Unrealized losses on the Company’s debt securities included in the above tables are primarily driven by the elevated interest rate environment and 2019 are temporary in nature.not considered to be credit-related based upon an analysis that considered the extent to which the fair value is less than the amortized basis of a security, adverse conditions specifically related to the security, changes to credit rating of the instrument subsequent to Company purchase, and the strength of the underlying collateral, if any. Additionally, the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases.
The Company had insignificant maturities of investment securities duringfollowing table summarizes the years ended December 31, 2020, 2019 and 2018, respectively.
The contractual maturity dates of the Company’s investment securities are as follows:debt securities.
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| (In thousands) | Cost | | Fair Value | | Cost | | Fair Value |
| | | | | | | |
| Due after 5 years through year 10 | $ | 236 | | | $ | 236 | | | $ | 278 | | | $ | 277 | |
| Due after 10 years | 170 | | | 171 | | | 276 | | | 272 | |
| Mortgage-backed securities with original maturities of 30 years | 133 | | | 138 | | | 164 | | | 174 | |
| Investment securities with no maturity dates | 36,680 | | | 36,728 | | | 30,221 | | | 29,737 | |
| Total | $ | 37,219 | | | $ | 37,273 | | | $ | 30,939 | | | $ | 30,460 | |
| | | | | | | | | | | | | | | |
| | December 31, | | | | |
| | 2023 | | |
| (in millions) | Amortized Cost | | Fair Value | | | | |
| | | | | | | |
| Due within one year | $ | 104.0 | | | $ | 101.9 | | | | | |
| Due after 1 year through year 5 | 670.9 | | | 637.1 | | | | | |
| Due after 5 years through year 10 | 875.7 | | | 853.0 | | | | | |
| Due after 10 years | 1,479.8 | | | 1,458.5 | | | | | |
| Total | $ | 3,130.4 | | | $ | 3,050.5 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
EQUITY SECURITIES
During the year ended December 31, 2022, unrealized losses recognized on equity securities still held as of December 31, 2022 approximated $3.2 million. During the years ended December 31, 2023 and 2021 unrealized gains and losses recognized on equity securities still held as of December 31, 2023 and 2021 were immaterial.
| | | | | |
| 8. | Property, Equipment and Capitalized Software, Net |
Property, equipment and capitalized software, net consist of the following: | | | | December 31, | | December 31, |
| (In thousands) | 2020 | | 2019 |
| (in millions) | | (in millions) | 2023 | | 2022 |
| Furniture, fixtures and equipment | Furniture, fixtures and equipment | $ | 87,111 | | | $ | 94,478 | |
| Computer software, including internal-use software | Computer software, including internal-use software | 463,614 | | | 411,308 | |
| Leasehold improvements | Leasehold improvements | 32,111 | | | 32,406 | |
| Construction in progress | 7,910 | | | 18,495 | |
| | Total | |
| Total | |
| Total | Total | 590,746 | | | 556,687 | |
| Less: accumulated depreciation | Less: accumulated depreciation | (402,406) | | | (344,212) | |
| Total property, equipment and capitalized software, net | Total property, equipment and capitalized software, net | $ | 188,340 | | | $ | 212,475 | |
Depreciation expense was $90.8$92.2 million, $77.7$93.4 million and $61.6$90.9 million in 2020, 20192023, 2022 and 2018,2021, respectively.
| | | | | |
| 9. | Goodwill and Other Intangible Assets |
Goodwill
The changes in the carrying amount of goodwill duringfor the period January 1 toyear ended December 31, 20202023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Fleet
Solutions
Segment | | Travel and Corporate Solutions Segment | | Health and Employee Benefit Solutions Segment | | Total |
| Gross goodwill, January 1, 2020 | $ | 1,378,107 | | | $ | 455,007 | | | $ | 622,109 | | | $ | 2,455,223 | |
| Current year acquisition | 0 | | | 291,884 | | | 0 | | | 291,884 | |
| Current year sale of subsidiary | (3,225) | | | 0 | | | (9,936) | | | (13,161) | |
| Foreign currency translation | 17,829 | | | 4,507 | | | (3,969) | | | 18,367 | |
| Gross goodwill, December 31, 2020 | $ | 1,392,711 | | | $ | 751,398 | | | $ | 608,204 | | | $ | 2,752,313 | |
| | | | | | | |
| Accumulated impairment, January 1, 2020 | $ | (4,087) | | | $ | (9,935) | | | $ | 0 | | | $ | (14,022) | |
| | | | | | | |
| Current year sale of subsidiary | 3,225 | | | 0 | | | 0 | | | 3,225 | |
WEX Fleet Europe impairment1 | (53,378) | | | 0 | | | 0 | | | (53,378) | |
| Accumulated impairment, December 31, 2020 | $ | (54,240) | | | $ | (9,935) | | | $ | 0 | | | $ | (64,175) | |
| | | | | | | |
| Net goodwill, January 1, 2020 | $ | 1,374,020 | | | $ | 445,072 | | | $ | 622,109 | | | $ | 2,441,201 | |
| Net goodwill, December 31, 2020 | $ | 1,338,471 | | | $ | 741,463 | | | $ | 608,204 | | | $ | 2,688,138 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Mobility | | Corporate
Payments | | Benefits | | Total |
| Balance as of January 1, 2023 | | | | | | | |
| Gross goodwill | $ | 1,363.8 | | | $ | 789.1 | | | $ | 776.6 | | | $ | 2,929.5 | |
| Accumulated impairment losses | (190.7) | | | (9.9) | | | — | | | (200.6) | |
| Net goodwill | $ | 1,173.1 | | | $ | 779.2 | | | $ | 776.6 | | | $ | 2,728.9 | |
| | | | | | | |
| Goodwill acquired during the year | 193.0 | | | — | | | 85.9 | | | 278.9 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Foreign currency translation | (0.2) | | | 8.1 | | | — | | | 7.9 | |
| | | | | | | |
| Balance at December 31, 2023 | | | | | | | |
| Gross goodwill | $ | 1,556.6 | | | $ | 797.2 | | | $ | 862.5 | | | $ | 3,216.3 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Accumulated impairment losses | (190.7) | | | (9.9) | | | — | | | (200.6) | |
| | | | | | | |
| | | | | | | |
| Net goodwill | $ | 1,365.9 | | | $ | 787.3 | | | $ | 862.5 | | | $ | 3,015.7 | |
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
The changes in the carrying amount of goodwill for the year ended December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Mobility | | Corporate
Payments | | Benefits | | Total |
| Balance as of January 1, 2022 | | | | | | | |
| Gross goodwill | $ | 1,380.6 | | | $ | 815.0 | | | $ | 776.6 | | | $ | 2,972.2 | |
| Accumulated impairment losses | (54.2) | | | (9.9) | | | — | | | (64.2) | |
| Net goodwill | $ | 1,326.3 | | | $ | 805.1 | | | $ | 776.6 | | | $ | 2,908.1 | |
| | | | | | | |
| Impairment charges | (136.5) | | | — | | | — | | | (136.5) | |
| Foreign currency translation | (16.7) | | | (25.9) | | | — | | | (42.7) | |
| | | | | | | |
| Balance at December 31, 2022 | | | | | | | |
| Gross goodwill | $ | 1,363.8 | | | $ | 789.1 | | | $ | 776.6 | | | $ | 2,929.5 | |
| Accumulated impairment losses | (190.7) | | | (9.9) | | | — | | | (200.6) | |
| Net goodwill | $ | 1,173.1 | | | $ | 779.2 | | | $ | 776.6 | | | $ | 2,728.9 | |
During the Company's annualthird quarter of 2022, certain triggering events were identified in our international fleet reporting units, including increasing interest rates, decreasing market valuations and inflationary pressures, leading to a decline in projected cash flows primarily in Europe, requiring us to perform an interim impairment test. We compared the carrying value of each reporting unit with assigned goodwill assessment completed as of October 1, 2020, management determined that the reduced volumes attributable in part to COVID-19, had a significant negative impact on theits fair value, of the WEX Fleet Europe reporting unit (the 2019 Go Fuel Card acquisition). The fair value of the reporting unitwhich was calculatedestimated using a combination of an income-based discounted cash flow method and a market-based guideline public company method. As a result of the income and market approaches, utilizing significant judgments including estimated cash flows and market prices from comparable businesses. Asfinancial impacts of the identified triggering events, our test concluded that the carrying value of thistwo of our international reporting unitunits exceeded itstheir estimated fair value, resulting in the Company recorded a non-cash goodwillrecognition of an impairment charge of $53.4$136.5 million to our Mobility segment, representing a full impairment of one reporting unit’s goodwill and partial impairment of the Fleet Solutions segment. There is $65.8 million remaining goodwill associated with thisother reporting unit.unit’s goodwill.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The changes in goodwill during the period January 1 to December 31, 2019 were as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Fleet
Solutions
Segment | | Travel and Corporate Solutions Segment | | Health and Employee Benefit Solutions
Segment | | Total |
| Gross goodwill, January 1, 2019 | $ | 1,251,501 | | | $ | 244,632 | | | $ | 350,193 | | | $ | 1,846,326 | |
| 2019 acquisitions | 128,251 | | | 209,887 | | | 272,399 | | | 610,537 | |
| Foreign currency translation | (1,645) | | | 488 | | | (483) | | | (1,640) | |
| Gross goodwill, December 31, 2019 | $ | 1,378,107 | | | $ | 455,007 | | | $ | 622,109 | | | $ | 2,455,223 | |
| | | | | | | |
| Accumulated impairment, January 1, 2019 | $ | (4,205) | | | $ | (9,992) | | | $ | 0 | | | $ | (14,197) | |
| Foreign currency translation | 118 | | | 57 | | | 0 | | | 175 | |
| Accumulated impairment, December 31, 2019 | $ | (4,087) | | | $ | (9,935) | | | $ | 0 | | | $ | (14,022) | |
| | | | | | | |
| Net goodwill, January 1, 2019 | $ | 1,247,296 | | | $ | 234,640 | | | $ | 350,193 | | | $ | 1,832,129 | |
| Net goodwill, December 31, 2019 | $ | 1,374,020 | | | $ | 445,072 | | | $ | 622,109 | | | $ | 2,441,201 | |
Other Intangible Assets
Other intangible assets consist of the following:
| | | | December 31, 2020 | | December 31, 2019 | | December 31, 2023 | | December 31, 2022 |
| | (in thousands) | Gross
Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Amount |
| (in millions) | | (in millions) | Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Amount | | Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Amount |
| Definite-lived intangible assets | Definite-lived intangible assets | |
| Acquired software and developed technology | Acquired software and developed technology | $ | 327,134 | | | $ | (164,245) | | | $ | 162,889 | | | $ | 269,888 | | | $ | (142,239) | | | $ | 127,649 | |
| Acquired software and developed technology | |
| Acquired software and developed technology | |
| Customer relationships | Customer relationships | 1,842,709 | | | (608,178) | | | 1,234,531 | | | 1,762,066 | | | (478,680) | | | 1,283,386 | |
| Licensing agreements | 152,805 | | | (35,010) | | | 117,795 | | | 145,295 | | | (24,160) | | | 121,135 | |
| Patent | 2,549 | | | (2,549) | | | 0 | | | 2,319 | | | (2,183) | | | 136 | |
Contractual rights(1) | |
| Merchant networks and other partner relationships | |
| | Trade names and brand names | Trade names and brand names | 61,978 | | | (25,181) | | | 36,797 | | | 62,275 | | | (19,531) | | | 42,744 | |
| | Trade names and brand names | |
| | Trade names and brand names | |
| | Other intangible assets | |
| Other intangible assets | |
| Other intangible assets | |
| Total | Total | $ | 2,387,175 | | | $ | (835,163) | | | $ | 1,552,012 | | | $ | 2,241,843 | | | $ | (666,793) | | | $ | 1,575,050 | |
|
(1)Contractual rights represent intangible rights to serve as custodian or sub-custodian to certain HSAs. See Note 4, Acquisitions for more information.
During the years ended December 31, 2020, 20192023, 2022 and 2018,2021, amortization expense was $171.1$184.0 million, $159.4$170.5 million and $138.2$181.7 million, respectively. The following table presents the estimated amortization expense related to the definite-lived intangible assets listed above for each of the next five fiscal years:
| | | | | |
| (in thousands) | |
| 2021 | $ | 182,080 | |
| 2022 | $ | 168,842 | |
| 2023 | $ | 157,711 | |
| 2024 | $ | 145,252 | |
| 2025 | $ | 130,911 | |
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
| | | | | |
| (in millions) | |
| 2024 | $ | 201.2 | |
| 2025 | $ | 188.1 | |
| 2026 | $ | 174.2 | |
| 2027 | $ | 159.4 | |
| 2028 | $ | 146.9 | |
Accounts payable consists of: | | | | | | | | | | | |
| | December 31, |
| (In thousands) | 2020 | | 2019 |
| Merchant payables | $ | 647,090 | | | $ | 852,964 | |
| Other payables | 131,117 | | | 116,852 | |
| Accounts payable | $ | 778,207 | | | $ | 969,816 | |
| | | | | | | | | | | |
| | December 31, |
| (in millions) | 2023 | | 2022 |
| Merchant payables | $ | 1,323.6 | | | $ | 1,225.0 | |
| Other payables | 155.5 | | | 140.7 | |
| Accounts payable | $ | 1,479.1 | | | $ | 1,365.8 | |
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 26,25, Supplementary Regulatory Capital Disclosure, for further information concerning these FDIC requirements.
WEX Bank accepts its deposits through: (i)through certain customers as required collateral for credit that has been extended (“customer deposits”) and (ii)through contractual arrangements with brokerage firms for bothbrokered and non-brokered certificate of deposit and brokered money market deposit products. Additionally, WEX Bank holds HSA deposits for the benefit of WEX Inc.’s HSA customers subject to the terms of a deposit agreement.
Customer deposits are generally non-interest bearing, certificates of deposit are issued at fixed rates, and brokered money market deposits are issued at both fixed and variable interest rates based on LIBOR or the Federal Funds rate.rate and HSA deposits are issued at rates as defined within the consumer account agreements.
The following table presents the composition of deposits, which are classified as short-term or long-term based on their contractual maturities:
| | | | | | | | | | | |
| | December 31, |
| (in thousands) | 2020 | | 2019 |
Interest-bearing brokered money market deposits1 | $ | 439,894 | | | $ | 362,246 | |
| Customer deposits | 116,694 | | | 112,571 | |
Certificates of deposits with maturities within 1 year1,2 | 354,807 | | | 835,996 | |
| Short-term deposits | 911,395 | | | 1,310,813 | |
Certificates of deposit with maturities greater than 1 year and less than 5 years 1,2 | 148,591 | | | 143,399 | |
| Total deposits | $ | 1,059,986 | | | $ | 1,454,212 | |
| | | |
| Weighted average cost of funds on certificates of deposit outstanding | 1.81 | % | | 2.57 | % |
| Weighted average cost of interest-bearing brokered money market deposits | 0.27 | % | | 1.88 | % |
| | | |
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
| | | | | | | | | | | |
| | December 31, |
| (in millions) | 2023 | | 2022 |
Interest-bearing money market deposits(1) | $ | 226.0 | | | $ | 157.2 | |
| Customer deposits | 195.9 | | | 146.7 | |
Contractual deposits with maturities within 1 year(1),(2) | 500.8 | | | 770.7 | |
HSA deposits(3) | 3,020.0 | | | 2,070.0 | |
| Short-term deposits | 3,942.8 | | | 3,144.6 | |
Contractual deposits with maturities greater than 1 year(1),(2) | 129.8 | | | 334.2 | |
| Total deposits | $ | 4,072.6 | | | $ | 3,478.8 | |
| | | |
| Weighted average cost of HSA deposits outstanding | 0.11 | % | | 0.04 | % |
| Weighted average cost of funds on contractual deposits outstanding | 3.53 | % | | 1.48 | % |
| Weighted average cost of interest-bearing money market deposits outstanding | 5.47 | % | | 4.45 | % |
| | | |
1 (1)As of December 31, 2020,2023 and 2022, all certificates of deposit and brokered money market deposits were in denominations of $250 thousand or less, corresponding to FDIC deposit insurance limits.
2 (2)Original maturities range from 1 year to 5 years, withIncludes certificates of deposit and certain money market deposits, which have a fixed maturity and substantially fixed interest rates ranging from 1.35 percent to 3.52 percent as of December 31, 2020. At December 31, 2019, original maturities ranged from 4 months to 5 years with interest rates ranging from 1.80 percent to 3.52 percent.rates.
In accordance with regulatory requirements, WEX Bank maintains reserves against a portion of its outstanding customer(3)HSA deposits are recorded within short-term deposits on the consolidated balance sheets as the funds can be withdrawn by keeping balances with the Federal Reserve Bank. There was no required reserveaccount holders at December 31, 2020, due to temporarily relaxed Federal Reserve requirements enacted in response to the COVID-19 pandemic. The required reserve was $24.9 million at December 31, 2019.any time.
The following table presents the average interest ratesscheduled maturities for contractual deposits and interest-bearing brokered money market deposits:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (in thousands) | 2020 | | 2019 | | 2018 |
| Average interest rate: | | | | | |
| Deposits | 2.21 | % | | 2.46 | % | | 1.91 | % |
| Interest-bearing brokered money market deposits | 0.61 | % | | 2.28 | % | | 2.03 | % |
Sourcesas of Funds
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 0 outstanding balances for ICS purchases at December 31, 2020 and 2019.2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | 2024 | | 2025 | | | | | | | | Total |
| Amounts due within the years ended December 31: | $ | 500.8 | | | $ | 129.8 | | | | | | | | | $ | 630.6 | |
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
| 12. | Derivative Instruments |
The Company is exposed to certain market risks relating to its ongoing business operations. INTEREST RATE SWAP CONTRACTS
From time to time, the Company entershas entered into derivative instrument arrangements to manage various risks including interest rate risk.
As of December 31, 2019, the Company had 7 interest rate swap contracts in effectto manage the interest rate risk associated with a collectiveits outstanding variable-interest rate borrowings. Such contracts are intended to economically hedge the reference rate component of future interest payments associated with outstanding borrowings under the Company’s Amended and Restated Credit Agreement.
On April 26, 2023, the Company’s then existing interest rate swap contracts were amended primarily to change the floating rate index from the one-month USD LIBOR to the one-month Term SOFR. In conjunction with the amendments to the floating rate index, the fixed interest rates payable by WEX under the contracts were also adjusted. There were no changes to notional amount at inception of $1.5 billion, withamounts or maturity dates fromas a result of these amendments.
On December 31, 2020 to March 12, 2023, at interest rates between 1.108 percent and 2.425 percent. During the second quarter of 2020, the Company amendedunwound and extended the terms of 5terminated all of its interest rateoutstanding swaps with a collective notional amount of $935.0 million. These amendments merged 2$1.1 billion in exchange for the receipt of the previously existing interest rate swap agreements into 1, reduced the effective fixed interest rates payable and extended the maturity date of each previously existing agreement by a period of one year. As of December 31, 2020, 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$50.0 million, resulting in an immaterial impact on the Company’s 2016 Credit Agreement. results of operations. The cash flow impact from the receipt of proceeds on termination has been reflected within operating activities on the consolidated statement of cash flows.
The following table presents relevant information for the interest rate swap agreements outstanding during 2020:
| | | | | | | | | | | | | | | | | | | | |
| Tranche A | Tranche B | Tranche C1 | Tranche D1 | Tranche E | Tranche F2 |
Notional amount at inception (in thousands) | $150,000 | $100,000 | $200,000 | $300,000 | $200,000 | $485,000 |
| Maturity date | 3/13/2023 | 3/12/2023 | 3/12/2023 | 12/30/2022 | 12/30/2023 | 12/31/2021 |
| Fixed interest rate | 1.954% | 1.956% | 2.413% | 2.204% | 1.862% | 0.743% |
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
1 Not amended or extended.
2 Result of the merging of tranches F and G, which were disclosed within the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
The following table presents information on the location and amounts of interest rate swap gains and losses:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | | | Year ended December 31, |
Derivatives
Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Consolidated Statements of Income | | 2020 | | 2019 | | 2018 |
Interest rate swap agreements –
unrealized portion | | Net unrealized (loss) gain on financial instruments | | $ | (27,569) | | | $ | (35,363) | | | $ | 3,772 | |
Interest rate swap agreements –
realized portion | | Financing interest expense | | $ | 15,842 | | | $ | (5,411) | | | $ | (6,160) | |
Derivativelosses incurred and recognized within financing interest expense, net of financial instruments and their related gains and losses are reported within cash flows from operating activities withinon the consolidated statements of cash flows.operations:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| (in millions) | | | | 2023 | | 2022 | | 2021 |
| Unrealized loss (gain) on interest rate swaps | | | | $ | 80.8 | | | $ | (86.4) | | | $ | (40.0) | |
| Realized (gain) loss on interest rate swaps | | | | (94.0) | | | (5.2) | | | 25.7 | |
| Financing interest expense | | | | 217.8 | | | 139.1 | | | 103.5 | |
| Financing interest expense, net of financial instruments | | | | $ | 204.6 | | | $ | 47.5 | | | $ | 89.2 | |
CONTINGENT CONSIDERATION DERIVATIVE LIABILITY
At December 31, 2023 and 2022, the Company had a contingent consideration derivative liability associated with its asset acquisition from Bell Bank. See Note 19,4, Acquisitions, for further discussion of this derivative. Also, see Note 18, Fair Value, for more information regarding the valuation of the Company’s interest rate swaps.derivatives.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
| 13. | Off-Balance Sheet Arrangements |
WEX Europe Services and WEX Bank Accounts Receivable Factoring
Under a factoring arrangement between WEX Europe Services and anWEX Bank are each party to separate accounts receivable factoring arrangements with unrelated third-party financial institution, the Company sells customerinstitutions to sell certain of their accounts receivable balances without recourse to the extent that the customer balances are maintained at or below the credit limit established by the buyer. 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 Companybalances. Each subsidiary 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 $452.2 million and $630.3 million of accounts receivable under this arrangement during the years ended December 31, 2020 and 2019, respectively. Proceeds received, which are recorded net of applicable costs, including interest and commissions, are recorded in operating activities in the consolidated statements of cash flows. The loss on factoring was $2.4 million and $3.5 million for the years ended December 31, 2020 and 2019, respectively, and was recorded within cost of services in the consolidated statements of income. As of December 31, 2020 and 2019, 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 the year ended December 31, 2020 and 2019 were insignificant.
WEX Bank Accounts Receivable Factoring
In August 2018, WEX Bank entered into a factoring agreement with an unrelated third-party financial institution to sell certain of its trade accounts receivable under non-recourse transactions. The Company obtained a true-sale opinionopinions from an independent attorney, which statesattorneys, stating that theeach representative 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 arrangementthese arrangements 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 buyers. Proceeds received, which are recorded net of applicable costs or negotiated discount rates, are recorded in operating activities in the consolidated statements of cash flows. Losses on factoring are recorded within cost of services in the consolidated statements of operations. Losses on factoring, which were $10.5 million, $4.8 million and $3.4 million for the years ended December 31, 2023, 2022 and 2021, respectively, are recorded within cost of services in the consolidated statements of operations.
The WEX Europe Services agreement automatically renews each January 1 unless either party gives not less than 90 days written notice of their intention to withdraw. Under this agreement, accounts receivable are sold without recourse to the extent that the customer balances are maintained at or below the credit limit established by the buyer. The Company maintains the risk of default on any customer receivable balances in excess of the buyer’s credit limit, which were immaterial as of December 31, 2023 and 2022. The Company sold $4.1$565.3 million, $599.1 million, and $566.4 million of accounts receivable under this arrangement during the years ended December 31, 2023, 2022, and 2021, respectively.
The WEX Bank agreement extends through August 2024, 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 sold $12.9 billion, $6.3 billion, and $14.8$2.9 billion of trade accounts receivable under this arrangement during the years ended December 31, 20202023, 2022, and 2019, respectively. Proceeds received, which are reported net of a negotiated discount rate, are recorded in operating activities in the consolidated statements of cash flows. The loss on factoring, which is recorded within cost of services in the consolidated statements of operations, was insignificant and $3.7 million for the years ended December 31, 2020 and 2019,2021, respectively.
Benefits Securitization
In April 2023, WEX Latin America SecuritizationHealth, through a wholly-owned special purpose entity (“SPE”), entered into a receivable securitization facility with a revolving limit of Receivables
$35.0 million and an initial term through April 2026, which can be extended for an additional period of up to three years and can be voluntarily terminated by the SPE at any time, subject to 30 days’ notice. During December 2023, the Company signed an amendment to the initial receivable securitization agreement, which suspends activities under the facility until such time as the parties agree in writing to reactivate it (the “Health Facility Amendment”). During this suspension period, the revolving limit of the facility is zero. Prior to the saleHealth Facility Amendment, under the facility, which is with an unrelated financial institution, WEX Health sold eligible trade accounts receivables to the SPE, which is a bankruptcy-remote subsidiary, and in turn, the SPE sold undivided ownership interests in certain of WEX Latin America on September 30, 2020,these
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
receivables to the financial institution in exchange for cash equal to the gross receivables transferred. Receivables sold to the SPE were no longer available to satisfy creditors of the Company or its subsidiaries in the event of bankruptcy. Receivables sold to the financial institution were fully guaranteed by the SPE, which also pledged any unsold receivables as collateral for such obligation. Prior to the Health Facility Amendment, WEX Health would continue to service receivables sold to the financial institution under the facility, however, WEX would not retain effective control of transferred certain unsecured receivables, associatedderecognized the assets and accounted for these transfers as sales and the third-party financial institution would have a first priority security interest in all assets of the SPE, and the SPE did not grant a security interest to any other parties. In addition, WEX Inc. provided a performance guarantee to the third-party financial institution with its salary advance payment card productrespect to an investment fund inWEX Health’s obligations as originator and servicer under the facility. The SPE paid interest on the amount funded by the financial institution based on variable interest rates, which WEX Latin America held a non-controlling equity interest, and that is managed by an unrelated third-party. Duringwas immaterial for the year ended December 31, 2020,2023 and reflected within operating interest on the consolidated statements of operations. The Company received an insignificant distribution fromsold approximately $140.7 million of receivables under the investment fund and did not make equity contributions to the investment fundsecuritization facility during the year ended December 31, 2019. During the year ended2023.
Non-Bank Custodial HSA Cash Assets
As a non-bank custodian, WEX Inc. contracts with depository partners to hold custodial cash assets on behalf of individual account holders. As of December 31, 2018, the Company’s equity contributions2023, WEX Inc. was custodian to the investment fund totaled $2.8 million. The securitization arrangement met the derecognition conditions under GAAP and transfers beginning July 1, 2018 under this arrangement were treated as sales and accounted for as a reductionapproximately $3.9 billion in HSA cash assets. Of these custodial balances, approximately $0.9 billion of trade receivables. During the year endedHSA cash assets at December 31, 2018, the Company recognized operating interest expense2023 were deposited with and managed by certain third-party depository partners and not recorded on our consolidated balance sheets. Such third-party depository partners are regularly monitored by management for stability. The remaining balance of $4.4 million under this financing arrangement. During the years ended$3.0 billion in HSA assets as of December 31, 20202023 were deposited with and 2019, the Company recognized a gainmanaged by WEX Bank and are therefore reflected on sale of $6.5 million and $16.1 million, respectively. The gain recognized consists of the difference between the sales price and the carrying value of the receivables, and isour consolidated balance sheets. See Note 11, Deposits, for further information about HSA deposits recorded within other revenue. Cash proceeds from the transfer of these receivables are recorded within operating activities in theon our consolidated statements of cash flows.balance sheets.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Income before income taxes consisted of the following: | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (In thousands) | 2020 | | 2019 | | 2018 |
| United States | $ | (163,014) | | | $ | 178,235 | | | $ | 194,770 | |
| Foreign | (138,067) | | | 38,281 | | | 43,849 | |
| Total | $ | (301,081) | | | $ | 216,516 | | | $ | 238,619 | |
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (in millions) | 2023 | | 2022 | | 2021 |
| United States | $ | 225.8 | | | $ | 254.8 | | | $ | 194.4 | |
| Foreign | 143.0 | | | 5.7 | | | 9.6 | |
| Total | $ | 368.8 | | | $ | 260.5 | | | $ | 203.9 | |
Income taxes from continuing operations consisted of the following for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | United States | | State
and Local | | Foreign | | Total |
| 2020 | | | | | | | |
| Current | $ | (7,546) | | | $ | 2,509 | | | $ | 13,782 | | | $ | 8,745 | |
| Deferred | $ | (22,568) | | | $ | (4,943) | | | $ | (1,831) | | | $ | (29,342) | |
| Income taxes | | | | | | | $ | (20,597) | |
| 2019 | | | | | | | |
| Current | $ | 20,748 | | | $ | 4,486 | | | $ | 16,322 | | | $ | 41,556 | |
| Deferred | $ | 19,946 | | | $ | 3,831 | | | $ | (4,110) | | | $ | 19,667 | |
| Income taxes | | | | | | | $ | 61,223 | |
| 2018 | | | | | | | |
| Current | $ | 16,027 | | | $ | 3,566 | | | $ | 17,916 | | | $ | 37,509 | |
| Deferred | $ | 29,520 | | | $ | 8,016 | | | $ | (6,202) | | | $ | 31,334 | |
| Income taxes | | | | | | | $ | 68,843 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | United States | | State and Local | | Foreign | | Total |
| 2023 | | | | | | | |
| Current | $ | 77.0 | | | $ | 13.3 | | | $ | 33.2 | | | $ | 123.5 | |
| Deferred | $ | (16.7) | | | $ | — | | | $ | (4.6) | | | $ | (21.3) | |
| Income taxes | | | | | | | $ | 102.2 | |
| 2022 | | | | | | | |
| Current | $ | 115.3 | | | $ | 23.9 | | | $ | 14.0 | | | $ | 153.2 | |
| Deferred | $ | (44.6) | | | $ | (9.2) | | | $ | (6.4) | | | $ | (60.2) | |
| Income taxes | | | | | | | $ | 93.1 | |
| 2021 | | | | | | | |
| Current | $ | 37.0 | | | $ | 7.1 | | | $ | 10.8 | | | $ | 54.9 | |
| Deferred | $ | (7.4) | | | $ | 6.4 | | | $ | 13.8 | | | $ | 12.9 | |
| Income taxes | | | | | | | $ | 67.8 | |
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
Undistributed earnings of certain foreign subsidiaries of the Company amounted to $58.5 million and $77.4$231.6 million at December 31, 2020 and 2019, respectively. The Company had historically asserted that the undistributed earnings of foreign subsidiaries were considered indefinitely reinvested outside the United States. The Company reevaluated its historic indefinite reinvestment assertion and determined that any historical undistributed earnings as well as the future earnings for WEX Australia are no longer considered to be indefinitely reinvested.2023. The Company continues to maintain its indefinite reinvestment assertion for its remaininginvestments in foreign subsidiaries. The deferred tax liability related to the foreignsubsidiaries except for any historical undistributed earnings and state tax costs associated with this change in assertion was immaterial.future earnings for WEX Australia. Upon distribution of the foreign subsidiariessubsidiaries’ earnings in which the Company continues to assert indefinite reinvestment, which approximates $203.5 million at December 31, 2023, 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 associated with these undistributed earnings; however, it is not expected to be material.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The reconciliation between the income tax computed by applying the U.S. federal statutory rate and the reported effective tax rate on income from continuing operations is as follows:
| | Year ended December 31, |
| (In thousands except for tax rates) | 2020 | | 2019 | | 2018 |
| Year ended December 31, | | | Year ended December 31, |
| 2023 | | | 2023 | | 2022 | | 2021 |
| Federal statutory rate | Federal statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % | Federal statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes (net of federal income tax benefit) | State income taxes (net of federal income tax benefit) | 1.6 | | | 1.4 | | | 2.2 | |
| Foreign income tax rate differential | Foreign income tax rate differential | 3.3 | | | 0.8 | | | 1.1 | |
| Revaluation of deferred tax assets for foreign and state tax rate changes, net | Revaluation of deferred tax assets for foreign and state tax rate changes, net | (1.9) | | | (1.0) | | | (1.3) | |
| Loss on sale of subsidiary | (2.3) | | | 0 | | | 0 | |
| Legal settlement | (5.1) | | | 0 | | | 0 | |
| Purchase accounting adjustments | 4.3 | | | 0 | | | 0 | |
| Research and development credit | 0 | | | (0.5) | | | (0.2) | |
| Tax credits | |
| Tax reserves | Tax reserves | (0.1) | | | 0.8 | | | 2.0 | |
| Withholding taxes | (0.1) | | | 0.7 | | | 0.2 | |
| 2017 Tax Act | 0 | | | 0 | | | (0.2) | |
| | Change in valuation allowance | |
| Change in valuation allowance | |
| Change in valuation allowance | Change in valuation allowance | (13.5) | | | 3.1 | | | 4.5 | |
| Nondeductible expenses | Nondeductible expenses | (1.6) | | | 2.3 | | | 1.4 | |
| Incremental tax benefit from share-based compensation awards | Incremental tax benefit from share-based compensation awards | 0.2 | | | (2.0) | | | (1.7) | |
| GILTI | GILTI | 0 | | | 0.5 | | | 0.8 | |
| | Other | |
| Other | |
| Other | Other | 1.0 | | | 1.2 | | | (0.9) | |
| Effective tax rate | Effective tax rate | 6.8 | % | | 28.3 | % | | 28.9 | % | Effective tax rate | 27.7 | % | | 35.7 | % | | 33.2 | % |
We recorded an income tax benefit for 2020 as compared to an income tax provision for 2019. The Company'sCompany’s effective tax rate for the year ended December 31, 20202023 was unfavorably impacted by no income tax benefit being recorded for i) operating losses generated by WEX Latin America during the current year through the date of sale, ii) the loss on saleextinguishment of WEX Latin America, and iii)Convertible Notes of $70.1 million during the legal settlement. These losses were included as partthird quarter of the current year loss and have been determined to be either non-deductible2023, which was disallowed for income tax purposes or requiredand a valuation allowance.
A portion of the legal settlement resultedtax shortfall arising from stock-based compensation, which was largely offset by a reduction in a foreign capital loss, which the Company concluded was not more likely than not to be realized and accordingly recorded a full valuation allowance against it. The remaining portion of the legal settlement was determinedprimarily attributable to be non-deductible for incomeforeign tax purposes.
Purchase accounting adjustments relate to the additional tax basiscredits and attributes for Discovery Benefits and Noventis recognizednet operating losses in the income tax (benefit) provision asU.K. during the respective measurement periods had ended.second quarter of 2023.
The lowerCompany’s effective tax rate for the year ended December 31, 2019 relative to 20182022 was adversely impacted primarily dueby a discrete tax adjustment of $12.7 million relating to the jurisdictional earnings mix.establishment of a valuation allowance recorded against a portion of deferred tax assets resulting from goodwill impairment charges and by a discrete tax item of $7.5 million primarily associated with an uncertain tax position. This was partially offset by the reduction in valuation allowance of $9.1 million primarily driven by the utilization of operating loss carryforwards in Australia for eNett and Optal.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
valuation allowances pertaining primarily to deferred tax assets for eNett and Optal and foreign tax credits.The tax effects of temporary differences in the recognition of income and expense for tax and financial reporting purposes that give rise to significant portions of the deferred tax assets and liabilities are presented below:
| | | | | | | | | | | |
| December 31, |
| (In thousands) | 2020 | | 2019 |
| Deferred tax assets related to: | | | |
| Reserve for credit losses | $ | 14,484 | | | $ | 11,831 | |
| Tax credit carryforwards | 1,371 | | | 2,570 | |
| Stock-based compensation, net | 21,376 | | | 16,070 | |
| Net operating loss carry forwards | 45,612 | | | 49,464 | |
| | | |
| Capital loss carry forwards | 28,211 | | | 0 | |
| Accruals | 29,477 | | | 18,934 | |
| Operating lease liabilities | 24,142 | | | 18,892 | |
| Other | 9,013 | | | 4,283 | |
| Total | $ | 173,686 | | | $ | 122,044 | |
| Deferred tax liabilities related to: | | | |
| Deferred financing costs | $ | (13,590) | | | $ | (1,090) | |
| Property, equipment and capitalized software | (34,232) | | | (35,273) | |
| Intangibles | (247,361) | | | (243,229) | |
| Operating lease assets | (20,425) | | | (15,602) | |
| Other liabilities | (107) | | | (86) | |
| | | |
| Total | $ | (315,715) | | | $ | (295,280) | |
| Valuation allowance | (60,569) | | | (32,671) | |
| Deferred income taxes, net | $ | (202,598) | | | $ | (205,907) | |
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
| | | | | | | | | | | |
| December 31, |
| (in millions) | 2023 | | 2022 |
| Deferred tax assets related to: | | | |
| Reserve for credit losses | $ | 22.2 | | | $ | 23.8 | |
| Tax credit carryforwards | 15.7 | | | 13.1 | |
| Stock-based compensation, net | 30.3 | | | 25.9 | |
| Net operating loss carry forwards | 42.7 | | | 40.3 | |
| | | |
| Capital loss carry forwards | 23.4 | | | 23.9 | |
| Accruals | 49.9 | | | 48.5 | |
| Operating lease liabilities | 17.8 | | | 20.0 | |
| Deferred financing costs | — | | | 9.3 | |
| Contractual obligations | 46.2 | | | 51.5 | |
| | | |
| Unrealized losses on debt securities | 19.4 | | | 34.9 | |
| Other | 5.0 | | | 3.3 | |
| Total | $ | 272.6 | | | $ | 294.6 | |
| Deferred tax liabilities related to: | | | |
| | | |
| Property, equipment and capitalized software | (9.4) | | | (17.1) | |
| Intangibles | (263.9) | | | (238.4) | |
| Interest rate swaps | — | | | (20.3) | |
| Operating lease assets | (13.8) | | | (16.2) | |
| Deferred financing costs | (0.6) | | | — | |
| | | |
| | | |
| Total | $ | (287.7) | | | $ | (292.0) | |
| Valuation allowance | (100.7) | | | (131.4) | |
| Deferred income taxes, net | $ | (115.8) | | | $ | (128.8) | |
Net deferred tax (liabilities) assets by jurisdiction are as follows:
| | | | | | | | | | | |
| December 31, |
| (In thousands) | 2020 | | 2019 |
| United States | $ | (201,739) | | | $ | (217,927) | |
| Australia | 4,009 | | | (795) | |
| Europe | 14,839 | | | 5,645 | |
| New Zealand | 123 | | | 237 | |
| Singapore | (19,863) | | | 0 | |
| Mexico | 6 | | | 0 | |
| Brazil | 0 | | | 6,820 | |
| Canada | 27 | | | 113 | |
| Deferred income taxes, net | $ | (202,598) | | | $ | (205,907) | |
| | | | | | | | | | | |
| December 31, |
| (in millions) | 2023 | | 2022 |
| United States | $ | (127.4) | | | $ | (137.8) | |
| Australia | 3.5 | | | 3.2 | |
| Europe | 5.5 | | | 9.3 | |
| | | |
| Singapore | 2.7 | | | (4.2) | |
| Other | (0.1) | | | 0.7 | |
| | | |
| | | |
| | | |
| Deferred income taxes, net | $ | (115.8) | | | $ | (128.8) | |
The Company had approximately $511.5$552.5 million and $473.3 million of post apportionment state $19.8net operating loss carryforwards as of December 31, 2023 and 2022, respectively. The Company’s foreign net operating loss carryforwards were approximately $32.7 million ofand $62.7 million at December 31, 2023 and 2022, respectively. The Company had $29.1 million and no federal and $76.4 million of foreign net operating loss carryforwards at December 31, 20202023 and approximately $608.7 million of post apportionment state, $31.3 million of federal and $58.6 million of foreign net operating loss carryforwards at December 31, 2019.2022, respectively. The U.S. state losses expire at various times through 2040. Foreign2043. United States federal losses and foreign losses in Australia and the United Kingdom have indefinite carryforward periods.
At December 31, 2020,2023, the Company’s valuation allowance primarily pertains to neti) deferred tax assets for certain states andon unrealized losses on debt securities included within accumulated other comprehensive loss, ii) foreign capital losses arising from a portion of the legal settlement.settlement of proceedings and appeals related to the acquisition of eNett and Optal, iii) net deferred tax assets for certain states and certain entities operating in Australia and the United Kingdom, and iv) a portion of U.S. foreign tax
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
credits. In each case, the Company has determined it is not more likely than not that the benefits will be utilized. During 2020 and 2019,2023, the Company recorded a net tax benefit of $17.1 million and during 2022 and 2021, the Company recorded net tax expense of $40.6$7.0 million and $6.6$32.7 million, respectively, for net increaseschanges to the valuation allowance. The increasefollowing table provides a summary of the Company’s valuation allowance:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | Balance at Beginning of Year | Charges to Expense | Releases | (Charges to)/ Releases from Accumulated Other Comprehensive Loss | Foreign Currency Translation | Balance at End of Year |
| Year ended December 31, 2022 | $ | (95.0) | | $ | (16.1) | | $ | 9.1 | | $ | (33.4) | | $ | 4.0 | | $ | (131.4) | |
| Year ended December 31, 2023 | $ | (131.4) | | $ | (2.5) | | $ | 19.6 | | $ | 14.9 | | $ | (1.3) | | $ | (100.7) | |
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The total amounts of interest and penalties recognized in the valuation allowance in 2020 was primarilyconsolidated statements of operations were not material for the years ended December 31, 2023, 2022, and 2021. As of December 31, 2023 and 2022 the amount accrued for interest and penalties related to the foreign capital losses arising from a portionunrecognized tax benefits totaled $1.2 million and $1.5 million, respectively.
A reconciliation of the legal settlementbeginning and operating losses generated from WEX Latin America during the current year through the dateending amount of sale. WEX Latin America’s deferredgross unrecognized tax assetsbenefits excluding interest and related valuation allowance are not reflected in the tables above, since the Company sold WEX Latin America on September 30, 2020. The majority of the increase in valuation allowance in 2019 was related to state net operating losses driven from the Company’s parent company separate state filings.penalties is as follows:
Table of Contents | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (in millions) | 2023 | | 2022 | | 2021 |
| Beginning balance | $ | 7.5 | | | $ | 5.0 | | | $ | 4.1 | |
| Increases related to prior year tax positions | 3.7 | | | 1.1 | | | 0.8 | |
| Increases related to current year tax positions | 1.5 | | | 7.5 | | | — | |
| | | | | |
| Decreases related to prior year tax positions | (2.6) | | | (0.5) | | | — | |
| Settlements | — | | | (5.5) | | | — | |
| | | | | |
| Ending balance | $ | 10.1 | | | $ | 7.5 | | | $ | 5.0 | |
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At December 31, 2020,2023, the Company had $4.1$10.1 million of unrecognized tax benefits, net of federal income tax benefit, of which $3.6 million would decrease our effective tax rate if fully recognized. The Company does not expect any changes to the unrecognized tax benefits within the next twelve months as a result of settlements of certain examinations or expiration of statutes of limitations. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The total amounts of interest and penalties were 0t material for the years ended December 31, 2020, 2019 and 2018, and as of December 31, 2020 and 2019, the Company had 0 material amounts accrued for interest and penalties related to unrecognized tax benefits.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits excluding interest and penalties is as follows:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (In thousands) | 2020 | | 2019 | | 2018 |
| Beginning balance | $ | 10,320 | | | $ | 8,996 | | | $ | 5,898 | |
| Increases related to prior year tax positions | 0 | | | 1,727 | | | 4,831 | |
| Increases related to current year tax positions | 0 | | | 0 | | | 0 | |
| | | | | |
| Decreases related to prior year tax positions | (826) | | | (39) | | | 0 | |
| Settlements | (5,361) | | | (364) | | | (1,733) | |
| | | | | |
| Ending balance | $ | 4,133 | | | $ | 10,320 | | | $ | 8,996 | |
The Company’s primary tax jurisdictions are the United States, Australia and the United Kingdom. The Company or one of its subsidiaries files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions, where required. In the normal course of business, theThe Company is generally no longer subject to income tax examination after the three-year Internal Revenue Service statute of limitations of three years. The Internal Revenue Service is currently examining the Company’s U.S. federal income tax returns for 2013 through 2015. The Company concluded the appeals process with the Internal Revenue Service in connection with the 2010 through 2012 audits with no additional tax impact to the Company.limitations. At December 31, 2020,2023, U.S. state tax returns were no longer subject to tax examination for years prior to 2014.2020. The tax years remaining open for income tax audits in the United Kingdom are 2019 and 2020,2021 through 2022, while the tax years open for audit in Australia are 20162018 through 2020.2022.
The Organization for Economic Cooperation and Development (“OECD”) Pillar Two global minimum tax rules, which generally provide for a minimum effective tax rate of 15 percent, are intended to apply for tax years beginning in 2024. On July 17, 2023, the OECD published Administrative Guidance proposing certain safe harbor rules that effectively extend certain effective dates to January 1, 2027. The Company is closely monitoring developments and evaluating the impact of these new rules, including eligibility to qualify for these safe harbor rules.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company has non-cancelable operating lease arrangements for its office space and equipment that expire at various dates through 2035. In addition, theThe Company additionally rents vehicles and office equipment under agreements that may be canceled anytime. Certain of our office leases contain options to renew for one to three successive five-year periods beyond the initial term. For the majority of these leases we have concluded that we are not reasonably certain to exercise renewal options,
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
therefore, the lease terms used to calculate those right-of-use assets and lease liabilities are not reflective of renewal options. The impact on our financial position from renewal options that have been recognized as part of our right-of-use assets and lease liabilities is immaterial.
The following table presents supplemental balance sheet information related to our operating leases:
| (In thousands) | | Balance Sheet Location | | December 31, 2020 | | December 31, 2019 |
| (in millions) | | (in millions) | | Balance Sheet Location | | December 31, 2023 | | December 31, 2022 |
| Assets | Assets | | | | | |
| Operating lease ROU assets | | Other assets | | $ | 85,034 | | | $ | 68,351 | |
| Operating lease right-of-use assets | |
| Operating lease right-of-use assets | |
| Operating lease right-of-use assets | |
| Liabilities | Liabilities | |
| Current operating lease liabilities | |
| Current operating lease liabilities | |
| Current operating lease liabilities | Current operating lease liabilities | | Other current liabilities | | 16,445 | | | 13,176 | |
| Non-current operating lease liabilities | Non-current operating lease liabilities | | Other liabilities | | 82,969 | | | 67,910 | |
| Total lease liabilities | Total lease liabilities | | $ | 99,414 | | | $ | 81,086 | |
The following table presents the weighted average remaining lease term and discount rate:
| | Operating leases | Operating leases | | | December 31, 2020 | | December 31, 2019 | |
| Operating leases | |
| Operating leases | |
| Weighted average remaining term (in years) | |
| Weighted average remaining term (in years) | |
| Weighted average remaining term (in years) | Weighted average remaining term (in years) | | | 10.2 | | 8.5 | |
| Weighted average discount rate | Weighted average discount rate | | | 4.5 | % | | 4.6 | % | |
| Weighted average discount rate | |
| Weighted average discount rate | |
Maturities of our operating lease liabilities are as follows:
| (In thousands) | | December 31, 2020 |
| 2021 | | $ | 20,384 | |
| 2022 | | 16,668 | |
| 2023 | | 12,484 | |
| (in millions) | | (in millions) | | December 31, 2023 |
| 2024 | 2024 | | 9,752 | |
| 2025 | 2025 | | 7,583 | |
| 2026 | |
| 2027 | |
| 2028 | |
| Thereafter | Thereafter | | 57,180 | |
| Total lease payments | Total lease payments | | $ | 124,051 | |
| Less: Imputed interest | Less: Imputed interest | | (24,637) | |
| Total lease obligations | Total lease obligations | | $ | 99,414 | |
| Less: Current portion of lease obligations | Less: Current portion of lease obligations | | 16,445 | |
| Long-term lease obligations | Long-term lease obligations | | $ | 82,969 | |
LeasesWe recognized $15.6 million, $19.5 million, and $24.3 million of operating lease expense during 2023, 2022 and 2021, respectively, which includes immaterial leases with an initiala term of twelve months or less are not recorded on the consolidated balance sheet. Short-term lease payments are recognized on a straight-line basis and variable short-term lease payments are recognized in the period in which the obligation is incurred. We recognized $18.2 million, $18.3 million, and $15.7 million of operating lease expense during 2020, 2019 and 2018, respectively, which includes these immaterial short-term leases and variable lease costs, as well as immaterial lease expense related to equipment and vehicles. These amounts areOperating lease expense is classified as general and administrative expenses on our consolidated statements of income.operations.
The following table presents supplemental cash flow and other information related to our leases:
| | | | | | | | | | | | | | |
| (In thousands) | | December 31, 2020 | | December 31, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from operating leases | | $ | 14,511 | | | $ | 16,314 | |
| Right-of-use assets obtained in exchange for lease liabilities: | | | | |
Operating leases(a) | | $ | 32,469 | | | $ | 11,001 | |
| | | | |
(a) Includes non-cash transactions resulting in adjustments to the lease liability or ROU asset due to modification, impairment or other reassessment events.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
| | | | | | | | | | | |
| (in millions) | December 31, 2023 | | December 31, 2022 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 12.7 | | | $ | 15.7 | |
| | | |
| Non-cash transactions: | | | |
| Right-of-use assets obtained in exchange for lease liabilities | $ | 7.5 | | | $ | 1.9 | |
| | | |
| | | |
| | | |
| | | | | |
| 16. | Financing and Other Debt |
The following table summarizestables summarize the Company’s total outstanding debt by type:as of:
| | | | | | | | | | | |
| Year ended December 31, |
| (In thousands) | 2020 | | 2019 |
| | | |
| Tranche A term loan | 873,777 | | | 923,707 | |
| Tranche B term loan | 1,442,368 | | | 1,457,048 | |
Term loans under 2016 Credit Agreement1 | 2,316,145 | | | 2,380,755 | |
Notes outstanding1 | 400,000 | | | 400,000 | |
Convertible Notes outstanding1 | 310,000 | | | 0 | |
| Securitized debt | 85,945 | | | 104,261 | |
| Participation debt | 0 | | | 50,000 | |
| Borrowed federal funds | 20,000 | | | 34,998 | |
| WEX Latin America debt | 0 | | | 2,660 | |
| Total gross debt | $ | 3,132,090 | | | $ | 2,972,674 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| (in millions) | Balance
Outstanding | | Interest
Rate | | Balance
Outstanding | | Interest
Rate |
| Short term debt: | | | | | | | |
| Securitized debt | $ | 101.9 | | | 5.85 | % | | $ | 110.6 | | | 3.83 | % |
| Participation debt | 39.1 | | | 7.62 | % | | 39.0 | | | 6.64 | % |
| Borrowed federal funds | 845.0 | | | 4.89 | % | | — | | | — | % |
Current portion of long-term debt(5) | 55.1 | | | ** | | 53.1 | | | ** |
| Total short term debt, net | $ | 1,041.1 | | | | | $ | 202.6 | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
** Provided for the total Amended and Restated Credit Agreement borrowings below.
| | | | | | | | | | | |
| Balance Outstanding at: |
| (in millions) | December 31, 2023 | | December 31, 2022 |
| Long-term debt: | | | |
| Amended and Restated Credit Agreement: | | | |
Tranche A Term Loans due April 2026(1) | $ | 843.9 | | | $ | 892.8 | |
Tranche B Term Loans due April 2028(2) | 1,402.3 | | | 1,416.8 | |
Borrowings on Revolving Credit Facility due April 2026(1) | 662.0 | | | — | |
Total borrowings under the Amended and Restated Credit Agreement(3) | 2,908.2 | | | 2,309.6 | |
| 6.5% Convertible Notes, originally due July 2027 | — | | | 310.0 | |
Total long-term debt(4) | 2,908.2 | | | 2,619.6 | |
| Less total unamortized debt issuance costs/discounts | (25.6) | | | (44.3) | |
Less current portion of long-term debt(5) | (55.1) | | | (53.1) | |
| Long-term debt, net | $ | 2,827.5 | | | $ | 2,522.2 | |
1 (1)Bears interest at variable rates, at the Company’s option, plus an applicable margin determined based on the Company’s consolidated leverage ratio. Outstanding borrowings under the Revolving Credit Facility are classified as long-term given they can be rolled forward with interest rate resets through maturity.
(2)As of December 31, 2023 and 2022, amounts outstanding bore interest at variable rates, at the Company’s option, plus an applicable margin, which was fixed at 1.25 percent for base rate borrowings and 2.25 percent with respect to Term SOFR borrowings.
(3)As of December 31, 2023 and December 31, 2022, amounts outstanding under the Amended and Restated Credit Agreement bore a weighted average effective interest rate of 7.3 percent and 6.4 percent, respectively. See Note 12, Derivative Instruments for discussion regarding interest rate swap contracts that were used to manage the interest rate risk associated with the Company’s outstanding variable-interest rate borrowings.
(4)See Note 19,18, Fair Value for more information regarding the fair value of the Company’s 2016debt.
(5)Current portion of long-term debt as of December 31, 2023 and December 31, 2022 is net of $8.3 million and $10.3 million, respectively, in unamortized debt issuance costs/discounts.
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Supplemental information under Amended and Restated Credit Agreement: | | | |
Letters of credit(1) | $ | 36.8 | | | $ | 31.1 | |
Remaining borrowing capacity on Revolving Credit Facility(2) | $ | 731.2 | | | $ | 898.9 | |
(1)Primarily collateralizing Corporate Payments processing activity.
(2)December 31, 2023 balance is reflective of the increased commitments resulting from the Third Amendment to Amended and Restated Credit Agreement Notes and Convertible Notes.
The following table summarizes the Company’s total outstanding debt by balance sheet classification:
| | | | | | | | | | | |
| Year ended December 31, |
| (In thousands) | 2020 | | 2019 |
| Current portion of gross debt | $ | 170,556 | | | $ | 256,529 | |
| Less: Unamortized debt issuance costs/debt discount | (17,826) | | | (7,998) | |
| Short-term debt, net | $ | 152,730 | | | $ | 248,531 | |
| | | |
| Long-term portion of gross debt | $ | 2,961,534 | | | $ | 2,716,145 | |
| Less: Unamortized debt issuance costs/debt discount | (87,421) | | | (29,632) | |
| Long-term debt, net | $ | 2,874,113 | | | $ | 2,686,513 | |
| | | |
| Supplemental information under 2016 Credit Agreement: | | | |
Letters of credit1 | $ | 51,628 | | | $ | 51,314 | |
Remaining borrowing capacity on revolving credit facility2 | $ | 818,372 | | | $ | 768,686 | |
1 Collateral for lease agreements, virtual card and fuel payment processing activity at the Company’s foreign subsidiaries.
2 Contingententered into on September 26, 2023. Borrowing capacity is contingent on maintaining compliance with the financial covenants as defined in the Company’s 2016Amended and Restated Credit Agreement.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 December 31, 2020, 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 Loan”), a senior secured tranche B term loan facility in an original principal amount of $1,485.0 million (the “Tranche B Term Loan” and together with the Tranche A Term Loan, 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 December 31, 2020, the Company had an outstanding principal amount of $873.8 million on the Tranche A Term Loan, an outstanding principal amount of $1.4 billion on the Tranche B Term Loan and outstanding letters of credit of $51.6 million drawn against the Revolving Credit Facility.
As of December 31, 2020, the Revolving Credit Facility and the Term Loans bear interest at variable rates determined by using (a) a variable reference rate, selected by the Company, if applicable, from a prescribed set of variable reference rates including (x) the Eurocurrency Rate (as defined in the 2016 Credit Agreement), or (y) the highest of (1) the federal funds effective rate plus 0.50%, (2) the rate of interest in effect for such day as publicly announced from time to time by Bank of America, N.A. as its “prime rate”, and (3) the Eurocurrency Rate plus 1.00% (the “Base Rate”), plus (b) an applicable margin. The applicable margin with respect to the Revolving Credit Facility and Tranche A Term Loan, is determined based on the Company’s Consolidated Leverage Ratio (as defined in the 2016 Credit Agreement). The applicable margin with respect to the Tranche B Term Loan is equal to 1.25 percent for loans accruing interest at the Base Rate and 2.25 percent for loans accruing interest at the Eurocurrency Rate. Starting in June 2020, revolving credit facility borrowings were subject to a 75 basis point LIBOR floor.
As of December 31, 2020 and December 31, 2019, amounts outstanding under the 2016 Credit Agreement bore a weighted average effective interest rate of 2.3 percent and 4.0 percent per annum, respectively. 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 Note 12, Derivative Instruments, for further discussion. In addition, the Company has agreed to paypays a quarterly commitment fee at a rate per annum ranging from 0.30%0.25 percent to 0.50%0.50 percent of the daily unused portion of the Revolving Credit Facility (which was 0.40%0.25 percent at December 31, 2020)2023 and 0.30 percent at December 31, 2022) determined based on the Consolidated Leverage Ratio.Company’s consolidated leverage ratio.
The RevolvingAmended and Restated Credit FacilityAgreement
As part of the Amended and Restated Credit Agreement, the Company has senior secured tranche A term loans (the “Tranche A Term Loans”), senior secured tranche B term loans (the “Tranche B Term Loans”), and revolving credit commitments. Prior to maturity, the Tranche A Term Loan mature,Loans and the commitments under the Revolving Credit Facility will terminate, on July 1, 2023. The Tranche B Term Loan matures on May 17, 2026. The Tranche A Term Loan and the Tranche B Term LoanLoans require prior to maturity, scheduled quarterly principal payments of $12.5$12.2 million and $3.7$3.6 million, respectively. The 2016 Credit Agreement also requires the Term Loans to be prepaid with the net cash proceeds from certain debt incurrences or issuances and asset dispositions, subject to certain exceptions, thresholds and reinvestment rights. The 2016 Credit Agreement also requires the Tranche B Term Loan to be annually prepaid with a variable percentage of the Company's Excess Cash Flow (as defined in the 2016 Credit Agreement), ranging from 0% to 50% determined based on the Company's Consolidated Leverage Ratio. As of December 31, 2020, this prepayment percentage was 25%. The Company may voluntarily prepay outstanding loans from time to time, subject to certain conditions, without premium or penalty other than customary “breakage” costs.
The obligations of the borrowers under the 2016 Credit Agreement are guaranteed by the Company and certain direct and indirect wholly-owned domestic subsidiaries of the Company and the obligations of foreign borrowers under the Revolving Credit Facility are guaranteed by certain direct and indirect foreign subsidiaries of the Company, subject to certain exceptions. Under the 2016Amended and Restated Credit Agreement, the Company has granted a security interest in substantially all of the assets of the Company, and the guarantors, subject to certain exceptions including without limitation, the assets of WEX Bank and certain foreign subsidiaries.
The 2016On September 26, 2023, the Company entered into the Third Amendment to Amended and Restated Credit Agreement, which increased the revolving credit commitments from an aggregate amount of $930.0 million to $1,430.0 million under the Company’s secured revolving credit facility (the “Revolving Credit Facility”). No other substantive changes were made to the Amended and Restated Credit Agreement as part of this amendment.
On April 24, 2023, the Company’s Amended and Restated Credit Agreement was amended contains customary representationssolely for the purpose of replacing the current reference rate with the USD LIBOR successor rate, SOFR (including an applicable credit spread adjustment). On August 10, 2023, the Amended and warranties, as well as affirmativeRestated Credit Agreement was further amended solely to modify the definition of Operating Indebtedness (as defined in the Amended and negative covenants, as further described under the following “Debt Covenants” heading.
See Note 26, Supplementary Regulatory Capital Disclosure, for further discussion.
Notes Outstanding
AsRestated Credit Agreement) to include any indebtedness incurred by certain subsidiaries of December 31, 2020 and 2019, the Company had $400.0 millionpursuant to the BTFP. Under the Amended and Restated Credit Agreement, Operating Indebtedness is excluded from our Consolidated Funded Indebtedness, which is used to calculate the Company’s Consolidated Leverage Ratio (all capitalized terms in this sentence are as defined in the Amended and Restated Credit Agreement). No other substantive changes were made to the Amended and Restated Credit Agreement as part of 4.75 percent fixed-rate senior notesthese amendments.
Convertible Notes
On August 11, 2023 (the “Notes”“Repurchase Date”) outstanding, which will mature on February 1, 2023. Interest is payable semiannually in arrears on February 1 and August 1 of each year. The Company may redeem the Notes with no premium due upon redemption. As discussed in Note 28,
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Subsequent Events,, the Company deliveredentered into a notice of redemption to the holders of the Notes, calling for redemption on March 15, 2021.
The Notes are guaranteed on a senior secured basis by each of the Company’s restricted subsidiaries and each of the Company’s regulated subsidiaries that guaranteed the Company’s obligations under the 2016 Credit Agreement. WEX Bank, is not a guarantor and is not subject to many of the restrictive covenants in the indenture governing the Notes. The Notes and guarantees described above are general senior secured obligations ranking equallyprivately negotiated repurchase agreement with the Company’s existing and future senior debt, senior in rightholder of paymentour Convertible Notes, WP Bronco Holdings, LLC, an affiliate of funds managed by Warburg Pincus LLC, to repurchase all of the Company’s subordinated debt, and effectively equal in lien priority to the Company’s 2016 Credit Agreement. In addition, the Notes and the guarantees are structurally subordinated to all liabilities of the Company’s subsidiaries that are not guarantors, including WEX Bank.
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 issuedoutstanding $310.0 million in aggregate principal amount of the Company’s Convertible Notes due 2027 (the “Convertible Notes”) and 577,254 sharesat 119 percent of the Company's common stockpar for an aggregatea total purchase price of $389.2$370.4 million, inclusive of which $90.0 million constitutedaccrued and unpaid interest from and including July 15, 2023, to, but excluding, the purchase price forRepurchase Date. At the shares, reflecting a purchase pricetime of $155.91 per share.
The issuancerepurchase, the net carrying amount of the Convertible Notes providedwas $298.8 million, resulting in a loss on extinguishment of $70.1 million, which has been recorded within non-operating expense on the Company with net proceedsconsolidated statement 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 onoperations for the year ended December 31, 2023.
Prior to repurchase, the holders of the Convertible Notes is calculatedcould opt to convert such Convertible Notes at any time prior to maturity, or earlier redemption or repurchase, based upon an initial conversion price of $200 per share of common stock, which the Company could elect to settle in cash, shares of the Company’s common stock, or a fixedcombination thereof. The Company accounted for the Convertible Notes and its conversion feature as a single unit of account. The debt discount and debt issuance costs associated with the Convertible Notes were amortized to interest expense using the effective interest rate method over the seven-year contractual life of the Convertible Notes. During each of the years ended December 31, 2022 and 2021 and through the date of repurchase, the Convertible Notes had an effective interest rate of 6.5% per annum,7.5 percent.
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
The Convertible Notes’ carrying amount consisted of the following:
| | | | | | | | | | | | | | |
| (in millions) | | December 31, 2023 | | December 31, 2022 |
Principal(1) | | $ | — | | | $ | 310.0 | |
| Less: Unamortized discounts | | — | | | (10.9) | |
| Less: Unamortized issuance cost | | — | | | (1.8) | |
| Net carrying amount of Convertible Notes | | $ | — | | | $ | 297.3 | |
| | | | |
(1)Recorded within long-term debt, net on our consolidated balance sheets, offset by the long-term portion of unamortized discounts and issuance cost.
Interest was payable semi-annually in arrears on January 15 and July 15 of each year, with the first interest payment due January 15, 2021.year. At the Company'sCompany’s option, interest iswas 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 Since inception and through 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 $200.00 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 (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 5 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 principal amount of the Convertible Notes, plus the present value of futureRepurchase Date, all interest payments through the date of maturity. No such repurchase occurred during the year ended December 31, 2020.
The $389.2 million of proceeds from this private placement was allocateddue 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 are allocated between a liability and equity component. The carrying amount of the liability component of the Convertible Notes was calculated by measuring the fair value of a hypothetical debt instrument with a similar tenor without a conversion feature. The fair value was determined 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
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. The effective interest rate on the liability component of the Convertible Notes was 11.2% at the date of loan origination.
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 consolidated balance sheet. This equity component will not be remeasured as long as it continues to meet the conditions for equity classification. Based on the closing price of the Company’s common stock as of December 31, 2020, the "if-converted" value of the Convertible Notes exceeds its principal amount by $5.5 million.
The Convertible Notes consist of the following:
| | | | | | | | |
(In thousands) | | December 31, 2020 |
Principal | | $ | 310,000 | |
Less: Unamortized discounts | | (66,755) | |
Less: Unamortized issuance cost | | (2,358) | |
Net carrying amount of Convertible Notes1
| | $ | 240,887 | |
| | |
Equity component2
| | $ | 54,689 | |
| | |
1 Recorded within long-term debt, net on our consolidated balance sheet.
2 Represents the proceeds allocated to the conversion option, or debt discount, recorded within additional paid-in capital on the consolidated balance sheet. Additional paid-in capital on the consolidated balance sheet is further reduced by $0.6 million of issuance costs and $13.6 millionpaid in taxes associated with the equity component.
cash. The following table sets forth total interest expense recognized for the Convertible Notes:
| | | | | | | |
(In thousands) | Year Ended December 31, 2020 | | |
Interest on 6.5% coupon | $ | 10,019 | | | |
Amortization of debt discount and debt issuance costs | 3,414 | | | |
| $ | 13,433 | | | |
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| (in millions) | 2023 | | 2022 | | 2021 | | |
| Interest on 6.5% coupon | $ | 12.4 | | | $ | 20.2 | | | $ | 20.2 | | | |
| Amortization of debt discount and debt issuance costs | 1.5 | | | 2.2 | | | 2.1 | | | |
| $ | 13.9 | | | $ | 22.4 | | | $ | 22.3 | | | |
Debt Issuance Costs
DuringUnder the yearterms of the private placement, for so long as Warburg Pincus continued to own at least 50 percent of the aggregate amount of the shares issued and the shares of common stock issuable upon conversion of the Convertible Notes, Warburg Pincus was entitled to nominate an individual to the board of directors. Such nominee was a managing director at Warburg Pincus LLC. As a member of our board of directors, such individual receives remuneration for their services, which was immaterial for the years ended December 31, 2020, the Company completed four amendments (the Eighth, Ninth, Tenth2023, 2022 and Eleventh Amendments) to the 2016 Credit Agreement, largely in connection with its acquisition of eNett and Optal. The Eighth Amendment was superseded by the Ninth Amendment (other than with respect to the consent fees payable in connection with the Eighth Amendment) and the Eleventh Amendment modified terms that were only applicable if the Company was required to finance the acquisition of eNett and Optal. However, the Ninth Amendment, among other things, amended certain provisions of the 2016 Credit Agreement relating to financial maintenance covenants and pricing terms and the Tenth Amendment increased the commitments under the Revolving Credit Facility by $50.0 million. The Company accounted for the Ninth, Tenth and Eleventh Amendments as debt modifications. As part of these transactions, the Company incurred and expensed an insignificant amount of third party costs, which are classified within general and administrative expenses in our consolidated statements of operations. In association with the Ninth Amendment, the Company incurred and capitalized $4.3 million of lender fees. Consent fees incurred pursuant to the Eighth Amendment and payable upon a consummation of the eNett and Optal acquisition of $2.9 million were capitalized during December 2020.
During the year ended December 31, 2019, the Company entered into the Fifth, Sixth and Seventh Amendments to the 2016 Credit Agreement. The Company accounted for the Fifth Amendment to the 2016 Credit Agreement as a debt modification. The Company accounted for the SixthAmendment to the 2016 Credit Agreement, which was completed in 2019, as both a debt modification and a partial debt extinguishment, and consequently recorded a loss on extinguishment of debt of $1.3 million related to the write-off of unamortized debt issuance costs during 2019. The Company incurred and expensed $10.6 million of third party costs associated with the Fifth and Sixth Amendments, which are classified within general and administrative expenses in the consolidated statements of income during 2019. We expensed as incurred an insignificant amount of costs resulting from the Seventh Amendment to the 2016 Credit Agreement. During 2019, the Company also
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
incurred and capitalized lender costs of $3.4 million associated with the Fifth Amendment and a debt discount of $11.0 million associated with the Sixth Amendment.
During the year ended December 31, 2018, the Company entered into the Third and Fourth Amendments to the 2016 Credit Agreement. The Third Amendment was accounted for as both a debt modification and partial debt extinguishment, which caused us to record a loss on extinguishment of debt of $1.1 million related to the write-off of unamortized debt issuance costs, while the Fourth Amendment was accounted for as a debt modification. The Company incurred general and administrative expenses of $3.8 million related to third-party costs associated with the Third and Fourth Amendments. The loss on extinguishment and third-party costs are reflected as financing interest expense and general and administrative expenses, respectively. In addition, the Company incurred and capitalized $5.8 million of new debt issuance costs related to the Third and Fourth Amendments.
Debt issuance costs incurred and capitalized in conjunction with the 2016 Credit Agreement and its amendments are being amortized into interest expense over the remaining term of the Term Loans and Revolving Credit Facility, as applicable, using the effective interest method.2021.
Debt Covenants
The 2016Amended and Restated Credit Agreement and the indenture governing the Notes contain variouscontains customary affirmative and negative covenants that, subject to certain customary exceptions, limitaffecting the Company and its subsidiaries’subsidiaries, including in certain limited circumstances, WEX Bank andcovenants limiting the Company’s other regulated subsidiaries, ability to, among other things (i) incur additional debt, (ii) pay dividends or make other distributions on, redeem or repurchase capital stock, or make investments or other restricted payments, (iii) enter into transactions with affiliates, (iv) dispose of assets or issue stock of restricted subsidiaries or regulated subsidiaries, (v) create liens on assets, or (vi) effect a consolidation or merger or sell all, or substantially all, of the Company’s assets. Additionally, the indenture governing the Convertible Notes contains customary negative and affirmative covenants that, subject to certain customary exceptions, limit the Company and its subsidiaries', but excluding WEX Bank and the Company's other regulated subsidiaries, ability to, among other things, incur additional debt. These covenants are subject to important exceptionsdebt, grant liens, make certain investments, pay dividends, repurchase equity interests and qualifications. At any time that the Notes are rated investment grade, which is not currently the case, andsell assets, subject to certain conditions, certain covenants will be suspended with respect to the Notes. WEX Bankexceptions. The Amended and the Company’s other regulated subsidiaries will not be subject to some of the restrictive covenants in the Indenture that place limitations on the Company and its restricted subsidiaries’ actions, and where WEX Bank and the Company’s regulated subsidiaries are subject to covenants, there are significant exceptions and limitations on the application of those covenants to WEX Bank and the Company’s regulated subsidiaries.
The 2016Restated Credit Agreement also requires, solely for the benefitcontains customary financial maintenance covenants, including a consolidated interest coverage ratio and a consolidated leverage ratio, which were as follows as of the lenders of the Tranche A Term Loan and lenders under the Revolving Credit Facility, that the Company maintain at the end of each fiscal quarter the following financial ratios:December 31, 2023:
•a Consolidated Interest Coverage (as defined in the 2016 Credit Agreement)consolidated interest coverage ratio of no less than 2.75 to 1.00 at December 31, 2020 and through March 31, 2021, after which the ratio reverts back to no less than 3.00 to 1.00; and
•a Consolidated Leverage Ratio (as defined in the 2016 Credit Agreement)consolidated leverage ratio of no more than 7.504.75 to 1.00 through March 31, 2021, 7.001.00.
The indenture governing the Convertible Notes contained customary covenants that, subject to 1.00 forcertain customary exceptions, limited the quarter ending June 30, 2021, 6.50Company’s ability to, 1.00 foramong other things, incur additional debt. In connection with the quarter ending September 30, 2021, 6.00repurchase of our Convertible Notes, this indenture was discharged and, as such, the Company is no longer subject to 1.00 for the quarters ending December 31, 2021 through September 30, 2022, and 5.00 to 1.00 thereafter.restrictions contained in the indenture governing the Convertible Notes.
Australian Securitization FacilityFacilities
The Company has aUnder securitized debt agreement with MUFG Bank Ltd., which expires in April 2021. Under the terms of the agreement,agreements, each month on a revolving basis, the Company sells certain of its Australian and European receivables to bankruptcy-remote subsidiaries consolidated by the Company’s Australian Securitization Subsidiary. The Australian Securitization Subsidiary,Company, which in turn usesuse the receivables as collateral to issue asset-backed commercial paper (“securitized debt”) for approximately 85 percent of the securitized receivables. The amountdebt. Amounts collected on the securitized receivables isare restricted to pay the securitized debt and isare 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 Ratevariable interest rates plus an applicable margin.
The interest rate was 0.97 percent and 1.80 percent as of December 31, 2020 and 2019, respectively. The Company hadCompany’s securitized debt under this facilityagreement for the securitization of $62.6 million and $78.6 million as of December 31, 2020 and 2019, respectively, recorded in short-term debt, net.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
its European Securitization Facility
The Company maintains a five-year securitized debt agreementreceivables is with MUFG Bank, Ltd., whichhas a maximum revolving borrowing limit of €55.0 million and expires April 2024, unless otherwise agreed to in April 2021. Underwriting by the terms of the agreement,parties. During September 2023, the Company sells certainentered into a new securitized debt facility with Australia and New Zealand Banking Group Limited (“ANZ”) for the securitization of its receivables from selected European countries toAustralian receivables. This agreement has a maximum revolving borrowing limit of A$140.0 million and an initial term of twelve months through October 2024, annually
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
renewable thereafter unless earlier terminated. During October 2023, the Company terminated its European Securitization Subsidiary. The European Securitization Subsidiary, in turn, uses the receivables as collateral to issue securitized debt. The amount collected on the securitized receivables is restricted to pay thepreviously existing Australian securitized debt agreement, which was with MUFG Bank, Ltd., and is not available for general corporate purposes. The amount of receivables to be securitized under this agreement is determined by management on a monthly basis. The interest rate was 0.98 percent and 0.63 percent as of December 31, 2020 and 2019, respectively. The Company had securitized debt under thisthe new facility of $23.4 million and $25.7 million as of December 31, 2020 and 2019, respectively, recorded in short-term debt, net.with ANZ became effective.
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 monthset according to 3 month LIBORan applicable reference rate plus a margin, which ranged from 2.25 percent to 2.50 percent as of 225 basis points. December 31, 2023 and 2022.
The following table providesAs of December 31, 2023, the amountsCompany had outstanding under the participation debt agreements in place:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| (In thousands) | | Amounts Available1 | | Amounts Outstanding | | Remaining Funding Capacity | | Amounts Available | | Amounts Outstanding2 | | Remaining Funding Capacity |
| Participation debt | | $ | 60,000 | | | 0 | | | 60,000 | | | $ | 80,000 | | | 50,000 | | | $ | 30,000 | |
| | | | | | | | | | | | |
| Average interest rate on participation debt outstanding | | | | Not applicable | | | | | | 4.17 | % | | |
1 Amounts available includesthat allow for total borrowings of up to $60$70.0 million under an agreement that terminates on December 31, 2021.
2 Amounts outstanding are recordedand expire at various points through 2024, unless otherwise agreed to in short-term debt, net.writing by the parties.
Borrowed Federal Funds
WEX Bank borrows from uncommitted federal funds lines to supplement the financing of the Company'sCompany’s accounts receivable. Federal funds lines of credit were $376.0$517.0 million and $355.0 million, respectively, as of December 31, 20202023. WEX Bank had $70.0 million in outstanding borrowings under these federal funds lines of credit as of December 31, 2023 and 2019. There were $20.0 million and $35.0 million ofno outstanding borrowings as of December 31, 2020 and 2019, respectively. The average interest rate on borrowed federal funds was 1.01 percent and 2.36 percent2022.
On March 12, 2023, the Federal Reserve Board announced the BTFP, which provides liquidity to U.S. depository institutions. This program allows bank loans for up to one year in length, collateralized by the years ended December 31, 2020 and 2019, respectively.
par value of qualifying assets. Under the BTFP, WEX Latin America Debt
WEX Latin America debt was comprised of credit facilities and loan arrangements relatedBank is able to its accounts receivable, which had a 35.04 percent interest rate as of December 31, 2019. The Company sold WEX Latin America on September 30, 2020 and no longer has this debt obligation.
Other
refinance outstanding obligations without penalty. As of December 31, 2020,2023, WEX Bank had $775.0 million in outstanding borrowings from the BTFP due in December of 2024 with an interest rate of 4.84 percent. At December 31, 2023, debt securities with a par value of $775.7 million and fair value of $704.1 million were pledged as collateral.
Other
As of December 31, 2023, WEX Bank pledged $249.8$217.3 million of fleet receivables held by WEX Bank to the Federal Reserve Bank as collateral for potential borrowings throughthe Federal Reserve Bank Discount Window. Amounts that can be borrowed are based on the amount of collateral pledged and were $188.4$151.8 million as of December 31, 2020.2023. WEX Bank had 0no borrowings outstanding on this line of credit through the Federal Reserve Bank Discount Window as of December 31, 20202023 and December 31, 2019.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2022.Debt Commitments
The table(1) below summarizes the Company’s annual principal payments on its total debt for each of the next five years:
| | | | | |
| (in millions) | |
| 2024 | $ | 1,049.3 | |
| 2025 | $ | 63.3 | |
| 2026 | $ | 1,422.5 | |
| 2027 | $ | 14.4 | |
| 2028 | $ | 1,344.7 | |
| | | | | |
| 2021 | $ | 170,556 | |
| 2022 | $ | 64,611 | |
| 2023 | $ | 1,188,598 | |
| 2024 | $ | 14,681 | |
| 2025 | $ | 14,681 | |
(1) Table is based on contractual maturities and, therefore, unadjusted for the Company's intention to early redeem its Notes during March 2021, as discussed further in Note 28, Subsequent Events.
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
| | | | | |
| 17. | Tax Receivable Agreement |
As a consequence of the Company’s separation from its former parent company in 2005, the tax basis of the Company’s net tangible and intangible assets increased, reducing the amount of tax that the Company would pay in the future to the extent the Company generated taxable income in sufficient amounts. The Company is contractually obligated to remit a portion of any such cash savings to a third party. The estimated amounts of future payments owed were $2.0 million at December 31, 2020 and $3.7 million at December 31, 2019, which are included within other current liabilities on the consolidated balances sheets based on the timing of payment. There has been a reassessment of the estimate for each period presented. For the years ended December 31, 2020, 2019 and 2018, this reassessment resulted in an insignificant change in the net future benefits and non-operating expense. In addition, the liability decreased due to payments of $1.3 million and $8.9 million made during the years ended December 31, 2020 and 2019, respectively.
| | | | | |
18. | Employee Benefit Plans |
The Company sponsors a 401(k) retirement and savings plan for U.S. employees. Eligible employees may participate in the plan immediately. The Company’s employees who are at least 18 years of age and have completed one year of service are eligible f orfor Company matching contributions in the plan. The Company matches 100 percent of each employee’s contributions up to a maximum of 6 percent of each employee’s eligible compensation. All contributions vest immediately. WEX has the right to discontinue the plan at any time. Contributions to the plan are voluntary. The Company contributed $13.7$18.2 million, $10.0$16.8 million and $8.0$15.1 million in matching funds to the plan for the years ended December 31, 2020, 20192023, 2022 and 2018,2021, respectively.
The Company also sponsors deferred compensation plans for certain employees designated by the Company. Participants may elect to defer receipt of designated percentages or amounts of their compensation.compensation and the Company provides a match of up to 6 percent of a portion of the participant’s applicable contributions, which was immaterial for the years ended December 31, 2023, 2022 and 2021. The Company maintains a grantor’s trust to hold the assets under these plans.plans, which are recorded at fair value. The assets and equally offsetting related obligations totaled $9.6$13.7 million and $8.0$11.1 million at December 31, 20202023 and 2019, respectively, and are included in other current liabilities and other liabilities on the consolidated balance sheets.2022, respectively. The assets are recorded at fair value, with any changes recorded to earnings, and are included in prepaid expenses and other current assets and other assets on the consolidated balance sheets.sheets, as applicable, and the related obligations are included in accrued expenses and other current liabilities and other liabilities on the consolidated balance sheets, as applicable. Refer to Note 19,18, Fair Value, for further information.
The Company has defined benefit pension plans in several foreign countries. The total net unfunded status for the Company’s foreign defined benefit pension plans was $6.3$3.8 million and $5.9$3.4 million as of December 31, 20202023 and 2019,2022, respectively. These obligations are recorded in accrued expenses and other current liabilities accrued expenses and other liabilities in the consolidated balance sheets.sheets, as applicable. The Company measures these plan obligations at fair value on an annual basis, with any changes recorded to earnings. The aggregate cost for these plans was insignificant to the consolidated financial statements for all periods presented.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
| | | | | PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
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:
| | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| (In thousands) | Fair Value Hierarchy | | 2020 | | 2019 | | |
| Financial Assets: | | | | | | | |
Money market mutual funds1 | 1 | | $ | 335,449 | | | $ | 223,217 | | | |
| | | | | | | |
| Investment securities | | | | | | | |
| Municipal bonds | 2 | | $ | 197 | | | $ | 302 | | | |
| Asset-backed securities | 2 | | 210 | | | 247 | | | |
| Mortgage-backed securities | 2 | | 138 | | | 174 | | | |
Pooled investment fund measured at net asset value2 | | | 9,000 | | | 5,000 | | | |
| Fixed-income mutual fund | 1 | | 27,728 | | | 24,737 | | | |
| Total investment securities | | | $ | 37,273 | | | $ | 30,460 | | | |
Executive deferred compensation plan trust3 | 1 | | $ | 9,586 | | | $ | 7,965 | | | |
Interest rate swaps4 | 2 | | $ | 0 | | | $ | 2,395 | | | |
| | | | | | | |
| Liabilities: | | | | | | | |
Interest rate swaps5 | 2 | | $ | 44,938 | | | $ | 19,764 | | | |
| | | | | | | | | | | | | | | | | | | |
| | | December 31, | | |
| (in millions) | Fair Value
Hierarchy | | 2023 | | 2022 | | |
| Financial Assets: | | | | | | | |
Money market mutual funds(1) | 1 | | $ | 25.5 | | | $ | 35.1 | | | |
U.S. Treasury bills(1) | 2 | | $ | 10.4 | | | $ | — | | | |
| | | | | | | |
| Investment securities, current: | | | | | | | |
| Debt securities: | | | | | | | |
| U.S. treasury notes | 2 | | 378.6 | | | 364.1 | | | |
| Corporate debt securities | 2 | | 1,068.8 | | | 497.8 | | | |
| Municipal bonds | 2 | | 65.7 | | | 45.0 | | | |
| Asset-backed securities | 2 | | 581.6 | | | 190.7 | | | |
| Mortgage-backed securities | 2 | | 927.4 | | | 297.7 | | | |
| | | | | | | |
| Total | | | $ | 3,022.1 | | | $ | 1,395.3 | | | |
| | | | | | | |
| Investment securities, non-current: | | | | | | | |
| Debt securities | 2 | | $ | 28.4 | | | $ | 14.5 | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Fixed-income mutual fund | 1 | | 25.5 | | | 24.5 | | | |
Pooled investment fund measured at NAV(2) | | | 12.9 | | | 9.0 | | | |
| Total | | | $ | 66.8 | | | $ | 48.0 | | | |
| | | | | | | |
Executive deferred compensation plan trust(3) | 1 | | $ | 13.7 | | | $ | 11.1 | | | |
Interest rate swaps(4) | 2 | | $ | — | | | $ | 81.4 | | | |
| | | | | | | |
| Liabilities: | | | | | | | |
Contingent consideration(5) | 3 | | $ | 186.2 | | | $ | 206.4 | | | |
1 (1)The fair value is recorded in cash and cash equivalents.
2 (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 consolidated balance sheets.
3 (3)The fair value of these assets is recorded as current or long-term based on the timing of the Company'sCompany’s executive deferred compensation plan payment obligations. At December 31, 2020, $0.92023, $1.7 million and $8.7$12.0 million in fair value iswas recorded within prepaid expenses and other current assets and other assets, respectively. At December 31, 2019, $0.92022, $1.9 million and $7.0$9.2 million in fair value iswas recorded within prepaid expenses and other current assets and other assets, respectively.
4(4)The fair value isof these assets was recorded as current or long-term depending on the timing of expected discounted cash flows. At December 31, 2019, $2.42022, $45.3 million ofand $36.1 million in fair value iswas recorded within prepaid expenses and other current assets.assets and other assets, respectively.
5 (5)The fair value of this liability is recorded as current or long-term dependingbased on the timing of expected discounted cash flows.payments. At December 31, 2020, $22.02023, $64.5 million and $22.9$121.7 million ofin fair value iswas recorded within accrued expenses and other current liabilities and other liabilities,
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
respectively. At December 31, 2022, $28.7 million and $177.7 million in fair value was recorded within accrued expenses and other current liabilities and other liabilities, respectively. At December 31, 2019, $6.7 million and $13.1 million of fair value is recorded within other current liabilities and other liabilities, respectively.
Money Market Mutual FundsMONEY 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 for identical instruments in an active market.
Investment SecuritiesU.S. TREASURY BILLS
When available,A portion of the Company usesCompany’s cash and cash equivalents are invested in U.S. treasury bills with maturities of 30 days or less, which are classified as Level 2 in the fair value hierarchy because they are valued using quoted market prices to determinefor similar or identical instruments in a market that is not active.
DEBT SECURITIES
The Company determines 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, whichU.S. treasury notes using quoted market prices for similar or identical instruments in a market that is invested in fixed-income securities and is held in order to satisfy the regulatory requirements of WEX Bank.not active. For mortgage-backed and asset-backedcorporate debt securities, and municipal bonds, asset-backed and mortgage-backed securities, 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 FundPOOLED INVESTMENT FUND
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Fair Value | | Unfunded Commitments | | Redemption Frequency | | Redemption Notice Period |
| | | | | | | |
| Pooled investment fund, as of December 31, 2020 | $ | 9,000 | | | 0 | | | Monthly | | 30 days |
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. As of December 31, 2023, the Company had no unfunded commitments with respect to the fund. Investments in the fund may be redeemed monthly with 30 days’ notice.
Executive Deferred Compensation Plan TrustFIXED INCOME MUTUAL FUND
The Company determines the fair value of its fixed income mutual fund using quoted market prices for identical instruments in an active market; such inputs are classified as Level 1 of the fair-value hierarchy.
EXECUTIVE DEFERRED COMPENSATION PLAN TRUST
The investments held in the executive deferred compensation plan trust, which consist primarily of mutual funds, are classified as Level 1 in the fair value hierarchy because the fair value is determined using quoted market prices for identical instruments in active markets.
Interest Rate SwapsINTEREST 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 LIBORSOFR curve, which are Level 2 inputs of the fair value hierarchy.
CONTINGENT CONSIDERATION
As part of the asset acquisition from Bell Bank discussed in Note 4, Acquisitions, the Company is obligated to pay additional consideration to Bell Bank contingent upon increases in the Federal Funds rate. The Company determines the fair value of this contingent consideration derivative liability based on discounted cash flows using the difference between the baseline Federal Funds rate in the purchase agreement with Bell Bank and future forecasted Federal Funds rates over the agreement term. The forecasted Federal Funds rates represent a Level 3 input within the fair value hierarchy. The resulting probability-weighted contingent consideration amounts were discounted using a rate of 3.84 percent and 3.52 percent as of December 31, 2023 and 2022, respectively. Due to significant increases in the Federal Funds rate, the fair value of the Company’s contingent consideration derivative liability at December 31, 2023 is effectively measured at the present value of the maximum remaining contingent consideration payable under the arrangement and accordingly, the fair value could not materially increase. A significant decrease in the Federal Funds rate could result in a material decrease in the derivative liability.
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
The Company records changes in the estimated fair value of the contingent consideration in the consolidated statements of operations. Changes in the contingent consideration derivative liability are measured at fair value on a recurring basis using unobservable inputs (Level 3) and during the years ended December 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | | |
| (in millions) | December 31, 2023 | | December 31, 2022 | | |
| |
| Contingent consideration – beginning of the year | $ | 206.4 | | | $ | 67.3 | | | |
Payments of contingent consideration(1) | (28.7) | | | — | | |
| Change in estimated fair value | 8.5 | | | 139.1 | | |
| Contingent consideration – end of the year | $ | 186.2 | | | $ | 206.4 | | |
(1)The Company has presented $27.2 million of this payment, which represents the fair value of the contingent consideration at acquisition date, within net cash provided by financing activities in the consolidated statement of cash flows. The remainder has been included in net cash provided by (used for) operating activities, specifically within changes in accrued expenses and other current and long-term liabilities.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company recorded a goodwill impairment charge of $53.4$136.5 million during the year ended December 31, 20202022 to write down the carrying value of thecertain reporting unitunits to fair value using Level 3 inputs as of the annual goodwill impairment test date of October 1, 2020.inputs. See Note 9, Goodwill and Other Intangible Assets for a description of the valuation techniques and inputs used for the fair value measurement. SeeNote 24, Impairment Charges, forThe Company had no other assets and liabilities measured at fair value on a non-recurring basis for the years ended December 31, 2020 and 2018 and the related impairment charges recorded.
The Company had no other assets and liabilities measured on a non-recurring basis during the years ended December 31, 20202023 and 2019.2022.
Assets and Liabilities Measured at Carrying Value, for which Fair Value is Disclosed
Notes OutstandingThe fair value of the Company’s financial instruments, which are measured and reported at carrying value, is as follows for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| (in millions) | Carrying value | | Fair value | | Carrying value | | Fair value |
| | | | | | | |
Tranche A Term Loans(1) | $ | 843.9 | | | ** | | $ | 892.8 | | | ** |
Tranche B Term Loans(1) | 1,402.3 | | | ** | | 1,416.8 | | | ** |
Outstanding borrowings on Revolving Credit Facility(1) | 662.0 | | | ** | | — | | | — | |
Convertible Notes(2) | — | | | — | | | 310.0 | | | 330.0 | |
Contractual deposits with maturities in excess of one year(3) | 129.8 | | | ** | | 334.2 | | | 308.1 | |
** Fair value approximates carrying value due to the instruments’ variable rates approximating market interest rates.
(1)The Company determines the fair value of borrowings on the NotesRevolving Credit Facility and Tranche A Term Loans and Tranche B Term Loans based on market rates for the issuance of our debt, which are classified as Level 2 in the fair value hierarchy. As of both December 31, 2020 and 2019, the carrying value of the Notes approximated fair value.
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 December 31, 2020 and 2019, the carrying value of the 2016 Credit Agreement, including both the tranche A and tranche B term loans, approximated fair value.
Convertible Notes
(2)The Company determinesdetermined 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 ratedsimilarly-rated credit issuances, all of which are Level 2 inputs in the fair value hierarchy. AsOn August 11, 2023, the Company repurchased all of December 31, 2020,the outstanding aggregate principal amount of the Company’s Convertible Notes and the repurchased Convertible Notes were canceled by the trustee at the instruction of the Company.
(3)The Company determines the fair value of our convertible notes is $405.6 million.its contractual deposits with maturities in excess of one year using current market interest rates for deposits of similar remaining maturities, which are Level 2 inputs in the fair value hierarchy.
Other Assets and Liabilities
The Company'scarrying value of certain of the Company’s financial instruments, other than those presented above, includeincluding cash, cash equivalents, restricted cash and restricted cash payable, short-term contractual deposits and HSA deposits, accounts receivable and securitized accounts receivable, accounts payable, accrued expenses and other liabilities. The carrying values of such assetscurrent liabilities and other liabilities, approximate their respective fair values due to their short-term nature.nature or maturities. The carrying valuesvalue of certificates of deposit,certain other financial instruments, including interest-bearing brokered money market deposits, securitized debt, participation debt, and borrowed federal funds and deferred consideration associated with our acquisitions approximate their respective fair values as thedue to stated interest rates on these financial instruments are variable market-basedbeing consistent with current market interest rates. All other financial instruments are reflected at fair value on the consolidated balance sheets.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
| | | | | PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
| | | | | |
20.19. | Redeemable Non-Controlling Interest |
On March 5, 2019, the Company acquired Discovery Benefits, an employee benefits administrator. The seller of Discovery Benefits, SBI, obtained a 4.9 percent equity interest in PO Holding, the newly formed parent company of WEX Health and Discovery Benefits (the “U.S. Health business”).Benefits. 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. On the date of acquisition, the excess of the fair value of the 4.9 percent equity interest in WEX Health over its carrying value was recognized as an equity transaction, resulting in a $41.4 million increase to additional paid-in capital. Remeasurement of the equity interest to fair value during the first quarter of 2019 resulted in an increase to redeemable non-controlling interest of $41.4 million and an offsetting decrease to retained earnings that did not impact earnings per share.
Theoriginal agreement provides the sellerprovided SBI with a put right and the Company with a call right for the equity interest, which cancould 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 makesmade the non-controlling interest redeemable and, therefore, the non-controlling interest iswas 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 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 will bewas offset against retained earnings and impactimpacted earnings per share.
As part of WEX Inc.’s purchase of the HSA contractual rights from Bell Bank on April 1, 2021, WEX Inc. and SBI entered into the PO Holding Operating Agreement, which reflected the Company’s purchase of $11.2 million of SBI’s non-controlling interest in PO Holding, which reduced SBI’s ownership percentage to 4.53 percent. Pursuant to the PO Holding Operating Agreement, SBI subsequently elected to participate in the equity financing of the June 1, 2021 benefitexpress Acquisition, which was facilitated through the Subscription Agreement, under which SBI agreed to pay the Company $12.5 million, equal to 4.53 percent of the purchase price. This receivable was ultimately offset against deferred payments owed by WEX Inc. to SBI with respect to the asset acquisition from Bell Bank.
On March 7, 2022, in complete satisfaction of any rights under the PO Holding operating agreement, WEX Inc. and SBI entered into the Share Purchase Agreement whereby WEX Inc. purchased SBI’s remaining 4.53 percent interest in PO Holding. The purchase price for the shares in PO Holding was $234.0 million plus any interest accruing pursuant to the terms of the Share Purchase Agreement. The initial liability associated with the future payment of the purchase price was recorded at a net present value of $216.6 million, as more fully described in Note 4, Acquisitions. The carrying value of the redeemable non-controlling interest immediately prior to the acquisition date was $254.4 million. The $37.8 million excess carrying value as of the acquisition date was recorded within the change in value of redeemable non-controlling interest on the consolidated statements of operations. This change in value of redeemable non-controlling interest was offset by $3.5 million of deferred tax expense resulting from the difference between the book and tax bases of the deferred liability payable to SBI. The carrying value of the redeemable non-controlling interest was reduced to zero as a result of the acquisition. As a result of this purchase, WEX Inc. owns 100 percent of PO Holding.
The following table presents the changes in the Company’s redeemable non-controlling interest:interest during the year ended December 31, 2022:
| | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2020 | | 2019 |
| Balance, beginning of year | $ | 156,879 | | | $ | 0 | |
| Acquisition of Discovery Benefits at fair value | 0 | | | 25,757 | |
| Establishing redeemable non-controlling interest for WEX Health at carrying value | 0 | | | 32,843 | |
| Adjustment to redeemable non-controlling interest to reflect WEX Health at fair value | 0 | | | 41,400 | |
| Net income (loss) attributable to redeemable non-controlling interest | 652 | | | (436) | |
| Change in value of redeemable non-controlling interest | (40,312) | | | 57,315 | |
| Balance, end of year | $ | 117,219 | | | $ | 156,879 | |
| | | | | | | |
| (in millions) | | | |
| Balance, beginning of year | | | $ | 254.1 | |
| | | |
| | | |
| Net income attributable to redeemable non-controlling interest | | | 0.3 | |
| Change in value of redeemable non-controlling interest | | | (37.8) | |
| Repurchase of non-controlling interest | | | (216.6) | |
| Balance, end of year | | | $ | — | |
| | | | | |
21.20. | Commitments and Contingencies |
Litigation and Regulatory Matters
The Company is subject to legal proceedingslitigation, claims and claimsregulatory matters 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 or regulatory proceedings is not material to the Company’s consolidated financial position, results of operations, cash flows or liquidity.
Extension of Credit to Customers
We have entered into commitments to extend credit in the ordinary course of business. We had $6.6$9.4 billion of unused commitments to extend credit at December 31, 2020,2023, as part of established customer agreements. These amounts may increase or decrease during 20212024 as we increase or decrease credit to customers, subject to appropriate credit reviews, as part of our lending product agreements. Many of these commitments are not expected to be utilized. We can adjust
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
most of our customers’ credit lines at our discretion at any time. Therefore, we do not believe total unused credit available to customers and customers of strategic relationships represents future cash requirements.
The unfunded portion of an extension of credit to customers fluctuates as the Company increases or decreases customer credit limits, subject to appropriate credit reviews. Given that the Company can generally adjust its customers’ credit lines at its discretion at any time, the unfunded portion of loan commitments to customers is unconditionally cancellable and thus the Company has not established a liability for expected credit losses on those commitments.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Unfunded Commitment
As a member bank, we have committed to providing a line of credit for the funding of up to a maximum of $8.0$15.0 million ofin loans to a nonprofit, community development financial institution to facilitate their offering of flexible financing for affordable, quality housing to assist Utah’s low and moderate-income residents. As of December 31, 2020,2023, the Company has funded $2.3$3.7 million against this line of its commitment,credit, which has been included on the consolidated balance sheet within accounts receivable. The Company’s remaining unused line of credit commitment as of December 31, 2020 is $5.7 million.2023 was $11.3 million and extends through August 2024.
As of December 31, 2023, the Company has entered into certain subscription and limited partnership agreements for limited partnership investment of up to $10.0 million in certain venture capital funds investing in climate/alternative energy technologies. Payment on such commitments are due, from time to time, upon the request by the partnerships’ general partners up until the tenth anniversary of the respective final closing date for each venture fund, except as otherwise modified in accordance with the terms of the respective limited partnership agreements.
Minimum Volume and Spend Commitments
Two ofUnder existing contractual arrangements, the Company’s subsidiaries areCompany is required to purchase a minimum amount of fuel from certain fuel suppliers on an annual basis through 2024.basis. Upon failing to meet these minimum volume commitments, a penalty is assessed as defined under the contracts. TheDuring 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 to revenue within the consolidated statement of operations during 2022. Shortfall penalties incurred $3.6under the amended contracts were immaterial and $2.7 million of shortfallfor the years ended December 31, 2023 and 2022, respectively. Shortfall penalties incurred under thesepreviously existing contracts were $6.0 million during the year ended December 31, 2020.2021. If the Company doeswere not to purchase any fuel under these commitments after December 31, 2020,2023, it would incur penaltiesadditional penalty expense totaling $49.6$15.7 million through 2024.2025. The Company considers the associated risk of lossincurring this maximum penalty to be remote based on current operations.
The Company is subject to minimum annual spend commitments as part of negotiated contracts for certain IT and
non-IT related services through 2023.services. Minimum spend commitments under thesesignificant non-cancelable contracts as of December 31, 2020 total $15.7 million, with commitments of $8.3 million in 2021, $6.7 million in 2022 and $0.7 million in 2023.2023 totaled approximately $54.1 million.
| | | | | |
22.21. | Dividend and Net Asset Restrictions |
The Company has certain restrictions on the dividends it may pay, including those under the 2016Amended and Restated Credit Agreement. The 2016Amended and Restated Credit Agreement does allowallows us to make certain restricted payments (including dividends), subject to regulator approval, if we are able to demonstrate pro forma compliance with a consolidated leverage ratio, as defined in the 2016Amended and Restated Credit Agreement, of no more than 2.502.75 to 1.00 for the most recent period of four fiscal quarters after execution of a restricted payment. Additionally, as long as the Company would be in compliance with its consolidated interest charge coverage ratio, and the lower of a consolidated leverage ratio of 5.50 to 1.00 and its maximum permitted consolidated leverage ratio for such period under the 2016 Credit Agreement after giving pro forma effect to such restricted payment, the Company may pay $50 million per annum formake annual restricted payments, including dividends, of which 100%up to $300.0 million initially, increasing by $50.0 million at the beginning of unused amounts mayeach subsequent fiscal year, such that the maximum payment amount will be carried over into subsequent years.$450.0 million for fiscal 2024. The Company has not declared any dividends on its common stock since it commenced trading on the NYSE on February 16, 2005.
Dividends paid by WEX Bank to WEX Inc. have historically provided a substantial part of the Company’s operating funds and for the foreseeable future it is anticipated that dividends paid by WEX Bank will continue to be a source of operating funds to the Company. Capital adequacy requirements serve to limit the amount of dividends that may be paid by WEX Bank. WEX Bank is chartered under the laws of the State of Utah and the FDIC insures its deposits. Under Utah law, WEX Bank may only pay a dividend out of net profits after it has (i) provided for all expenses, losses, interest and taxes accrued or due from WEX Bank and (ii) transferred to a surplus fund 10 percent of its net profits before dividends for the period covered by the dividend, until the surplus reaches 100 percent of its capital stock. For purposes of these Utah dividend
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
limitations, WEX Bank’s capital stock is $5.3$116.3 million and its capital surplus exceeds 100 percent of capital stock.
Under FDIC regulations, WEX Bank may not pay any dividend if, following the payment of the dividend, WEX Bank would be “undercapitalized,” as defined under the Federal Deposit Insurance Act and applicable regulations. The FDIC also has the authority to prohibit WEX Bank from engaging in business practices that the FDIC considers to be unsafe or unsound, which, depending on the financial condition of WEX Bank, could include the payment of dividends.
As a result of these regulations, WEX Bank is restricted in its ability to transfer a portion of its net assets to WEX Inc. As of December 31, 2023, these restricted net assets approximated 17 percent of the Company’s total consolidated net assets. WEX Bank complied with the aforementioned dividend restrictions for each of the years ended December 31, 2020, 20192023, 2022 and 2018.2021.
Certain of the Company’s other subsidiaries have restrictions on their ability to dividend funds to WEX Inc. due to specific legal or regulatory restrictions. As of December 31, 2023, such restrictions represented less than 1 percent of the Company’s total consolidated net assets.
Although the restrictions set forth above cap the amount of funding that WEX Bank and certain of the Company’s other subsidiaries can transfer to WEX Inc., we do not believe these restrictions will have a material impact on our ability to fund operating needs.
| | | | | |
23.22. | Stock-Based Compensation |
On May 9, 2019, our stockholders approvedUnder the WEX Inc.Amended and Restated 2019 Equity and Incentive Plan (the “Plan”“Amended 2019 Plan”), which replaced our 2010 Equity and Incentive Plan (the “Prior Plan”). Upon the expiration ofCompany regularly grants equity awards in the Prior Plan on May 20, 2020, all then outstanding awards will remain in effect, but no additional awards may be made under the Prior Plan. The Plan permits the grantform of stock options, stock appreciation rights, restricted stock, restricted stock unitsRSUs and other stock-based or cash-based awards to non-employeecertain employees and directors, officers, employees, advisors or consultants. The Plans permitwhich vest over specified terms so long as the Company to grantemployee remains employed by WEX through the vesting dates, as further described below. Notwithstanding the foregoing, such equity awards provide for accelerated vesting in the event of death, upon a total
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
number of shares which iscontrol (as defined in the sum of; (i) 3.7 million shares of common stock; plus (ii) such additional number of shares of common stock (up to 1.5 million) as is equal to the number of shares of common stock subject toAmended 2019 Plan), and beginning with awards granted underduring 2022, upon retirement (subject to provisions defined in the Prior Plan.Amended 2019 Plan). There were 3.62.6 million shares of common stock available for grant for future equity compensation awards under the Amended 2019 Plan at December 31, 2020.
Asas of December 31, 2020, the Company had 4 stock-based2023.
Stock-based compensation award types, which are described below. The compensation cost that has been recorded as an expense for these programs totals $63.9recognized under our equity incentive plans was $127.0 million, $45.6$97.9 million and $33.9$74.8 million for 2020, 20192023, 2022 and 2018,2021, respectively. In connection with the Noventis acquisition, the Company recognized an additional $5.5 million of compensation cost for 2019. Refer to Note 4, Acquisitions, for further information. The associated tax benefit related to these costs was $11.5$23.1 million, $9.9$16.9 million and $8.0$14.1 million, for 2020, 20192023, 2022 and 2018,2021, respectively.
Restricted Stock Units
The Company periodically grants RSUs, a right to receive a specific number of shares of the Company’s common stock at a specified date, to non-employee directors and certain employees. RSUs granted to non-employee directors vest 12 months from the date of grant, or upon termination of board service if the director elects to defer receipt. RSUs issued to certain employees generally vest evenlyin even annual increments over up to three years and provide for accelerated vesting if there is a change of control (as defined in the Plan). The fair value of each RSU award is based on the closing market price of the Company’s stock on the day of grant as reported by the NYSE.years.
The following is a summary of RSU activity during the year ended December 31, 2020:2023:
| | | | | | | | | | | |
| (In thousands except per share data) | Units | | Weighted-Average
Grant-Date
Fair Value |
| Unvested at January 1, 2020 | 260 | | | $ | 181.23 | |
| Granted | 309 | | | 119.78 | |
Vested, including 17 shares withheld for tax1 | (74) | | | 160.30 | |
| Forfeited | (23) | | | 150.11 | |
| Unvested at December 31, 2020 | 472 | | | $ | 145.77 | |
| | | | | | | | | | | |
| (in millions except per share data) | Units | | Weighted-Average
Grant-Date
Fair Value |
| Unvested at January 1, 2023 | 0.4 | | | $ | 164.69 | |
| Granted | 0.3 | | | 178.28 | |
Vested, including 0.1 shares withheld for tax(1) | (0.2) | | | 159.73 | |
| Forfeited | — | | | 171.56 | |
| Unvested at December 31, 2023 | 0.5 | | | $ | 176.06 | |
1(1)The Company withholds shares of common stock to pay the minimum required statutory taxes due upon RSU vesting. Cash is then remitted by the Company to the appropriate taxing authorities.
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
As of December 31, 2020,2023, there was $42.2$47.6 million of total unrecognized compensation cost related to RSUs. That cost is expected to be recognized over a weighted-average period of 1.2 years. The total grant-date fair value of RSUs granted was $37.0$58.4 million, $34.0$45.9 million and $16.8$44.5 million during 2020, 20192023, 2022 and 2018,2021, respectively. The total grant-date fair value of RSUs that vested during 2020, 20192023, 2022 and 20182021 was $11.9$39.2 million, $7.6$46.3 million and $9.2$24.4 million, respectively.
Performance-Based Restricted Stock Units
Performance-based restricted stock units
The Company periodically grants PBRSUs to employees. A PBRSUemployees, which is a right to receive stock based on the achievement of both performance goals and continued employment during the vesting period. In a PBRSU, the number of shares earned varies based upon meeting certain performance goals. PBRSU awards generally have performance goals spanning one to three years, depending on the nature of the goal, and the ultimate number of shares earned can vary dependent on final performance goal. The fair value of each PBRSU award is based on the closing market price of the Company’s stock on the grant date as reported by the NYSE.attainment levels.
Market-Based Restricted Stock Units (TSR awards)
Given the economic uncertainty and business disruption created by the COVID-19 pandemic, effective June 23, 2020, the Company's Compensation Committee approved certain modifications to performance-basedPerformance-based restricted stock units previouslywith a market condition
The Company has periodically granted on March 16, 2020 and March 20, 2019. Such changes included replacing Company performance metricsemployees PBRSUs with TSR metrics for the March 16, 2020 awards, and for the March 20, 2019 awards, adding aan added relative TSR modifier to scale the payment up or down by +/- 15 percent. Additionally,The TSR modifier’s performance period generally spans three years and the Company granted certain employees new TSR awardsultimate modifier is based on June 24, 2020.
Attainment of the Company's TSR awards is tied to WEX'sCompany’s TSR relative to the TSR of the companies included in the S&P MidCap 400 fromIndex over the timespecified TSR performance period.
Grant-date fair value of modification (for awards modified on June 23, 2020) orPBRSUs with market conditions
The grant date (for awards granted on June 24, 2020). Given that these are market-based performance awards, the fair value of awards with market conditions is calculated byestimated on the Monte Carlodate of grant using a Monte-Carlo simulation valuation model.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
future stock price paths based on historical volatility levels. The key inputs for the fair values and other relevant information by grant date are outlined below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Grant date | 6/24/2020 | | 6/24/2020 | | 3/16/2020 | | 3/20/2019 |
| | | | | | | |
| Grantee(s) | Non-CEO | | CEO | | All | | All |
| Number of grantees affected | 134 | | 1 | | 332 | | 215 |
| Modification date | N/A | | N/A | | 6/23/2020 | | 6/23/2020 |
| Risk-free rate | 0.21% | | 0.21% | | 0.20% | | 0.18% |
Stock price1 | $160.14 | | $160.14 | | $173.15 | | $173.15 |
| Volatility | 47.72% | | 47.72% | | 51.32% | | 62.29% |
| Performance period | June 24, 2020 –
June 23, 2023 | | June 24, 2020 –
June 23, 2023 | | June 23, 2020 – December 31, 2022 | | June 23, 2020 – December 31, 2021 |
| Shares at target | 110,467 | | 28,101 | | 199,870 | | 86,845 |
| | | | | | | |
Fair value per share2 | $264.17 | | $240.55 | | $280.93 | | $188.21 |
| | | | | | | |
Total incremental compensation cost3 | $11.5 million | | $2.3 million | | $21.8 million | | $1.3 million |
| | | | | | | | | | | | | | | | | | | |
| Grant date | 6/15/2022 | | 3/15/2021 | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Risk-free interest rate | 3.04 | % | | 0.29 | % | | | | | | | | |
Stock price(1) | $ | 161.08 | | | $ | 226.02 | | | | | | | | | |
| Expected stock price volatility | 37.31 | % | | 53.65 | % | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Weighted-average fair value per share(1) | $ | 158.25 | | | $ | 238.92 | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
1 (1)At the date of grant or modification date, whichever is applicable.
2 At the date of grant or modification date, whichever is applicable. The CEO's June 24, 2020 award has a one-year post-vesting holding period.
3Risk-free interest rate For the Company's awards that were modified on June 23, 2020, the final attainment for recipients other than executive officers will be– The risk-free interest rate is based on the greaterU.S. Treasury yield curve in effect at the time of the payout undergrant for the original awards performance metrics orperiod matching the modified metrics as described above. Asvesting term of the awards.
Expected stock price volatility – The Company estimates expected stock price volatility based on historical volatility of the Company’s common stock over a result,period matching the Company is requiredvesting term of the awards.
Expected dividend yield – We have never paid, nor do we expect to assess which payout is more likely and adjust the expense accordingly. If the original awards' performance metrics are expected to result in a higher number of shares vesting, then the expense recordedpay, any cash dividends on our common stock; therefore, we assume that no dividends will be based on awards expected to vest atpaid over the grant-date stock price. Alternatively, ifvesting term of the modified metrics are expected to result in a higher numberawards.
Rollforward of shares vesting, then the expense recorded will be based on the fair value calculated using the Monte Carlo simulation valuation model. As of December 31, 2020, the expense associated with the awards in the table above is calculated using the Monte Carlo modification-date fair value.PBRSUs
The following is a summary of TSR awards and PBRSU activity during the year ended December 31, 2020:2023:
| | | | | | | | | | | | | | | |
| TSR awards and PBRSUs | | | | | | | |
| (In thousands except per share data) | Shares | | | | | | Weighted-Average
Grant-Date
Fair Value |
| Unvested at January 1, 2020 | 449 | | | | | | | $ | 140.58 | |
| Granted | 343 | | | | | | | 170.71 | |
| Forfeited | (21) | | | | | | | 150.40 | |
Vested, including 52 shares withheld for tax1 | (203) | | | | | | | 107.77 | |
Performance adjustment2 | 14 | | | | | | | 81.21 | |
| Unvested at December 31, 2020 | 582 | | | | | | | $ | 170.05 | |
| | | | | | | | | | | | | | | |
| (in millions except per share data) | Shares | | | | | | Weighted-Average
Grant-Date
Fair Value |
| Unvested at January 1, 2023 | 0.6 | | | | | | | $ | 208.94 | |
| Granted | 0.3 | | | | | | | 173.96 | |
| Forfeited | (0.1) | | | | | | | 186.11 | |
Vested, including an immaterial amount of shares withheld for tax(1) | (0.1) | | | | | | | 246.28 | |
Performance adjustment(2) | 0.1 | | | | | | | NM |
| Unvested at December 31, 2023 | 0.8 | | | | | | | $ | 184.81 | |
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
NM - Not meaningful
1(1)The Company withholds shares of common stock to pay the minimum required statutory taxes due upon PBRSU vesting. Cash is then remitted by the Company to the appropriate taxing authorities.
2 (2)Reflects adjustments to the number of shares of PBRSUs expected to vest based on the change in estimated performance attainmentattainments during the year ended December 31, 2020.2023. This adjustment does not include the impact on awards as a result of expected market condition attainments until the attainment measurement period concludes.
As of December 31, 2020,2023, there was $74.1$47.0 million of unrecognized compensation cost related to the TSR awards and PBRSUs that is expected to be recognized over a weighted-average period of 2.01.6 years. The total grant-date fair value of PBRSUs and TSRs granted during 2020, 20192023, 2022 and 20182021 was $58.5$42.4 million, $19.0$39.5 million and $18.3$34.9 million, respectively. The total grant-date fair value of PBRSUs that vested during 2020, 20192023, 2022 and 20182021 was $21.7$16.3 million, $9.3$17.2 million and $12.0$23.7 million, respectively.
Stock Options
Market Performance-Based Stock Options
In May 2017, the Company granted market performance-based stock options with a contractual term of ten years to certain members of senior management. The options contain a market condition that requires the closing price of the Company’s stock to meet or exceed certain price thresholds for 20 consecutive trading days (“Stock Price Hurdle”) in order
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
for shares to vest. The options also contain a service condition that requires the award recipients to be continually employed from the grant date until such date that the Stock Price Hurdle is satisfied in order for shares to vest. The Stock Price Hurdle began operating in May 2020, on the third anniversary of the grant date. As of December 31, 2020, 75 percent of the shares had vested as a result of the Company's stock exceeding the applicable Stock Price Hurdle. The Stock Price Hurdle condition ends five years from the date of grant, and therefore the remaining 25 percent of awards may still vest.
The grant date fair value of these options was estimated on the date of the grant using a Monte-Carlo simulation model used to simulate a distribution of future stock price paths based on historical volatility levels. The Company expensed the total grant date fair value of these options on a graded basis over the derived service period of approximately three years.
The table below summarizes the assumptions used to calculate the fair value:
| | | | | |
Exercise price | $ | 99.69 | |
Expected stock price volatility | 31.14 | % |
Risk-free interest rate | 2.18 | % |
Weighted average fair value of market performance-based stock options granted | $ | 28.69 | |
Service-Based Stock Options
The Company periodically grants stock options to certain officers and employees, under the Plan, which generally become exercisable over three years (with approximately 33 percent of the total grant vesting each year on the anniversary of the grant date) and expire 10 years from the date of grant. All service-based stock option grants provide for an option exercise price equal to the closing market value of the common stock on the date of grant as reported by the NYSE. The fair value of option awards is estimated on the grant date using the Black-Scholes-Merton option-pricing model. The vast majority of awards were valued utilizing the assumptions included in the following table:
| | | | | | | | | | | | | | | | | |
| | | | | |
| 2023 | | 2022 | | 2021 |
| Weighted average grant date fair value | $ | 81.65 | | | $ | 70.82 | | | $ | 92.82 | |
| Weighted average expected term (in years) | 6 | | 6 | | 6 |
| Weighted average exercise price | $ | 173.56 | | | $ | 163.22 | | | $ | 226.02 | |
| Expected stock price volatility | 43.64 | % | | 42.23 | % | | 41.81 | % |
| Risk-free interest rate | 3.55 | % | | 2.13 | % | | 1.05 | % |
Expected term – Based on the Company’s lacklimited history of historical option exercise experienceexercises and its granting of stock options with “plain vanilla” characteristics, the Company uses the simplified method to estimate the expected term of its employee stock options. The fair value of each option award is estimated on the grant date using the following assumptions and a Black-Scholes-Merton option-pricing model. The expected term assumption as it relates to the valuation of the options represents the period of time that options granted are expected to be outstanding.
Expected stock price volatility – The Company estimates expected stock price volatility based on historical volatility of the Company’s common stock over a period matching the expected term of the options granted.
Risk-free interest rate – The option-pricing model also includes a risk-free interest rate for the period matching the expected term of the option and is based on the U.S. Treasury yield curve in effect at the time of the grant.grant for the period matching the expected term of the option.
Expected dividend yield – We have never paid, nor do we expect to pay any cash dividends on our common stock; therefore, we assume that no dividends will be paid over the expected terms of option awards.
The table below summarizes the assumptions used to calculate the fair value by year of grant:
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| Weighted average grant date fair value | $ | 35.13 | | | $ | 58.28 | | | $ | 51.27 | |
| | | | | |
| Weighted average expected term (in years) | 6 | | 6 | | 6 |
| Weighted average exercise price | $ | 109.66 | | | $ | 184.81 | | | $ | 158.23 | |
| Expected stock price volatility | 32.37 | % | | 27.21 | % | | 27.35 | % |
| Risk-free interest rate | 0.58 | % | | 2.37 | % | | 2.69 | % |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) | | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
The following is a summary of all stock option activity during the year ended December 31, 2020:2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | | | | | | |
| (In thousands, except per share data) | Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value |
| Outstanding at January 1, 2020 | 892 | | | $ | 115.82 | | | | | |
| Granted | 262 | | | 109.66 | | | | | |
| Exercised | (96) | | | 96.55 | | | | | |
| Forfeited or expired | (15) | | | 138.52 | | | | | |
| Outstanding at December 31, 2020 | 1,043 | | | $ | 115.72 | | | 7.2 | | $ | 91,603 | |
| Exercisable on December 31, 2020 | 559 | | | $ | 110.49 | | | 6.4 | | $ | 52,036 | |
| Vested and expected to vest at December 31, 2020 | 476 | | | $ | 121.90 | | | 8.2 | | $ | 38,844 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| (in millions, except per share data or as otherwise indicated) | Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value |
| Outstanding at January 1, 2023 | 0.8 | |
| $ | 145.44 | |
|
|
|
|
| Granted | 0.2 | | | 173.58 | | | | | |
| Exercised | (0.1) | | | 117.59 | | | | | |
| Forfeited or expired | (0.1) | | | 179.58 | | | | | |
| Outstanding at December 31, 2023 | 0.8 | | | $ | 155.58 | | | 6.7 | | $ | 34.3 | |
| Exercisable at December 31, 2023 | 0.5 | | | $ | 142.55 | | | 5.4 | | $ | 26.8 | |
| Expected to vest at December 31, 2023 | 0.3 | | | $ | 174.64 | | | 8.7 | | $ | 7.3 | |
As of December 31, 2020,2023, there was $9.6$13.2 million of total unrecognized compensation cost related to options. That cost is expected to be recognized over a weighted-average period of 1.11.2 years. The total intrinsic value of options exercised during the years ended December 31, 2020, 20192023, 2022 and 20182021 was $8.7$10.1 million, $5.7$2.2 million and $1.9$48.1 million, respectively. The total grant-date fair value of options granted during 2020, 2019 and 2018 was $9.3 million, $7.2 million, and $5.2 million, respectively.
Deferred Stock Units
Non-employee directors may elect to defer their cash fees and RSUs in the form of DSUs. The Company grants fully vested DSUs to non-employee directors. These awards are distributed as common stock 200 days immediately following the date upon which such director’s service as a member of the Company’s Board of Directors terminates for any reason. There were approximately 54 thousand and 63 thousand0.1 million DSUs outstanding as of both December 31, 20202023 and 2019, respectively.2022. DSU activity is included in the RSU table above. Unvested DSUs as of December 31, 20202023 and 20192022 were not material.
| | | | | |
24.23. | Impairment ChargesRestructuring Activities |
During 2020,October 2022, the Company recordedcommenced a $53.4 million non-cash goodwill impairment chargerestructuring initiative as a result of its global review of operations in light of the executive leadership team reorganization that became effective January 1, 2022. The review of operations identified certain opportunities to further streamline the business and position WEX for future growth. The restructuring charges related to the WEX Fleet Europe reporting unit (the 2019 Go Fuel Card acquisition). See Note 9, Goodwill and Other Intangible Assets, for further information. The Company did not record any impairment charges during its annual goodwill assessment completed in the fourth quarterthis initiative, which primarily consisted of 2019. In the fourth quarteremployee separation costs, were $9.2 million as of 2018, a goodwill impairment chargeDecember 31, 2022, $4.7 million of $3.2 millionwhich was recorded related towithin our Mobility segment, $0.6 million within our Corporate Payments segment, $1.6 million within our Benefits segment and $2.3 million within our unallocated corporate expenses. Approximately half of these costs have been reflected within general and administrative expense with the Brazil fleet reporting unit. Management also impaired $2.4remaining costs split between cost of services and sales and marketing expenses on the consolidated statements of operations. Restructuring costs accrued and unpaid as of December 31, 2022 were $6.1 million and included within accrued expenses and other current liabilities on the consolidated balance sheet. There were no material remaining accrued and unpaid restructuring charges as of computer software in 2018, which was determined to provide no future benefit.December 31, 2023.
| | | | | |
| | | | | PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
| | | | | |
25.24. | Segment Information |
The Company determines its operating segments and reports segment information in accordance with how our Chief Executive Officer, the Company’s chief operating decision maker (“CODM”)CODM, allocates resources and assesses performance. The Company’s CODM is its Chief Executive Officer. TheCompany has both three operating segments are aggregated into the 3and three reportable segments, as described below.
•Fleet SolutionsMobility provides customers with payment andprocessing, transaction processing, and information management services specifically designed for the needs of commercialfleets of all sizes from small businesses to federal and state government fleets. This segment also provides information management services to these fleet customers.fleets and over-the-road carriers.
•Travel and Corporate Solutions Payments focuses on the complex payment environment of global B2B payments, providingenabling customers with payment processingto utilize our payments solutions forto integrate into their corporate paymentown workflows and transaction monitoring needs.manage their accounts payable automation and spend management functions.
•Health and Employee Benefit Solutions Benefits provides healthcare payment products anda SaaS platform for consumer directed platforms. Priorhealthcare benefits and a full-service benefit enrollment solution, bringing together benefits administration, certain compliance services and consumer-directed and benefits accounts. Additionally, the Company serves as the non-bank custodian to the sale of WEX Latin America, this operating segment additionally provided payroll related benefits to customers.certain HSA assets.
TableThe CODM evaluates the financial performance of Contentseach segment using segment adjusted operating income, which excludes unallocated corporate expenses, acquisition-related intangible amortization, other acquisition and divestiture related items, debt restructuring costs, stock-based compensation, other costs and certain non-recurring or non-cash operating charges that are not core to our operations, as applicable depending on the period presented. We do not allocate assets to our operating segments as the Company does not produce such information internally, nor does it use such data to assess our performance.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following tables present the Company’s reportable segment revenues:disclosures:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| (In thousands) | Fleet Solutions | | Travel and Corporate Solutions | | Health and Employee Benefit Solutions | | Total |
| Payment processing revenue | $ | 404,843 | | | $ | 229,144 | | | $ | 64,904 | | | $ | 698,891 | |
| Account servicing revenue | 153,823 | | | 41,927 | | | 253,706 | | | 449,456 | |
| Finance fee revenue | 197,307 | | | 1,079 | | | 137 | | | 198,523 | |
| Other revenue | 162,337 | | | 5,690 | | | 44,972 | | | 212,999 | |
| Total revenues | $ | 918,310 | | | $ | 277,840 | | | $ | 363,719 | | | $ | 1,559,869 | |
| | | | | | | |
| Interest income | $ | 4,326 | | | $ | 272 | | | $ | 1,252 | | | $ | 5,850 | |
| | Year Ended December 31, 2019 |
| (In thousands) | Fleet Solutions | | Travel and
Corporate Solutions | | Health and
Employee Benefit Solutions | | Total |
| Year Ended December 31, 2023 | | | Year Ended December 31, 2023 |
| (in millions) | | (in millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| Payment processing revenue | Payment processing revenue | $ | 457,244 | | | $ | 303,385 | | | $ | 64,963 | | | $ | 825,592 | |
| Account servicing revenue | Account servicing revenue | 164,735 | | | 43,293 | | | 205,524 | | | 413,552 | |
| Finance fee revenue | Finance fee revenue | 245,082 | | | 2,086 | | | 150 | | | 247,318 | |
| Other revenue | Other revenue | 171,334 | | | 19,062 | | | 46,833 | | | 237,229 | |
| Total revenues | Total revenues | $ | 1,038,395 | | | $ | 367,826 | | | $ | 317,470 | | | $ | 1,723,691 | |
| | Interest income | $ | 6,249 | | | $ | 1,521 | | | $ | 1,534 | | | $ | 9,304 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2018 |
| (In thousands) | Fleet Solutions | | Travel and
Corporate Solutions | | Health and
Employee Benefit Solutions | | Total |
| Payment processing revenue | $ | 464,980 | | | $ | 203,289�� | | | $ | 55,722 | | | $ | 723,991 | |
| Account servicing revenue | 162,662 | | | 37,262 | | | 108,172 | | | 308,096 | |
| Finance fee revenue | 190,528 | | | 1,391 | | | 16,708 | | | 208,627 | |
| Other revenue | 156,970 | | | 61,402 | | | 33,553 | | | 251,925 | |
| Total revenues | $ | 975,140 | | | $ | 303,344 | | | $ | 214,155 | | | $ | 1,492,639 | |
| | | | | | | |
| Interest income | $ | 3,503 | | | $ | 958 | | | $ | 11,706 | | | $ | 16,167 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| (in millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| Payment processing revenue | $ | 720.2 | | | $ | 353.7 | | | $ | 81.9 | | | $ | 1,155.9 | |
| Account servicing revenue | 169.2 | | | 42.9 | | | 357.3 | | | 569.3 | |
| Finance fee revenue | 359.7 | | | 0.6 | | | 0.1 | | | 360.5 | |
| Other revenue | 194.6 | | | 5.1 | | | 65.2 | | | 264.9 | |
| Total revenues | $ | 1,443.7 | | | $ | 402.3 | | | $ | 504.5 | | | $ | 2,350.5 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| (in millions) | Mobility | | Corporate Payments | | Benefits | | Total |
| Payment processing revenue | $ | 513.4 | | | $ | 274.1 | | | $ | 71.5 | | | $ | 859.0 | |
| Account servicing revenue | 168.4 | | | 44.2 | | | 314.4 | | | 526.9 | |
| Finance fee revenue | 254.3 | | | 0.9 | | | 0.1 | | | 255.3 | |
| Other revenue | 175.4 | | | 5.8 | | | 28.2 | | | 209.4 | |
| Total revenues | $ | 1,111.4 | | | $ | 324.9 | | | $ | 414.2 | | | $ | 1,850.5 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
No one customer accounted for more than 10 percent of the total consolidated revenue in 2020, 20192023, 2022 or 2018. 2021.
Segment adjusted operating income
| | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (in millions) | 2023 | | 2022 | | 2021 |
| Segment adjusted operating income: | | | | | |
| Mobility | $ | 599.4 | | | $ | 693.4 | | | $ | 557.1 | |
| Corporate Payments | 277.2 | | | 192.7 | | | 86.9 | |
| Benefits | 241.8 | | | 133.7 | | | 104.4 | |
| Total segment adjusted operating income | $ | 1,118.4 | | | $ | 1,019.8 | | | $ | 748.4 | |
| | | | | |
| Reconciliation: | | | | | |
| Total segment adjusted operating income | $ | 1,118.4 | | | $ | 1,019.8 | | | $ | 748.4 | |
| Less: | | | | | |
| Unallocated corporate expenses | 103.0 | | | 84.5 | | | 78.2 | |
| Acquisition-related intangible amortization | 184.0 | | | 170.5 | | | 181.7 | |
| Other acquisition and divestiture related items | 6.6 | | | 17.9 | | | 40.5 | |
| Impairment charges | — | | | 136.5 | | | — | |
| Debt restructuring costs | — | | | — | | | 6.2 | |
| Stock-based compensation | 131.6 | | | 100.7 | | | 76.6 | |
| Other costs | 46.1 | | | 39.9 | | | 23.2 | |
| Operating income | $ | 647.1 | | | $ | 469.8 | | | $ | 342.0 | |
| Financing interest expense, net of financial instruments | (204.6) | | | (47.5) | | | (89.2) | |
| Net foreign currency gain (loss) | 4.9 | | | (22.7) | | | (12.3) | |
| Other income | — | | | — | | | 3.6 | |
| Loss on extinguishment of Convertible Notes | (70.1) | | | — | | | — | |
| Change in fair value of contingent consideration | (8.5) | | | (139.1) | | | (40.1) | |
| | | | | |
| | | | | |
| Income before income taxes | $ | 368.8 | | | $ | 260.5 | | | $ | 203.9 | |
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
Other segment reportable income and expense information
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| (in millions) | Mobility | | Corporate Payments | | Benefits | | | | | | |
| | | | | | | | | | | |
| Year Ended December 31, 2023: | | | | | | | | | | | |
Interest income(1) | $ | 17.5 | | | $ | 21.6 | | | $ | 109.1 | | | | | | | |
| Operating interest expense | $ | 69.5 | | | $ | 9.4 | | | $ | 5.3 | | | | | | | |
Depreciation(2) | $ | 40.9 | | | $ | 19.5 | | | $ | 27.2 | | | | | | | |
| | | | | | | | | | | |
| Year Ended December 31, 2022: | | | | | | | | | | | |
Interest income(1) | $ | 6.5 | | | $ | 1.3 | | | $ | 32.2 | | | | | | | |
| Operating interest expense | $ | 13.9 | | | $ | 5.8 | | | $ | 0.9 | | | | | | | |
Depreciation(2) | $ | 44.9 | | | $ | 15.2 | | | $ | 26.5 | | | | | | | |
| | | | | | | | | | | |
| Year Ended December 31, 2021: | | | | | | | | | | | |
Interest income(1) | $ | 1.8 | | | $ | — | | | $ | 2.7 | | | | | | | |
| Operating interest expense | $ | 6.8 | | | $ | 2.3 | | | $ | 0.1 | | | | | | | |
Depreciation(2) | $ | 47.5 | | | $ | 14.1 | | | $ | 25.1 | | | | | | | |
(1)The CODM evaluatesamounts of interest income disclosed by reportable segment are included within other revenue in the financial performancepreceding tables.
(2)Does not include amortization of each segment usingintangible assets as such amortization is not included in determining segment adjusted operating income, which excludes: (i) unallocated corporate expenses; (ii) acquisition and divestiture related items (including acquisition-related intangible amortization); (iii) legal settlement; (iv) impairment charges; (v) loss on sale of subsidiary; (vi) debt restructuring costs; (vii) stock-based compensation; and (viii) other costs. Additionally, we do not allocate foreign currency gains and losses, financing interest expense, unrealized and realized gains and losses on financial instruments and non-cash adjustments related to the tax receivable agreement to our operating segments.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table reconciles total segment adjusted operating income to (loss) income before income taxes:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (In thousands) | 2020 | | 2019 | | 2018 |
| Segment adjusted operating income | | | | | |
| Fleet Solutions | $ | 383,502 | | | $ | 485,539 | | | $ | 459,646 | |
| Travel and Corporate Solutions | 62,096 | | | 168,786 | | | 135,379 | |
| Health and Employee Benefit Solutions | 96,769 | | | 80,283 | | | 44,931 | |
| Total segment adjusted operating income | $ | 542,367 | | | $ | 734,608 | | | $ | 639,956 | |
| | | | | |
| Reconciliation: | | | | | |
| Total segment adjusted operating income | $ | 542,367 | | | $ | 734,608 | | | $ | 639,956 | |
| Less: | | | | | |
| Unallocated corporate expenses | 62,938 | | | 67,982 | | | 58,095 | |
| Acquisition-related intangible amortization | 171,144 | | | 159,431 | | | 138,186 | |
| Other acquisition and divestiture related items | 57,787 | | | 37,675 | | | 4,143 | |
| Legal settlement | 162,500 | | | 0 | | | 0 | |
| Impairment charges | 53,378 | | | 0 | | | 5,649 | |
| Loss on sale of subsidiary | 46,362 | | | 0 | | | 0 | |
| Debt restructuring costs | 535 | | | 11,062 | | | 4,425 | |
| Stock-based compensation | 65,841 | | | 47,511 | | | 35,103 | |
| Other costs | 13,555 | | | 25,106 | | | 13,717 | |
| Operating (loss) income | $ | (91,673) | | | $ | 385,841 | | | $ | 380,638 | |
| Financing interest expense | (157,080) | | | (134,677) | | | (105,023) | |
| Net foreign currency loss | (25,783) | | | (926) | | | (38,800) | |
| Non-cash adjustments related to tax receivable agreement | 491 | | | 932 | | | (775) | |
| Net unrealized (loss) gain on financial instruments | (27,036) | | | (34,654) | | | 2,579 | |
| (Loss) income before income taxes | $ | (301,081) | | | $ | 216,516 | | | $ | 238,619 | |
Assets are not allocated to the segments for internal reporting purposes.
Geographic Data
Revenue by principal geographic area, based on the country in which the sale originated, was as follows:
| | | Year ended December 31, | | Year ended December 31, |
| (In thousands) | 2020 | | 2019 | | 2018 |
| (in millions) | | (in millions) | 2023 | | 2022 | | 2021 |
| United States | United States | $ | 1,401,144 | | | $ | 1,535,985 | | | $ | 1,287,405 | |
| Other international1 | 158,725 | | | 187,706 | | | 205,234 | |
Other international(1) | |
Other international(1) | |
Other international(1) | |
| Total revenues | Total revenues | $ | 1,559,869 | | | $ | 1,723,691 | | | $ | 1,492,639 | |
1(1)No single country within made up more than 5 percent of total revenues for any of the years presented.
Net property, equipment and capitalized software is subject to geographic risks because it is generally difficult to move and relatively illiquid. Net property, equipment and capitalized software by principal geographic area was as follows:
| | Year ended December 31, |
| (In thousands) | 2020 | | 2019 | | 2018 |
| Year ended December 31, | | | Year ended December 31, |
| (in millions) | | (in millions) | 2023 | | 2022 | | 2021 |
| United States | United States | $ | 176,348 | | | $ | 200,101 | | | $ | 176,111 | |
| International1 | 11,992 | | | 12,374 | | | 11,757 | |
Other international(1) | |
| Other international(1) | |
| Other international(1) | |
| Net property, equipment and capitalized software | Net property, equipment and capitalized software | $ | 188,340 | | | $ | 212,475 | | | $ | 187,868 | |
1(1)No single country within made up more than 5 percent of total net property, equipment and capitalized software for any of the years presented.
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
| | | | | PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
| | | | | |
26.25. | 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.UDFI. 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 business activities and have a material effect on the Company'sCompany’s 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 December 31, 2020,2023, 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.
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 |
| December 31, 2020 | | | | | | | | | | | |
(in millions) | |
(in millions) | Actual Amount | | Ratio | | Minimum for Capital Adequacy Purposes Amount | | Ratio | | Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions Amount | | Ratio |
| December 31, 2023 | |
| Total Capital to risk-weighted assets | |
| Total Capital to risk-weighted assets | |
| Total Capital to risk-weighted assets | Total Capital to risk-weighted assets | $ | 299,136 | | | 15.04 | % | | $ | 159,148 | | | 8.00 | % | | $ | 198,935 | | | 10.00 | % | $ | 727.2 | | | 16.27 | | 16.27 | % | | $ | 357.5 | | | 8.00 | | 8.00 | % | | $ | 446.9 | | | 10.00 | | 10.00 | % |
| Tier 1 Capital to average assets | Tier 1 Capital to average assets | $ | 287,570 | | | 12.71 | % | | $ | 90,514 | | | 4.00 | % | | $ | 113,143 | | | 5.00 | % | Tier 1 Capital to average assets | $ | 675.2 | | | 10.21 | | 10.21 | % | | $ | 264.4 | | | 4.00 | | 4.00 | % | | $ | 330.5 | | | 5.00 | | 5.00 | % |
| Common equity to risk-weighted assets | Common equity to risk-weighted assets | $ | 287,570 | | | 14.46 | % | | $ | 89,521 | | | 4.50 | % | | $ | 129,308 | | | 6.50 | % | Common equity to risk-weighted assets | $ | 675.2 | | | 15.11 | | 15.11 | % | | $ | 201.1 | | | 4.50 | | 4.50 | % | | $ | 290.5 | | | 6.50 | | 6.50 | % |
| Tier 1 Capital to risk-weighted assets | Tier 1 Capital to risk-weighted assets | $ | 287,570 | | | 14.46 | % | | $ | 119,361 | | | 6.00 | % | | $ | 159,148 | | | 8.00 | % | Tier 1 Capital to risk-weighted assets | $ | 675.2 | | | 15.11 | | 15.11 | % | | $ | 268.1 | | | 6.00 | | 6.00 | % | | $ | 357.5 | | | 8.00 | | 8.00 | % |
| December 31, 2019 | |
| December 31, 2022 | |
| Total Capital to risk-weighted assets | |
| Total Capital to risk-weighted assets | |
| Total Capital to risk-weighted assets | Total Capital to risk-weighted assets | $ | 329,276 | | | 13.54 | % | | $ | 194,566 | | | 8.00 | % | | $ | 243,208 | | | 10.00 | % | $ | 595.6 | | | 15.16 | | 15.16 | % | | $ | 314.4 | | | 8.00 | | 8.00 | % | | $ | 393.0 | | | 10.00 | | 10.00 | % |
| Tier 1 Capital to average assets | Tier 1 Capital to average assets | $ | 314,466 | | | 10.88 | % | | $ | 115,583 | | | 4.00 | % | | $ | 144,479 | | | 5.00 | % | Tier 1 Capital to average assets | $ | 546.2 | | | 10.22 | | 10.22 | % | | $ | 213.7 | | | 4.00 | | 4.00 | % | | $ | 267.1 | | | 5.00 | | 5.00 | % |
| Common equity to risk-weighted assets | Common equity to risk-weighted assets | $ | 314,466 | | | 12.93 | % | | $ | 109,443 | | | 4.50 | % | | $ | 158,085 | | | 6.50 | % | Common equity to risk-weighted assets | $ | 546.2 | | | 13.90 | | 13.90 | % | | $ | 176.8 | | | 4.50 | | 4.50 | % | | $ | 255.4 | | | 6.50 | | 6.50 | % |
| Tier 1 Capital to risk-weighted assets | Tier 1 Capital to risk-weighted assets | $ | 314,466 | | | 12.93 | % | | $ | 145,925 | | | 6.00 | % | | $ | 194,566 | | | 8.00 | % | Tier 1 Capital to risk-weighted assets | $ | 546.2 | | | 13.90 | | 13.90 | % | | $ | 235.8 | | | 6.00 | | 6.00 | % | | $ | 314.4 | | | 8.00 | | 8.00 | % |
Our Board of Directors is expressly authorized to provide for the issuance of up to 10.0 million shares of Preferred Stock, $0.01 par value per share (“Preferred Stock”), in one or more classes or series. Each such class or series of Preferred Stock shall have such voting powers, designations, preferences, qualifications and special or relative rights or privileges, limitations or restrictions thereof, as shall be determined by the Board of Directors, which may include, among others, redemption provisions, dividend rights, liquidation preferences, and conversion rights. There are no shares of Preferred Stock outstanding as of December 31, 2023 and 2022.
| | | | | |
| 27. | Related Party TransactionTransactions |
During the years ended December 31, 2023, 2022 and 2021, WEX has had certain transactions with parties determined to be related to the Company through equity interests. Such related parties included:
SBI/Bell Bank Revolving Credit Agreement
The seller– No longer a related party at December 31, 2022 due to the Company’s repurchase of Discovery Benefits, Bell Bank, holds a 4.9 percentSBI’s equity interest in PO Holding during 2022. See Note 4, Acquisitions and Note 19, Redeemable Non-Controlling Interest for further information regarding transactions between the Company's U.S. Health businessCompany and is a revolving loan lender under the Company's 2016 Credit Agreement. As of December 31, 2020 and 2019, there were no amounts outstanding, with available capacity of $50.0 million.these parties.
| | | | | |
| PART II |
WEX INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) |
Warburg Pincus – During 2023, Warburg Pincus Convertible Notes
On July 1, 2020, the Company closed on a private placement with an affiliatesold all of funds managed by Warburg Pincus LLC, pursuant to which the Companyits issued convertible senior unsecured notes due in 2027 in an aggregate principal amount of $310 million and 577,254 shares of common stock, with gross proceeds in respect of the common stock of $90 million. After giving effect to the purchase of theWEX common stock and convertible notes, on an as-converted basis, Warburg Pincus owned approximately 4.7%the Company repurchased all of the Company'sCompany’s outstanding common stock on the closing date of the private placement. Refer toConvertible Notes held by Warburg Pincus. See Note 16, Financing and Other Debt, for morefurther information regarding the convertible senior notes.
A member of the Company’s board of directors (“related person”), is a managing director at Warburg Pincus LLC. The Company has a written policy regarding entering certain transactions in which any member of the board of directors has a direct or indirect material interest. Pursuant to this policy, the private placement was approved by the Corporate Governance Committee of the Company’s board of directors, after it had reviewed and considered all relevant facts and circumstances, including, but not limited to, whether the transaction was entered into on terms no less favorable tobetween the Company than terms
WEX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
that could have been reached with an unrelated third party and the interest of thethis related person in the transaction. Following approval by the Corporate Governance Committee of the board of directors, the private placement was approved by the disinterested members of the Company’s board of directors.party.
HSA Purchase Agreement
On February 11, 2021,15, 2024, the Company's board of directors authorized an amended share repurchase program under which up to an additional $400.0 million worth of WEX's common stock may be repurchased by the Company entered into an asset purchase agreement with Bell Bankthrough December 31, 2025, expanding the total authorization from $650.0 million 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. We believe the acquisition will allow the Company to better capture the economics from those HSAs, leverage our investments to provide customers with market-leading HSA solutions, and align with our growth strategy. The transaction is expected to close in the second quarter of 2021, subject to regulatory approvals and other customary closing conditions.
Pursuant to the purchase agreement, the Company will pay Bell Bank initial cash consideration of approximately $200 million, and 2 additional deferred cash payments of $25 million in July 2023 and January 2024, contingent upon closing of the transaction. 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 and will not adversely impact the Company’s adjusted net income or financial position as net revenues earned on the acquired HSA assets will increase in the event the Federal Funds rate increases in the future.
Notes Redemption Notice
On February 11, 2021, the Company provided irrevocable notice to The Bank of New York Mellon Trust Company, N.A., the trustee for the Notes, of its intent to redeem its outstanding $400 million 4.75% Senior Secured Notes due February 1, 2023 on March 15, 2021. The redemption price of the Notes is $400 million plus accrued and unpaid interest through the proposed redemption date. The redemption is expected to be funded from cash.$1.05 billion.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
and Procedures
Our management, under the supervision and 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 December 31, 2020.2023. “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, or the Exchange Act, 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 Exchange Act, 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. Based on their evaluation, the principal executive officer and principal financial officer of WEX Inc. concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2020.2023.
Management’s Annual Report on Internal Control Over Financial Reporting
WEX Inc.’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Exchange Act as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions and disposition of assets; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures are made only in accordance with management and Board authorizations; and providing reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.
Under the supervision of and with the participation of management, including the principal executive officer and principal financial and accounting officer, an evaluation was conducted of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by The Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s evaluation under the framework in Internal Control - Integrated Framework (2013), management concluded that WEX Inc.’s internal control over financial reporting was effective as of December 31, 2020.2023.
TheOn September 1, 2023, the Company acquired eNett and Optal on December 15, 2020.certain entities collectively referred to as Ascensus Health & Benefits, a line of business of Ascensus. On November 1, 2023, the Company acquired Payzer Holdings, Inc. Management excluded these businesses from its assessment of the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2020.2023. These exclusions were in accordance with Securities and Exchange Commission guidance that an assessment of a recently acquired business’s internal control over financial reporting may be omitted from management’s report on internal control over financial reporting in the year of acquisition of the business. These businesses represented, in aggregate, 9.5%less than 1.0 percent of the Company’s total consolidated assets (excluding goodwill and intangibles, which are included within the scope of the assessment) and less than 1%1.0 percent of total consolidated revenues, as of and for the year ended December 31, 2020.2023.
The effectiveness of our internal control over financial reporting as of December 31, 2020,2023, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the fiscal quarter ended December 31, 20202023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal control over financial reporting despite the fact that most of our
employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal control to minimize the impact on their design and operating effectiveness.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the ShareholdersStockholders and the Board of Directors of WEX Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of WEX Inc. and subsidiaries (the “Company”) as of December 31, 2020,2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020,2023, of the Company and our report dated March 1, 2021,February 23, 2024, expressed an unqualified opinion on those financial statements.
As described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at eNettAscensus Health & Benefits, and Optal,Payzer Holdings, Inc., which were acquired on December 15, 2020,September 1, 2023 and November 1, 2023, respectively, and whose financial statements in aggregate constitute 9.5%less than 1.0% of total assets (excluding goodwill and intangibles) and less than 1%1.0% of total revenues of the consolidated financial statementsstatement amounts as of and for the year ended December 31, 2020.2023. Accordingly, our audit did not include the internal control over financial reporting at eNettAscensus Health & Benefits, and Optal.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting appearing at Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 23, 2024
Boston, Massachusetts
March 1, 2021
ITEM 9B. OTHER INFORMATION
Rule 10b5-1 Trading Plans
During the fiscal quarter ended December 31, 2023, none of our directors or officers (as defined in Rule 16a-1(f)) adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Regulation S-K, Item 408, intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c), except as disclosed in the table following:
| | | | | | | | | | | | | | |
| Name and Title | Date Adopted (“A”) or
Terminated (“T”) | Character of Trading
Arrangement | Maximum Aggregate
Number of Shares of
Common Stock to be
Purchased or Sold
Pursuant to the Trading
Arrangement | Duration of Trading
Arrangement |
Jagtar Narula Chief Financial Officer | (A) November 14, 2023 | Rule 10b5-1 trading arrangement | Up to 8,091 shares to be sold(1) | March 5, 2024 -
December 13, 2024 |
(1)This number includes up to 6,366 shares of common stock subject to RSUs previously granted to Mr. Narula (the “RSU Shares”) that vest on March 15, 2024 and June 15, 2024. The aggregate number of RSU Shares that will be available for sale is not yet determinable because the shares available will be net of shares sold to satisfy tax withholding obligations that arise in connection with the vesting and settlement of such RSU awards. As such, for purposes of this disclosure, the shares included in this table reflect the aggregate maximum number of shares underlying Mr. Narula’s RSUs without excluding the shares that will be sold to satisfy the tax withholding obligations.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
See the information in the Company’s definitive proxy statement to be delivered to stockholders in connection with the 20212024 Annual Meeting of Stockholders (the “2021“2024 Proxy Statement”) set forth under the captions “Executive Officers” and “Governance” and the related subsections including “The Board of Directors”, “Executive Officers,” and “Delinquent Section 16(a) Reports,” if applicable, which information is incorporated herein by reference.
Website Availability of Corporate Governance and Other Documents
The following documents are available onwithin the Corporate Governance documents page of the investor relations section of the Company’s website, www.wexinc.com:www.wexinc.com: (1) WEX Code of Business Conduct and Ethics, which covers all employees, officers and our board of directors, (2) the Company’s Corporate Governance Guidelines and (3) key Board Committeeboard of directors’ committee charters, including charters for the Audit, Corporate Governance, Leadership Development and Compensation, Finance, and Technology and Cybersecurity Committees.
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Address Stockholders also may obtain printed copies of these documents by submitting a written request to Investor Relations, WEX Inc., 1 Hancock Street, Portland, Maine 04101. | | | Internet The Company intends to post on its website, www.wexinc.com, 97 Darling Avenue, South Portland, Maine 04106. The Company intends to post on its website, www.wexinc.com, all disclosures that are required by law or NYSE listing standards concerning any amendments to, or waivers from, the Code of Business Conduct and Ethics. |
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ITEM 11. EXECUTIVE COMPENSATION
See the information in the 20212024 Proxy Statement set forth under the captions “Executive Compensation” and the related subsections and “Governance” and related subsections including “Director Compensation” and “Compensation Committee Interlocks and Insider Participation”, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
See the information in the 20212024 Proxy Statement set forth under the caption “Information About Stock Ownership” and related subsections including “Securities Authorized for Issuance Underunder Equity Compensation Plans” and “Principal Stockholders”, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
See the information in the 20212024 Proxy Statement set forth under the caption “Governance” and related subsections including “Director Independence” and “Certain Relationships and Related Transactions,” which information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES
See the informationInformation about aggregate fees billed to us by our principal accountant, Deloitte & Touche LLP (PCAOB ID No. 34) will be presented in the 20212024 Proxy Statement set forth under the caption “Audit Matters” and related subsection “Auditor Selection and Fees,” which information is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
1.Financial Statements (see Index to Consolidated Financial Statements on page 73)77). 2.Financial statement schedules have been omitted since they are either not required or not applicable or the information is otherwise included herein.
3.The exhibit index attached to this Annual Report on Form 10–10–K is hereby incorporated by reference.
ITEM 16. FORM 10–10–K SUMMARY
None.
EXHIBIT INDEXExhibit Index
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| Exhibit No. | | Description | |
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| 2.1 | | Unit Purchase Agreement, dated October 18, 2015, by and among WEX Inc., Mustang HoldCo 1 LLC, Warburg Pincus Private Equity (E&P) XI - B, L.P., Warburg Pincus Private Equity XI‑C, L.P., WP XI Partners, L.P., Warburg Pincus Private Equity XI‑B, L.P., WP Mustang Co‑Invest‑B, L.P., WP Mustang Co‑Invest‑C L.P., Warburg Pincus XI (E&P) Partners‑B, L.P., Warburg Pincus (E&P) XI, L.P., WP Mustang Topco LLC and Warburg Pincus Private Equity XI (Lexington), LLC (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on October 19, 2015, File No. 001-32426) |
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2.2 | | Share Purchase Agreement, dated January 24, 2020, by and among WEX Inc., eNett International (Jersey) Limited, a Jersey limited company, Optal Limited, a private company limited by shares incorporated in England and Wales, Travelport Limited, a Bermuda exempted company, Toro Private Holdings I, Ltd., a private company limited by shares incorporated in England and Wales, Optal Limited, in its capacity as trustee of the PSP Group DESOP Discretionary Trust established by way of discretionary trust deed dated 28 October 2008, as amended from time to time, and the other shareholders of eNett and Optal set forth therein (incorporated herein by reference to Exhibit No. 2.1 to our Current Report on Form 8-K filed with the SEC on January 24, 2020, File No. 001-32426)2020) | |
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| 10.3 | | | |
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| 10.4 | | | |
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| 10.5 | | Guarantee, dated as of June 26, 2009, by Apollo Investment Fund VI, L.P., Apollo Overseas Partners VI, L.P., Apollo Overseas Partners (Delaware) VI, L.P., Apollo Overseas Partners (Delaware892) VI, L.P. and Apollo Overseas Partners (Germany) VI, L.P. in favor of Wright Express Corporation (incorporated by reference to Exhibit No. 10.3 to our Quarterly Report on Form 10-Q filed with the SEC on July 30, 2009, File No. 001-324426)2009) | |
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| 10.6 | | Investors RightsRestatement Agreement, dated as of JulyApril 1, 2016,2021, by and among WEX Inc., Mustang HoldCo 1 LLC, Warburg Pincus Private Equity (E&P) XI‑the subsidiaries of WEX Inc. identified therein, each of the Lenders party hereto, the Incremental Revolving Lenders, the Incremental Term A Lenders, the Additional Term A Lender, the Term B L.P., Warburg Pincus Private Equity XI – C, L.P., WP XI Partners, L.P., Warburg Pincus Private Equity XI – B, L.P., WP Mustang Co-Invest – B L.P., WP Mustang Co-Invest – C L.P., Warburg Pincus XI (E&P) Partners – B, L.P., Warburg Pincus (E&P) XI, L.P., WP (Lexington) Holdings II, L.P., Warburg Pincus Private Equity (Lexington) XI – A, L.P., Warburg Pincus XI (Lexington) Partners – A , L.P., WP Mustang Co-Invest LLCLender and the other investors party thereto (incorporated by reference to Exhibit No. 10.1 to our Current Report on Form 8-K filed with the SEC on July 1, 2016, File No. 001-32426) |
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10.7 | | Credit Agreement among WEX Inc., certain of its subsidiaries as borrowers, WEX Card Holding Australia Pty Ltd.BANK OF AMERICA, N.A., as designated borrower, Bank of America, N.A., asthe Administrative Agent, Swing Line Lender and the L/C Issuer, and the other lenders party thereto (incorporated by reference to Exhibit No. 10.2 to our Current Report on Form 8-K filed with the SEC on July 1, 2016, File No. 001-32426) |
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10.8 | | | |
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10.910.7 | | | |
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| 10.8 | | | |
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| 10.9 | | | |
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| 10.10 | | ThirdFourth Amendment to Amended and Restated Credit Agreement, dated January 17, 2018, between WEX Inc., Wright Express International Holdings Limited, WEX Card Holdings Australia Pty Ltd., Bank of America22, 2024 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on January 18, 2018, File No. 001-32426)25, 2024) | |
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| 10.11 | |
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10.12 | | |
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10.13 | | |
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10.14 | | Seventh Amendment to Credit Agreement dated as of November 19, 2019, by and among WEX Inc., the subsidiaries of WEX Inc. identified therein, Bell Bank, as the incremental revolving loan lender, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on November 25, 2019, File No. 001-32426) |
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10.15 | | |
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†10.16 | | |
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†10.17 | | |
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† 10.18 | |
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† 10.19 | |
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† 10.20 | | |
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†10.21 | | |
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†10.22 | | |
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† 10.23 | | |
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† 10.24 | | |
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† 10.25 | | |
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† 10.26 | | |
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† 10.27 | | |
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† 10.28 | | |
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† 10.29 | | |
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† 10.30 | | |
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† 10.31 | | |
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† 10.32 | | |
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† 10.33 | | |
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† 10.34 | | |
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† 10.35 | | |
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† 10.36 | | |
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† 10.37 | | |
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† 10.38 | | |
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† 10.39 | | |
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† 10.40 | | |
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† 10.41 | | |
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10.42 | | |
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10.43 | | | |
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10.44 | | |
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10.45 | | | |
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10.46 | | | |
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10.47 | | | Commitment Letter, dated as of October 18, 2015, by and among WEX Inc., Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, SunTrust Bank, SunTrust Robinson Humphrey and MUFG Union Bank, N.A (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on October 19, 2015, File No. 001-32426) |
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10.48 | | | |
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† 10.49 | | |
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† 10.50 | | |
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10.51 | | | |
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10.52 | | | Amended and Restated Commitment Letter, dated as of February 10, 2020, by and among WEX Inc., Bank of America, N.A., BofA Securities, Inc., Citizens Bank, N.A., MUFG Bank, Ltd., SunTrust Robinson Humphrey, Inc., Truist Bank, Wells Fargo Securities, LLC, Wells Fargo Bank, N.A., Bank of Montreal, BMO Capital Markets Corp., Santander Bank, N.A., KeyBank National Association, KeyBanc Capital Markets Inc., Regions Capital Markets, a division of Regions Bank, Deutsche Bank AG Cayman Islands Branch, Deutsche Bank AG New York Branch, Deutsche Bank Securities Inc. and Fifth Third Bank, National Association (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on February 13, 2020, File No. 001-32426) |
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10.53 | | Second Amended and Restated Commitment Letter, dated as of June 26, 2020, by and among WEX Inc., Bank of America, N.A., BofA Securities, Inc., Citizens Bank, N.A., MUFG Bank, Ltd., Sun Trust Robinson Humphrey, Inc., Truist Bank, Wells Fargo Securities, LLC, Wells Fargo Bank, N.A., Bank of Montreal, BMO Capital Markets Corp., Santander Bank, N.A., KeyBank National Association, KeyBanc Capital Markets Inc., Regions Capital Markets, a division of Regions Bank, Deutsche Bank AG Cayman Islands Branch, Deutsche Bank AG New York Branch, Deutsche Bank Securities Inc. and Fifth Third Bank, National Association (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on June 29, 2020, File No. 001-32426) |
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10.54 | | Third Amended and Restated Commitment Letter, dated as of August 20, 2020, by and among WEX Inc., Bank of America, N.A., BofA Securities, Inc., Citizens Bank, N.A., MUFG Bank, Ltd., Truist Securities, Inc., Truist Bank, Wells Fargo Securities, LLC, Wells Fargo Bank, N.A., Bank of Montreal, BMO Capital Markets Corp., Santander Bank, N.A., KeyBank National Association, KeyBanc Capital Markets Inc., Regions Capital Markets, a division of Regions Bank, Deutsche Bank AG Cayman Islands Branch, Deutsche Bank AG New York Branch, Deutsche Bank Securities Inc. and Fifth Third Bank, National Association (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on August 21, 2020, File No. 001-32426) |
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10.55 | | Ninth Amendment to Credit Agreement, dated as of June 26, 2020, by and among WEX Inc., the subsidiaries of WEX Inc. identified therein, Bank of America, N.A., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on June 29, 2010, File No. 001-32426) |
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10.56 | | Tenth Amendment to Credit Agreement, dated as of July 29, 2020, by and among WEX Inc., the subsidiaries of WEX Inc. Tenth Amendment to Credit Agreement, dated as of July 29, 2020, by and among WEX Inc., the subsidiaries of WEX Inc. identified therein, Mizuho Bank, Ltd., as the incremental revolving loan lender, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on August 3, 2020, File No. 001-32426) therein, Mizuho Bank, Ltd., as the incremental revolving loan lender, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on August 3, 2020, File No. 001-32426) |
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10.57 | | Eleventh Amendment to Credit Agreement, dated as of August 20, 2020, by and among WEX Inc., the subsidiaries of WEX Inc. identified therein, Bank of America, N.A., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on August 21, 2020, File No. 001-32426) |
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10.58 | | | |
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10.5910.12 | | | |
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10.6010.13 | | | |
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10.6110.14 | | |
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10.62 | | |
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10.63 | | Deed of Settlement, made as of December 15, 2020, between the parties listed in Schedule A thereto, the parties listed in Schedule B thereto, WEX Inc., eNett International (Jersey) Limited, Optal Limited, Toro Private Holdings I, Ltd. and Optal Limited, in its capacity as trustee of the PSP Group Employee Share Trust, and including the Amended Purchase Agreement attached as Schedule D thereto (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on December 15, 2020, File No. 001-32426).2020) | |
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† * 10.6410.15 | † | | |
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| 10.16 | † | | |
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| 10.17 | † | | |
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| 10.18 | † | | |
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| 10.19 | † | | |
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| 10.20 | † | | |
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| 10.21 | † | | |
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| 10.22 | † | | |
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| 10.23 | † | | |
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| 10.24 | † | | |
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| 10.25 | † | | |
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| 10.26 | † | | |
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| 10.27 | † | | |
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| 10.28 | † | | |
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| 10.29 | † | | |
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| 10.30 | † | | |
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| 10.31 | † | | |
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| 10.32 | † | | |
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| 10.33 | † | | |
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| 10.34 | † | | |
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| 10.35 | † | | |
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| 10.36 | † | | |
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| 10.37 | † | | |
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| 10.38 | † | | |
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| 10.39 | † | | |
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† * 10.6510.40 | † | | |
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* 10.41 | † | | |
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| 10.42 | † | | |
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| 10.43 | † | | |
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| 21.1 | * | | |
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* 23.1 | * | | |
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* 31.2 | * | | |
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* 32.1 | * | | |
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* 32.2 | * | | |
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| 97 | * | | |
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| 101.INS | * | Inline XBRL Instance Document | |
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* 101.SCH | * | Inline XBRL Taxonomy Extension Schema Document | |
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* 101.CAL | * | Inline XBRL Taxonomy Calculation Linkbase Document | |
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* 101.LAB | * | Inline XBRL Taxonomy Label Linkbase Document | |
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* 101.PRE | * | Inline XBRL Taxonomy Presentation Linkbase Document | |
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* 101.DEF | * | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
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* 104 | * | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) | |
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| * | | Filed with this report. | |
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| † | | Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b) of this Form 10-K. | |
| | | |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | | WEX INC. |
| February 23, 2024 | | WEX INC.
|
March 1, 2021 | | By: | /s/ Roberto SimonJagtar Narula |
| | | Roberto SimonJagtar Narula
Chief Financial Officer (principal financial officer and principal accounting officer) |
| | | |
| | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | | | | | | | |
| | |
March 1, 2021February 23, 2024 | | /s/ Melissa D. Smith |
| | Melissa D. Smith |
| | President, Chief Executive Officer, Chair, and ChairPresident |
| | (principal executive officer) |
| |
March 1, 2021February 23, 2024 | | /s/ Roberto Simon Jagtar Narula |
| | Roberto SimonJagtar Narula |
| | Chief Financial Officer |
| | (principal financial andofficer) |
| |
| February 23, 2024 | | /s/ Jennifer Kimball |
| | Jennifer Kimball |
| | Chief Accounting Officer |
| | (principal accounting officer) |
| | |
March 1, 2021February 23, 2024 | | /s/ Jack A. VanWoerkom |
| | Jack A. VanWoerkom |
| | Vice Chairman and Lead Director |
| | |
March 1, 2021February 23, 2024 | | /s/ John E. BachmanNancy Altobello |
| | | John E. BachmanNancy Altobello |
| | Director |
| | |
March 1, 2021February 23, 2024 | | /s/ Daniel Callahan |
| | Daniel Callahan |
| | Director |
| | |
March 1, 2021February 23, 2024 | | /s/ Shikhar Ghosh |
| | Shikhar Ghosh |
| | Director |
| | |
March 1, 2021February 23, 2024 | | /s/ James Groch |
| | James Groch |
| | Director |
| | |
| | | | | | | | |
March 1, 2021February 23, 2024 | | /s/ James C. Neary |
| | James C. Neary |
| | Director |
| | |
| February 23, 2024 | | /s/ Derrick Roman |
| | March 1, 2021Derrick Roman |
| | Director |
| | |
| February 23, 2024 | | /s/ Stephen Smith |
| | Stephen Smith |
| | Director |
| | |
March 1, 2021February 23, 2024 | | /s/ Susan Sobbott |
| | Susan Sobbott |
| | Director |
| |
March 1, 2021February 23, 2024 | | /s/ Regina O. Sommer |
| | Regina O. Sommer |
| | Director |
| | |
| February 23, 2024 | | /s/ Aimee Cardwell |
| | Aimee Cardwell |
| | Director |
