WEX(WEX) - 2020 Q4 - Annual Report

Part I Business WEX Inc. provides financial technology services across three segments, supported by WEX Bank, and completed key acquisitions and divestitures in 2020, while focusing on strategic expansion Our Company WEX Inc. is a leading financial technology service provider with three segments, supported by WEX Bank for funding and credit extension - WEX operates in three main segments: Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions[41] - WEX Bank, a wholly-owned FDIC insured depository institution, provides a low-cost funding mechanism and makes credit decisions for the Fleet and Travel segments[42] Recent Developments In 2020, WEX acquired eNett and Optal for a reduced price of $577.5 million after a legal settlement and sold its WEX Latin America subsidiary - WEX acquired eNett and Optal on December 15, 2020, for a reduced cash price of $577.5 million following a legal dispute and settlement, with the original deal at $1.3 billion in cash and 2.0 million shares[43][45] - A residual value of $162.5 million from the eNett and Optal transaction was allocated to a legal settlement expense[45] - The company sold its WEX Latin America subsidiary (UNIK S.A.) on September 30, 2020, resulting in a pre-tax loss on sale of $46.4 million[46] Fleet Solutions Segment The Fleet Solutions segment leads in payment processing for commercial and government vehicle fleets, serving 15.8 million vehicles as of year-end 2020 - As of December 31, 2020, the Fleet Solutions segment serves 15.8 million vehicles[48] Fleet Solutions Transaction Volume | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Payment Processing Transactions (millions) | 464 | 505 | - Revenue sources include payment processing fees, account servicing fees, finance fees, and other ancillary services like data analytics and tax reporting[49][52][62] - The segment utilizes direct marketing channels (WEX, EFS, Fleet One) and indirect channels through co-branded and private label partnerships with fuel providers and fleet management companies[54][55][56] Travel and Corporate Solutions Segment The Travel and Corporate Solutions segment provides corporate purchasing and payment solutions, including electronic payments and corporate cards, to streamline B2B transactions - The segment offers electronic payment solutions, including virtual payments and integrated payables, to streamline B2B transactions[59][60] - Virtual payments utilize a unique account number (VCN) for each transaction with customized credit limits and expiration dates to limit fraud and simplify reconciliation[60][63] - The segment also offers corporate cards for purchasing and travel & entertainment, as well as prepaid and gift card products in Australia[61][62] Health and Employee Benefit Solutions Segment The Health and Employee Benefit Solutions segment provides a SaaS platform for consumer-directed healthcare payments, serving 408,000 employers and 33.1 million consumers - The segment provides a SaaS platform to support healthcare benefit programs like FSAs, HSAs, and COBRA administration[66][67] - The segment has relationships with approximately 408,000 employers, reaching about 33.1 million consumers[68] - Primary revenue sources are SaaS licensing fees charged to partners and interchange fees from spending on customer debit cards[68][69] Other Items This section covers WEX's competitive landscape, corporate strategy, human capital management, technology, and extensive regulatory environment - The company's 2020 strategy focused on five pillars: winning with customer relationships, delivering modular solutions on integrated platforms, diversifying through new verticals and acquisitions, mitigating risk to maximize scale, and leveraging culture to grow talent[81] - As of December 31, 2020, WEX had approximately 5,300 employees, with 4,300 located in the United States[78] - The company's technology infrastructure relies on proprietary closed-loop platforms for fleet services and an integrated multi-account payment platform for WEX Health, supported by global data centers and cloud services[86][87] - WEX and its subsidiary WEX Bank are subject to extensive U.S. and foreign regulations, including banking laws (FDIC, Utah DFI), consumer protection (CFPB), data privacy (GLBA, HIPAA, CCPA, GDPR), and anti-money laundering laws[92][93][125] Risk Factors The company faces multiple risks from the COVID-19 pandemic, fuel price volatility, substantial indebtedness, regulatory changes, and cybersecurity threats - The COVID-19 pandemic is a primary risk, negatively impacting worldwide travel, fuel demand, and consumer spending, which is expected to continue affecting business operations and financial condition[132][133] - A significant portion of revenues is tied to fuel prices and volume; a one-cent decline in average domestic fuel prices is estimated to result in a $1.5 million decline in 2021 revenue[136] - The company faces risks from its substantial indebtedness of approximately $3.0 billion as of December 31, 2020, which could affect business flexibility and ability to meet debt service obligations[30][192] - WEX Bank's industrial loan charter (ILC) provides access to low-cost funds; its loss or suspension, or changes in regulations, could disrupt operations and increase costs[29][181] - The business is regularly subject to cyberattacks and security breaches, which could lead to liability, reputational damage, and loss of customer confidence[34][227] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[250] Properties All of the company's facilities are leased, including its corporate headquarters in Portland, Maine, and significant space for WEX Health operations - The company leases all its facilities, with its corporate headquarters in Portland, Maine[251] Legal Proceedings The company is not involved in any material legal proceedings, with the eNett and Optal acquisition dispute settled and an ongoing SEC investigation - The legal proceedings initiated by eNett and Optal shareholders were dismissed with prejudice on December 15, 2020, as part of a settlement that finalized the acquisition at a reduced price[252][253] - The company is cooperating with an SEC investigation related to the revision of its financial statements due to issues at its former Brazil subsidiary[254] Mine Safety Disclosures This item is not applicable to the company - Not applicable[255] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities WEX Inc.'s common stock trades on the NYSE under WEX, with no dividends declared since its 2005 IPO and no share repurchases in 2020 - The company's common stock trades on the NYSE under the symbol WEX[257] - No dividends have been declared on common stock since the company's IPO in 2005[258] - The company did not repurchase any of its common stock during the year ended December 31, 2020; the full $150 million authorized under the share repurchase program was available as of year-end[260][261] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's 2020 financial performance, significantly impacted by COVID-19, resulting in decreased revenue and a net loss, while maintaining strong liquidity 2020 Key Performance Indicators vs. 2019 | Segment | Metric | 2020 | Change vs. 2019 | | :--- | :--- | :--- | :--- | | Fleet Solutions | Avg. Vehicles Serviced | 15.3 million | +9% | | | Avg. US Fuel Price/Gallon | $2.29 | -18% | | | Payment Processing Transactions | 463.9 million | -8% | | Travel & Corp. Solutions | Payment Solutions Purchase Volume | $20.9 billion | -47% | | Health & Employee Benefit | Avg. SaaS Accounts | 14.5 million | +12% | - The company's financial performance in 2020 was significantly impacted by the COVID-19 pandemic, with the Travel and Corporate Solutions segment being the most severely affected due to the decline in worldwide travel[284][285] - In December 2020, the company acquired eNett and Optal for a reduced price of $577.5 million, paid with cash on hand, and recorded a $162.5 million legal settlement expense related to the transaction[276] - In July 2020, WEX issued $310 million in convertible senior notes and $90 million in common stock to an affiliate of Warburg Pincus LLC[277] Results of Operations For 2020, total revenues decreased by 9.5% to $1.56 billion, resulting in an operating loss of $91.7 million and a net loss of $243.6 million Consolidated Results of Operations (in thousands) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenues | $1,559,869 | $1,723,691 | | Operating (Loss) Income | $(91,673) | $385,841 | | Net (Loss) Income Attributable to Shareholders | $(243,638) | $99,006 | - The operating loss in 2020 was primarily due to a $162.5 million legal settlement, a $53.4 million goodwill impairment charge, and a $46.4 million loss on the sale of a subsidiary[465] Application of Critical Accounting Policies and Estimates The company's critical accounting policies involve significant judgment in revenue recognition, credit loss allowances, asset valuation, and income tax calculations - Key estimates are required for revenue recognition, especially concerning variable consideration like fee rebates tied to performance milestones[348][354] - The allowance for expected credit losses is calculated using analytical models based on historical loss rates, adjusted for current conditions and economic forecasts; a 0.5% change would impact the provision by $10.3 million[359][364] - Goodwill and intangible assets are tested for impairment annually or when indicators exist; in 2020, a $53.4 million goodwill impairment charge was recorded for WEX Fleet Europe due to reduced volumes from COVID-19[369][377] Liquidity, Capital Resources and Cash Flows The company maintains adequate liquidity and capital resources, with net cash from operating activities increasing to $857.0 million in 2020 and approximately $3.0 billion in debt outstanding Cash Flow Summary (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $857,019 | $663,171 | | Net cash used for investing activities | $(329,086) | $(990,614) | | Net cash (used for) provided by financing activities | $(179,256) | $749,773 | - As of December 31, 2020, the company had approximately $3.0 billion of debt outstanding and $818.4 million in remaining borrowing capacity under its revolving credit facility[192][430] - WEX Bank, a key source of funding, was categorized as "well capitalized" as of December 31, 2020[421][754] - The company utilizes off-balance sheet arrangements, including accounts receivable factoring and securitization facilities in Australia and Europe, to improve liquidity[412][414][417] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates, foreign currency exchange rates, and commodity prices, with some interest rate hedging in place - The company has $2.3 billion in variable-rate debt under its 2016 Credit Agreement, with interest rate swaps in place to fix the rate on $1.4 billion of this debt[434] - A hypothetical 1.00% increase in interest rates would increase the annual interest expense on the 2016 Credit Agreement by an estimated $8.8 million[436][437] - The company is exposed to foreign currency fluctuations from its international subsidiaries but does not currently use hedging instruments to mitigate this risk[438] - The company is not hedged for changes in fuel prices[439] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2020, reporting $1.56 billion in revenues and a net loss of $243.6 million, with critical audit matters identified Consolidated Financial Highlights (Year Ended Dec 31, 2020) | Metric | Amount (in thousands) | | :--- | :--- | | Total Revenues | $1,559,869 | | Operating (Loss) Income | $(91,673) | | Net (Loss) Income Attributable to Shareholders | $(243,638) | | Diluted EPS | $(5.56) | | Total Assets | $8,183,361 | | Total Liabilities | $6,148,225 | | Total Stockholders' Equity | $1,917,917 | - The independent auditor's report highlighted three critical audit matters: the complexity of auditing highly automated revenue systems, the accounting for the 2020 convertible notes issuance, and the valuation and allocation of the purchase price for the eNett and Optal acquisition[448][449][453][458] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[764] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020, excluding recent acquisitions - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[765] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020[767] - The recently acquired eNett and Optal businesses were excluded from management's assessment of internal control over financial reporting[768] - The independent registered public accounting firm issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2020[769][773] Other Information This item is not applicable to the company - Not applicable[781] Part III Directors, Executive Officers and Corporate Governance Information regarding the company's directors, executive officers, and corporate governance practices is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the 2021 Proxy Statement[783] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's definitive 2021 Proxy Statement - Information is incorporated by reference from the 2021 Proxy Statement[785] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and equity compensation plans is incorporated by reference from the company's definitive 2021 Proxy Statement - Information is incorporated by reference from the 2021 Proxy Statement[786] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive 2021 Proxy Statement - Information is incorporated by reference from the 2021 Proxy Statement[787] Principal Accounting Fees and Services Information regarding the fees paid to and services provided by the principal independent registered public accounting firm is incorporated by reference from the company's definitive 2021 Proxy Statement - Information is incorporated by reference from the 2021 Proxy Statement[788] Part IV Exhibits and Financial Statement Schedules This section lists the documents filed as part of the Form 10-K, including financial statements and an index of all exhibits - This section contains the index to the consolidated financial statements and the exhibit index[791] Form 10–K Summary The company has not provided a Form 10-K summary - None[792]