WEX Inc. (WEX) FY 2021 MD&A

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, 2021 and 2020, financial condition at December 31, 2021 and 2020 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, and notes to the consolidated financial statements.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is presented in the following sections:

•2021 Highlights and Year in Review

•Recent Events

•Our Segments

•Results of Operations

•Application of Critical Accounting Policies and Estimates

•Recently Adopted and New Accounting Standards

•Liquidity and Capital Resources

2021 Highlights and Year in Review

Our Company’s management regularly monitors key performance indicators to measure our current performance and project future performance. A recurring, more extensive list of key performance indicators is included by segment within the Results of Operations section of this MD&A. Management believes the following key performance indicators by segment were of particular importance to our overall performance in 2021 as they provide enhanced information and data underlying our financial results.

Fleet Solutions

•Fuel transactions processed increased 9 percent from 2020 to 628.6 million in 2021, substantially as a result of increased transactions processed in North America.

•Payment processing transactions, which represents the total number of purchases made by fleets that have a payment processing relationship with WEX, increased 11 percent from 2020 to 515.4 million in 2021, substantially as a result of increased transactions processed in North America.

•The average U.S. price per gallon of fuel was $3.11 during 2021, a 36 percent increase as compared to 2020.

•Provision for credit losses in the Fleet Solutions segment decreased 33 percent to $37.8 million during 2021, as compared to $56.6 million during 2020. Our credit losses were 7.6 basis points of fuel expenditures for 2021, as compared to 16.7 basis points of fuel expenditures for 2020, a decrease of 54 percent primarily due to increased collections efforts in 2021 resulting from initiatives implemented in late 2020 and overall improvements in the collection environment due to the availability of government stimulus monies that helped support customers during 2021.

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Travel and Corporate Solutions

•Purchase volume, which represents the total dollar value of all WEX issued transactions that use WEX corporate card products and virtual card products, was $38.6 billion in 2021, an 85 percent increase from 2020, driven primarily by the acquisition of eNett and Optal. Increased volumes in our corporate payment solutions business also contributed in part to the increase year over year.

Health and Employee Benefit Solutions

•Purchase volume, which represents the total U.S. dollar value of all transactions where interchange is earned by WEX, increased $310.3 million in 2021 resulting from continued recovery from the COVID-19 pandemic combined with customer acquisition.

•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 16.3 million in 2021 from 14.5 million in 2020 resulting from existing partner growth, the impact of new partner and employer group enrollments and the acquisition of benefitexpress.

Recent Events

Amended and Restated Credit Agreement

On April 1, 2021, the Company entered into the Amended and Restated Credit Agreement, which amended and restated its 2016 Credit Agreement. Information regarding this amendment and restatement, and its impact on the Company’s operations and financial condition, is included within our Liquidity and Capital Resources discussion later in MD&A.

Asset Acquisition and HSA Investments

On April 1, 2021, WEX Inc. completed the acquisition of certain contractual rights to serve as custodian or sub-custodian to certain HSAs from the HealthcareBank division of Bell Bank, which is owned by State Bankshares, Inc. This acquisition increases the Company’s role in its customer-directed healthcare ecosystem and aligns with its growth strategy. On October 14, 2021, under its rights as non-bank custodian, WEX Inc. transferred $960.0 million of custodial cash assets previously held by a third-party depository partner to WEX Bank to be managed and invested. Financial impacts resulting from this acquisition and transfer of assets are reflected within the Company’s Health and Employee Benefit Solutions segment. Additional information regarding this acquisition, including the initial cash consideration paid, deferred cash payments and the potential for additional consideration payable is included within our Liquidity and Capital Resources discussion later in MD&A.

Acquisition of remaining interest in WEX Europe Services

On April 13, 2021, the Company acquired the remaining 25 percent non-controlling interest in WEX Europe Services, which operates part of our European Fleet business within our Fleet Solutions segment. This transaction further streamlines the European Fleet business in order to create revenue synergies and manage the associated cost structure. For further information, including purchase price paid, see the discussion of this acquisition within the Liquidity and Capital Resources section later in MD&A.

benefitexpress Acquisition

On June 1, 2021, WEX Inc.’s subsidiary, WEX Health, completed the acquisition of Cirrus Holdings, LLC, the indirect owner of Benefit Express Services, LLC, which is a provider of highly configurable, cloud-based benefits administration technologies and services doing business under the name benefitexpress. The transaction expanded the Company’s role in the healthcare ecosystem, bringing together benefit administration, compliance services, and consumer-directed health and lifestyle spending accounts together to form a full-service benefits marketplace. Financial impacts resulting from this acquisition are reflected within the Company’s Health and Employee Benefit Solutions segment. Additional information regarding this acquisition, including the initial cash consideration paid, is included within our Liquidity and Capital Resources discussion later in MD&A. For further information regarding the structure of the benefitexpress Acquisition refer to Item 8 - Note 4, Acquisitions, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

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Our Segments

WEX currently operates in three reportable segments: Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. Our Fleet Solutions segment is a leader in fleet vehicle payment processing, transaction processing and information management services specifically designed for the needs of fleets of all sizes from small businesses to federal and state government fleets and over-the-road carriers. Our Travel and Corporate Solutions segment focuses on the complex payment environment of B2B payments, enabling customers to utilize our payments solutions to integrate into their own workflows and manage their accounts payable automation and spend management functions. Our Health and Employee Benefit Solutions segment provides a SaaS platform for consumer directed healthcare benefits and a full-service benefit enrollment solution, bringing together benefits administration, certain compliance services and consumer-directed and benefits accounts. Additionally, the Company serves as a non-bank custodian to certain HSA assets. Our Health and Employee Benefit Solutions segments provided payroll related benefits to customers in Brazil until September 30, 2020, the date of sale of our former subsidiary UNIK S.A.

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 the operating debt obtained to provide liquidity for its short-term receivables or used for investing purposes in fixed income debt 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 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 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.

The Company does not allocate foreign currency gains and losses, financing interest expense, unrealized gains and losses on financial instruments, change in fair value of contingent consideration, 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.

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Impacts from COVID-19 Pandemic

A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in January 2020, and subsequently declared a global pandemic by the World Health Organization on March 11, 2020. 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, we took certain measures during 2020 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, we continued to suspend most travel for employees during 2021, our office capacity generally remained limited and, since mid-March 2020, our employees have largely continued to work remotely in most geographies.

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. During 2021 we generally saw recovery across our reportable segments with improvements in transaction volumes, revenues and earnings, as further discussed within the following Results of Operations section. As of December 31, 2021, the COVID-19 pandemic is continuing to evolve and its impact on the business going forward cannot reasonably be foreseen as it will depend on many factors outside of our control.

Results of Operations

Year Ended December 31, 2021, Compared to the Year Ended December 31, 2020

Fleet Solutions

Revenues

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

1 Foreign currency exchange rate fluctuations had a $7.6 million favorable impact on Fleet Solutions’ revenue for the twelve months ended December 31, 2021, as compared to the prior year.

2 Favorable impact from domestic fuel prices was partially offset by unfavorable European fuel price spreads resulting in an increase of $115.6 million in revenue for the year ended December 31, 2021, as compared to 2020.

3 Fuel transactions processed represents the total number of fuel transactions (funded and unfunded) made by fleets.

4 Payment processing transactions represents the total number of purchases made by fleets that have a payment processing relationship with WEX.

5 Payment processing $ of fuel represents the total dollar value of the fuel purchased by fleets that have a payment processing relationship with WEX.

6 Net payment processing rate represents the percentage of the dollar value of each payment processing transaction that WEX records as revenue from merchants less certain discounts given to customers and network fees.

7 Net late fee rate represents late fee revenue as a percentage of fuel purchased by fleets that have a payment processing relationship with WEX.

Fleet Solutions payment processing revenue increased $108.5 million for 2021, as compared to 2020. Revenues were favorably impacted by higher domestic fuel prices as well as increased volumes from the pandemic-driven lows of 2020.

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Fleet Solutions account servicing revenue increased $14.5 million for 2021, as compared to 2020, due to an increase in miscellaneous card fees. Such increases were driven by volume recoveries in the North American fleet and over-the-road businesses, which had been impacted by the COVID-19 pandemic, and increased monthly fees resulting from increased card penetration.

Finance fee revenue is comprised of the following components:

Finance income primarily consists of late fees charged for receivables not paid within the terms of the customer agreement based upon the outstanding customer receivable balance. This revenue is earned when a customer’s receivable balance becomes delinquent and is calculated using the greater of a minimum charge or a stated late fee rate multiplied by the outstanding balance that is subject to a late fee charge. Changes in the absolute amount of such outstanding balances can be attributed to (i) changes in fuel prices; (ii) customer specific transaction volume; and (iii) customer specific delinquencies. Late fee revenue can also be impacted by (i) changes in late fee rates and (ii) increases or decreases in customer overdue balances. Late fee rates are determined and set based primarily on the risk associated with our customers, coupled with a strategic view of standard rates within our industry. Periodically, we assess the market rates associated within our industry to determine appropriate late fee rates. We consider factors such as the Company’s overall financial model and strategic plan, the cost to our business from customers failing to pay timely and the impact such late payments have on our financial results. These assessments are typically conducted at least annually but may occur more often depending on macro-economic factors.

Finance income increased $39.6 million in 2021, as compared to 2020. Increases in average unpaid invoice balances, attributable primarily to improvement in spend and increased fuel prices, contributed to over half the increase in finance income, as compared to 2020. The remaining increase was driven by higher weighted average late fee rates. For both 2021 and 2020, monthly late fee rates and minimum finance charges ranged up to 9.99 percent and $75, respectively. The weighted average late fee rate, net of related charge-offs, was 6.1 percent and 5.7 percent for 2021 and 2020, respectively. Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time to pay, placing a customer on a payment plan or granting waivers of late fees. There were no material concessions granted to customers experiencing financial difficulties during 2021 or 2020.

The primary source of factoring fee revenue is calculated as a negotiated percentage fee of the receivable balance that we purchase. A secondary source of factoring fee revenue is a flat rate service fee to our customers that request a non-contractual same day funding of the receivable balance. Factoring fee revenue for 2021 increased $17.4 million, as compared to 2020, due to increased shipping demand and increased rates, leading to an increase in the size and volume of factored invoices.

Other revenue increased $13.1 million in 2021, as compared to 2020, due primarily to the increase in transaction processing volumes in our over-the-road business and an increase in domestic servicing revenues due to higher levels of spend as compared to the lows of 2020, which resulted from travel bans and restrictions as a result of the COVID-19 pandemic.

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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:

1 Our CODM evaluates the financial performance of each segment using segment adjusted operating income, which excludes: (i) unallocated corporate expenses; (ii) acquisition-related intangible amortization and other acquisition and divestiture related items; (iii) legal settlement; (iv) impairment charges; (v) loss on sale of subsidiary; (vi) debt restructuring costs; (vii) stock-based compensation; and (viii) other costs. 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 (loss) before income taxes. See also Item 8 – Note 24, Segment Information, of our consolidated financial statements for more information regarding our segment determination.

2 Segment adjusted operating income margin is calculated by dividing segment adjusted operating income by segment revenue. The 2021 increase in segment adjusted operating income margin reflects revenue growth, higher fuel prices and scale in the expense base.

NM - Not meaningful

Cost of services

Processing costs increased $21.0 million for 2021, as compared to 2020, primarily driven by higher business support costs incurred as a result of the increased volumes experienced, coupled with increased employee compensation costs.

Service fees for 2021 were generally consistent with service fees in 2020.

Provision for credit losses decreased $18.8 million for 2021, as compared to 2020. The reduction in credit losses stemmed from a number of factors including increased collections efforts in 2021 resulting from initiatives implemented in late 2020 and overall improvements in the collection environment due to the availability of government stimulus monies that helped support customers during 2021. We generally measure our credit loss performance by calculating fuel-related credit losses as a percentage of total fuel expenditures on payment processing transactions. This metric for credit losses was 7.6 basis points of fuel expenditures for 2021, as compared to 16.7 basis points of fuel expenditures for 2020.

Operating interest expense decreased $11.5 million in 2021, as compared to 2020. The decrease is primarily due to lower interest rates.

Depreciation and amortization expenses remained generally consistent between 2021 and 2020.

Other operating expenses

General and administrative expenses remained consistent between 2021 and 2020.

Sales and marketing expenses increased $27.1 million in 2021, as compared to 2020. This increase was primarily driven by higher partner commissions due to volume growth and a rise in segment expenses as the Company relaxed prior year cost containment initiatives enacted as a result of the COVID-19 pandemic.

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Depreciation and amortization expenses decreased $11.2 million in 2021, as compared to 2020, due primarily to lower ongoing amortization over time resulting from the impact of the accelerated method of amortization on certain acquired customer relationships.

Impairment charges consisted of a non-cash goodwill impairment charge of $53.4 million for our WEX Fleet Europe reporting unit, which was identified during the annual goodwill assessment completed in the fourth quarter of 2020. No impairment to any of our reporting units was identified during the year ended December 31, 2021. See 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:

1 Foreign currency exchange rate fluctuations had a $0.9 million favorable impact on Travel and Corporate Solutions revenues in 2021, compared to the prior year.

2 Purchase volume represents the total dollar value of all WEX-issued transactions that use WEX corporate card products and virtual card products.

3 Net interchange rate represents the percentage of the dollar value of each payment processing transaction that WEX records as revenue from merchants, less certain discounts given to customers and network fees.

Travel and Corporate Solutions total revenue increased $47.1 million for 2021, as compared to 2020. The increase was primarily driven by travel-related revenues attributable to the acquisition of eNett and Optal and increased purchase volumes in our corporate payments business as a result of continued strength in the partner channel. These increases were in part offset by a reduction in net interchange rate due to rate changes for travel-related customers and unfavorable product mix. Additionally, the net interchange rate was driven lower by the impact of an accounting change in the fourth quarter of 2021, which required a shift from gross revenue presentation to net for one customer.

Finance fee revenue was not material to Travel and Corporate Solutions’ operations in 2021 or 2020. Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time to pay, placing a customer on a payment plan or granting waivers of late fees. There were no material concessions to customers experiencing financial difficulties during either 2021 or 2020.

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Operating Expenses

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

1 Our CODM evaluates the financial performance of each segment using segment adjusted operating income, which excludes: (i) unallocated corporate expenses; (ii) acquisition-related intangible amortization and other acquisition and divestiture related items; (iii) legal settlement; (iv) impairment charges; (v) loss on sale of subsidiary; (vi) debt restructuring costs; (vii) stock-based compensation; and (viii) other costs. 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 (loss) before income taxes. See also Item 8 – Note 24, Segment Information, of our consolidated financial statements for more information regarding our segment determination.

2 Segment adjusted operating income margin is calculated by dividing segment adjusted operating income by segment revenue. The 2021 increase in segment adjusted operating income margin is due to a return of volume in the travel business from historically low levels due to COVID-19, strong growth in our over-the-road corporate payments business, which has a high margin profile, and the divestiture of our Brazil subsidiary.

NM - Not meaningful

Cost of services

Processing costs increased $12.1 million in 2021, as compared to 2020, due primarily to the acquisition of eNett and Optal. This increase was partly offset by a reduction of costs as a result of the sale of the Company’s Brazilian subsidiary during the third quarter of 2020.

Despite significant increases in volumes, service fees decreased $2.6 million in 2021, as compared to 2020. This decrease was due primarily to savings from the conversion to an internal transaction processing platform during 2020, offset by an increase in service fees due to the acquisition of eNett and Optal.

Provision for credit losses decreased $14.6 million in 2021, as compared to 2020. The prior year provision for credit losses included a specific reserve taken on a customer in Brazil prior to the sale of WEX Latin America during the third quarter of 2020. Additionally, the prior year was unfavorably impacted by increased credit losses as a result of the COVID-19 pandemic.

Operating interest expense decreased $3.1 million in 2021, as compared to 2020, primarily as a result of lower interest rates.

Depreciation and amortization expenses increased $5.6 million in 2021, as compared to 2020, due primarily to the acquisition of certain developed technology from eNett and Optal.

Other operating expenses

General and administrative expenses increased $44.2 million in 2021, as compared to 2020. The increase is primarily due to integration costs related to the acquisition of eNett and Optal and a vendor contract termination payment from the first quarter of 2021.

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Sales and marketing expenses increased $21.0 million in 2021, as compared to 2020, primarily due to higher relative commission payments associated with corporate payments volumes and the acquisition of eNett and Optal.

Depreciation and amortization expenses increased $1.2 million in 2021, as compared to 2020, due primarily to the acquisition of certain customer relationships from eNett and Optal, offset in part by lower ongoing amortization over time resulting from the impact of the accelerated method of amortization on certain acquired customer relationships.

Legal settlement expenses were $162.5 million in 2020 due to the settlement of legal proceedings related to the eNett and Optal acquisition, and represents the consideration paid to the sellers of eNett and Optal in excess of the businesses’ fair values.

Health and Employee Benefit Solutions

Revenues

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

1 Purchase volume represents the total U.S. dollar value of all transactions where interchange is earned by WEX.

2 Average number of SaaS accounts represents the number of active Consumer-Directed Health, COBRA, and billing accounts on our SaaS platforms in the U.S.

Payment processing revenue increased $6.6 million in 2021, as compared to 2020, due primarily to increased cardholder enrollment and increased cardholder spend volumes.

Account servicing revenue increased $60.6 million for 2021, as compared to 2020. The increase is primarily due to growth in participants and revenue recognized as a result of the benefitexpress Acquisition. In addition, account servicing revenue for 2021 includes approximately $7 million of revenue resulting from COBRA-related services we provided as a result of the American Rescue Plan Act legislation. These additional COBRA-related service revenues were primarily earned during the second quarter of 2021.

Finance fee revenue was not material to Health and Employee Benefit Solutions’ operations in either 2021 or 2020.

Other revenue decreased $16.8 million in 2021 as compared to 2020. The decrease was primarily due to lower U.S. Health professional services revenue coupled with the absence of revenues associated with the Company’s former WEX Latin America business, which was sold during the third quarter of 2020. These decreases were offset in part by interest income earned on the investment of HSA deposits received during the fourth quarter of 2021.

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Operating Expenses

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

1 Our CODM evaluates the financial performance of each segment using segment adjusted operating income, which excludes: (i) unallocated corporate expenses; (ii) acquisition-related intangible amortization and other acquisition and divestiture related items; (iii) legal settlement; (iv) impairment charges; (v) loss on sale of subsidiary; (vi) debt restructuring costs; (vii) stock-based compensation; and (viii) other costs. 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 (loss) before income taxes. See also Item 8 – Note 24, Segment Information, of our consolidated financial statements for more information regarding our segment determination.

2 Segment adjusted operating income margin is calculated by dividing segment adjusted operating income by segment revenue. The 2021 decrease in segment adjusted operating income margin is primarily a result of the benefitexpress Acquisition.

Cost of services

Processing costs increased $30.7 million in 2021, as compared to 2020. The increase was primarily driven by higher costs to support partner growth and increases as a result of the benefitexpress Acquisition.

Service fees increased $7.6 million in 2021, as compared to 2020. This increase was driven by costs associated with COBRA-related services we provided as a result of the American Rescue Plan Act, increased custodial management fees as a result of the April 2021 acquisition of contractual rights to serve as custodian or sub-custodian to certain HSAs from Bell Bank, and growth in existing partner volumes.

Provision for credit losses and operating interest was not material to Health and Employee Benefit Solutions’ operations in either 2021 or 2020.

Depreciation and amortization expenses increased $1.1 million in 2021, as compared to 2020, resulting primarily from the amortization of technology assets acquired as part of the benefitexpress Acquisition.

Other operating expenses

General and administrative expenses increased $3.5 million in 2021, as compared to 2020, due primarily to integration costs related to the benefitexpress Acquisition.

Sales and marketing expenses increased $4.3 million in 2021, as compared to 2020, due to in part to the benefitexpress Acquisition and in part to increased segment expenses as the Company relaxed prior year cost containment initiatives enacted as a result of the COVID-19 pandemic.

Depreciation and amortization expenses increased $13.4 million in 2021, as compared to 2020, primarily as a result of the April 2021 acquisition of contractual rights to serve as custodian of certain HSAs and the amortization of customer relationships acquired as part of the benefitexpress Acquisition.

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Unallocated corporate expenses

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

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

General and administrative expenses decreased $13.3 million for 2021, as compared to 2020, primarily due to a decrease in professional fees and litigation costs associated with the eNett and Optal transaction, offset in part by increased employee compensation and professional fees incurred in connection with the amendment and restatement of our 2016 Credit Agreement.

Depreciation and amortization expense in 2021 remained consistent with that of 2020.

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.

Non-operating income and expense

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

NM - Not meaningful

Financing interest expense decreased $28.7 million in 2021, as compared to 2020. Financing interest expense in 2020 was unfavorably impacted by financing fees incurred in connection with the eNett and Optal acquisition. Lower interest expense as a result of the redemption of the Company’s Notes in March 2021 was largely offset by having a full year of interest on the Convertible Notes issued in July 2020.

For the twelve months ended December 31, 2021, the Company’s contingent consideration derivative liability associated with WEX Inc.’s April 2021 acquisition of certain contractual rights from Bell Bank to serve as custodian or sub-custodian to certain HSA assets increased as a result of the steepening of the Federal Funds futures curve.

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

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Our foreign currency exchange exposure is primarily related to the remeasurement of our cash, receivable and payable balances, including intercompany transactions that are denominated in foreign currencies. During 2021, net foreign currency loss was $12.3 million, as compared to $25.8 million in 2020. The losses in 2021 resulted from the remeasurement of assets and liabilities and losses on intercompany transactions, resulting from the U.S. dollar strengthening relative to numerous major foreign currencies in which we transact. The majority of the 2020 losses were recorded during the three months ended March 31, 2020, as a result of weakening foreign currencies stemming from the COVID-19 pandemic.

The Company incurred unrealized gains on financial instruments of $39.2 million during 2021 primarily due to a reduction in the interest rate swap liabilities driven by a decrease in remaining future settlements, coupled with an increase in the LIBOR forward yield curve. The net unrealized losses on financial instruments during 2020 resulted primarily from a decrease in the LIBOR forward yield curve.

We recorded an income tax provision of $67.8 million for 2021 as compared to an income tax benefit of $20.6 million for 2020. Our effective tax rate was a 33.2 percent provision for 2021 as compared to a 6.8 percent benefit in 2020. The Company's effective tax rate for the year ended December 31, 2021 was impacted by the establishment of valuation allowances in 2021 pertaining primarily to deferred tax assets for eNett and Optal and foreign tax credits. The effective tax rate for the year ended December 31, 2020 was impacted by no income tax benefit being recorded for operating losses generated by WEX Latin America during 2020 through the date of sale, the loss on the sale of WEX Latin America, and the legal settlement. These losses were included as part of the 2020 loss and were determined to be either non-deductible for income tax purposes or required a valuation allowance.

Net income from non-controlling interests relates to our non-controlling interest in the U.S. Health business and our non-controlling interest in WEX Europe Services through April 13, 2021, at which time we purchased the remaining interest in WEX Europe Services. Such amounts were not material to Company operations for 2021 or 2020.

The redemption value of the Company's redeemable non-controlling interest in the U.S. Health business increased during 2021 due to increases in the trailing twelve month net revenues as well as an increase in the market set multiple used to value the non-controlling interest redemption value resulting in expense of $135.2 million for the year ended December 31, 2021. The income recognized during the year ended December 31, 2020 was substantially due 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.

Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019

Discussion and analysis of the year ended December 31, 2020 compared to the year ended December 31, 2019 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, 2020, as filed with the SEC on March 1, 2021.

Non-GAAP Financial Measures That Supplement GAAP Measures

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

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

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

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

•Exclusion of the non-cash, mark-to-market adjustments on financial instruments, including interest rate swap agreements and investment securities, helps management identify and assess trends in the Company’s underlying

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business that might otherwise be obscured due to quarterly non-cash earnings fluctuations associated with these financial instruments. Additionally, the non-cash, mark-to-market adjustments on financial instruments are difficult to forecast accurately, making comparisons across historical and future quarters difficult to evaluate;

•Net foreign currency gains and losses primarily result from the remeasurement to functional currency of cash, accounts receivable and accounts payable balances, certain intercompany notes denominated in foreign currencies and any gain or loss on foreign currency hedges relating to these items. The exclusion of these items helps management compare changes in operating results between periods that might otherwise be obscured due to currency fluctuations;

•The change in fair value of contingent consideration, which is related to the acquisition of certain contractual rights to serve as custodian or sub-custodian to HSAs, is dependent upon changes in future interest rate assumptions and has no significant impact on the ongoing operations of the Company. Additionally, the non-cash, mark-to-market adjustments on financial instruments are difficult to forecast accurately, making comparisons across historical and future quarters difficult to evaluate;

•The Company considers certain acquisition-related costs, including certain financing costs, investment banking fees, warranty and indemnity insurance, certain integration related expenses and amortization of acquired intangibles, as well as gains and losses from divestitures to be unpredictable, dependent on factors that may be outside of our control and unrelated to the continuing operations of the acquired or divested business or the Company. In addition, the size and complexity of an acquisition, which often drives the magnitude of acquisition-related costs, may not be indicative of such future costs. The Company believes that excluding acquisition-related costs and gains or losses on divestitures facilitates the comparison of our financial results to the Company’s historical operating results and to other companies in our industry;

•Legal settlement represents the consideration paid to the sellers of eNett and Optal in excess of the businesses' fair values, which 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;

•Other costs are not consistently occurring and do not reflect expected future operating expense, nor do they provide insight into the fundamentals of current or past operations of our business. This also includes costs related to certain identified initiatives, including technology initiatives, to further streamline the business, improve the Company’s efficiency, create synergies and globalize the Company’s operations, all with an objective to improve scale and efficiency and increase profitability going forward. For 2019, other costs also included amounts related to the remediation of material weaknesses that were identified during the 2018 fiscal year. For the year ended December 31, 2020, other costs also included certain costs incurred in association with the COVID-19 pandemic, including the cost of providing additional health, welfare and technological support to our employees as they work remotely;

•Impairment charges represent non-cash asset write-offs, which do not reflect recurring costs that would be relevant to the Company’s continuing operations. The Company believes that excluding these nonrecurring expenses facilitates the comparison of our financial results to the Company’s historical operating results and to other companies in its industry;

•Debt restructuring and debt issuance cost amortization are unrelated to the continuing operations of the Company. Debt restructuring costs are not consistently occurring and do not reflect expected future operating expense, nor do they provide insight into the fundamentals of current or past operations of our business. In addition, since debt issuance cost amortization is dependent upon the financing method, which can vary widely company to company, we believe that excluding these costs helps to facilitate comparison to historical results as well as to other companies within our industry;

•The adjustments attributable to non-controlling interests, including adjustments to the redemption value of a non-controlling interest, have no significant impact on the ongoing operations of the business;

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•The tax related items are the difference between the Company’s GAAP tax provision and a pro forma tax provision based upon the Company’s adjusted net income before taxes as well as the impact from certain discrete tax items. The methodology utilized for calculating the Company’s adjusted net income tax provision is the same methodology utilized in calculating the Company’s GAAP tax provision; and

•The Company does not allocate certain corporate expenses to our operating segments, as these items are centrally controlled and are not directly attributable to any reportable segment.

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

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

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Application of Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. Preparation of these financial statements requires us to make estimates and judgments that affect reported amounts of assets and liabilities, revenue and expenses and related disclosure of contingent assets and liabilities at the date of our financial statements. We continually evaluate our judgments and estimates in determination of our financial condition and operating results. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets 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 as those that are both most important to the portrayal of our financial condition and operating results and require management’s most subjective judgments. Our consolidated financial statements are based on the selection and application of critical accounting policies and estimates, the most significant of which are included in the tables below.

Revenue Recognition

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Reserve for Credit Losses

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Business Combinations, Acquired Intangible Assets and Goodwill

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Income Taxes

Recently Adopted and New Accounting Standards

We early adopted ASU 2020-06 on January 1, 2021. 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. See Item 8 – Note 1, Basis of Presentation and Summary of Significant Accounting Policies, in this report for further discussion of the impact the adoption of this new accounting standard has had on our consolidated financial statements.

See Item 8 – Note 2, Recent Accounting Pronouncements, for recently issued accounting standards that have not yet been adopted.

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Liquidity and Capital Resources

As of the date of this filing, we believe that the Company has the ability to meet its foreseeable obligations given our cash generating capabilities, financial condition and operations, and access to available funding sources. The table below summarizes our primary sources and uses of cash:

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

Cash Flows

The table below summarizes our cash activities:

Operating Activities

We fund a customer’s entire receivable as part of our fleet and certain of our travel payment processing transactions, while the revenue generated by these transactions is only a small percentage of that amount. Consequently, cash flows from operations are impacted significantly by changes in accounts receivable and accounts payable balances, which directly impact our capital resource requirements.

•Cash provided by operating activities for 2021 decreased $706.6 million as compared to the prior year, substantially due to an increase in accounts receivable balances, which was partially offset by a corresponding increase in accounts payable and accrued expense balances. Given that the Company finances the majority of domestic Fleet Solutions and Travel and Corporate Solutions operations through WEX Bank, operating cash flows were negatively impacted by volume and domestic fuel price increases during 2021, whereas in 2020, operating cash flows were positively impacted by a decrease in volumes and domestic fuel prices caused by the COVID-19 pandemic.

•Cash provided by operating activities for 2020 increased $193.8 million as compared to the prior year, resulting from increased collections on accounts receivable offset in part by a reduction in payables.

Investing Activities

•Cash used for investing activities for 2021 increased $1,272.0 million as compared to the prior year, primarily resulting from the purchase of $994.0 million of available-for-sale debt securities and from $558.8 million of payments made for acquisitions, including the acquisition of certain contractual rights to serve as custodian or sub-custodian of HSAs from Bell Bank and the benefitexpress Acquisition.

•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.

Financing Activities

•Cash provided by financing activities during 2021 totaled $1,403.3 million, due primarily to an increase in deposits of $1,620.3 million. The early redemption of the Company’s $400.0 million of Notes, as further described within Item 8 – Note 16, Financing and Other Debt, was substantially offset by additional term loan borrowings of $49.2 million, net of quarterly repayments, and net borrowings of $119.8 million against our revolving credit facility.

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•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.

Liquidity

In general, the Company’s trade receivables provide for payment terms of 30 days or less. Receivables not paid within the terms of the agreement are generally subject to late fees based upon the 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 $93.7 million and $60.2 million of receivables with revolving credit balances as of December 31, 2021 and 2020, respectively.

At December 31, 2021, approximately 98 percent of the outstanding balance of $2.9 billion of total trade accounts receivable was 29 days or less past due and approximately 99 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, 2021 or December 31, 2020.

Our short-term cash requirements consist primarily of funding the working capital needs of our business, payments on maturities and withdrawals of 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 deposits and borrowed federal funds. Any remaining cash needs are primarily funded through operations, our borrowings and availability under our Amended and Restated 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 Amended and Restated Credit Agreement and various facilities lease agreements.

Undistributed earnings of certain foreign subsidiaries of the Company amounted to $133.0 million at December 31, 2021. The Company continues to maintain its indefinite reinvestment assertion for its investments in foreign subsidiaries except for any historical undistributed earnings and future earnings for WEX Australia. Upon distribution of the foreign subsidiaries’ earnings in which the Company continues to assert indefinite reinvestment, the Company would be subject to withholding taxes payable to foreign countries, where applicable, but would generally have no further federal income tax liability.

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.

Deposits and Borrowed Federal Funds

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, which include risk-based asset and capital requirements. WEX Bank accepts its deposits through: (i) certain customers as required collateral for credit that has been extended (“customer deposits”) and (ii) contractual arrangements for brokered and non-brokered certificate of deposit and money market deposit products. 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 LIBOR or the Federal Funds rate. Deposits are classified based on their contractual maturities. 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.

WEX Bank has issued contractual deposits, including certificates of deposit and certain money market deposits with fixed maturity and interest rates, in various maturities ranging between 9 months and 5 years, with interest rates ranging from 0.12 percent to 3.52 percent as of December 31, 2021, as compared to maturities ranging between 1 year and 5 years and interest rates ranging from 1.35 percent to 3.52 percent as of December 31, 2020. As of December 31, 2021, we had approximately $1,218.6 million of contractual deposits outstanding at a weighted average interest rate of 0.48 percent, compared to $503.4 million of contractual deposits outstanding at a weighted average interest rate of 1.81 percent as of December 31, 2020.

WEX Bank has issued interest-bearing money market deposits with interest rates ranging from 0.12 percent to 0.23 percent as of December 31, 2021, as compared to interest rates ranging from 0.12 percent to 0.30 percent as of December 31, 2020. As of December 31, 2021, we had approximately $370.8 million of interest-bearing money market deposits at a weighted

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average interest rate of 0.20 percent, as compared to $439.9 million of interest-bearing money market deposits at a weighted average interest rate of 0.27 percent as of December 31, 2020.

As of December 31, 2021, all certificates of deposit and money market 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 deposits are paying competitive yields and that there continues to be consumer demand for these instruments.

Customer deposits held were $129.2 million and $116.7 million at December 31, 2021 and 2020, 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, 2021 and 2020 due to temporarily relaxed Federal Reserve requirements enacted in response to the COVID-19 pandemic.

Beginning in October 2021, WEX Bank holds deposits associated with the HSA custodial cash assets managed by WEX Bank through an investment manager. As of December 31, 2021, such HSA deposits totaled $960.0 million and bore a weighted average interest rate of 0.03 percent.

WEX Bank also borrows from uncommitted federal funds lines to supplement the financing of our accounts receivable. Our federal funds lines of credit were $530.0 million and $376.0 million as of December 31, 2021 and 2020, respectively, with $20.0 million of borrowings as of December 31, 2020. There were no outstanding borrowings on federal funds lines at December 31, 2021.

From time to time, WEX Bank utilizes alternative funding sources such as IntraFi Network LLC’s (formerly Promontory Interfinancial Network, LLC) 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 an amount not to exceed $125.0 million through this service. There were no outstanding balances for ICS purchases at December 31, 2021 and 2020.

Amended and Restated Credit Agreement

On April 1, 2021, the Company entered into the Amended and Restated Credit Agreement, which amended and restated the 2016 Credit Agreement. As part of the Amended and Restated Credit Agreement, the lenders agreed to (i) increase commitments under the Company’s secured revolving credit facility from $870.0 million to $930.0 million (the “Revolving Credit Facility”), (ii) provide additional senior secured tranche A term loans (the “Tranche A Term Loans”) resulting in an aggregate outstanding principal amount of the Tranche A Term Loans equal to $978.4 million, (iii) re-establish the senior secured tranche B term loans’ aggregate principal at $1,442.0 million (the “Tranche B Term Loans”), (iv) eliminate the 0.75 percent eurocurrency rate floor with respect to the Revolving Credit Facility, and (v) make certain other changes to the previously existing 2016 Credit Agreement, including without limitation, (a) extending the maturity dates for the Tranche A Term Loans and Revolving Credit Facility to April 1, 2026 and the maturity date for the Tranche B Term Loans to April 1, 2028, (b) providing additional flexibility with respect to certain negative covenants, prepayments and other provisions of the Company’s previously existing 2016 Credit Agreement, and (c) revising the Company’s maximum consolidated leverage ratio for all future quarters.

As of December 31, 2021, the Company had an outstanding principal amount of $941.7 million on the Tranche A Term Loans, an outstanding principal amount of $1,431.2 million on the Tranche B Term Loans, borrowings of $119.8 million on the Revolving Credit Facility and letters of credit of $51.4 million drawn against the Revolving Credit Facility.

The Revolving Credit Facility and the Tranche A Term Loans bear interest at variable rates, at the Company’s option, plus an applicable margin determined based on the Company’s consolidated leverage ratio, as determined in accordance with the Amended and Restated Credit Agreement. The Tranche B Term Loans bear interest at variable rates, at the Company’s option, plus an applicable margin, which is fixed at 1.25 percent for base rate borrowings and 2.25 percent with respect to eurocurrency rate borrowings. Under the Amended and Restated Credit Agreement, the Company pays a quarterly commitment fee at a rate per annum ranging from 0.25 percent to 0.50 percent of the daily unused portion of the Revolving Credit Facility, determined based on the consolidated leverage ratio. Prior to maturity, the Tranche A Term Loans and Tranche B Term Loans require scheduled quarterly payments of $12.2 million and $3.6 million, respectively, due on the last day of each March, June, September and December.

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Under the terms of the Amended and Restated Credit Agreement, incremental loans could be made available upon the request of the Company, subject to specified terms and conditions, including receipt of lender commitments. Such incremental loans may not exceed the greater of (x) $375.0 million and (y) 75 percent of consolidated EBITDA, adjusted for certain voluntary prepayments and repurchases of term loans, reductions of commitments under the Revolving Credit Facility, and Incremental Facilities, as defined within the Amended and Restated Credit Agreement, established or incurred, or that could be established or incurred without causing the Company’s consolidated secured leverage ratio to exceed 4.00 to 1.00.

See Item 8 – Note 16, Financing and Other Debt, for further information with respect to the Amended and Restated Credit Agreement.

Convertible Notes Outstanding

On July 1, 2020, the Company closed on a private placement with Warburg Pincus, pursuant to which the Company issued $310.0 million in aggregate principal amount of its Convertible Senior Notes due 2027. The issuance of the Convertible Notes provided the Company with net proceeds of approximately $299.2 million after original issue discount. The Convertible Notes have a seven-year term and mature on July 15, 2027, unless earlier converted, repurchased or redeemed. Interest on the Convertible Notes is calculated at a fixed rate of 6.5% per annum, payable semi-annually in arrears on January 15 and July 15 of each year. At the Company's option, interest is either payable in cash, through accretion to the principal amount of the Convertible Notes, or a combination of cash and accretion. The Company has paid, and expects to continue to pay interest in cash as it comes due.

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

The Company will have the right, at any time after July 1, 2023, to redeem the Convertible Notes in whole or in part if the closing price of WEX’s common stock is at least 200% of the conversion price of the Convertible Notes for 20 trading days (whether or not consecutive) out of any 30 consecutive trading day period prior to the time the Company delivers a redemption notice (including at least one of the five trading days immediately preceding the last day of such 30 trading day period), subject to the right of holders of the Convertible Notes to convert its Convertible Notes prior to the redemption date.

Debt Covenants

The Amended and Restated Credit Agreement contains various affirmative and negative covenants that, subject to certain customary exceptions, limit the Company and its subsidiaries’ including, in certain limited circumstances, WEX Bank and 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 exceptions and qualifications.

The Amended 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 coverage ratio (as defined in the Amended and Restated Credit Agreement) of no less than 3.00 to 1.00; and

•a consolidated leverage ratio (as defined in the Amended and Restated Credit Agreement) of no more than 6.00 to 1.00 for the quarter ended December 31, 2021, 5.75 to 1.00 for the quarter ending March 31, 2022, 5.50 to 1.00 for the quarter ending June 30, 2022, 5.25 to 1.00 for the quarter ending September 30, 2022, 5.00 to 1.00 for the quarters ending December 31, 2022 through September 30, 2023, and 4.75 to 1.00 thereafter.

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The indenture governing the Convertible Notes includes a debt incurrence covenant that restricts the Company from incurring certain indebtedness, including disqualified stock and preferred stock issued by the Company or its subsidiaries, subject to customary exceptions, including if, after giving effect to any such proposed incurrence or issuance, and the receipt and application of the proceeds therefrom, the ratio of (x) the Company’s consolidated EBITDA for the most recent four fiscal quarters for which financial statements are available, to (y) the Company’s consolidated fixed charges for such period would be greater than 1.5:1.0. The indenture governing the Convertible Notes also contains other customary terms and covenants, including customary events of default.

We were in compliance with all material covenants and restrictions at December 31, 2021.

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 set according to an applicable reference rate plus a margin of 225 to 250 basis points as of December 31, 2021. As of December 31, 2021, the Company had outstanding participation agreements for the borrowing of up to $45.0 million through December 31, 2022 and up to $35.0 million thereafter through December 31, 2023. There was $1.5 million borrowed against these participation agreements as of December 31, 2021 with an average interest rate of 2.54 percent. There were no amounts borrowed against participation agreements as of December 31, 2020.

Australian Securitization Facility

The Company maintains a securitized debt agreement with MUFG Bank, Ltd., which currently extends through April 2022. Under the terms of the agreement, each month on a revolving basis, the Company sells certain of its Australian receivables to the Company’s Australian Securitization Subsidiary, which in turn uses the receivables as collateral to issue asset-backed commercial paper (“securitized debt”). The amount collected on the securitized receivables is restricted to pay the securitized debt and is not available for general corporate purposes.

The Company pays a variable interest rate on the outstanding balance of the securitized debt, based on the Australian Bank Bill Rate plus an applicable margin. The interest rate was 0.91 percent and 0.97 percent as of December 31, 2021 and 2020, respectively. The Company had securitized debt under this facility of approximately $70.1 million and $62.6 million as of December 31, 2021 and 2020, respectively.

European Securitization Facility

Under the terms of the Company’s securitized debt agreement with MUFG Bank, Ltd. through April 2022, each month on a revolving basis, the Company sells certain of its receivables from selected European countries to its European Securitization Subsidiary, which in turn uses the receivables as collateral to issue securitized debt. The amount collected on the securitized receivables is restricted to pay the securitized debt and is not available for general corporate purposes. The interest rate was 0.92 percent and 0.98 percent as of December 31, 2021 and December 31, 2020, respectively. The Company had $30.8 million and $23.4 million of securitized debt under this facility as of December 31, 2021 and December 31, 2020, respectively.

WEX Bank Accounts Receivable Factoring

WEX Bank is party to a receivables purchase agreement with an unrelated third-party financial institution to sell certain of our trade accounts receivable under non-recourse transactions, which extends through August 2022, after which the agreement can be renewed for successive one-year periods assuming WEX provides advance written notice that is accepted by the purchaser. This agreement is an off-balance sheet arrangement. WEX Bank continues to service the receivables post-transfer with no participating interest. The Company obtained a true-sale opinion from an independent attorney, which states that the factoring agreement provides legal isolation upon WEX Bank bankruptcy or receivership under local law. As such, transfers under this arrangement are treated as a sale. Proceeds from the sale are reported net of negotiated discount rates and are accounted for as a reduction in trade accounts receivable because effective control of the receivables is transferred to the buyer. The Company sold approximately $2.9 billion and $4.1 billion of trade accounts receivable under this arrangement during the years ended December 31, 2021 and 2020, respectively. Proceeds from the sales, 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 for the years ended December 31, 2021 and 2020.

WEX Europe Services Accounts Receivable Factoring

WEX Europe Services is party to a factoring arrangement with an unrelated third-party financial institution (the “Purchasing Bank”) to sell certain of its customer accounts receivable in order to accelerate the collection of the Company’s cash and reduce internal costs, thereby improving liquidity. This agreement is an off-balance sheet arrangement. The agreement

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automatically renews each January 1 unless either party gives not less than 90 days written notice of their intention to withdraw. Under this arrangement, the Purchasing Bank establishes a credit limit for each customer account. The factored receivables are without recourse to the extent that the customer balances are maintained at or below the established credit limit. For customer receivable balances in excess of the Purchasing Bank’s credit limit, the Company maintains the risk of default. The Company obtained a true sale opinion from an independent attorney, which states that the factoring agreement 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. 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. Accordingly, transfers under this arrangement are treated as sales and accounted for as reductions in trade accounts receivable because effective control of the receivables is transferred to the buyer. The Company continues to service these receivables post-transfer with no participating interest.

Available capacity is dependent on the level of our trade accounts receivable eligible to be sold and the financial institution’s willingness to purchase such receivables. As such, this factoring arrangement can be reduced or eliminated at any time due to market conditions and changes in the credit worthiness of our customers, which would negatively impact our liquidity.

Proceeds from the sales, which are recorded net of applicable costs, are recorded in operating activities within our consolidated statement of cash flows. The Company sold approximately $566.4 million and $452.2 million of receivables under this arrangement during the years ended December 31, 2021 and December 31, 2020, respectively. Charge-backs on balances in excess of the credit limit during the years ended December 31, 2021 and December 31, 2020 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, 2021, WEX Bank met all the requirements to be deemed “well-capitalized” pursuant to FDIC regulation and for purposes of the Federal Deposit Insurance Act.

Notes Redemption

On February 11, 2021, the Company provided irrevocable notice to The Bank of New York Mellon Trust Company, N.A., of its intent to redeem its outstanding $400 million 4.75 percent senior secured notes due February 1, 2023. On March 15, 2021, the Company redeemed such senior secured notes outstanding for a redemption price of $400 million plus accrued and unpaid interest through the redemption date.

Other Liquidity Matters

At December 31, 2021, we had variable-rate borrowings of $2.5 billion under our Amended and Restated Credit Agreement. We periodically review our projected borrowings under our Amended 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. As of December 31, 2021, we maintained certain interest rate swap contracts that mature at various times through May 2026. Collectively, these derivative contracts are intended to economically hedge the LIBOR component of future interest payments associated with our variable rate borrowings under our Amended and Restated Credit Agreement. See Item 8 – Note 12, Derivative Instruments, and Item 8 – Note 18, Fair Value, for more information

The Company’s long-term cash requirements consist primarily of amounts owed on the Amended and Restated Credit Agreement and various facility lease agreements.

As of December 31, 2021, we had $51.4 million in letters of credit outstanding, which are off-balance sheet arrangements, and $758.8 million in remaining borrowing capacity under the Amended and Restated Credit Agreement, subject to the covenants as described above. The letters of credit are issued by us in favor of third-party beneficiaries and primarily related to facility lease agreements and virtual card and fuel payment processing activity at our foreign subsidiaries. These irrevocable letters of credit are unsecured and are renewed on an annual basis unless the Company chooses not to renew them.

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We have entered into commitments to extend credit in the ordinary course of business. We had approximately $7.5 billion of unused commitments to extend credit at December 31, 2021, as part of established customer agreements, which are off-balance sheet arrangements. These amounts may increase or decrease during 2022 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 issuance of certificates of deposit, borrowed federal funds and other debt facilities.

We currently have authorization from our board of directors to repurchase up to $150 million of our common stock through September 30, 2025, subject to earlier termination by the board of directors. The program is funded either through our future cash flows or through borrowings on our Amended and Restated Credit Agreement. Share repurchases may be made through open market purchases, privately negotiated transactions, block trades or otherwise, 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. We did not purchase any shares of our common stock during the year ended December 31, 2021. The dollar value of shares that were available to be purchased under our share repurchase program remained at $150 million as of December 31, 2021.

Contractual Obligations

The table below summarizes the estimated amounts of payments under contractual obligations as of December 31, 2021:

(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, 2021. 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) Contractual deposits – Includes certificates of deposit and certain money market deposits, which have a fixed maturity and interest rate. See Item 8 – Note 11, Deposits, for more information.

(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, 2021.

(6) Deferred cash payments on acquisition – Relates to deferred cash payments owed pursuant to the acquisition of certain contractual rights to serve as custodian or sub-custodian to certain HSAs from Bell Bank. The purchase agreement also includes potential additional consideration payable annually by WEX that is calculated on a quarterly basis and is contingent, and based, upon any future increases in the Federal Funds rate. The continent payment period began on July 1, 2021 and extends through the earlier of December 31, 2030, or the date when the cumulative amount paid as contingent consideration equals $225.0 million. Given the timing of contingent consideration is dependent on future changes in interest rates and therefore uncertain, the table above does not include any amounts related to this contingent consideration. See Item 8 – Note 4, Acquisitions, for more information.

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(7) Revolving line-of-credit – Amounts borrowed under the Revolving Credit Facility can be rolled forward with applicable interest rate resets in accordance with the terms of the Amended and Restated Credit Agreement through the April 1, 2026 maturity of this facility. See Item 8 – Note 16, Financing and Other Debt, for more information.

(8) Interest payments on revolving line-of-credit – Interest payments are based on effective rates and credits spreads in effect as of December 31, 2021, assuming that the balance on the revolving line-of-credit as of December 31, 2021 remains constant over the life of the agreement. See Item 8 – Note 16, Financing and Other Debt, for more information.

(9) Other – This amount is comprised of contractually obligated future payments due under information technology service and hotel contracts.

Uncertain tax benefits – The Company has excluded $5.0 million in gross unrecognized tax benefits from the table above, $4.4 million of which could be settled during 2022 as a result of certain examinations or expiration of statutes of limitation.