# WEX Inc. (WEX) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from WEX Inc.'s 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/1309108/000130910823000022/wex-20221231.htm Accession: 0001309108-23-000022 Filing date: 2023-02-28 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/WEX/ All MD&A years: /company/WEX/mda/ Previous year: /company/WEX/mda/fy2021/ (FY 2021) Next year: /company/WEX/mda/fy2023/ (FY 2023) 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, 2022 and 2021, financial condition at December 31, 2022 and 2021 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 within Part II - Item 8 of this Annual Report on Form 10-K. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is presented in the following sections: •2022 Highlights and Year in Review •Our Segments •Results of Operations •Application of Critical Accounting Estimates •Recently Adopted and New Accounting Standards •Liquidity and Capital Resources 2022 Highlights and Year in Review Company Highlights The following table presents a comparative, summarized view of our financial results for 2022. The other key metric included below is considered by Management to be of particular importance to our overall performance in 2022 as it provides enhanced information and data underlying our financial results. A recurring, more extensive list of key performance indicators is included by segment within the Results of Operations section later in this MD&A. [[GREPCENT_TABLE]] [["(in thousands, except per share data)","Year ended December 31,"],["2022","","2021","","2020"],["GAAP Measures:"],["Total revenues","$","2,350,511","","","$","1,850,542","","","$","1,559,869"],["Net income attributable to shareholders","$","201,438","","","$","137","","","$","(243,638)"],["Net income attributable to shareholders per diluted share","$","4.50","","","$","\u2014","","","$","(5.56)"],["Net cash provided by (used for) operating activities3","$","679,425","","","$","(42,579)","","","$","736,804"],["Non-GAAP Measures:1"],["Adjusted net income attributable to shareholders","$","610,997","","","$","414,057","","","$","268,324"],["Adjusted net income attributable to shareholders per diluted share","$","13.53","","","$","9.14","","","$","6.06"],["Adjusted free cash flow","$","782,388","","","$","535,443","","","$","260,268"],["Other Key Metric:"],["Total volume across the Company (in millions)2","$","211,727","","","$","146,170","","","$","55,607"]] [[/GREPCENT_TABLE]] 1 Adjusted net income attributable to shareholders, adjusted net income attributable to shareholders per diluted share, and adjusted free cash flow are supplemental non-GAAP financial measures of operating performance. Refer to the sections titled Non-GAAP Financial Measures That Supplement GAAP Measures and Liquidity and Capital Resources later in this MD&A for more information and a reconciliation of the non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP. 2 Total volume processed across the Company, which includes purchases on WEX-issued accounts as well as purchases issued by others using a WEX platform. 3 Restricted cash payable inflows of $193.0 million and $120.2 million for the years ended December 31, 2021 and 2020, respectively, have been reclassified from operating activities to financing activities to conform to the current period presentation. Refer to Item 8 – Note 1, Basis of Presentation and Summary of Significant Accounting Policies for more information. 47 Table of Contents Recent Events During March 2022, WEX Inc. and SBI entered into the Share Purchase Agreement whereby WEX Inc. purchased SBI’s remaining 4.53 percent interest in PO Holding for a purchase price of $234.0 million plus any interest accruing pursuant to the terms of the Share Purchase Agreement. This transaction made PO Holding, the direct parent of WEX Health, a wholly owned subsidiary of WEX Inc., to which the Company is solely entitled to the economic benefits. For further information regarding this transaction refer to Part II - Item 8 - Note 4, Acquisitions, to the consolidated financial statements. During June 2022, the Company entered into a definitive agreement to purchase a portfolio of certain assets from a third-party, consisting primarily of branded commercial fleet card customer accounts with respect to participating Exxon and Mobil locations within the U.S. and Canada. During September 2022, the Company closed on the purchase of these receivable accounts for total net consideration of approximately $41.6 million. This portfolio purchase further expands our private label revolving credit card offering. For further information regarding this transaction refer to Part II - Item 8 - Note 4, Acquisitions, to the consolidated financial statements. During 2022, the Company repurchased approximately 1.9 million shares of our common stock subject to authorized share buyback plans for a total cost of $290.8 million. During 2023, through the close of trading on the latest practicable date, which the Company has determined to be February 10, 2023 for the purpose of the filing of this Annual Report on Form 10-K, the Company repurchased an additional $17.1 million shares of our common stock, leaving $491.6 million in shares of common stock that remain available to be purchased pursuant to the existing repurchase authorization. For further information regarding our share buyback plans refer to Part II - Item 5, Issuer Purchases of Equity Securities. Our Segments WEX has 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 solutions, 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 global B2B payments, enabling customers to utilize our payments solutions to integrate into their own workflows and manage their accounts payable automation and spend management functions. Our Health and Employee Benefit Solutions segment provides SaaS software with embedded payment solutions and plan administration services for consumer directed health benefits, COBRA accounts, and benefit enrollment and administration. Additionally, the Company provides custodial and depository services for HSAs. Our Health and Employee Benefit Solutions segment 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 operating debt and deposits, which provide liquidity to fund short-term receivables or is used to purchase fixed income securities. •Depreciation and amortization - The Company has identified those tangible and intangible assets directly associated with providing a service that generates revenue and records the depreciation and amortization associated with those assets under this category. Such assets include processing platforms and related infrastructure, acquired developed technology intangible assets and other similar asset types. Other Operating Expenses •General and administrative - General and administrative includes compensation and related expenses for executive, finance and accounting, other information technology, human resources, legal, and other corporate functions. Also included are corporate facilities expenses, certain third-party professional service fees, and other corporate expenses. •Sales and marketing - The Company’s sales and marketing expenses relate primarily to compensation, benefits, sales commissions, and related expenses for sales, marketing, and other related activities. 48 Table of Contents •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 Part II – Item 8 – Note 4, Acquisitions, of our consolidated financial statements for more information. •Impairment charges - Represents non-cash goodwill impairment charges. See Part II – 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. Results of Operations Year Ended December 31, 2022, Compared to the Year Ended December 31, 2021 The following includes information that our management believes is material to an understanding of our results of operations. Any significant changes, unusual or infrequent events or significant economic changes that materially affect our reported income from continuing operations are discussed below. Fleet Solutions Revenues The following table reflects comparative revenue and key operating statistics within Fleet Solutions:  [[GREPCENT_TABLE]] [["","Twelve Months Ended December 31,","","Increase (Decrease)"],["(In thousands, except per transaction and per gallon data)","2022","","2021","","Amount","","Percent"],["Revenues1, 2"],["Payment processing revenue","$","720,242","","","$","513,365","","","$","206,877","","","40","%"],["Account servicing revenue","169,159","","","168,350","","","809","","","\u2014","%"],["Finance fee revenue","359,672","","","254,306","","","105,366","","","41","%"],["Other revenue","194,591","","","175,394","","","19,197","","","11","%"],["Total revenues","$","1,443,664","","","$","1,111,415","","","$","332,249","","","30","%"],["Key performance indicators"],["Total volume","$","98,906,370","","","64,891,957","","","34,014,413","","","52","%"],["Payment processing transactions","560,238","","","515,416","","","44,822","","","9","%"],["Payment processing $ of fuel","$","66,172,056","","","$","44,680,341","","","$","21,491,715","","","48","%"],["Average U.S. fuel price (US$ / gal)","$","4.46","","","$","3.11","","","$","1.35","","","43","%"],["Net payment processing rate3","1.09","%","","1.15","%","","(0.06)","%","","(5)","%"],["Net late fee rate","0.46","%","","0.45","%","","0.02","%","","4","%"]] [[/GREPCENT_TABLE]] 1 Foreign currency exchange rate fluctuations had a $16.8 million unfavorable impact on Fleet Solutions’ revenue for the twelve months ended December 31, 2022, as compared to the prior year. 2 Favorable impact from domestic fuel prices and European fuel price spreads resulted in an increase of $195.2 million in revenue for the year ended December 31, 2022, as compared to 2021. 3 Given a portion of payment processing revenue earned is a fixed amount per transaction, our net payment processing rate decreased from 2021 to 2022 primarily due to the impact of higher domestic fuel prices. 49 Table of Contents Fleet Solutions payment processing revenue increased $206.9 million for 2022, as compared to 2021. Revenues were favorably impacted by higher domestic fuel prices and volume growth in our North American fleet and over-the-road businesses. Finance fee revenue is comprised of the following components: [[GREPCENT_TABLE]] [["","Twelve Months Ended December 31,","","Increase (Decrease)"],["(In thousands)","2022","","2021","","Amount","","Percent"],["Finance income","$","307,124","","","$","199,590","","","$","107,534","","","54","%"],["Factoring fee revenue","52,548","","","54,716","","","(2,168)","","","(4)","%"],["Finance fee revenue","$","359,672","","","$","254,306","","","$","105,366","","","41","%"]] [[/GREPCENT_TABLE]] Finance income primarily consists of late fees charged for receivables not paid within the terms of the customer agreement based upon the outstanding customer receivable balance. This revenue is earned when a customer’s receivable balance becomes delinquent and is calculated using the greater of a minimum charge or a stated late fee rate multiplied by the outstanding balance that is subject to a late fee charge. Changes in the absolute amount of such outstanding balances can be attributed to (i) changes in fuel prices; (ii) customer specific transaction volume; and (iii) customer specific delinquencies. Late fee revenue can also be impacted by (i) changes in late fee rates and (ii) increases or decreases in customer overdue balances. Late fee rates are determined and set based primarily on the risk associated with our customers, coupled with a strategic view of standard rates within our industry. We consider factors such as the Company’s overall financial model and strategic plan, the cost to our business from customers failing to pay timely and the impact such late payments have on our financial results. We typically conduct an assessment of our late fee rates at least annually but such assessment may occur more often depending on macro-economic factors. In addition, we periodically assess the market rates within our industry to determine appropriate late fee rates. Finance income increased $107.5 million in 2022, as compared to 2021. These increases were driven primarily by higher domestic fuel prices, coupled with increased customer delinquencies. During the fourth quarter of 2022, we converted the private label credit card portfolio for which we had entered into a definitive agreement to purchase in June. While this revolving balance portfolio had only a small impact on the increase in finance income for the year, it is expected to have a larger contribution to increasing finance fee income in future periods. 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 2022 or 2021. The primary source of factoring fee revenue is calculated as a negotiated percentage fee of the receivable balance that we purchase. A secondary source of factoring fee revenue is a flat rate service fee to our customers that request a non-contractual same day funding of the receivable balance. Factoring fee revenue for 2022 decreased $2.2 million, as compared to 2021. Increases in shipping demand in the first quarter of 2022 were offset by softening of the spot rates, or uncontracted transactional market rates paid by a shipper to move a truckload of goods, in the over-the-road market during the latter part of 2022. Other revenue increased $19.2 million in 2022, as compared to 2021, due primarily to an increase in unfunded direct bill volume growth in our over-the road business, coupled with higher domestic interest revenue. 50 Table of Contents Operating Expenses The following table compares line items within operating income and presents segment adjusted operating income and segment adjusted operating income margin for Fleet Solutions:  [[GREPCENT_TABLE]] [["","Twelve Months Ended December 31,","","Increase (Decrease)"],["(In thousands)","2022","","2021","","Amount","","Percent"],["Cost of services"],["Processing costs","$","254,089","","","$","221,729","","","$","32,360","","","15","%"],["Service fees","$","8,369","","","$","7,743","","","$","626","","","8","%"],["Provision for credit losses","$","172,694","","","$","37,808","","","$","134,886","","","357","%"],["Operating interest","$","13,917","","","$","6,835","","","$","7,082","","","104","%"],["Depreciation and amortization","$","46,089","","","$","49,862","","","$","(3,773)","","","(8)","%"],["Other operating expenses"],["General and administrative","$","110,175","","","$","92,587","","","$","17,588","","","19","%"],["Sales and marketing","$","203,325","","","$","175,563","","","$","27,762","","","16","%"],["Depreciation and amortization","$","72,544","","","$","78,413","","","$","(5,869)","","","(7)","%"],["Impairment charges","$","136,486","","","$","\u2014","","","$","136,486","","","NM"],["Operating income","$","425,976","","","$","440,875","","","$","(14,899)","","","(3)","%"],["Segment adjusted operating income1","$","693,439","","","$","557,083","","","$","136,356","","","24","%"],["Segment adjusted operating income margin2","48.0","%","","50.1","%","","(2.1)","%","","(4)","%"]] [[/GREPCENT_TABLE]] 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, to 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 2022 decrease in segment adjusted operating income margin reflects unfavorability in credit and fraud losses and impairment charges to goodwill, partly offset by operating leverage from higher revenues. NM - Not meaningful Cost of services Processing costs increased $32.4 million for 2022, as compared to 2021, and were driven in nearly equal parts by higher compliance costs incurred primarily in association with a consent order issued by the FDIC and UDFI and by employee compensation and other business support costs incurred as a result of the increased volumes experienced during 2022. Provision for credit losses, which includes estimates for both credit and fraud losses, increased $134.9 million for 2022, as compared to 2021. We generally measure our loss performance by calculating fuel-related losses as a percentage of total fuel expenditures on payment processing transactions. This metric for provision for credit losses was 26.0 basis points of fuel expenditures for 2022, as compared to 7.6 basis points of fuel expenditures for 2021. Estimated fraud losses contributed 8.2 basis points to the provision for credit losses totals noted above during 2022, as compared to 1.5 basis points during 2021. Slower payments from small customers in our over-the-road business, which we believe is due to higher fuel prices and declining spot shipping rates, have been a significant contributor to the increase in credit-related losses. We additionally believe that higher fuel prices have contributed to the increase in application and transactional fraud-related losses. Efforts to refine the fraud prevention and monitoring tools we use has slowed the higher rate of fraudulent activity experienced during the second and third quarters of 2022, when fraud losses contributed approximately 11 basis points to the overall credit loss provision, to approximately 6 basis points in the fourth quarter of 2022. In addition, we are in ongoing conversations with our merchant partners in our over-the-road business to address the sources of elevated transactional fraud we experienced during 2022, and in some cases to shift the financial responsibility. Operating interest expense increased $7.1 million in 2022, as compared to 2021. The increase is due in nearly equal parts to increased interest rates and higher operating debt balances. 51 Table of Contents Other operating expenses General and administrative expenses increased $17.6 million in 2022, as compared to 2021 due to increased compensation and professional services in support of business growth. Sales and marketing expenses increased $27.8 million in 2022, as compared to 2021. This increase was primarily driven by higher partner commissions due to fuel price increases and volume growth, coupled to a lesser extent with increased employee compensation and travel in support of that growth. Impairment charges consisted of non-cash goodwill impairment charges of $136.5 million to two of our international reporting units within our Fleet Solutions segment. No impairment to any of our reporting units was identified during the year ended December 31, 2021. See Item 8 – Note 9, Goodwill and Other Intangible Assets, of our consolidated financial statements for more information. Travel and Corporate Solutions Revenues The following table reflects comparative revenue and key operating statistics within Travel and Corporate Solutions:  [[GREPCENT_TABLE]] [["","Twelve Months Ended December 31,","","Increase (Decrease)"],["(In thousands, except per transaction data)","2022","","2021","","Amount","","Percent"],["Revenues1"],["Payment processing revenue","$","353,748","","","$","274,092","","","$","79,656","","","29","%"],["Account servicing revenue","42,850","","","44,157","","","(1,307)","","","(3)","%"],["Finance fee revenue","647","","","873","","","(226)","","","(26)","%"],["Other revenue","5,063","","","5,796","","","(733)","","","(13)","%"],["Total revenues","$","402,308","","","$","324,918","","","$","77,390","","","24","%"],["Key performance indicators"],["Total volume","$","101,615,998","","","$","71,027,414","","","$","30,588,584","","","43","%"],["Purchase volume","$","66,671,462","","","$","38,559,264","","","$","28,112,198","","","73","%"],["Net interchange rate2","0.53","%","","0.71","%","","(0.18)","%","","(25)","%"]] [[/GREPCENT_TABLE]] 1 Foreign currency exchange rate fluctuations had a $14.8 million unfavorable impact on Travel and Corporate Solutions revenues in 2022, compared to the prior year. 2 Changes in customer and product mix, including the significant growth in travel-related purchase volumes, has reduced our net interchange rate from 2021 to 2022 and we expect it to continue to impact the rate going forward. Travel and Corporate Solutions total revenue increased $77.4 million for 2022, as compared to 2021. The increase was primarily driven by continued strength in consumer travel demand, which doubled travel-related purchase volumes during 2022 compared to 2021, and volume growth in the corporate payments partner channel. These revenue increases were partly offset by the impact of an accounting change in the fourth quarter of 2021, which required a shift from gross revenue presentation to net for one customer. Concessions to certain customers experiencing financial difficulties may be granted and are limited to extending the time to pay, placing a customer on a payment plan or granting waivers of late fees. There were no material concessions to customers experiencing financial difficulties during either 2022 or 2021. 52 Table of Contents Operating Expenses The following table compares line items within operating income and presents segment adjusted operating income and segment adjusted operating income margin for Travel and Corporate Solutions:  [[GREPCENT_TABLE]] [["","Twelve Months Ended December 31,","","Increase (Decrease)"],["(In thousands)","2022","","2021","","Amount","","Percent"],["Cost of services"],["Processing costs","$","72,925","","","$","69,869","","","$","3,056","","","4","%"],["Service fees","$","13,220","","","$","14,851","","","$","(1,631)","","","(11)","%"],["Provision for credit losses","$","6,452","","","$","6,967","","","$","(515)","","","(7)","%"],["Operating interest","$","5,770","","","$","2,251","","","$","3,519","","","156","%"],["Depreciation and amortization","$","21,568","","","$","25,861","","","$","(4,293)","","","(17)","%"],["Other operating expenses"],["General and administrative","$","67,846","","","$","75,727","","","$","(7,881)","","","(10)","%"],["Sales and marketing","$","56,316","","","$","102,934","","","$","(46,618)","","","(45)","%"],["Depreciation and amortization","$","24,353","","","$","24,528","","","$","(175)","","","(1)","%"],["Operating income","$","133,858","","","$","1,930","","","$","131,928","","","6,836","%"],["Segment adjusted operating income1","$","192,665","","","$","86,860","","","$","105,805","","","122","%"],["Segment adjusted operating income margin2","47.9","%","","26.7","%","","21.2","%","","79","%"]] [[/GREPCENT_TABLE]] 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 2022 increase in segment adjusted operating income margin primarily reflects accelerated travel volumes and the benefit of an accounting change effective in the fourth quarter of 2021 from gross revenue presentation to net revenue presentation for one customer. As a result of owning all of our technology and issuing capabilities, our Travel and Corporate Solutions segment has a highly scalable and relatively fixed cost base resulting in largely comparable expenses year to year. As a result, the significant increase in 2022 revenues has also significantly increased operating income, segment adjusted operating income, and our segment adjusted operating income margin. Instances in which our expenses in 2022 did not remain comparable to those of 2021 are described hereafter. Cost of services Operating interest expense increased $3.5 million in 2022, as compared to 2021. The increase is due in nearly equal parts to increased interest rates and higher operating debt balances. Depreciation and amortization expenses decreased $4.3 million in 2022, as compared to 2021, due primarily to the prior year amortization of developed technology intangible assets with a one-year life that were acquired as part of the eNett and Optal acquisition. Other operating expenses General and administrative expenses decreased $7.9 million in 2022, as compared to 2021. The decrease is primarily due to a vendor contract termination payment from the first quarter of 2021. Sales and marketing expenses decreased $46.6 million in 2022, as compared to 2021, primarily due to a reduction in partner commissions, stemming from the impact of an accounting presentation change in the fourth quarter of 2021. This accounting presentation change resulted from an amended contract, which required a shift from gross revenue presentation to net revenue presentation for one customer. 53 Table of Contents Health and Employee Benefit Solutions Revenues The following table reflects comparative revenue and key operating statistics within Health and Employee Benefit Solutions: [[GREPCENT_TABLE]] [["","Twelve Months Ended December 31,","","Increase (Decrease)"],["(In thousands)","2022","","2021","","Amount","","Percent"],["Revenues"],["Payment processing revenue","$","81,917","","","$","71,533","","","$","10,384","","","15","%"],["Account servicing revenue","357,275","","","314,351","","","42,924","","","14","%"],["Finance fee revenue","149","","","144","","","5","","","3","%"],["Other revenue","65,198","","","28,181","","","37,017","","","131","%"],["Total revenues","$","504,539","","","$","414,209","","","$","90,330","","","22","%"],["Key performance indicators"],["Total volume","$","11,205,348","","","$","10,250,375","","","$","954,973","","","9","%"],["Purchase volume","$","5,869,062","","","$","5,115,705","","","$","753,357","","","15","%"],["Average number of SaaS accounts1","18,041","","","16,257","","","1,784","","","11","%"]] [[/GREPCENT_TABLE]] 1 The growth in average number of SaaS accounts, which represents the number of active Consumer-Directed Health, COBRA, and billing accounts on our SaaS platforms, was primarily due to existing partner growth and the impact of new partner and employer group enrollments and to a lesser extent, the acquisition of benefitexpress. SaaS accounts include HSA accounts for which WEX Inc. serves as the passive non-bank custodian under designation by the U.S. Department of Treasury. Payment processing revenue increased $10.4 million in 2022, as compared to 2021, due primarily to increased spend volumes, inclusive of cardholder growth. Account servicing revenue increased $42.9 million for 2022, as compared to 2021. Account growth and an increased number of participants using our SaaS platform accounted for greater than half of the increase in revenue. The remaining increase was driven primarily by increased revenues recognized as a result of the benefitexpress Acquisition and an increase in program fees for custodial services, offset in part by a reduction of revenue resulting from one-time COBRA-related services provided as a result of the American Rescue Plan Act legislation during 2021. Other revenue increased $37.0 million in 2022 as compared to 2021. The increase was substantially due to increased interest income, coupled with higher professional services revenue. The significant increase in interest income was due to the investment of larger average HSA deposit balances held by WEX Bank, which approximated $1,523 million, for the full year of 2022 versus $824 million for the fourth quarter of 2021, when the deposits were first received and invested. Operating Expenses The following table compares line items within operating income and presents segment adjusted operating income and segment adjusted operating income margin for Health and Employee Benefit Solutions: 54 Table of Contents [[GREPCENT_TABLE]] [["","Twelve Months Ended December 31,","","Increase (Decrease)"],["(In thousands)","2022","","2021","","Amount","","Percent"],["Cost of services"],["Processing costs","$","231,897","","","$","191,272","","","$","40,625","","","21","%"],["Service fees","$","43,605","","","$","30,210","","","$","13,395","","","44","%"],["Provision for credit losses","$","751","","","$","339","","","$","412","","","122","%"],["Operating interest","$","892","","","$","71","","","$","821","","","1,156","%"],["Depreciation and amortization","$","38,212","","","$","36,441","","","$","1,771","","","5","%"],["Other operating expenses"],["General and administrative","$","41,183","","","$","38,129","","","$","3,054","","","8","%"],["Sales and marketing","$","52,192","","","$","40,581","","","$","11,611","","","29","%"],["Depreciation and amortization","$","59,102","","","$","55,436","","","$","3,666","","","7","%"],["Operating income","$","36,705","","","$","21,730","","","$","14,975","","","69","%"],["Segment adjusted operating income1","$","133,682","","","$","104,408","","","$","29,274","","","28","%"],["Segment adjusted operating income margin2","26.5","%","","25.2","%","","1.3","%","","5","%"]] [[/GREPCENT_TABLE]] 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. Revenue recognized from the invested HSA deposits has contributed to the 5 percent increase over 2021. Cost of services     Processing costs increased $40.6 million in 2022, as compared to 2021. The increase primarily resulted from higher customer service and technology costs to support partner growth, along with increased costs as a result of the benefitexpress Acquisition. Service fees increased $13.4 million in 2022, as compared to 2021. This increase was primarily related to greater custodial program fees incurred driven by an increase in volumes and rates as well as an increase in print and mail fees. Other operating expenses Sales and marketing expenses increased $11.6 million in 2022, as compared to 2021, due primarily to the expansion of the sales and marketing team, coupled with increased expense due to the benefitexpress Acquisition. Unallocated corporate expenses Unallocated corporate expenses represent the portion of expenses relating to general corporate functions including acquisition and divestiture expenses, certain finance, legal, information technology, human resources, administrative and executive expenses and other expenses not directly attributable to a reportable segment. The following table compares line items within operating income for unallocated corporate expenses: [[GREPCENT_TABLE]] [["","Twelve Months Ended December 31,","","Increase (Decrease)"],["(In thousands)","2022","","2021","","Amount","","Percent"],["Other operating expenses"],["General and administrative","$","124,697","","","$","120,435","","","$","4,262","","","4","%"],["Depreciation and amortization","$","2,000","","","$","2,100","","","$","(100)","","","(5)","%"]] [[/GREPCENT_TABLE]] Increased stock and other compensation expense during 2022 was substantially offset by a reduction in professional fees, including legal and arrangement fees incurred in connection with the amendment and restatement of our 2016 Credit Agreement during 2021, resulting in general and administrative expense remaining relatively consistent with that of 2021. 55 Table of Contents Non-operating income and expense The following table reflects comparative results for certain amounts excluded from operating income: [[GREPCENT_TABLE]] [["","Twelve Months Ended December 31,","","Change"],["(In thousands)","2022","","2021","","Amount","","Percent"],["Financing interest expense","$","(130,690)","","","$","(128,422)","","","$","2,268","","","2","%"],["Change in fair value of contingent consideration","$","(139,088)","","","$","(40,100)","","","$","98,988","","","247","%"],["Other income","$","\u2014","","","$","3,617","","","$","(3,617)","","","(100)","%"],["Net foreign currency loss","$","(22,702)","","","$","(12,339)","","","$","10,363","","","84","%"],["Net unrealized gain on financial instruments","$","83,184","","","$","39,190","","","$","43,994","","","112","%"],["Income tax provision","$","93,085","","","$","67,807","","","$","25,278","","","37","%"],["Net income from non-controlling interests","$","268","","","$","846","","","$","(578)","","","(68)","%"],["Change in value of redeemable non-controlling interest","$","34,245","","","$","(135,156)","","","$","169,401","","","NM"]] [[/GREPCENT_TABLE]] NM - Not meaningful Financing interest expense in 2022 remained consistent with that of 2021. Increases in interest expense as a result of higher interest rates on our term loans and accretion of deferred payments associated with the acquisition of the remaining interest in PO Holding during March 2022, were largely offset by realized gains on our interest rate swaps, reductions as a result of the early redemption of the Company’s $400.0 million senior notes and the write-off of certain deferred financing costs in conjunction with the amendment and restatement of the Company’s 2016 Credit Agreement, both during 2021. The Company’s contingent consideration derivative liability increased during 2022 as a result of the steepening of the Federal Funds futures curve, resulting in a $99.0 million increase in change in fair value of contingent consideration compared to 2021. During 2021, the Company recognized other income of $3.6 million resulting from a gain on the sale of a fully impaired equity investment. Our foreign currency exchange exposure is primarily related to the remeasurement of our cash, receivable and payable balances, including intercompany transactions that are denominated in foreign currencies. During 2022, net foreign currency loss was $22.7 million, as compared to $12.3 million in 2021. The increased losses resulted from the further weakening of certain foreign currencies in which we transact, including the Australian dollar, the Euro and the British Pound sterling, relative to the U.S. dollar. The Company incurred unrealized gains on financial instruments of $83.2 million during 2022 and $39.2 million during 2021. The increase in unrealized gains on interest rate swaps was substantially due to significant increases in the LIBOR forward yield curve. We recorded an income tax provision of $93.1 million for 2022 as compared to $67.8 million for 2021. Our effective tax rate was a 35.7 percent provision for 2022 as compared to a 33.2 percent provision in 2021. The Company’s effective tax rate for 2022 was adversely impacted primarily by a discrete tax adjustment of $12.7 million relating to the establishment of a valuation allowance recorded against a portion of deferred tax assets resulting from goodwill impairment charges and a $7.5 million discrete tax item primarily associated with an uncertain tax provision. During March 2022, the Company purchased the remaining non-controlling interest in PO Holding from SBI, reducing the carrying value of the redeemable non-controlling interest to zero. The transaction resulted in a $34.2 million gain, net of tax expense. See Part II – Item 8 – Note 4, Acquisitions, to our consolidated financial statements for further information. Year Ended December 31, 2021, Compared to the Year Ended December 31, 2020 Discussion and analysis of the year ended December 31, 2021 compared to the year ended December 31, 2020 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, 2021, as filed with the SEC on March 1, 2021 and is incorporated by reference herein. 56 Table of Contents Non-GAAP Financial Measures That Supplement GAAP Measures Segment Adjusted Operating Income and Adjusted Net Income In addition to evaluating the Company’s performance on a GAAP basis, Management 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. Our Management also uses adjusted net income, a non-GAAP measure, to evaluate its performance. WEX believes that adjusted net income, which similarly excludes all items discussed in the paragraph above except unallocated corporate expenses, and further excludes unrealized gains and losses on financial instruments, net foreign currency gains and losses, change in fair value of contingent consideration, debt issuance cost amortization, other adjustments attributable to non-controlling interests and tax related items, is also integral to the Company’s reporting and planning processes. Segment adjusted operating income and adjusted net income may be useful to investors as a means of evaluating our performance. However, because segment adjusted operating income and adjusted net income are non-GAAP measures, they should not be considered as a substitute for, or superior to, operating income or net income as determined in accordance with GAAP. Segment adjusted operating income and adjusted net income as used by WEX may not be comparable to similarly titled measures employed by other companies. Specifically, in addition to evaluating the Company's performance on a GAAP basis, management evaluates the Company's performance on a non-GAAP basis that excludes the items specified above for the reasons discussed below: •Exclusion of the non-cash, mark-to-market adjustments on financial instruments, including interest rate swap agreements and investment securities, helps management identify and assess trends in the Company’s underlying business that might otherwise be obscured due to quarterly non-cash earnings fluctuations associated with these financial instruments. Additionally, the non-cash, mark-to-market adjustments on financial instruments are difficult to forecast accurately, making comparisons across historical and future quarters difficult to evaluate; •Net foreign currency gains and losses primarily result from the remeasurement to functional currency of cash, accounts receivable and accounts payable balances, certain intercompany notes denominated in foreign currencies and any gain or loss on foreign currency hedges relating to these items. The exclusion of these items helps management compare changes in operating results between periods that might otherwise be obscured due to currency fluctuations; •The change in fair value of contingent consideration, which is related to the acquisition of certain contractual rights to serve as custodian or sub-custodian to HSAs, is dependent upon changes in future interest rate assumptions and has no significant impact on the ongoing operations of the Company. Additionally, the non-cash, mark-to-market adjustments on financial instruments are difficult to forecast accurately, making comparisons across historical and future quarters difficult to evaluate; •The Company considers certain acquisition-related costs, including certain financing costs, investment banking fees, warranty and indemnity insurance, certain integration related expenses and amortization of acquired intangibles, as well as gains and losses from divestitures to be unpredictable, dependent on factors that may be outside of our control and unrelated to the continuing operations of the acquired or divested business or the Company. In addition, the size and complexity of an acquisition, which often drives the magnitude of acquisition-related costs, may not be indicative of such future costs. The Company believes that excluding acquisition-related costs and gains or losses on divestitures facilitates the comparison of our financial results to the Company’s historical operating results and to other companies in our industry; •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; 57 Table of Contents •Stock-based compensation is different from other forms of compensation, as it is a non-cash expense. For example, a cash salary generally has a fixed and unvarying cash cost. In contrast, the expense associated with an equity-based award is generally unrelated to the amount of cash ultimately received by the employee, and the cost to the Company is based on a stock-based compensation valuation methodology and underlying assumptions that may vary over time; •Other costs are not consistently occurring and do not reflect expected future operating expense, nor do they provide insight into the fundamentals of current or past operations of our business. This also includes non-recurring professional service costs, costs related to certain identified initiatives, including restructuring and technology initiatives, to further streamline the business, improve the Company’s efficiency, create synergies and globalize the Company’s operations, all with an objective to improve scale and efficiency and increase profitability going forward. For the year ended December 31, 2021, other costs additionally include a penalty incurred on a vendor contract termination; •Impairment charges represent non-cash asset write-offs, which do not reflect recurring costs that would be relevant to the Company’s continuing operations. The Company believes that excluding these nonrecurring expenses facilitates the comparison of our financial results to the Company’s historical operating results and to other companies in its industry; •Debt restructuring and debt issuance cost amortization are unrelated to the continuing operations of the Company. Debt restructuring costs are not consistently occurring and do not reflect expected future operating expense, nor do they provide insight into the fundamentals of current or past operations of our business. In addition, since debt issuance cost amortization is dependent upon the financing method, which can vary widely company to company, we believe that excluding these costs helps to facilitate comparison to historical results as well as to other companies within our industry; •The adjustments attributable to non-controlling interests, including adjustments to the redemption value of a non-controlling interest, have no significant impact on the ongoing operations of the business; •The tax related items are the difference between the Company’s GAAP tax provision and a pro forma tax provision based upon the Company’s adjusted net income before taxes as well as the impact from certain discrete tax items. The methodology utilized for calculating the Company’s adjusted net income tax provision is the same methodology utilized in calculating the Company’s GAAP tax provision; and •The Company does not allocate certain corporate expenses to our operating segments, as these items are centrally controlled and are not directly attributable to any reportable segment. The following table reconciles net income (loss) attributable to shareholders to adjusted net income attributable to shareholders and related per share data: [[GREPCENT_TABLE]] [["","Year ended December 31,"],["(In thousands)","2022","","2021","","2020"],["Net income (loss) attributable to shareholders","$","201,438","","","$","4.50","","","$","137","","","$","\u2014","","","$","(243,638)","","","$","(5.56)"],["Unrealized (gain) loss on financial instruments","(83,184)","","","(1.86)","","","(39,190)","","","(0.86)","","","27,036","","","0.62"],["Net foreign currency loss","22,702","","","0.51","","","12,339","","","0.27","","","25,783","","","0.59"],["Change in fair value of contingent consideration","139,088","","","3.11","","","40,100","","","0.88","","","\u2014","","","\u2014"],["Acquisition-related intangible amortization","170,500","","","3.81","","","181,694","","","4.01","","","171,144","","","3.90"],["Other acquisition and divestiture related items","17,874","","","0.40","","","36,916","","","0.81","","","57,787","","","1.32"],["Legal settlement","\u2014","","","\u2014","","","\u2014","","","\u2014","","","162,500","","","3.71"],["Loss on sale of subsidiary","\u2014","","","\u2014","","","\u2014","","","\u2014","","","46,362","","","1.06"],["Stock-based compensation","100,694","","","2.25","","","76,550","","","1.70","","","65,841","","","1.50"],["Other costs","38,434","","","0.86","","","23,171","","","0.52","","","13,064","","","0.30"],["Impairment charges","136,486","","","3.05","","","\u2014","","","\u2014","","","53,378","","","1.22"],["Debt restructuring and debt issuance cost amortization","17,333","","","0.39","","","21,768","","","0.48","","","40,063","","","0.91"],["ANI adjustments attributable to non-controlling interests","(34,587)","","","(0.77)","","","132,030","","","2.91","","","(42,910)","","","(0.98)"],["Tax related items","(115,781)","","","(2.59)","","","(71,458)","","","(1.58)","","","(108,086)","","","(2.47)"],["Dilutive impact of stock awards1","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","(0.06)"],["Dilutive impact of convertible debt2","\u2014","","","(0.13)","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Adjusted net income attributable to shareholders","$","610,997","","","$","13.53","","","$","414,057","","","$","9.14","","","$","268,324","","","$","6.06"]] [[/GREPCENT_TABLE]] 58 Table of Contents 1 As the Company reported a net loss attributable to shareholders for 2020, the 2020 diluted weighted average shares outstanding equaled the basic weighted average shares outstanding under GAAP. The non-GAAP adjustments described above resulted in adjusted net income for 2020, therefore, dilutive common stock equivalents have been included in the calculation of adjusted diluted weighted average shares outstanding to arrive at adjusted per share data. The total number of shares used in calculating adjusted net income per diluted share for 2020 was 44.3 million. 2 Under the ‘if-converted’ method, approximately 1.6 million shares of the Company’s common stock associated with the assumed conversion of the convertible notes as of the beginning of the period was included in the 2022 calculation of adjusted net income per diluted share, as the effect of including such adjustments was dilutive. Under the ‘if-converted’ method, $15.1 million of interest expense associated with our convertible notes, net of tax, was added back to adjusted net income. The total number of share used in calculating adjusted net income per diluted share for 2022 is 46.3 million. GAAP operating income (loss) was $469.8 million, $342.0 million and $(91.7) million for the years ended December 31, 2022, 2021 and 2020, respectively. For a reconciliation of GAAP operating income (loss) to total segment adjusted operating income, please see the following table: [[GREPCENT_TABLE]] [["","Year ended December 31,"],["(In thousands)","2022","","2021","","2020"],["Segment adjusted operating income"],["Fleet Solutions","$","693,439","","","$","557,083","","","$","383,502"],["Travel and Corporate Solutions","192,665","","","86,860","","","62,096"],["Health and Employee Benefit Solutions","133,682","","","104,408","","","96,769"],["Total segment adjusted operating income","$","1,019,786","","","$","748,351","","","$","542,367"],["Reconciliation:"],["Total segment adjusted operating income","$","1,019,786","","","$","748,351","","","$","542,367"],["Less:"],["Unallocated corporate expenses","84,484","","","78,218","","","62,938"],["Acquisition-related intangible amortization","170,500","","","181,694","","","171,144"],["Other acquisition and divestiture related items","17,874","","","40,533","","","57,787"],["Legal settlement","\u2014","","","\u2014","","","162,500"],["Impairment charges","136,486","","","\u2014","","","53,378"],["Loss on sale of subsidiary","\u2014","","","\u2014","","","46,362"],["Debt restructuring costs","43","","","6,185","","","535"],["Stock-based compensation","100,694","","","76,550","","","65,841"],["Other costs","39,863","","","23,171","","","13,555"],["Operating income (loss)","$","469,842","","","$","342,000","","","$","(91,673)"]] [[/GREPCENT_TABLE]] Adjusted Free Cash Flow The Company’s non-GAAP adjusted free cash flow is calculated as cash generated from operations, less net purchases of current investment securities and capital expenditures plus the change in net deposits. Although non-GAAP adjusted free cash flow is not calculated in accordance with GAAP, WEX believes that adjusted free cash flow is a useful measure for investors to further evaluate our results of operations because (i) adjusted free cash flow indicates the level of cash generated by the operations of the business after appropriate reinvestment for recurring investments in property, equipment and capitalized software that are required to operate the business; (ii) changes in net deposits occur on a daily basis as a regular part of operations; and (iii) purchases of current investment securities are made as a result of deposits gathered operationally. However, because adjusted free cash flow is a non-GAAP measure, it should not be considered as a substitute for, or superior to, operating cash flow as determined in accordance with GAAP. In addition, adjusted free cash flow as used by WEX may not be comparable to similarly titled measures employed by other companies. 59 Table of Contents The following table reconciles GAAP operating cash flow to adjusted free cash flow for the years ended December 31, 2022, 2021 and 2020: [[GREPCENT_TABLE]] [["(In thousands)","","Year ended December 31,"],["","","","2022","","2021","","2020"],["Operating cash flow, as reported","","","","$","679,425","","","$","(42,579)","","","$","736,804"],["Adjusted for certain investing and financing activities:"],["Increases (decreases) in net deposits","","","","801,592","","","1,620,284","","","(396,065)"],["Less: Purchases of current investment securities, net of sales and maturities","","","","(585,754)","","","(956,221)","","","\u2014"],["Less: Capital expenditures","","","","(112,875)","","","(86,041)","","","(80,471)"],["Adjusted free cash flow","","","","$","782,388","","","$","535,443","","","$","260,268"]] [[/GREPCENT_TABLE]] Critical Accounting Estimates The preparation of financial statements in accordance with GAAP requires us to make estimates and judgments about certain items and future events that affect reported amounts of assets and liabilities, revenue and expenses and related disclosure of contingent assets and liabilities at the date of the financial statements. Our significant accounting policies are described in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated financial statements, included in Part II, Item 8 of this Annual Report on Form 10-K. The accounting policies that we believe are most dependent on the application of critical accounting estimates and assumptions, or those that are most important to the portrayal of our financial condition and operating results and require management’s most subjective judgments, are related to the determination of: •Credit loss reserves; •The valuation of the Company’s contingent consideration derivative liability; •The valuation of the Company’s business combinations and asset acquisitions; •Goodwill impairment; and •Income taxes, in particular the recoverability of our deferred tax assets. These accounting policies require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial condition, results of operations and cash flows could be materially affected. Credit Loss Reserves The allowance for expected credit losses is primarily calculated by analytical models using actual loss-rate experience and management discretion. Receivables exhibiting elevated credit risk characteristics from homogenous pools are assessed and reserved on an individual basis for expected credit losses. We assess these receivables for individual expected credit loss estimates utilizing credit scoring and other information including the occurrence of disputes, conversations with customers, or other significant credit loss events. Management monitors the credit quality of accounts receivable in making judgments necessary to estimate expected credit losses by analyzing delinquency reports, loss-rate trends, changes in customer payment patterns, economic indicators and recent trends in competitive, legal, and regulatory environments. When such indicators are forecasted to deviate from historical actual results, the Company qualitatively assesses what impact, if any, the trends are expected to have on the reserve for credit losses. Assumptions regarding expected credit losses are reviewed each reporting period and may be impacted by actual performance of accounts receivable and changes in any of the factors discussed above. To the extent calculated expected credit losses are not indicative of future performance, actual loss experience and our results of operations could differ significantly from management’s judgments and expectations, resulting in either higher or lower future provisions for credit losses, as applicable. As of December 31, 2022, we have an estimated reserve for credit losses that is 3.2 percent of the total gross accounts receivable balance as compared to December 31, 2021, when our estimated reserve for credit losses was 2.2 percent of gross accounts receivable. An increase or decrease to the 2022 reserve by 0.5 percent of the total gross accounts receivable balance would increase or decrease the provision for credit losses by $16.9 million. For additional information on credit losses, see Note 1, Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. 60 Table of Contents Contingent Consideration Derivative Liability In April 2021, we completed the acquisition of certain contractual rights to serve as custodian or sub-custodian to certain HSA assets. In addition to cash consideration paid by WEX upon closing, the purchase agreement also includes potential additional consideration that is contingent upon any future increases in the Federal Funds rate post closing. The contingent payment period began on July 1, 2021 and extends until the earlier of (i) the year ending December 31, 2030, or (ii) the date when the cumulative amount paid as contingent consideration equals $225 million. Contingent payments are calculated quarterly and are paid and settled annually. Given the agreement’s term extends through the end of 2030, there is not sufficient, observable market data in Federal Funds futures contracts to use Level 1 or Level 2 input-based methodologies for determining the fair value. Accordingly, we have determined the fair value of our contingent consideration liability using a mathematical method of modeling the movement of interest rates, which is considered a Level 3 (unobservable) input-based methodology, to estimate a future Federal Funds rate curve, which is used in a discounted cash flow model to determine the present value of our expected payment obligations. The fair value of our contingent consideration liability is highly sensitive to current and future changes in the Federal Funds rate and increases or decreases in such rate could have a significant effect on our results of operations. However, any changes in the Federal Funds rate will only affect future calculable payments. While the final amount to be paid by WEX through 2030 could change significantly from our estimations, given the $225 million payment ceiling, the actual liability cannot exceed our current estimate as of December 31, 2022 by more than $18.6 million. As of December 31, 2022, the fair value of our contingent liability includes $28.7 million of liability related to calendar 2022, no longer subject to estimation and payable during January 2023. For additional information on the contingent consideration derivative liability, see Note 18, Fair Value, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Business Combinations and Asset Acquisitions The accounting for business combinations and asset acquisitions requires estimates and judgment as to expectations for future cash flows of the acquired business or assets, and the allocation of those cash flows to identifiable assets, including intangible assets and goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including projected financial information, effective income tax rates, present value discount factors and long-term growth expectations. Goodwill is not amortized but is instead reviewed for impairment. Accordingly, the allocation of cash flows between amortizable assets and goodwill could have a significant impact on annual operations. There have been no business combinations or asset acquisitions requiring material estimates during 2022. For additional information regarding the accounting for past acquisitions, see Note 4, Acquisitions, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Goodwill Impairment Our quantitative goodwill impairment test is performed at least annually as of October 1, or more frequently, if events or conditions indicate the carrying amount of goodwill may not be recoverable. The test consists of a comparison of the carrying value of each reporting unit with assigned goodwill to its estimated fair value. The fair value of each reporting unit is estimated using a combination of an income-based DCFM valuation model and a market-based GPCM valuation model. The key assumptions that drive fair value of our reporting units are the WACC and projected financial information (i.e. growth rates and the amount and timing of expected future cash flows) within the DCFM and relevant comparable company earnings multiples within the GPCM, all of which require significant management judgment. In the DCFM, as the WACC increases, fair value decreases because market participants would require a higher rate of return. Therefore, for example, if the current economic environment were to deteriorate, and as a result the WACC were to increase, the fair value of our reporting units would decrease. Additionally, the profitability of individual reporting units may suffer periodically from downturns in customer demand or other economic factors. Individual reporting units may be more greatly impacted than the Company as a whole, given the different market sectors and geographies in which we operate. As a result, demand for the services of one or more of the reporting units could decline, which could adversely affect the key inputs to our estimated fair value of the Company’s reporting units. If actual reporting unit growth rates were to fall short of previous estimates or delays in the timing of future cash flows were to occur, the fair value of a reporting unit could be negatively impacted. The GPCM requires us to identify a population of publicly traded companies with similar operations and key attributes to those of our reporting units (GPCs), which involves a certain degree of judgment as no two companies are entirely alike. Various revenue and earnings based multiples from these GPCs are then used in our fair value calculation. In selecting appropriate multiples to apply to each 61 Table of Contents reporting unit, we perform a comparative analysis between the reporting units and GPCs, considering revenue growth, profitability and the size of the reporting unit compared to the GPCs. Significant increases or decreases in these multiples would result in an increase or decrease, respectively, in the fair value of the reporting unit. During the third quarter of 2022, certain triggering events were identified in our international fleet reporting units requiring us to perform an interim impairment test. As a result of the financial impacts of the identified triggering events, our test concluded that the carrying value of two of our international reporting units exceeded their estimated fair value, resulting in the recognition of an impairment charge of $136.5 million to our Fleet Solutions segment. No triggering events were identified during the third quarter of 2022 with respect to our other reporting units. Our annual goodwill impairment test performed as of October 1, 2022 identified no further impairments. For the two reporting units for which we recognized impairment during the third quarter of 2022, one had no remaining goodwill and the other had $95.4 million of goodwill as of December 31, 2022. Future impairment of this reporting unit may occur if financial results or macroeconomic conditions deteriorate versus our current expectations. Our annual goodwill impairment test indicated excesses of estimated fair value over the respective carrying values of our other reporting units ranging from approximately 100 percent to greater than 200 percent. We have performed sensitivity analyses on the key inputs into the fair value calculations and we validate the results of our impairment test through a reconciliation of the fair value of all our reporting units to our overall market capitalization. Although no reporting units are deemed at risk of impairment as of December 31, 2022, unforeseen events, changes in circumstances and market conditions and differences in estimates of future cash flows could adversely affect the fair value of our assets and could result in future impairment charges. For additional information on the accounting for goodwill and goodwill impairments recorded, see Note 1, Basis of Presentation and Summary of Significant Accounting Policies and Note 9, Goodwill and Other Intangible Assets, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Income Taxes Valuation allowance We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized, the determination of which requires significant judgment. In evaluating the ability to recover deferred tax assets, we consider all available positive and negative evidence including past operating results, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. Our valuation allowance at December 31, 2022 increased to $131.4 million from $95.0 million at December 31, 2021, resulting in deferred tax liabilities, net, of $128.8 million as of December 31, 2022. Changes in the expectations regarding the realization of deferred tax assets could materially impact income tax expense in future periods. For additional information on income taxes, see Note 1, Basis of Presentation and Summary of Significant Accounting Policies, and Note 14, Income Taxes, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Recently Adopted and New Accounting Standards See Item 8 – Note 2, Recent Accounting Pronouncements, for a complete discussion of recently issued accounting standards adopted and not yet adopted. Liquidity and Capital Resources We fund our business operations primarily via cash on hand, cash generated from operations, the issuance of deposits, borrowings under our Amended and Restated Credit Agreement, our participation debt and our accounts receivable factoring and securitization arrangements. As of December 31, 2022, we had cash and cash equivalents of $922.0 million, including Corporate Cash of $171.5 million, and remaining borrowing availability of $898.9 million under the Revolving Credit Facility (as defined below) along with access to various sources of funds, including uncommitted federal funds lines of credit from other banks. Our short-term cash requirements consist primarily of funding the working capital needs of our business, payments on maturities and withdrawals of deposits, payments on borrowed federal funds, required capital expenditures, repayments and interest payments on the credit facilities under our Amended and Restated Credit Agreement and Convertible Notes and other operating expenses. Our long-term cash requirements consist primarily of amounts owed under our Amended and Restated Credit Agreement, Convertible Notes and various facilities lease agreements. 62 Table of Contents Our Amended and Restated Credit Agreement provides for a senior secured revolving credit facility (the “Revolving Credit Facility”), senior secured tranche A term loans (the “Tranche A Term Loans”) and senior secured tranche B term loans (the “Tranche B Term Loans”). As of December 31, 2022,we had an outstanding principal amount of $892.8 million on the Tranche A Term Loans, an outstanding principal amount of $1,416.8 million on the Tranche B Term Loans, no borrowings on the Revolving Credit Facility and letters of credit of $31.1 million drawn against the Revolving Credit Facility. 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 secured and are renewed on an annual basis unless the Company chooses not to renew them. The Tranche A Term Loans and Tranche B Term Loans require scheduled quarterly payments through the April 1, 2026 and April 1, 2028 respective maturity dates. The Revolving Credit Facility and the Tranche A Term Loans bear interest at variable rates, at our option, plus an applicable margin determined based on our consolidated leverage ratio, and the Tranche B Term Loans bear interest at variable rates, at our option, plus a fixed margin of 1.25 percent for base rate borrowings and 2.25 percent with respect to eurocurrency rate borrowings. See Part II – Item 8 – Note 16, Financing and Other Debt, in this report for more information regarding our applicable interest rates on our Amended and Restated Credit Agreement. As of December 31, 2022, the Company had outstanding $310.0 million in aggregate principal amount of Convertible Notes, issued in a private placement with Warburg Pincus with a maturity date of July 15, 2027, unless earlier converted. Interest is calculated at a fixed rate of 6.5 percent, payable semi-annually in arrears. 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, however, as of December 31, 2022, the closing price of the Company’s common stock was less than the conversion price. The Company will have the right to redeem the Convertible Notes at any time after July 1, 2023 contingent, in part, on the closing price of WEX’s common stock being at least 200 percent of the Convertible Notes conversion price for 20 trading days out of any 30 consecutive trading day period. The Company may settle conversions of Convertible Notes, at its election, in cash, shares of the Company’s common stock, or a combination thereof. It is the Company’s intention to settle all conversions of the Convertible Notes in shares of the Company’s common stock. The Company is also party to two securitized debt agreements. Under these agreements, our subsidiaries sell trade accounts receivable to bankruptcy-remote subsidiaries consolidated by the Company, which in turn use the receivables as collateral to issue securitized debt. Amounts collected on the securitized receivables are restricted to pay the securitized debt and are not available for general corporate purposes. The Company had $110.6 million of securitized debt under these facilities as of December 31, 2022. In addition, from time to time, WEX Bank enters into participation agreements with third-party banks to fund customers’ balances that exceed WEX Bank’s lending limit to individual customers. There was $39.0 million borrowed against these participation agreements as of December 31, 2022. See Part II – Item 8 – Note 16, Financing and Other Debt, in this report for more information regarding these facilities. We utilize two off-balance sheet factoring arrangements to sell certain of our accounts receivable to unrelated third-party financial institutions in order to accelerate the collection of the Company’s cash and reduce internal costs. Under the arrangements, the factored receivables have been transferred without recourse. Available capacity is dependent on the level of our trade accounts receivable eligible to be sold and the financial institution’s willingness to purchase such receivables. However, the Company is not dependent on them to maintain its liquidity and capital resources. We are not aware of any circumstances that are reasonably likely to cause the off-balance sheet arrangements to have a material adverse effect on liquidity and capital resources. See Part II – Item 8 – Note 13, Off-Balance Sheet Arrangements, in this report for further information about the Company’s off-balance sheet arrangements. WEX Bank’s regulatory status enables it to raise capital to fund the Company’s working capital requirements by issuing deposits, subject to various regulatory capital requirements administered by the FDIC and the Utah DFI. WEX Bank accepts its deposits through certain customers as required collateral for credit that has been extended (“customer deposits”) and contractual arrangements for brokered and non-brokered certificate of deposit and money market deposit products. Additionally, beginning in October 2021, WEX Bank holds HSA deposits transferred from third-party depository partners. 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 and HSA deposits are issued at rates as defined within the consumer account agreements. Certificates of deposit and certain fixed term money market deposit products have fixed contractual maturities. Money market deposits without fixed terms may be withdrawn by the holder at any time, although the allowed number of transactions may be limited and notification may be required. Customer deposits are released at the termination of the relationship, net of any customer receivable, or upon reevaluation of the customer’s credit in limited instances. HSA funds can be withdrawn by the account holders on demand. We believe that our deposits are paying competitive 63 Table of Contents yields and that there continues to be consumer demand for these instruments. As of December 31, 2022, we had $3.5 billion in deposits. See Part II – Item 8 – Note 11, Deposits, in this report for more information regarding our deposits. We believe that our current cash and cash equivalents, cash generating capabilities, financial condition and operations, and access to available funding sources will be adequate to fund our cash needs for the next 12 months and the foreseeable future. The table below summarizes our primary sources and uses of cash: [[GREPCENT_TABLE]] [["Sources of cash","","Use of cash1"],["\u2022Borrowings and availability on our Amended and Restated Credit Agreement\u2022Convertible Notes\u2022Deposits\u2022Borrowed federal funds\u2022Participation debt\u2022Accounts receivable factoring and securitization arrangements","","\u2022Payments on our Amended and Restated Credit Agreement\u2022Payments on maturities and withdrawals of deposits\u2022Payments on borrowed federal funds\u2022Working capital needs of the business\u2022Capital expenditures\u2022Purchases of shares of treasury stock\u2022Merger and acquisition activity"]] [[/GREPCENT_TABLE]] 1 Our long-term cash requirements consist primarily of amounts owed on our Amended and Restated Credit Agreement and various facilities lease agreements. Cash Flows The table below summarizes our cash activities and adjusted free cash flow: [[GREPCENT_TABLE]] [["(In thousands)","Year ended December 31,"],["2022","","2021","","2020"],["Net cash provided by (used for):"],["Operating activities1","$","679,425","","","$","(42,579)","","","$","736,804"],["Investing activities","$","(716,654)","","","$","(1,601,106)","","","$","(329,086)"],["Financing activities1","$","681,259","","","$","1,596,246","","","$","(59,041)"],["Non-GAAP financial measure:"],["Adjusted free cash flow2","$","782,388","","","$","535,443","","","$","260,268"]] [[/GREPCENT_TABLE]] 1 Restricted cash payable inflows of $193.0 million and $120.2 million for the years ended December 31, 2021 and 2020, respectively, have been reclassified from operating activities to financing activities to conform to the current period presentation. Refer to Part II – Item 8 – Note 1, Basis of Presentation and Summary of Significant Accounting Policies for more information. 2 The Company’s non-GAAP adjusted free cash flow is calculated as cash generated from operations, less net purchases of current investment securities and capital expenditures plus the change in net deposits. For a reconciliation to net cash provided by operating activities, the most closely comparable GAAP measure, and the reasons why we believe this is an important financial measure, please refer to the section titled Non-GAAP Financial Measures That Supplement GAAP Measures. Operating Activities We fund a customer’s entire receivable in the majority of our fleet and travel payment processing transactions, while the revenue generated by these transactions is only a small percentage of that amount. Consequently, cash flows from operations are impacted significantly by increases or decreases in fuel prices, driving changes in accounts receivable and accounts payable balances, which directly impact our capital resource requirements. The majority of the Company’s trade receivables provide for payment terms of 30 days or less and receivables not paid within the terms of the agreement are generally subject to late fees based upon the outstanding receivable balance. The Company also extends revolving credit to certain small fleets. Such accounts are also subject to late fees and interest charges based on a revolving balance. The Company had approximately $157.8 million and $93.7 million of receivables with revolving credit balances as of December 31, 2022 and 2021, respectively. The receivables portfolio consists of a large group of homogeneous smaller balances across a wide range of industries. No one customer receivable balance represented 10 percent or more of the outstanding receivables balance at December 31, 2022 or December 31, 2021. At December 31, 2022, approximately 98 percent and 99 percent of the outstanding balance of total trade accounts receivable was less than 30 days and 60 days past due, respectively. •Net cash provided by operating activities for 2022 increased $722.0 million as compared to the prior year, primarily attributable to a decreased change in accounts receivable, net of a corresponding increased change in accounts payable, as well as higher net income adjusted for non-cash items. 64 Table of Contents •Net cash provided by operating activities for 2021 decreased $779.4 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. Investing Activities Investing cash flows generally consist of capital expenditures, cash used for acquisitions and investment of eligible custodial cash assets. •Net cash used for investing activities for 2022 decreased $884.5 million as compared to the prior year, primarily resulting from a reduction in payments made for acquisitions as well as a reduction in net purchases of available-for-sale debt securities. •Net cash used for investing activities for 2021 increased $1,272.0 million as compared to the prior year, primarily resulting from the purchase of available-for-sale debt securities and 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. Financing Activities Financing cash flows generally consist of the issuance and repayment of debt, deposits and proceeds from employee exercises of stock options, changes in restricted cash payable and purchases of treasury shares. Repurchases of our common stock may vary based on management’s evaluation of market and economic conditions and other factors. •Net cash provided by financing activities during 2022 decreased $915.0 million as compared to the prior year, primarily resulting from lower relative deposit issuances and purchases of treasury shares. •Net cash provided by financing activities during 2021 increased $1,655.3 million as compared to the prior year due primarily to higher relative deposit issuances, offset in part by the early redemption of the Company’s $400.0 million of Notes, as further described within Part II – Item 8 – Note 16, Financing and Other Debt. Cash used to repurchase approximately 1.9 million shares of our common stock totaled $282.8 million during 2022. The remaining dollar value of shares authorized by our board of directors for repurchase is $508.8 million as of December 31, 2022. Adjusted Free Cash Flow The definition of adjusted free cash flow, and the reasons why we believe it to be an important financial measure, can be found in the section titled Non-GAAP Financial Measures That Supplement GAAP Measures. •Adjusted free cash flow increased $246.9 million during 2022 from 2021 reflecting a significant increase in operating cash flows and decrease in purchases of current investment securities, offset in part by the reduction in cash provided by net deposits as compared to the prior year. •Adjusted free cash flow increased $275.2 million during 2021 from 2020, reflecting a significant increase in net deposits, offset in part by the investment of such deposits in current investment securities, coupled with a significant decrease in operating cash flows. Undistributed Earnings Undistributed earnings of certain foreign subsidiaries of the Company amounted to $159.9 million at December 31, 2022. 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, which approximates $129.1 million at December 31, 2022, 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, 65 Table of Contents 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. Financial 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. 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 5.00 to 1.00 for the quarters ending December 31, 2022 through September 30, 2023, and 4.75 to 1.00 thereafter. We were in compliance with these covenants and restrictions at December 31, 2022. Commitments to extend credit We have entered into commitments to extend credit in the ordinary course of business. We had approximately $9.2 billion of unused commitments to extend credit at December 31, 2022, as part of established customer agreements, which are off-balance sheet arrangements. These amounts may increase or decrease during 2023 as we increase or decrease credit to customers, subject to appropriate credit reviews, as part of our lending product agreements. Many of these commitments are not expected to be utilized. We can adjust most of our customers’ credit lines at our discretion at any time. Therefore, we do not believe total unused credit available to customers and customers of strategic relationships represents future cash requirements. We believe that we can adequately fund actual cash requirements related to these credit commitments through the sources of cash described above. Other contractual commitments The table below summarizes the estimated amounts of payments under contractual obligations as of December 31, 2022: [[GREPCENT_TABLE]] [["","Payments Due By Period"],["(In thousands)","Total","","Less than 1 Year","","1-3 Years","","3-5 Years","","More Than 5 Years"],["Operating lease obligations(1)","$","101,536","","","$","15,025","","","$","22,829","","","$","16,443","","","$","47,239"],["Long-term debt obligations:"],["Term loans","2,309,585","","","63,342","","","126,683","","","774,895","","","1,344,665"],["Interest payments on term loans(2)","642,479","","","146,766","","","281,660","","","191,753","","","22,300"],["Convertible Notes","310,000","","","\u2014","","","\u2014","","","310,000","","","\u2014"],["Interest payments on Convertible Notes(3)","100,750","","","20,150","","","40,300","","","40,300","","","\u2014"],["Other commitments:"],["Contractual deposits(4)","1,104,901","","","770,718","","","334,183","","","\u2014","","","\u2014"],["Interest on contractual deposits","15,850","","","12,559","","","3,291","","","\u2014","","","\u2014"],["Minimum volume purchase commitments(5)","18,078","","","5,641","","","12,437","","","\u2014","","","\u2014"],["Deferred payments on acquisitions(6)","300,230","","","53,688","","","165,875","","","80,667","","","\u2014"],["Interest owed on deferred payments on acquisition(7)","14,913","","","\u2014","","","9,438","","","5,475","","","\u2014"],["Other (8)","15,034","","","10,049","","","4,985","","","\u2014","","","\u2014"],["Total","$","4,933,356","","","$","1,097,938","","","$","1,001,681","","","$","1,419,533","","","$","1,414,204"]] [[/GREPCENT_TABLE]] 66 Table of Contents (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, 2022. See Item 8 – Note 16, Financing and Other Debt, for more information. The Company’s variable interest payments in this table are economically hedged with $1.6 billion notional amount of interest rate swaps, which expire at various dates through May 2026, to reduce our exposure to interest rate volatility. See Item 8 – Note 12, Derivative Instruments, and Item 8 – Note 18, Fair Value, 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 – Under existing contractual arrangements, the Company is required to purchase a minimum amount of fuel from certain fuel suppliers on an annual basis. Upon failing to meet these minimum commitments, a penalty is assessed as defined under the contracts. See Item 8 – Note 20, Commitments and Contingencies, for more information. The table above represents the Company’s annual penalty assuming we purchase no fuel under these commitments after December 31, 2022. (6) Deferred payments on acquisition – Relates to deferred cash payments and additional consideration owed pursuant to previously completed acquisitions. The asset purchase agreement with Bell Bank includes the potential for additional consideration payable annually by WEX that is calculated on a quarterly basis and is contingent, and based, upon any future increases in the Federal Funds rate. The contingent 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. Through December 31, 2022, $28.7 million of consideration has been incurred and included in the above table as it is no longer contingent upon future events. Given the timing and amount of any additional contingent consideration is dependent on future changes in interest rates and therefore uncertain, the table above does not include any amounts related to potential additional contingent consideration. Assuming no further changes to the Federal Funds rate as of December 31, 2022, however, the Company expects that it will incur the full $225.0 million in contingent consideration, payable in annual increments of approximately $54.2 million over the next three years with any remaining balance payable during 2027. See Item 8 – Note 4, Acquisitions, for more information. (7) Interest owed on deferred payments on acquisition – The purchase agreement for the remaining 4.53 percent interest in PO Holding includes the payment of interest on the outstanding purchase price balance. See Item 8 – Note 4, Acquisitions, for more information. (8) Other – This amount is comprised of contractually obligated future payments due under information technology service, hotel and other service contracts. Uncertain tax benefits – The Company has excluded $7.5 million in gross unrecognized tax benefits from the table above, $4.2 million of which could be settled during 2023 as a result of certain examinations or expiration of statutes of limitation.