WEX

WEX Inc. (Wright Express Corporation) 2009 10-K Summary

Business Context and Reporting Period

This Annual Report on Form 10-K covers the fiscal year ended December 31, 2009. Wright Express Corporation (WEX) is a leading provider of payment processing and information management services to the U.S. commercial and government vehicle fleet industry. The company operates through two primary segments: Fleet (88% of revenue), which provides fuel and maintenance payment processing via a proprietary closed network, and MasterCard, which offers corporate charge cards and single-use accounts. WEX also owns Wright Express Financial Services Corporation (FSC), a Utah industrial bank that funds transactions.

Key Financial Metrics

Note: Net Income for 2009 includes a significant non-cash gain of $136.5 million from the settlement of a tax receivable agreement.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 19% to $318.2 million, primarily driven by a 31% drop in average fuel prices (from $3.47 to $2.39 per gallon) and a 6% decrease in payment processing transaction volume due to the economic recession.
• Profitability Increase: Despite lower revenues, Net Income increased 9% to $139.7 million. This was largely due to a $136.5 million gain from settling obligations to Realogy Corporation under a Tax Receivable Agreement for $51 million (recorded liability was $187.5 million).
• Derivative Losses: The company recognized a net loss of $22.5 million on fuel price derivatives in 2009, compared to a gain of $55.2 million in 2008. This reflects an unrealized loss of $43.1 million as fuel prices rose in late 2009 against hedged positions.
• Reduced Credit Losses: The provision for credit losses dropped significantly by 61% (from $45.0 million to $17.7 million) due to improved receivables aging and lower fuel expenditures.
• MasterCard Growth: The MasterCard segment grew 38% in revenue to $37.2 million, driven by increased volume in single-use accounts for online travel.

Guidance, Outlook, and Risks

Outlook: Management anticipates a stable economic environment in 2010, expecting transaction volume to be slightly negative to slightly positive compared to 2009. Credit losses for the Fleet segment are estimated at 18 to 23 basis points of payment processing expenditures for 2010.

Key Risks and Contingencies:

• Fuel Price Volatility: Approximately 57% of revenues are tied to fuel prices. A 10-cent decline in average fuel prices could reduce revenue by approximately $7.5 million.
• Derivative Exposure: Fuel price derivatives do not qualify for hedge accounting; unrealized gains/losses flow directly to earnings, creating volatility. As of Dec 31, 2009, the net fair value of these derivatives was an asset of $6.2 million.
• Liquidity and Debt: The company has a $450 million revolving credit facility with $128 million outstanding. The facility expires in May 2012. Rising interest rates could increase expenses on the variable-rate portion of debt.
• Regulatory: Operations depend on the charter of the Utah industrial bank subsidiary (FSC). Loss of this charter would disrupt operations and increase costs.

Investor Verification Checklist

• Tax Receivable Agreement Gain: Verify the sustainability of the $136.5 million one-time gain from the Realogy settlement and its impact on "Adjusted Net Income" vs. GAAP Net Income.
• Fuel Price Sensitivity: Assess the company's exposure to future fuel price declines, given that 57% of revenue is percentage-based on fuel volume.
• Derivative Valuation: Review the fair value assumptions for fuel price derivatives, as unrealized losses of $43 million significantly impacted 2009 earnings.
• Credit Quality: Monitor the provision for credit losses, which dropped sharply in 2009; verify if this trend holds as the economy recovers and transaction volumes increase.
• Debt Covenants: Confirm compliance with the 3.00:1.00 leverage ratio and 3.00:1.00 interest coverage ratio required by the credit facility.