WEX Inc. (Wright Express Corporation) 2006 10-K Summary
Business Context and Reporting Period
This report covers the fiscal year ended December 31, 2006. 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 (payment and transaction processing for vehicle fleets) and MasterCard (corporate charge cards and rotating accounts). WEX utilizes a proprietary "closed" network covering over 90% of retail fuel locations and 45,000 maintenance locations. The company is a Delaware corporation, formerly a subsidiary of Cendant Corporation (now Avis Budget Group), which divested its interest via IPO in February 2005.
Key Financial Metrics (Year Ended Dec 31, 2006)
| Metric | 2006 | 2005 |
|---|---|---|
| Total Revenues | $291.2 million | $241.3 million |
| Net Income | $74.6 million | $18.7 million |
| Basic EPS | $1.85 | $0.46 |
| Operating Income | $135.1 million | $106.6 million |
| Total Assets | $1,551.0 million | $1,448.3 million |
| Total Liabilities | $1,367.9 million | $1,345.7 million |
| Stockholders' Equity | $183.1 million | $102.6 million |
| Cash and Equivalents | $35.1 million | $45.0 million |
| Operating Cash Flow | $60.4 million | ($40.9 million) |
| Debt Outstanding | $151.0 million (Credit Facility) | $220.5 million (Credit Facility) |
| Effective Tax Rate | 36.0% | 33.1% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 21% to $291.2 million, driven by a 13% increase in average fuel prices and a 9% increase in payment processing transactions (181.3 million transactions).
- Profitability Surge: Net income jumped 300% to $74.6 million. This was significantly aided by a reduction in net realized and unrealized losses on fuel price derivatives, which dropped from $65.8 million in 2005 to $4.2 million in 2006.
- Segment Performance:
- Fleet Segment: Revenues grew 20% to $271.9 million. Payment processing revenue increased 23% due to higher fuel prices and transaction volume.
- MasterCard Segment: Revenues grew 26% to $19.3 million, with purchase volume increasing 35% to $1.3 billion.
- Expense Increases: Credit losses rose to $16.7 million (from $8.8 million in 2005), primarily due to higher fuel prices increasing receivable balances and a specific $1.7 million reserve for one customer. Operating interest expense increased to $23.4 million due to higher interest rates (average 4.9% vs 3.4% in 2005) and higher debt balances.
- Strategic Agreements: Signed a new 10-year private label agreement with ExxonMobil and renewed a 10-year agreement with Imperial Oil of Canada.
Guidance, Outlook, and Risks
- Outlook: Management expects the new ExxonMobil agreement to significantly increase revenue in 2007, though with lower margins (5-10 basis points lower) and higher operating interest/credit loss rates. The company anticipates higher depreciation due to assets placed in service in 2006.
- Fuel Price Sensitivity: Revenues are highly correlated with fuel prices. A 10-cent decline in average fuel prices would have reduced 2006 revenue by approximately $7.9 million. The company uses derivative instruments to hedge 90% of its earnings exposure to fuel price volatility.
- Key Risks:
- Fuel Price Volatility: Declines in fuel prices directly reduce revenue.
- Derivative Risk: While derivatives stabilize cash flows, they can increase earnings volatility due to mark-to-market accounting.
- Competition: Increased competition may pressure profit margins.
- Credit Risk: Exposure to bad debt, particularly in small-to-mid-sized business fleets.
- Regulatory: Dependence on the charter of its Utah industrial bank subsidiary (FSC) for funding operations.
- Share Repurchase: In February 2007, the company announced a $75 million share repurchase program over 24 months.
Investor Verification Checklist
- Derivative Accounting: Verify the impact of unrealized gains/losses on fuel price derivatives on net income volatility versus cash flow stability.
- Credit Loss Trends: Monitor the "credit loss as a percentage of fuel expenditures" metric (15.2 basis points in 2006 vs 10.8 in 2005) to assess if the increase is a one-time anomaly or a structural shift.
- ExxonMobil Transition: Confirm the revenue mix shift from transaction processing to payment processing in 2007 and its impact on net margins.
- Debt Covenants: Review compliance with leverage ratios (max 2.50:1.00 through Sept 2007) and fixed charge coverage ratios.
- Tax Receivable Agreement: Assess the impact of the $418.4 million liability to Avis (formerly Cendant) for 85% of tax savings realized from the IPO step-up in asset basis.