WEX

Business Context and Reporting Period

Company: Wright Express Corporation (formerly Wright Express LLC)

Reporting Period: Quarter ended March 31, 2005

Business Overview: Wright Express provides payment processing and information management services to the U.S. commercial and government vehicle fleet industry. The company operates primarily through its "Wright Express" segment (payment and transaction processing) and an "Other" segment (MasterCard products).

Key Event: On February 22, 2005, the company completed its Initial Public Offering (IPO) and converted from a limited liability company to a Delaware corporation. Concurrently, it paid a special dividend of approximately $306 million to its former parent, Cendant Corporation.

Key Financial Metrics

Note: Adjusted Net Income excludes unrealized derivative losses, termination losses, and stock-based compensation costs.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 20% year-over-year, driven by a 22% increase in average expenditure per transaction (due to a 20% rise in fuel prices) and an 8% increase in vehicles serviced.
• Net Loss: The company reported a net loss of $18.5 million compared to net income of $10.4 million in the prior year. This reversal was primarily caused by:
  • Derivative Losses: $44.2 million in realized and unrealized losses on fuel price derivative instruments.
  • Stock-Based Compensation: A one-time charge of $5.7 million related to the conversion of equity instruments during the IPO.
  • Financing Costs: New interest expense of $1.4 million associated with debt incurred to fund the special dividend.
• Balance Sheet Expansion: Total assets increased 52% to $1.24 billion, largely due to a $488.7 million deferred tax asset recorded from the IPO tax basis step-up and higher accounts receivable balances correlated with fuel prices.
• Debt Incurrence: The company entered a new $350 million credit facility ($220 million term loan, $130 million revolver) in February 2005 to fund the special dividend and support operations.

Outlook, Risks, and Management Commentary

• Derivative Strategy: The company utilizes fuel price collars (floor ~$1.88, ceiling ~$1.95) to hedge revenue volatility. While these caused significant non-cash unrealized losses in Q1 2005 due to rising fuel prices, management expects revenue fluctuations to neutralize derivative gains/losses over the contract life.
• Liquidity: Management believes cash from operations and existing cash balances are sufficient for the next 12 months. However, timing differences in fuel payments may necessitate temporary borrowings under the revolving credit facility.
• Key Risks:
  • Fuel Price Volatility: Approximately 61% of revenue is derived from fuel transactions; price fluctuations directly impact revenue and receivables.
  • Interest Rate Risk: New debt is variable-rate (LIBOR-based). The company entered interest rate swaps in April 2005 to hedge a portion of this risk.
  • Concentration: Top five strategic relationships include two major oil companies and three fleet management companies.
  • Legal: Pending litigation from the Enron bankruptcy trustee (claims of $3.3 million); a $0.45 million reserve has been recorded.
• Tax Receivable Agreement: The company is obligated to pay Cendant 85% of tax savings resulting from the IPO tax basis step-up. A liability of $415.4 million is recorded, with the first payment due in June 2005.

Investor Verification Checklist

• Derivative Valuation: Verify the fair value assumptions and the timeline for the maturity of fuel derivative contracts to understand future earnings volatility.
• Debt Covenants: Review the financial covenants in the new credit agreement (leverage and fixed charge coverage ratios) to ensure compliance is sustainable.
• Tax Receivable Liability: Confirm the estimated tax savings and the resulting payment schedule to Cendant, as these are estimates subject to change upon final tax filings.
• Adjusted Net Income: Scrutinize the reconciliation of GAAP net loss to "Adjusted Net Income" to assess the recurring nature of the reported profitability.
• Related Party Settlements: Confirm that all intercompany balances with Cendant have been fully settled and that no contingent liabilities remain from the divestiture.