Wright Express Corporation (WEX) — Q2 2010 Form 10-Q
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2010. Wright Express provides payment processing and information services, primarily to vehicle fleets, and operates Fleet and MasterCard segments. Figures below are in U.S. dollars; financial statement amounts are shown in millions unless otherwise noted.
Financial performance and liquidity
- Q2 revenue: $91.4 million, up 17% from $77.9 million a year earlier. Service revenue was $90.7 million.
- Q2 operating income: $39.3 million, up 22%; operating margin was approximately 43.0%, versus 41.6% in Q2 2009.
- Q2 net income and EPS: Net income was $30.0 million and diluted EPS was $0.77, compared with $93.2 million and $2.36 in Q2 2009. The prior-year quarter included a $136.5 million pre-tax gain from settling part of the tax receivable agreement. Adjusted net income, the company’s non-GAAP measure, was $26.8 million versus $22.4 million.
- First-half results: Revenue was $175.3 million versus $146.4 million; operating income was $71.5 million versus $51.7 million. Net income was $48.6 million versus $104.2 million, affected by the same prior-year gain. Adjusted net income was $50.5 million versus $38.7 million.
- Cash flow: First-half GAAP operating cash flow was negative $16.9 million, versus negative $83.9 million. Management’s non-GAAP operating cash measure was positive $32.5 million, compared with negative $169.7 million. Investing cash outflow was $12.3 million; financing cash inflow was $3.3 million.
- Balance sheet and funding: June 30 cash was $13.2 million; total assets were $1.64 billion. Revolver borrowings were $91.2 million, borrowed federal funds $24.8 million, and deposits $519.6 million. The company reported $357 million available under its revolving facility and a $135 million federal-funds line, of which about $25 million was drawn.
- Credit and capital: Accounts receivable, net of reserves, was $1.03 billion, up from $844.2 million at year-end 2009. The credit-loss reserve was $7.7 million. The company repurchased about 334,000 shares for $10.5 million during Q2.
Material changes versus the prior comparable period
- Fleet revenue rose 15% in Q2 to $78.4 million. Payment-processing revenue increased 23%, primarily reflecting a 23% increase in average fuel price per gallon to $2.87; payment-processing transactions rose 2% while transaction-processing transactions fell 8%.
- Average vehicles serviced declined 2% year over year to approximately 4.6 million, but increased by nearly 100,000 sequentially from Q1 2010. Management described this as the first sequential increase since Q4 2008.
- MasterCard revenue grew 37% to $13.1 million, and purchase volume increased 34% to $1.04 billion. The company attributed growth to new single-use-account business and greater corporate-card penetration.
- Q2 fuel-derivative results shifted to a $9.4 million net realized and unrealized gain from an $18.1 million loss in Q2 2009. These non-hedge-accounted changes can materially affect reported earnings.
- Operating interest expense fell to $1.4 million from $2.6 million, primarily due to lower rates; average operating debt was higher. Fleet credit-loss expense increased to $2.3 million from $1.9 million.
- The company reported an immaterial correction to prior-year classification of customer discounts between payment-processing revenue and operating interest expense; operating income and net income were unchanged.
Outlook, commentary, risks and unusual items
- Management said it believed cash needs could be adequately funded over the next 12 months and expected continued access to short-term funding. It reported compliance with material credit-agreement covenants.
- The company expects to continue purchasing fuel-price derivatives, which do not qualify for hedge accounting and can create earnings volatility. Management said fixed-fee pricing arrangements had reduced some fuel-price exposure.
- Management expected deposit funding rates to stabilize at relatively low levels as higher-rate certificates of deposit matured. No specific earnings or revenue guidance was provided in the supplied filing text.
- Risks highlighted include fuel-price volatility, customer and partner agreement renewals, competition and technology investment, banking regulation, economic conditions and fleet activity, credit losses, international expansion, litigation, and interest-rate and derivative exposure.
- Management stated ordinary-course litigation was not expected to have a material adverse effect; the filing reported no material legal proceedings as of its filing date. Disclosure controls were concluded effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Assess underlying earnings using the reconciliation of GAAP results to adjusted net income, especially the prior-year tax receivable agreement gain and current-period derivative effects.
- Track receivables, credit-loss reserves and charge-offs alongside fleet activity; receivables increased materially from year-end.
- Review funding needs and liquidity in light of low cash, deposit and federal-funds financing, revolver availability, and planned share repurchases.
- Monitor fuel-price assumptions, derivative fair-value estimates and the extent to which fixed-fee pricing reduces exposure.
- Evaluate whether MasterCard growth and the sequential fleet-vehicle improvement persist, given the year-over-year decline in vehicles serviced.