Wright Express Corporation (now WEX Inc.) — Q1 2012 10-Q
Reporting period: Three months ended March 31, 2012. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted. Comparative figures are for Q1 2011.
Business context
The company provides fleet and other business payment-processing and information-management services through Fleet Payment Solutions and Other Payment Solutions. It reported more than 350,000 customers and operates in North America, Asia Pacific and Europe.
Financial and operating highlights
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Total revenue | $140.1 million | $120.1 million; up 17% |
| Operating income | $58.0 million | $46.2 million; up 26% |
| Operating margin | 41.4% | 38.5% |
| Net income | $23.2 million | $12.1 million |
| Diluted EPS | $0.59 | $0.31 |
| Adjusted net income (company-defined, non-GAAP) | $35.6 million | $29.2 million |
| GAAP operating cash flow | $(38.2) million | $(44.5) million |
| Management operating cash (non-GAAP) | $15.2 million inflow | $24.0 million inflow |
- Fleet Payment Solutions revenue was $109.1 million, up 11%; segment net income was $17.8 million versus $7.9 million. Other Payment Solutions revenue was $31.0 million, up 44%; segment net income was $5.5 million versus $4.2 million.
- Fleet activity grew: average vehicles serviced increased 13% to 6.7 million, and total fuel transactions rose 8% to 79.3 million. Corporate charge-card purchase volume grew 52% to $2.2 billion.
- Higher fuel prices contributed to fleet payment revenue growth: average domestic fuel price rose 10% to $3.72 per gallon. Average expenditure per payment-processing transaction increased 12% to $74.37.
- Total assets were $2.514 billion at March 31, versus $2.278 billion at December 31, 2011. Accounts receivable increased to $1.555 billion from $1.324 billion, primarily in the context of higher fuel prices and transaction volume. Cash was $30.4 million.
- Revolving credit-facility borrowings and term-loan debt totaled $288.4 million, down from $295.3 million at year-end; this comprised approximately $98.4 million on the revolver and $190 million on the term loan. Borrowed federal funds were $47.2 million. The company reported $599.2 million of unused revolver capacity and approximately $93 million available under federal-funds lines.
Changes, outlook, risks and unusual items
- Net income benefited from lower derivative losses: reported net realized and unrealized fuel-derivative losses were $18.8 million versus $25.2 million in Q1 2011. The company recorded a $13.6 million derivative liability at quarter-end; realized settlement payments were $5.3 million. These instruments do not qualify for hedge accounting, so fair-value changes affect reported earnings.
- Management said derivative losses are generally offset by higher payment-processing revenue when fuel prices rise, and expected to continue purchasing derivatives. It did not provide formal earnings or revenue guidance. Management stated it believed cash needs could be funded for at least the next 12 months.
- GAAP operating cash flow remained negative, largely reflecting the substantial working-capital needs of receivables; the company’s positive “management operating cash” measure adjusts for changes in deposits and borrowed federal funds and is non-GAAP.
- Other Payment Solutions operating expenses rose 48%, including higher service fees associated with increased volume and cross-border charges. A single customer bankruptcy contributed approximately $0.9 million to the segment’s $1.2 million credit-loss provision.
- The rapid! PayCard acquisition’s contingent consideration was revised to $8.486 million; the $0.839 million estimate adjustment reduced other operating expense. The amount was paid on April 30, 2012. The company also revised the acquired trade-name valuation, increasing recorded goodwill by $0.6 million.
- Management warned proposed Australian tax-consolidation law changes could affect the deductibility of approximately $70 million of amortization and could result in a discrete tax expense charge in 2012. The reported effective tax rate was 36.9%.
- The last $150 million interest-rate swap expired in March 2012; no swaps were outstanding at quarter-end, and management said it was evaluating whether to enter new swaps. The filing cited risks including economic and fuel-price volatility, credit losses, technology or security breaches, international expansion and integration, key-agreement renewals, regulation, foreign exchange, interest rates and litigation.
- Management said ordinary-course litigation was not expected to have a material adverse effect; the filing reported no material legal proceedings. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- How much of reported earnings growth reflects operating performance versus noncash fuel-derivative fair-value movements; compare GAAP net income with the company’s adjusted net income measure.
- Whether receivables growth and funding through deposits, federal funds and credit facilities remain manageable, and how the non-GAAP management operating cash measure reconciles to GAAP cash flow.
- The future cash and earnings impact of fuel-derivative settlements, including the quarter-end liability and the company’s stated plan to continue the program.
- The outcome and timing of proposed Australian tax-law changes and any resulting tax charge.
- Whether customer-credit performance, including the Other Payment Solutions bankruptcy exposure, and the integration and growth of acquired businesses develop as expected.