WEX

WEX Inc. (Wright Express Corporation) 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Wright Express Corporation (WEX Inc.) for the period ended March 31, 2010. WEX is a leading provider of payment processing and information management services to the vehicle fleet industry and corporate purchasing sectors. The company operates through two reportable segments: Fleet (payment and transaction processing for vehicle fleets) and MasterCard (corporate purchasing and transaction monitoring solutions).

Key Financial Metrics

Note: Debt figures represent the sum of the Revolving line-of-credit facility ($112.4M) and Borrowed federal funds ($76.6M) as of March 31, 2010.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 22% year-over-year, driven primarily by a 38% increase in average fuel prices ($2.76/gallon vs. $2.00/gallon) which boosted payment processing revenue despite a 5% decline in the average number of vehicles serviced.
• Profitability: Net income rose 69% to $18.6 million. Operating income increased 67% to $32.2 million.
• Segment Performance:
  • Fleet Segment: Revenues grew 19% to $73.4 million. Operating income surged 50% to $28.1 million.
  • MasterCard Segment: Revenues grew 57% to $10.4 million, driven by a 31% increase in purchase volume. Operating income increased nearly 600% to $4.1 million.
• Expense Trends:
  • Credit Losses: Provision for credit losses increased 39% to $5.9 million (21 basis points of fuel expenditures) due to higher receivable balances and lower recoveries.
  • Interest Expense: Operating interest expense decreased 65% to $1.4 million due to significantly lower interest rates (1.2% average vs. 3.9% in 2009).
• Derivatives: The company reported a net loss of $1.8 million on fuel price derivatives, compared to a gain of $0.7 million in the prior year, as fuel prices moved closer to the floor of the company's hedging collar.

Outlook, Risks, and Management Commentary

• Liquidity: Cash and cash equivalents decreased by $27 million during the quarter. Management utilized approximately $5.9 million in "management operating cash" and paid down $16 million on its revolving credit facility. The company maintains approximately $336 million in available credit under its revolving facility.
• Capital Structure: On March 6, 2010, the company redeemed all outstanding Series A preferred stock, converting it to common stock.
• Future Derivatives: On April 15, 2010 (subsequent event), the company entered into new fuel price derivative contracts (costless collar) to manage volatility, locking in a floor price of ~$3.03 and a ceiling of ~$3.09 per gallon.
• Risks: Key risks include fuel price volatility, failure to maintain key agreements, regulatory changes impacting the company's industrial loan bank, credit losses, and general economic conditions affecting fleet activity.

Investor Verification Checklist

• Credit Loss Trajectory: Verify the sustainability of the 21 basis points credit loss ratio given the increase in receivable balances and the economic environment.
• Derivative Exposure: Assess the impact of the new April 2010 derivative contracts on future earnings volatility, specifically the $3.03-$3.09 price collar.
• Working Capital: Monitor the trend in accounts receivable ($949M) versus deposits ($406M) to ensure liquidity remains sufficient to fund operations without excessive reliance on the revolving credit facility.
• MasterCard Growth: Confirm if the 57% revenue growth in the MasterCard segment is sustainable or driven by one-time volume spikes in specific markets (e.g., online travel).