WEX Inc. (Wright Express Corporation) 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for the period ended September 30, 2009. Wright Express Corporation (WEX) is a leading provider of payment processing and information management services to the vehicle fleet industry. The company operates through two primary segments: Fleet (payment and transaction processing for vehicle fleets) and MasterCard (corporate purchasing and transaction monitoring solutions).
Key Financial Metrics (Nine Months Ended Sept 30, 2009)
| Metric | 2009 (9 Months) | 2008 (9 Months) |
|---|---|---|
| Total Revenues | $234.4 million | $312.7 million |
| Net Income | $127.5 million | $62.5 million |
| Diluted EPS | $3.25 | $1.57 |
| Operating Cash Flow | ($66.2 million) used | $4.4 million provided |
| Cash & Equivalents (End) | $15.9 million | $58.4 million |
| Total Debt (Deposits + Borrowed Funds + Revolver) | $627.0 million | $710.7 million |
Note: Operating cash flow is negative primarily due to a significant prepayment of a tax receivable agreement and changes in working capital related to deposits.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 25% year-over-year for the quarter and 25% for the nine-month period. This was driven by a 36% drop in average fuel prices (from $4.02 to $2.58 per gallon), which reduced payment processing revenue despite a 3% increase in the number of vehicles serviced.
- Profitability Surge: Net income increased 104% for the nine months ended September 30, 2009. This was primarily due to a one-time $136.5 million gain from the settlement of a portion of the Tax Receivable Agreement with Realogy Corporation.
- Expense Reduction: Operating interest expense decreased significantly (62% for the nine months) due to lower interest rates and a reduction in the average balance of operating debt (deposits and borrowed federal funds).
- Credit Losses: Provision for credit losses decreased 64% for the nine-month period, attributed to lower fuel expenditures and improvements in receivables aging.
- MasterCard Segment Growth: The MasterCard segment saw revenue growth of 31% for the nine months, driven by a 26% increase in purchase volume.
Guidance, Outlook, and Risks
- Outlook: Management expects to continue paying down debt and repurchasing shares. The company has approximately $67 million remaining under its $150 million share repurchase authorization.
- Liquidity: Cash balances dropped significantly ($167 million) during the period due to the tax agreement prepayment and the maturing of certificates of deposit. Management believes it can adequately fund cash needs for the next 12 months.
- Risks: Key risks include fuel price volatility, failure to maintain key agreements, regulatory changes impacting the industrial loan bank subsidiary, and general economic factors affecting fleet commercial activity.
- Derivatives: The company utilizes fuel price derivatives to manage cash flow volatility. For the nine months ended September 30, 2009, these resulted in a net loss of $13.8 million, compared to a loss of $31.9 million in the prior year.
Investor Verification Checklist
- Tax Receivable Agreement Gain: Verify the sustainability of the $136.5 million gain from the Realogy settlement, as this is a non-recurring item significantly inflating net income.
- Cash Position: Review the sharp decline in cash and cash equivalents (from $183M to $16M) and the company's ability to manage liquidity without further dilution or debt issuance.
- Fuel Price Sensitivity: Assess the impact of the new pricing arrangements (fixed fee components) on revenue stability as fuel prices fluctuate.
- Operating Cash Flow: Analyze the negative operating cash flow of $66.2 million to understand the timing of the tax prepayment versus core business cash generation.
- Debt Covenants: Confirm continued compliance with financial covenants on the revolving credit facility, especially given the reduction in cash reserves.