Business Context and Reporting Period
Company: Wright Express Corporation (WEX Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: A leading provider of payment processing and information management services to the U.S. commercial and government vehicle fleet industry. The company operates two segments: Fleet (93% of revenue) and MasterCard. It utilizes a proprietary "closed loop" network covering over 90% of U.S. retail fuel locations.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenues | $393.6 million | $336.1 million |
| Net Income | $127.6 million | $51.6 million |
| Basic EPS | $3.28 | $1.29 |
| Operating Income | $161.4 million | $152.1 million |
| Provision for Credit Losses | $45.0 million | $20.6 million |
| Net Derivative Gains/Losses | $55.2 million (Gain) | $(53.6) million (Loss) |
| Total Assets | $1,611.9 million | $1,785.1 million |
| Cash and Cash Equivalents | $183.1 million | $43.0 million |
| Long-Term Debt (Revolving Credit) | $170.6 million | $199.4 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 17% to $393.6 million, driven primarily by a 22% increase in average fuel prices and a 3% increase in payment processing transactions.
- Profitability Surge: Net income more than doubled to $127.6 million. This was significantly aided by a $55.2 million net gain on fuel price derivatives, compared to a $53.6 million loss in 2007.
- Acquisitions: The company acquired Pacific Pride Services (Feb 2008) and Financial Automation Limited (Aug 2008) to expand its franchise network and international software capabilities.
- Credit Losses: The provision for credit losses more than doubled to $45.0 million (up 117%) due to the economic recession, increased bankruptcies, and higher fuel prices increasing receivable balances.
- Cash Position: Cash and cash equivalents grew to $183.1 million from $43.0 million, largely due to a $670 million drop in accounts receivable balances in Q4 2008 as fuel prices collapsed.
Guidance, Outlook, and Risks
- 2009 Outlook: Management anticipates challenging economic conditions to continue. They forecast a 10% to 15% decline in transaction volume within the existing customer base.
- Credit Loss Forecast: Credit loss in the Fleet segment is forecast to be between 45 to 55 basis points of payment processing transaction expenditures for 2009.
- Fuel Price Derivatives: The company holds derivative instruments that are currently in a significant gain position due to the drop in oil prices. They expect to receive significant cash gains from these instruments in 2009.
- Key Risks:
- Fuel Price Volatility: Approximately 69% of revenue is tied to fuel purchase volumes; a 10-cent decline in fuel prices could reduce revenue by ~$9 million.
- Economic Downturn: Reduced fleet traffic and corporate purchasing could lower transaction volumes and increase credit defaults.
- Counterparty Risk: Exposure to financial institutions acting as counterparties for derivatives and credit facilities.
Investor Verification Checklist
- Derivative Impact: Verify the sustainability of the $55.2 million derivative gain, as it is a non-operating item driven by market volatility rather than core business performance.
- Credit Quality: Monitor the trend of the provision for credit losses, which doubled in 2008, as a leading indicator of economic stress on the customer base.
- Volume vs. Price: Distinguish between revenue growth driven by higher fuel prices (2008) versus actual transaction volume growth, as volume is expected to decline in 2009.
- Liquidity: Confirm the company's ability to manage the maturity of $507.4 million in certificates of deposit due within one year against its current cash position.
- Acquisition Integration: Assess the integration progress and revenue contribution of the Pacific Pride and Financial Automation Limited acquisitions.