Business Context and Reporting Period
Company: Wright Express Corporation (WEX Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: Wright Express is a leading provider of payment processing and information management services to the U.S. commercial and government vehicle fleet industry. The company operates a proprietary "closed-loop" network for fuel and maintenance transactions and issues a MasterCard-branded corporate card. Services are delivered through two segments: Fleet and MasterCard.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Total Revenues | $336.1 million | $291.2 million |
| Net Income | $51.6 million | $74.6 million |
| Basic EPS | $1.29 | $1.85 |
| Total Assets | $1,785.1 million | $1,551.0 million |
| Total Liabilities | $1,580.8 million | $1,367.9 million |
| Stockholders' Equity | $204.3 million | $183.1 million |
| Operating Cash Flow (GAAP) | $(92.1) million | $60.4 million |
| Management Operating Cash (Non-GAAP) | $53.2 million | $56.5 million |
| Debt Outstanding (Revolving Credit) | $199.4 million | $20.0 million |
Note: GAAP operating cash flow was negative due to significant increases in accounts receivable driven by higher fuel prices and transaction volumes. Management Operating Cash adjusts for these working capital fluctuations.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 15% to $336.1 million, driven by a 19% increase in payment processing revenue. This was primarily due to a 16% increase in transaction volume and an 8% increase in the average price per gallon of fuel ($2.84 in 2007 vs. $2.63 in 2006).
- Net Income Decline: Net income decreased 31% to $51.6 million. The decline was primarily caused by a $53.6 million net loss on fuel price derivative instruments (compared to a $4.2 million loss in 2006) and a $81 million charge to income taxes due to a change in Maine state tax law.
- Acquisitions: Acquired TelaPoint, Inc. for approximately $40 million in cash to expand supply chain software offerings for petroleum distributors.
- Debt Refinancing: Entered a new $350 million revolving credit facility in May 2007, refinancing the previous term loan and revolver. Outstanding debt on the new facility was $199.4 million at year-end.
- Share Repurchases: Repurchased 200,644 shares of common stock in Q4 2007 under a $75 million program authorized in February 2007.
Guidance, Outlook, and Risks
Outlook and Strategy:
- Management anticipates continued growth in the small fleet marketplace, estimating over 50% of fleets still use cash for fuel.
- Plans to diversify revenue streams through the TelaPoint acquisition and expansion into the contractor market.
- Expects to leverage the MasterCard program for midsize businesses and continue growth in single-use accounts.
- Capital expenditures for 2008 are expected to be between $24 million and $27 million.
Key Risks and Contingencies:
- Fuel Price Volatility: Approximately 70% of revenues are tied to fuel purchase prices. A 10-cent decline in average fuel prices could reduce revenue by approximately $9.0 million. The company uses derivative instruments to hedge this risk, but these instruments caused significant unrealized losses in 2007.
- Derivative Instrument Risk: Unrealized gains and losses on fuel price derivatives are recorded in earnings, creating volatility in net income. As of December 31, 2007, the net fair value of these derivatives was a liability of approximately $41.6 million.
- Credit Risk: Credit losses increased to $20.6 million (16.3 basis points of fuel expenditures) due to higher fuel prices and the conversion of the ExxonMobil portfolio to payment processing.
- Tax Receivable Agreement: The company is obligated to pay its former parent, Avis Budget Group, 85% of tax savings realized from the tax basis increase upon the company's IPO. A change in Maine tax law reduced the expected benefit, resulting in a $78.9 million non-operating gain in 2007.
Investor Verification Checklist
- Derivative Exposure: Verify the current fair value of fuel price derivatives and the extent of unrealized losses impacting earnings versus cash flow.
- Fuel Price Sensitivity: Assess the impact of current fuel price trends on revenue, given the 70% correlation.
- Credit Loss Trends: Monitor the credit loss ratio (basis points of fuel expenditures) to ensure it remains within the historical normalized range of 11-22 basis points.
- Debt Covenants: Confirm compliance with the new credit facility covenants, specifically the maximum consolidated leverage ratio of 3.00 to 1.00.
- Acquisition Integration: Review the integration progress and revenue contribution of the TelaPoint acquisition.