Wright Express Corporation (WEX) - 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended June 30, 2007. Wright Express Corporation 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 solutions). The company utilizes a wholly owned Utah-chartered industrial bank subsidiary to facilitate transactions.
Key Financial Metrics (Six Months Ended June 30, 2007)
| Metric | 2007 (YTD) | 2006 (YTD) |
|---|---|---|
| Total Revenues | $157.8 million | $140.8 million |
| Net Income | $26.7 million | $21.2 million |
| Diluted EPS | $0.65 | $0.52 |
| Operating Cash Flow | ($153.6 million) used | ($62.6 million) used |
| Cash and Equivalents | $32.9 million | $35.1 million (Dec 31, 2006) |
| Total Debt (Credit Facility) | $164.6 million | $149.8 million (Dec 31, 2006) |
| Deposits | $599.8 million | $394.7 million (Dec 31, 2006) |
Note: Operating cash flow was negative primarily due to a $341.4 million increase in accounts receivable to fund the ExxonMobil portfolio conversion and higher transaction volumes.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 12% year-over-year. Fleet segment revenues grew 11% to $147.3 million, driven by a 16% increase in payment processing transactions. MasterCard segment revenues grew 25% to $10.5 million, driven by a 41% increase in purchase volume.
- Profitability: Net income increased 26% to $26.7 million. This was significantly aided by a reduction in net realized and unrealized losses on fuel price derivatives, which decreased from $28.0 million in 2006 to $20.3 million in 2007.
- Expense Increases: Operating interest expense rose to $15.9 million (from $10.6 million) due to higher average debt balances and interest rates. Credit loss provisions increased to $9.3 million (from $6.2 million) linked to higher receivables and charge-offs.
- Debt Restructuring: On May 22, 2007, the company entered a new $350 million revolving credit facility, refinancing its previous term loan and revolving line. This resulted in a $1.6 million loss on extinguishment of debt.
Outlook, Risks, and Unusual Items
- Derivative Strategy: The company continues to use fuel price derivatives (options) to manage earnings exposure. For the second quarter, the collar range was a floor of $2.29 and a ceiling of $2.36 per gallon. Management plans to lock in approximately 90% of earnings exposure on a rolling basis.
- Acquisition: Subsequent to the reporting period (August 6, 2007), the company acquired TelaPoint, Inc. for approximately $40 million in cash to enhance supply chain software solutions.
- Share Repurchases: The company repurchased 698,700 shares for $20.6 million during the first six months of 2007 under a $75 million program. Approximately $54.4 million remains authorized.
- Risks: Key risks include volatility in fuel prices, credit risk associated with fleet customers, and regulatory requirements regarding the ownership of the industrial bank subsidiary. The company notes that a decrease in fuel demand or failure to maintain key strategic relationships could materially impact results.
Investor Verification Checklist
- Derivative Impact: Verify the sensitivity of net income to fuel price fluctuations, as unrealized losses on derivatives significantly impact reported earnings.
- Credit Quality: Monitor the trend in the provision for credit losses relative to the growing accounts receivable balance ($1.13 billion), particularly regarding the ExxonMobil portfolio.
- Liquidity Management: Assess the company's ability to manage the significant cash outflow from operations ($153.6 million used) against its $32.9 million cash balance and $350 million credit facility.
- Debt Covenants: Confirm continued compliance with the financial covenants of the new May 2007 credit agreement.