WEX

Wright Express Corporation (WEX) - 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for the period ended June 30, 2006. Wright Express Corporation is a leading provider of payment processing and information management services to the vehicle fleet industry. The company operates through a wholly-owned bank subsidiary, Wright Express Financial Services Corporation (FSC), utilizing a closed network of oil companies and fuel retailers. The report covers the three and six months ended June 30, 2006, compared to the same periods in 2005.

Key Financial Metrics

Revenue and Profit (Six Months Ended June 30, 2006):

• Total Revenues: $140.8 million (up from $109.5 million in 2005).
• Operating Income: $67.4 million (up from $41.4 million in 2005).
• Net Income: $21.2 million (compared to a net loss of $3.5 million in 2005).
• Diluted Earnings Per Share (EPS): $0.52 (compared to a loss of $0.09 in 2005).

Cash Flow and Liquidity:

• Cash and Cash Equivalents: $16.6 million as of June 30, 2006 (down from $45.0 million at year-end 2005).
• Net Cash Used in Operating Activities: $62.6 million (primarily due to a $244.9 million increase in accounts receivable).
• Net Cash Provided by Investing Activities: $8.5 million.
• Net Cash Provided by Financing Activities: $25.7 million.

Balance Sheet Highlights:

• Total Assets: $1.61 billion.
• Total Liabilities: $1.51 billion.
• Stockholders' Equity: $98.2 million.
• Accounts Receivable: $890.9 million (net of $5.2 million reserve).
• Debt Obligations: Includes $414.3 million in deposits, $151.4 million in term loans, and $48.0 million on a revolving line of credit.

Material Changes vs. Prior Period

Revenue Growth Drivers: Total revenue increased 28.6% year-over-year for the six-month period. This growth was primarily driven by:

• Fuel Price Increases: Average fuel price per gallon rose 26% to $2.64, increasing the average expenditure per transaction by 28%.
• Transaction Volume: Payment processing transactions increased 14% to 89.5 million.
• MasterCard Segment: Purchase volume grew 25% to $602.1 million.

Expense and Margin Changes:

• Operating Expenses: Increased to $73.4 million from $68.2 million, largely due to higher operating interest expense ($10.6 million vs. $5.5 million) driven by higher interest rates and increased debt balances to fund receivables.
• Derivative Losses: The company reported a net realized and unrealized loss on derivative instruments of $28.0 million for the six months ended June 30, 2006, compared to a loss of $41.5 million in the prior year. This volatility significantly impacts net income.
• Credit Losses: Provision for credit losses increased to $6.2 million (from $4.9 million) due to higher receivable balances, though the loss rate as a percentage of expenditures declined slightly.

Outlook, Risks, and Contingencies

Management Commentary and Guidance:

• Management believes current liquidity sources (cash, certificates of deposit, federal funds lines, and a $130 million revolving credit facility) are adequate to fund needs for the next 12 months.
• The company plans to continue hedging approximately 90% of its earnings exposure to fuel price variations on a rolling quarterly basis.
• Capital expenditures for the six months were approximately $6.2 million, consistent with the prior year.

Risks and Contingencies:

• Fuel Price Volatility: Revenues are highly dependent on fuel prices. While derivatives mitigate cash flow volatility, they introduce mark-to-market earnings volatility.
• Interest Rate Risk: Operating interest expense is sensitive to rate changes; average rates on operating debt increased to 4.6% for the six months ended June 30, 2006.
• Credit Risk: A significant increase in bad debt expense could materially affect results if actual loss rates exceed estimates.
• Legal Proceedings: The company settled a claim with Enron Corporation, paying $0.7 million and subsequently selling the resulting claim for $0.3 million. No other material litigation is pending.
• Tax Receivable Agreement: The company has a liability of $414.8 million payable to Cendant Corporation (former parent) for 85% of tax savings realized from the separation.

Investor Verification Checklist

• Derivative Impact: Verify the sensitivity of net income to fuel price fluctuations and the specific terms of the outstanding put/call options.
• Working Capital Cycle: Monitor the growth in accounts receivable ($890.9 million) relative to revenue and the associated funding costs (interest expense).
• Credit Quality: Review the trend in the reserve for credit losses ($5.2 million) and charge-off rates against the backdrop of rising fuel prices.
• Liquidity Covenants: Confirm continued compliance with financial covenants in the $130 million revolving credit facility and federal funds lines.
• Non-GAAP Measures: Reconcile "Adjusted Net Income" ($26.4 million for six months) to GAAP Net Income ($21.2 million) to understand the magnitude of derivative and stock-based compensation adjustments.