Wright Express Corporation (now WEX Inc.) — Q1 2011 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2011, compared with Q1 2010. The company provided fleet and other business payment-processing solutions through Fleet Payment Solutions and Other Payment Solutions. Unless stated otherwise, financial amounts below are in millions of U.S. dollars.
Financial results and key metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $120.1 | $83.8 | +43% |
| Operating income | $46.2 | $32.2 | +43% |
| Operating margin | 38.5% | 38.4% | Approximately flat |
| Income before taxes | $19.0 | $29.7 | -36% |
| Net income | $12.1 | $18.6 | -35% |
| Diluted EPS | $0.31 | $0.48 | -35% |
| GAAP operating cash flow | $(44.5) | $6.3 | Down $50.8 |
| Capital expenditures | $6.4 | $6.7 | — |
| Cash and cash equivalents, quarter-end | $35.9 | $12.4 | Compared with Q1 2010 end |
The reported operating cash outflow reflected working-capital movements, including a $262.0 million increase in accounts receivable, partly offset by a $171.7 million increase in accounts payable and $128.0 million of deposit inflows. Management’s non-GAAP “management operating cash” measure was a $24.0 million inflow, versus a $5.9 million outflow in Q1 2010; it includes changes in deposits and borrowed federal funds and is not a substitute for GAAP cash flow.
At March 31, 2011, total assets were $2.397 billion, total liabilities $1.812 billion, and stockholders’ equity $584.9 million. Revolving credit facility and term-loan borrowings totaled $413.1 million, compared with $407.3 million at December 31, 2010. Deposits were $657.8 million; borrowed federal funds were zero, down from $59.5 million at year-end. Accounts receivable was $1.419 billion.
Material changes versus the prior comparable period
- Fleet Payment Solutions revenue rose 34% to $98.5 million, and operating income increased 41% to $39.6 million. Average vehicles serviced rose 21% to 5.445 million; fleet transactions increased 14% to 70.3 million.
- Other Payment Solutions revenue more than doubled to $21.6 million, while segment net income increased 62% to $4.2 million. Corporate charge-card purchase volume grew 68% to $1.436 billion.
- Higher fuel prices contributed to increased revenue: average domestic fuel price rose 22% to $3.38 per gallon, and average spend per payment transaction increased 25% to $69.83. The Australia acquisition also contributed to year-over-year growth.
- Despite revenue and operating-income growth, net income declined, principally reflecting $25.2 million in net realized and unrealized fuel-derivative losses, versus $1.8 million of losses in Q1 2010. Interest expense on financing also increased to $2.4 million from $0.7 million.
- Adjusted net income, a company-defined non-GAAP segment measure, increased 23% to $29.2 million from $23.7 million. It excludes specified items, including derivative fair-value changes and acquired-intangible amortization.
Outlook, management commentary, risks and unusual items
- Management said it believed cash needs could be adequately funded over the next 12 months. The filing provides no specific revenue, earnings or EPS guidance.
- The revolving credit facility had approximately one year remaining, $335.2 million drawn and $91.8 million available. The $75 million term loan was due in Q3 2011; the company said it was renegotiating its credit facility. Management expected continued compliance with material covenants.
- The company had approximately $140 million available through federal-funds credit lines. It had posted $18 million of letters of credit as collateral for fuel derivatives in an unrealized-loss position.
- Fuel-price options are not designated for hedge accounting, so realized and unrealized changes affect current earnings. The filing attributed the quarter’s large derivative losses to rising fuel prices exceeding contract ceilings; management said higher fuel prices also benefit payment-processing revenue. It expected the derivatives program to continue.
- On March 31, 2011, the company acquired certain assets of rapid! Financial Services for approximately $18.1 million, including a $10 million estimated earn-out. Purchase-price allocations remained preliminary; goodwill recorded was $14.4 million.
- The ReD Australia acquisition’s purchase-price allocation also remained subject to final valuation of acquired intangibles and certain assumed liabilities. Management designated $7.0 million of Australian subsidiary earnings as indefinitely reinvested outside the U.S.
- Management said ordinary-course litigation was not expected to materially adversely affect the company. The filing identifies risks including fuel-price volatility, credit losses, key agreements, regulation, litigation, foreign exchange, economic conditions, international expansion, acquisition integration and interest rates.
Important facts for investors to verify
- How much of revenue growth and fleet expansion is organic versus attributable to the Australia acquisition, higher fuel prices and other acquired or new business?
- How fuel-price derivative losses, future settlements and collateral requirements may affect earnings, cash flows and liquidity, and how these compare with fuel-related revenue benefits.
- Progress and terms of the credit-facility renegotiation, refinancing or repayment of the $75 million term loan due in Q3 2011, and continued covenant compliance.
- Whether credit-loss performance and receivable reserves remain adequate as accounts receivable and financing needs grow.
- Final purchase accounting and earn-out obligations for rapid!, and final valuation adjustments for the ReD acquisition.
- The distinction between GAAP operating cash flow and management’s non-GAAP operating-cash measure when assessing underlying cash generation.