Wright Express Corporation (WEX) — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. The company provided fleet payment and transaction processing and corporate purchasing card services through its Fleet and MasterCard segments. Unless noted, financial amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $100.2 million | $85.8 million | $275.5 million | $232.2 million |
| Operating income | $36.2 million | $36.3 million | $107.7 million | $88.0 million |
| Net income | $20.6 million | $23.4 million | $69.2 million | $127.5 million |
| Diluted EPS | $0.53 | $0.60 | $1.77 | $3.25 |
| Adjusted net income (company-defined) | $28.1 million | $24.9 million | $78.5 million | $63.6 million |
- Q3 revenue rose about 17%, while operating income was approximately flat and net income declined about 12%. Q3 operating margin was about 36%, versus 42% a year earlier.
- Nine-month revenue increased about 19% and operating income about 22%. GAAP net income fell about 46%, principally because 2009 included a $136.5 million gain on extinguishment of part of the tax receivable agreement. Adjusted net income increased about 24% for the period.
- Q3 Fleet revenue rose 12% to $83.5 million; Fleet operating income fell 9% to $28.8 million as operating expenses increased 26%. MasterCard revenue increased 53% to $16.7 million and segment net income rose 46% to $4.3 million. MasterCard purchase volume grew 50% to $1.31 billion.
- Management attributed Fleet payment-processing revenue growth to higher fuel prices and transaction volume. Average fuel price was $2.78 per gallon in Q3, up 8%; average expenditure per payment transaction increased 9% to $57.45. Average vehicles serviced grew 4% to approximately 4.8 million, and fleet transactions processed rose 3% to 69.0 million.
Cash flow, balance sheet and liquidity
- For the first nine months, GAAP operating cash flow was $4.8 million, compared with cash used of $66.2 million in 2009. The company’s non-GAAP “management operating cash” was $69.8 million, versus cash used of $144.0 million. Receivables growth was a major operating cash use; management’s measure also includes changes in customer deposits and borrowed federal funds.
- Investing cash use was $359.0 million, including $340.0 million for the Australia acquisition and $20.4 million in property and equipment purchases. Financing provided $340.8 million, including $292.5 million of net additional credit-facility and term-loan borrowing.
- At September 30, cash and equivalents were $26.0 million; accounts receivable were $1.147 billion; customer deposits were $495.1 million; and borrowed federal funds were $65.0 million. Total assets were $2.078 billion and stockholders’ equity was $522.4 million.
- Revolving-facility and term-loan debt totaled $420.5 million: approximately $346 million drawn on the revolver, with $102 million available, and a $75 million term loan due August 2011. The revolver rate was LIBOR plus 45 basis points; management expected the spread to rise to 70 basis points in Q4. A 364-day $75 million term facility carries LIBOR plus 250 basis points.
- The company had approximately $510 million of brokered deposits outstanding and $130 million of federal-funds lines, of which $65 million was drawn. It had $200 million of interest-rate swaps effectively converting variable-rate borrowing to fixed rates. Management said it expected to meet its needs for at least the next 12 months and remain in compliance with material covenants; the stated maximum consolidated leverage ratio was generally 3.00-to-1, with a possible post-acquisition step-up to 3.50-to-1.
Material changes, outlook and risks
- On September 14, WEX acquired all outstanding shares of RD Card Holdings Australia and an intercompany note, extending its international presence. Total consideration was AUD 365 million, approximately $340 million at closing. Preliminary purchase accounting included $202.7 million of goodwill and $93.2 million of acquired intangible assets; final purchase-price allocations were not complete. Only two weeks of the acquired business were included in reported 2010 results. Performance metrics cited by management generally excluded the acquired Australian business.
- The company recorded a roughly $6.8 million foreign-currency gain after buying Australian dollars ahead of the acquisition. This contributed to the reported Q3 foreign-currency gain of $7.0 million.
- Fuel derivatives produced a $3.8 million Q3 loss, versus a $3.7 million gain in Q3 2009; the nine-month result was a $3.8 million gain versus a $13.8 million loss in 2009. These instruments do not qualify for hedge accounting, so fair-value changes affect earnings. Management expected to continue using fuel derivatives, while noting that fixed-fee pricing had reduced some exposure. It did not plan to hedge Australia’s comparatively limited fuel-price exposure.
- Q3 effective tax rate was 45.5%, versus 39.6% a year earlier. Management cited earnings mix across tax jurisdictions and nondeductible Australia-acquisition costs. No quantified earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Risks highlighted include fuel-price and foreign-exchange volatility, key agreement renewals, competition and technology development, regulatory or banking changes, litigation, economic conditions, acquisition integration, credit losses, interest rates and potential costs of unwinding derivatives. Management said ordinary-course litigation was not expected to have a material adverse effect; the filing reported no material legal proceedings.
- The 2009 comparative income statements were corrected for an immaterial classification error involving electronic-payment discounts. Revenue and operating interest expense were both reduced by equal amounts; operating income and net income were unaffected.
Important facts for investors to verify
- Final purchase-price allocation, integration costs and subsequent operating contribution of Wright Express Australia.
- Receivables, deposit funding and credit-loss trends, including the effect on cash generation and liquidity.
- Debt availability, term-loan repayment, borrowing costs and compliance with leverage covenants.
- Fuel-derivative positions, fair-value movements and the sensitivity of reported earnings to fuel prices and foreign exchange.
- How reported results compare with company-defined adjusted net income, including the adjustments and tax assumptions used.