Wright Express Corporation (WEX) - Q2 2009 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2009. Wright Express Corporation (WEX) 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 filing includes unaudited condensed consolidated financial statements.
Key Financial Metrics
Revenue and Profit (Six Months Ended June 30, 2009):
- Total Revenues: $147.8 million (down 28% from $204.2 million in 2008).
- Net Income: $104.2 million (compared to a net loss of $9.9 million in 2008).
- Earnings Per Share (Diluted): $2.65 (compared to a loss of $0.25 in 2008).
- Operating Income: $51.7 million (down from $88.0 million in 2008).
Cash Flow and Liquidity:
- Cash and Cash Equivalents: $24.3 million (down from $183.1 million at year-end 2008).
- Net Cash Used in Operating Activities: $83.9 million.
- Management Operating Cash: Used $169.7 million, driven by the maturity of over $200 million in certificates of deposit.
- Debt: Revolving line-of-credit facility balance was $191.8 million; borrowed federal funds were $48.2 million.
Material Changes vs. Prior Period
The financial results were significantly impacted by a non-recurring event and macroeconomic factors:
- Tax Receivable Agreement Gain: The company recorded a $136.5 million gain from settling a portion of its tax receivable agreement with Realogy Corporation. This one-time gain was the primary driver of the net income turnaround from a loss in the prior year.
- Fuel Price Impact: Average fuel prices decreased 41% year-over-year to $2.33 per gallon. This caused a $35.0 million decrease in Fleet payment processing revenue for the quarter, as revenue is partially tied to fuel volume and price.
- Transaction Volume: Total fleet transactions declined 9% to 66.1 million, while the average number of vehicles serviced increased 5% to 4.7 million.
- MasterCard Segment Growth: Despite the Fleet decline, the MasterCard segment saw purchase volume grow 24% to $771.5 million, driving a 32% revenue increase for the segment.
- Derivatives: Net realized and unrealized losses on fuel price derivatives were $17.5 million for the six months, a significant improvement from $97.9 million in losses during the same period in 2008.
Guidance, Outlook, and Risks
Management Commentary:
- Management expects to continue paying down debt and repurchasing shares in the remainder of 2009.
- The company anticipates receiving cash gains from its fuel hedging program in 2009 based on current fuel prices.
- Operating interest expense decreased due to lower interest rates and a reduction in average operating debt balances.
Risks and Contingencies:
- Fuel Price Volatility: While hedging mitigates some risk, revenue remains sensitive to fuel price fluctuations.
- Liquidity: Cash balances dropped significantly due to the maturity of certificates of deposit used to fund accounts receivable. The company relies on its revolving credit facility and federal funds lines to manage short-term liquidity.
- Regulatory and Economic: Risks include changes in banking regulations affecting the industrial loan bank subsidiary and general economic conditions impacting fleet commercial activity.
Investor Verification Checklist
- Non-Recurring Gain: Verify the sustainability of earnings by excluding the $136.5 million one-time gain from the tax receivable agreement settlement.
- Adjusted Net Income: Review the "Adjusted Net Income" metric ($38.7 million for six months) to understand core operational performance without derivative and tax agreement impacts.
- Liquidity Position: Monitor the $24.3 million cash balance against the $191.8 million credit facility draw and upcoming certificate of deposit maturities.
- Fleet Revenue Correlation: Assess the correlation between future fuel price trends and payment processing revenue, noting the shift toward fixed-fee components in merchant agreements.
- Derivative Exposure: Review the fair value of fuel price derivatives ($20.2 million asset) and the potential for future mark-to-market volatility.