WEX

WEX Inc. (Wright Express Corporation) 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Wright Express Corporation (WEX Inc.) for the period ended June 30, 2008. WEX is a leading provider of payment processing and information management services to the vehicle fleet industry, operating through two segments: Fleet (payment and transaction processing for fleets) and MasterCard (corporate purchasing solutions). The company recently acquired Pacific Pride Services, Inc. in February 2008 to expand its fleet network.

Key Financial Metrics (Six Months Ended June 30, 2008)

Note: Management Operating Cash is a non-GAAP measure defined as cash from operations adjusted for changes in deposits and borrowed federal funds.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 29% year-over-year. The Fleet segment revenue grew 30% to $191.0 million, driven by a 34% increase in average fuel prices ($3.61/gallon vs. $2.70/gallon) and a 5% increase in transaction volume. The MasterCard segment revenue grew 25% to $13.2 million.
• Profitability Decline: Despite strong operating income growth (27%), the company reported a net loss of $9.9 million compared to a net income of $24.7 million in the prior year. This reversal was primarily caused by $97.9 million in net realized and unrealized losses on fuel price derivatives.
• Credit Losses: Provision for credit losses increased significantly to $21.2 million (vs. $9.3 million in 2007), rising to 25.2 basis points of fuel expenditures due to higher charge-offs and reserve rates.
• Acquisitions: The acquisition of Pacific Pride contributed to transaction processing volume growth and added $19.1 million in goodwill.

Guidance, Outlook, and Risks

• Fuel Price Derivatives: The company uses derivatives to hedge fuel price volatility. Because these do not qualify for hedge accounting, fair value changes flow directly to earnings. With average fuel prices ($3.61) significantly above the derivative collar ceiling ($2.62), the company recorded substantial unrealized losses. Management intends to reduce the hedged percentage of forecasted earnings from 90% to approximately 80%.
• Liquidity and Debt: On May 29, 2008, the company increased its revolving credit facility from $350 million to $450 million. Outstanding borrowings on this facility were $218.9 million as of June 30, 2008. Management believes current resources are sufficient to fund needs for the next 12 months.
• Share Repurchases: No shares were repurchased in Q2 2008. However, in July 2008, the Board approved an additional $75 million authorization, extending the program to July 2010, with approximately $83 million remaining available.
• Risks: Key risks include fuel price volatility, the impact of derivative mark-to-market accounting on earnings, credit exposure in a declining economy, and the ability to maintain key agreements.

Investor Verification Checklist

• Derivative Exposure: Verify the specific terms and remaining duration of the fuel price derivative contracts causing the $97.9 million loss and assess the impact of future fuel price movements on earnings.
• Credit Quality: Review the trend in credit loss provisions (25.2 bps) and the composition of the accounts receivable reserve ($14.9 million) to gauge exposure to fleet customer defaults.
• Debt Covenants: Confirm compliance with financial covenants under the amended $450 million credit facility, particularly given the volatility in net income.
• Non-GAAP Measures: Reconcile "Management Operating Cash" ($58.5 million) to GAAP net cash used for operating activities ($(136.9) million) to understand the true cash burn vs. working capital financing.
• Acquisition Integration: Assess the financial contribution of the Pacific Pride acquisition and the status of the pending Financial Automation Limited (FAL) acquisition.