WEX Inc. (then Wright Express Corporation) — Q3 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2011. Wright Express provided fleet and other business payment processing and information-management services through Fleet Payment Solutions and Other Payment Solutions. The company reported more than 350,000 customers. Financial amounts below are in U.S. dollars; reported statement amounts were in thousands.
Financial performance and liquidity
- Third quarter: Revenue was $151.9 million, up 52% year over year. Operating income was $65.2 million, up 80%; net income was $48.1 million, up 134%. Diluted EPS was $1.23 versus $0.53. Operating margin was approximately 43.0%, compared with 36.1%.
- Nine months: Revenue was $413.2 million, up 50%; operating income was $172.6 million, up 60%; net income was $100.8 million, up 46%. Diluted EPS was $2.59 versus $1.77. Operating margin was approximately 41.8%, compared with 39.1%.
- Segment results: Q3 Fleet Payment Solutions revenue was $117.1 million (+40%) and net income was $40.2 million (+148%). Other Payment Solutions revenue was $34.8 million (+108%) and net income was $7.9 million (+82%).
- Cash flow: Nine-month GAAP operating cash flow was negative $74.5 million, versus positive $4.8 million a year earlier, largely reflecting a $384.0 million increase in accounts receivable. Management’s non-GAAP “management operating cash” measure was positive $105.7 million, versus $69.8 million. Investing cash flow was negative $31.8 million; financing cash flow was positive $130.9 million. Cash rose $24.0 million to $42.1 million.
- Debt and liquidity: Debt under the new credit agreement totaled $360.2 million at quarter-end, comprising $165.2 million of revolver borrowings and a $195.0 million term loan. Reported availability was $530.7 million under a $700 million revolver. The borrowing rate was 2.15% at September 30. Deposits were $700.8 million and borrowed federal funds were $68.7 million. Management said it expected to fund cash needs for the next 12 months and expected continued covenant compliance.
- Credit and other metrics: Q3 provision for credit losses was $8.7 million versus $3.9 million; fleet credit losses were 18.1 basis points of fuel expenditures versus 12.2 basis points. The Q3 effective tax rate was 35.3%, compared with 45.5%.
Material changes versus prior comparable periods
- Growth reflected the inclusion of Wright Express Australia, acquired in September 2010, higher fuel prices, increased transaction and vehicle volumes, and rapid!, acquired in March 2011. Average vehicles serviced rose 29% to approximately 6.5 million; fleet transactions rose 20% to 85.1 million.
- Higher fuel prices increased fleet payment-processing revenue: average U.S. fuel price was $3.70 per gallon in Q3, up 33%, and average expenditure per payment transaction rose 33% to $73.26.
- Other Payment Solutions benefited from corporate charge-card purchase volume growth of 83% to $2.4 billion. Management cited single-use accounts, market penetration and cross-border charges; it also reported lower interchange rates due to contract mix and foreign spend.
- Results included substantial fuel-derivative volatility: Q3 reported a $14.0 million net gain versus a $3.8 million loss in Q3 2010; the nine-month period had a $5.0 million loss versus a $3.8 million gain. Q3 realized settlements were a $6.8 million loss, compared with a $3.0 million gain a year earlier. The derivatives do not qualify for hedge accounting.
- Comprehensive income was $18.4 million in Q3 versus $34.3 million, chiefly reflecting a $29.9 million foreign-currency translation loss, despite higher net income.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or EPS guidance. Management said it expected adequate funding for the next 12 months and expected the fuel-derivatives program to remain important, with future purchases planned. It did not plan to hedge Wright Express Australia’s fuel-price exposure.
- Management identified risks including acquisition integration and international expansion, fuel-price volatility, key agreement renewals, competition and technology, regulatory changes, litigation, foreign exchange, economic conditions and credit losses. It specifically noted uncertainty about the range of fourth-quarter credit losses.
- The new five-year credit agreement, entered into May 23, refinanced prior facilities and includes financial and restrictive covenants, including restrictions on dividends in certain circumstances. It is secured by a pledge of 65% of the stock of Wright Express Australia Holdings Pty Ltd.
- rapid! purchase consideration included an estimated $10 million contingent payment based on performance over the first 12 months; payment was anticipated in Q2 2012. The acquisition purchase-price allocation remained preliminary.
- Management stated ordinary-course litigation was not expected to have a material adverse effect; the filing said there were no material legal proceedings as of its filing date. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of revenue and profit growth came from acquired businesses, higher fuel prices and transaction volumes, versus underlying organic growth.
- Whether receivable aging and credit losses improved after the reported softening in early-stage aging, and how fourth-quarter losses developed.
- The cash-flow implications of receivable growth and the distinction between GAAP operating cash flow and management’s non-GAAP operating-cash measure.
- Fuel-derivative settlements, fair-value changes and their effect on reported earnings; compare these with the offsetting effect of fuel prices on payment-processing revenue.
- Debt balances, revolver availability, interest costs and covenant headroom, as well as the final rapid! contingent consideration and purchase-price allocation.