Wright Express Corporation (now WEX Inc.) — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; comparisons are primarily with 2009. The filing also reports fourth-quarter results. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
Business context
The company provides fleet payment processing and information services, alongside corporate charge-card and prepaid payment solutions. Its Utah industrial bank subsidiary, Wright Express Financial Services Corporation, supports domestic payment operations. The company acquired RD Card Holdings Australia Pty Ltd. on September 14, 2010, for approximately $340 million, expanding its Australian fuel-card and prepaid businesses.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $390.4 million | $315.2 million | +24% |
| Operating income | $150.7 million | $118.2 million | +28% |
| Operating margin | 38.6% | 37.5% | +1.1 percentage points |
| Net income | $87.6 million | $139.7 million | -37% |
| Diluted EPS | $2.25 | $3.55 | -37% |
| GAAP operating cash flow | -$10.6 million | -$33.2 million | Improved |
| Management operating cash (non-GAAP) | $83.7 million | -$78.3 million | Improved |
Fleet Payment Solutions revenue rose 18% to $329.2 million; Other Payment Solutions revenue increased 64% to $61.2 million. Corporate charge-card purchase volume grew 43% to $4.41 billion. Fleet payment-processing transactions increased 5% to 214.8 million, while average U.S. fuel prices rose 19% to $2.84 per gallon.
Fourth-quarter 2010 revenue was $114.9 million, operating income $43.0 million, and net income $18.5 million, compared with $83.0 million, $30.1 million, and $12.1 million, respectively, in fourth-quarter 2009.
Balance sheet, debt and liquidity
- At year-end, total assets were $2.10 billion, accounts receivable net were $1.16 billion, and stockholders’ equity was $559.0 million.
- Borrowings under the revolving facility and term loan totaled $407.3 million, up from $128.0 million a year earlier, primarily reflecting acquisition funding. The company reported $115.6 million available under its $450 million revolver.
- The $75 million term loan was due in August 2011; the $450 million revolving facility was due in May 2012. Management planned to negotiate an extension or replacement facility during 2011.
- Deposits totaled $529.8 million and borrowed federal funds $59.5 million; these are funding sources for the bank subsidiary’s receivables and should be distinguished from corporate financing debt. Cash and cash equivalents were $18.0 million.
- The company said it was in compliance with material debt covenants and believed it could fund cash needs for the next 12 months. No common dividends had been declared since its 2005 public listing.
Material changes, outlook and risks
- Revenue growth reflected higher fuel prices and transaction volumes, the Australian acquisition, and growth in corporate charge products. Fleet segment operating income grew 22%; Other Payment Solutions operating income grew 70%.
- GAAP net income fell despite higher operating income. 2009 included a $136.5 million gain from settling part of the tax receivable agreement; fuel-derivative results also varied significantly. Fuel derivatives produced a $7.2 million net loss in 2010 versus a $22.5 million loss in 2009. The 2010 effective tax rate was 39.6%, compared with 38.0%.
- Acquisition consideration was approximately $340 million; the purchase-price allocation and working-capital adjustment were not finalized at filing. Acquisition-related goodwill and intangible assets increased materially.
- Management targeted more than 400,000 gross new domestic vehicles serviced in 2011, planned to grow corporate charge volume and pursue prepaid products, and expected 2011 capital expenditures of $28–$35 million. A full year of Australian operations was expected to affect results. Management was evaluating foreign-earnings repatriation; a change could lower the effective tax rate.
- Fuel-price exposure is significant: approximately 50% of revenue is tied to fees based on fuel purchase prices. Derivatives cover a portion of forecast North American exposure but are not designated for hedge accounting, so fair-value changes affect current earnings. At year-end, fuel derivatives had a net liability of $10.9 million.
- Other key risks include competition and fee pressure, reliance on strategic relationships (top five generated about 17% of 2010 revenue), customer credit and fraud losses, interest-rate and refinancing exposure, foreign currency and international expansion, technology and data-security disruptions, and regulation of the Utah industrial bank. The company reported no material legal proceedings; ordinary-course litigation was not expected to materially affect results.
- The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting. The acquired Australian business was excluded from the company’s internal-control assessment for 2010.
Investor verification points
- Reconcile GAAP net income and EPS with the company’s non-GAAP adjusted net income, particularly the 2009 tax-receivable settlement gain and fuel-derivative impacts.
- Review the Australian acquisition’s final purchase-price and working-capital adjustments, integration costs, and contribution to full-year results.
- Track operating cash conversion and receivables growth: GAAP operating cash flow remained negative while management operating cash was positive under its non-GAAP definition.
- Assess refinancing progress for the August 2011 term loan and May 2012 revolver, alongside covenant headroom and variable-rate exposure.
- Monitor fuel-price sensitivity, derivative valuations and settlement outcomes, credit-loss performance, and the company’s 2011 vehicle-growth and capital-expenditure targets.