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 September 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 is a large accelerated filer incorporated in Delaware.
Key Financial Metrics
Revenue and Profit (Nine Months Ended Sept 30, 2008):
- Total Revenues: $312.7 million (up 27% from $245.4 million in 2007).
- Net Income: $62.5 million (up 33% from $47.0 million in 2007).
- Earnings Per Share (Diluted): $1.57 (up from $1.15 in 2007).
- Operating Income: $142.4 million (up 26% from $112.6 million in 2007).
Cash Flow and Liquidity:
- Cash and Cash Equivalents: $58.4 million (up from $43.0 million at year-end 2007).
- Net Cash Provided by Operating Activities: $4.4 million (compared to a use of $59.3 million in 2007).
- Management Operating Cash (Non-GAAP): $94.3 million generated in the first nine months of 2008.
- Deposits: $665.7 million outstanding (used to finance accounts receivable).
Debt and Margins:
- Revolving Line-of-Credit: $212.2 million outstanding (facility increased to $450 million in May 2008).
- Borrowed Federal Funds: $31.5 million outstanding.
- Effective Tax Rate: 32.3% (significantly lower than 69.8% in 2007 due to tax rate reassessment).
Material Changes vs. Prior Period
- Revenue Growth Drivers: Fleet segment revenue increased 28% primarily due to a 36% increase in the average price per gallon of fuel ($3.75 vs $2.76) and a 5% increase in payment processing transactions. The acquisition of Pacific Pride in February 2008 contributed significantly to transaction processing volume.
- Provision for Credit Losses: Increased sharply to $30.5 million (from $12.6 million in 2007), driven by higher charge-offs in fleet portfolios and increased reserve rates due to economic uncertainty. Credit losses represented 23.3 basis points of fuel expenditures.
- Fuel Price Derivatives: The company reported a net loss of $31.9 million on fuel price derivatives for the nine months ended Sept 30, 2008, compared to a loss of $25.0 million in the prior year. This included realized losses of $36.5 million partially offset by unrealized gains of $4.7 million.
- Tax Receivable Agreement: A $9.2 million charge was recorded related to the adjustment of the liability due to Avis following a reassessment of blended tax rates.
- Acquisitions: Completed acquisitions of Pacific Pride Services (Feb 2008) and Financial Automation Limited (Aug 2008), adding to goodwill and intangible assets.
Guidance, Outlook, and Risks
Management Commentary:
- Management notes that concerns about economic growth, high oil prices, and credit market instability have led to slower volume growth than anticipated and increased credit losses.
- Despite these challenges, the company maintains that fleet customers remain over 98% current on payments.
- Capital expenditures for 2008 are expected to be approximately $18 to $19 million.
- Share repurchases continued, with 71,100 shares purchased in Q3 2008. The board authorized an additional $75 million for repurchases, extending the program to July 2010.
Risks and Contingencies:
- Counterparty Credit Risk: Increased exposure due to instability in financial markets affecting counterparties for fuel price derivatives and interest rate swaps.
- Economic Conditions: General economic downturns could reduce customer usage of services and impair their ability to pay, increasing bad debt reserves.
- Fuel Price Volatility: While derivatives hedge against price changes, they introduce volatility in earnings due to mark-to-market accounting.
Investor Verification Checklist
- Verify the sustainability of revenue growth given the heavy reliance on rising fuel prices (which increased 36% YoY) versus transaction volume growth (which was modest at 5%).
- Monitor the trend in the provision for credit losses, which more than doubled year-over-year, as a leading indicator of fleet customer financial health.
- Review the impact of fuel price derivatives on net income, noting the significant volatility between realized losses and unrealized gains.
- Confirm the company's compliance with financial covenants under its $450 million credit facility, particularly given the increased debt levels and economic uncertainty.
- Assess the integration and performance of recent acquisitions (Pacific Pride and FAL) in driving organic transaction volume growth.