Wright Express Corporation (now WEX Inc.) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Amounts below are in millions of U.S. dollars unless stated otherwise. The filing reports the registrant as Wright Express Corporation.
Business context
The company provides business payment processing and information management services through Fleet Payment Solutions and Other Payment Solutions. Growth in the period reflected higher fuel prices and transaction activity, the 2010 acquisition of Wright Express Australia, and the March 2011 acquisition of rapid!, a payroll-card and electronic-payments provider.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $141.3 | $91.4 | $261.4 | $175.3 |
| Operating income | $61.2 | $39.3 | $107.3 | $71.5 |
| Net income | $40.6 | $30.0 | $52.7 | $48.6 |
| Diluted EPS | $1.04 | $0.77 | $1.36 | $1.24 |
| Operating margin | 43.3% | 43.0% | 41.1% | 40.8% |
| Net margin | 28.7% | 32.9% | 20.2% | 27.7% |
Margins are calculated from reported revenue and income. Q2 revenue rose 54.5% and net income 35.2% year over year; for the first half, revenue increased 49.1%, while net income increased 8.5%. The first-half earnings comparison was materially affected by fuel-derivative results: a $18.9 million net loss in 2011 versus a $7.6 million net gain in 2010. Q2 included a $6.2 million net derivative gain, compared with $9.4 million in Q2 2010.
- Fleet Payment Solutions: Q2 revenue was $113.6 million, up 45%; operating income was $51.7 million, up 51%. Average vehicles serviced increased 29% to 6.3 million and total fleet transactions increased 19% to 81.2 million. Higher fuel prices boosted payment-processing revenue, while Australia contributed additional scale.
- Other Payment Solutions: Q2 revenue was $27.6 million, up 112%; operating income was $9.5 million, up 82%. Corporate charge-card purchase volume grew 83% to $1.9 billion. The filing attributes growth to product penetration, transaction volume, cross-border fees, and acquired operations.
Q2 provision for credit losses was $6.1 million versus $2.9 million a year earlier. Fleet credit losses were 12.5 basis points of fuel expenditures versus 7.4 basis points; management cited higher receivables and softer aging in June and July, while July charge-offs were lower than prior months. The six-month credit-loss ratio was 13.2 basis points versus 13.6 basis points.
Cash flow, debt and liquidity
- Cash and cash equivalents were $57.0 million at June 30, compared with $18.0 million at December 31, 2010. Total assets were $2.56 billion and total liabilities were $1.92 billion.
- For the first six months, GAAP operating cash flow was a use of $108.8 million, compared with a use of $16.9 million in 2010. Accounts receivable increased approximately $404 million, primarily reflecting higher fuel prices and transaction growth.
- Management’s non-GAAP “management operating cash” measure showed $79.8 million of inflows, versus $32.5 million in 2010. The measure adjusts GAAP operating cash flow for changes in customer deposits and borrowed federal funds; it is not a substitute for GAAP cash flow.
- Financing cash flow was $165.5 million. The company entered a five-year credit agreement in May, including a $200 million term loan and a $700 million revolver. At quarter-end, borrowings were $386.5 million and stated availability was $511 million. The reported facility rate was 2.17% at June 30.
- Customer deposits were approximately $700 million; federal funds lines totaled approximately $140 million. Management said it expected adequate funding for cash needs over the next 12 months and expected continued covenant compliance.
Material changes, outlook and risks
- The new credit agreement refinanced prior facilities. It carries financial and restrictive covenants, including limits on certain dividends, and is secured by a pledge of 65% of the stock of an Australian subsidiary.
- The rapid! acquisition included estimated contingent consideration of $10 million, measured using unobservable projected-revenue inputs; payment was anticipated in Q2 2012. Purchase accounting remained preliminary. ReD acquisition valuation adjustments also remained partly unfinished.
- Management provided no specific revenue or earnings guidance in the supplied filing text. It said the company expected to continue its North American fuel-derivatives program; these instruments do not qualify for hedge accounting, so fair-value changes affect reported earnings. The company did not plan to hedge Australian fuel-price exposure.
- Key disclosed risks include fuel-price volatility, credit losses and receivable aging, acquisition integration, international expansion, key agreement renewals, regulatory changes, litigation, interest rates, foreign exchange, and economic conditions. Management stated that ordinary-course litigation was not expected to have a material adverse effect and reported no material legal proceedings as of the filing date.
- Management reported effective disclosure controls as of June 30, 2011, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the June–July receivables-aging softness and elevated quarterly credit-loss ratio persisted or led to higher subsequent charge-offs or reserves.
- How much reported earnings continue to fluctuate with fuel-derivative fair values and settlements, and how derivative outcomes relate to underlying fuel-linked revenue.
- Whether Australia and rapid! deliver expected growth and integration benefits, including final acquisition valuations and the rapid! contingent payment.
- Current borrowing, unused revolver capacity, interest-rate exposure, covenant headroom, and the funding needs associated with receivables and deposits.
- How the acquisition and fuel-price effects influence comparable operating performance beyond the reported headline revenue and earnings growth.