WEX - 10-Q quarterly report FY

 

 

Commission file number                                               001-32426

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

     The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for statements that are forward-looking and are not statements of historical facts. This Quarterly Report contains forward-looking statements. Any statements that are not statements of historical facts may be deemed to be forward-looking statements. When used in this Quarterly Report, the words “may,” “will,” “could,” “anticipate,” “plan,” “continue,” “project,” “intend,” “estimate,” “believe,” “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. These statements relate to our future plans, objectives, expectations and intentions and are not historical facts and accordingly involve known and unknown risks and uncertainties and other factors that may cause the actual results or the performance by us to be materially different from future results or performance expressed or implied by these forward-looking statements. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report, in press releases and in oral statements made by our authorized officers: fuel price volatility; financial loss if we determine it necessary to unwind our derivative instrument position prior to the expiration of the contracts; our failure to maintain or renew key agreements; failure to expand our technological capabilities and service offerings as rapidly as our competitors; the actions of regulatory bodies, including bank regulators; risks related to the undertaking of or consummation of corporate transactions; as well as other risks and uncertainties as identified in Item 1A of our Annual Report for the year ended December 31, 2007, filed on Form 10-K with the Securities and Exchange Commission on February 28, 2008. Our forward-looking statements and these factors do not reflect the potential future impact of any merger, acquisition or disposition. The forward-looking statements speak only as of the date of the initial filing of this Quarterly Report and undue reliance should not be placed on these statements.

          The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to consolidated financial statements included in the Annual Report on Form 10-K of Wright Express Corporation for the year ended December 31, 2007. When used in these notes, the term “Company” means Wright Express Corporation and all entities included in the consolidated financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

          The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, as of January 1, 2008. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement requires, among other things, the Company’s valuation techniques used to measure fair value to maximize the use of observable inputs and minimize the use of unobservable inputs. This change resulted in no impact to January 1, 2008, retained earnings.

          In conjunction with the adoption of SFAS No. 157, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, as of January 1, 2008. SFAS No. 159 provides an option for most financial assets and liabilities to be reported at fair value on an instrument-by-instrument basis with changes in fair value reported in earnings. After initial adoption, the election is made at the acquisition of a financial asset, financial liability, or a firm commitment and it may not be revoked. The Company has not elected to report certain financial instruments and other items at fair value as permitted by the SFAS No. 159 transition provisions. The adoption of this Statement therefore had no impact to January 1, 2008, retained earnings.

          In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for the Company on January 1, 2009. Currently, the Company has no noncontrolling interests in any of its subsidiaries.

          Also in December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. It requires acquisition-related costs and restructuring costs that the acquirer expects but is not obligated to incur to be recognized separately from the acquisition. SFAS No. 141(R) modifies the criteria for the recognition of contingencies as of the acquisition date. It also provides guidance on subsequent accounting for acquired contingencies. SFAS No. 141(R) is effective for business acquisitions for which the acquisition date is on or after January 1, 2009. The Company may not apply it before that date. SFAS No. 141(R) will not impact the Company’s accounting for prior acquisitions.

          In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities. Under this Statement, entities are required to disclose how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is evaluating the impact, if any, the adoption of SFAS No. 161 will have on its financial statement disclosures.

          Acquisition of TelaPoint, Inc. In August 2007, the Company acquired the stock of TelaPoint, Inc. (“TelaPoint”) for approximately $40,000 cash. The Company purchased TelaPoint in order to take advantage of its browser-based supply chain software solutions for bulk petroleum distributors and retailers.

          Acquisition of Pacific Pride Services, Inc. In February 2008, the Company acquired certain assets of Pacific Pride Services, Inc. (“Pacific Pride”) for approximately $32,000 cash. Pacific Pride’s franchise network encompasses more than three-hundred thirty independent fuel franchisees who issue their own Pacific Pride commercial fueling cards to fleet customers. These cards provide access to fuel at more than one thousand Pacific Pride and strategic partner locations in the U.S. and Canada. This transaction has been treated as an acquisition of assets for tax purposes; therefore, there is no original basis difference between the book and tax basis balance sheets. The Company has allocated the purchase price of the acquisition based upon the preliminary fair values of the assets acquired and liabilities assumed. In connection with the fair valuing of the assets acquired and liabilities assumed, management performed preliminary assessments of intangible assets using customary valuation procedures and techniques.

          The operations for each of these acquisitions are reported within the results of the Company’s fleet segment from the acquisition date. The operations subsequent to the acquisitions, individually and in the aggregate, did not have a material effect on the Company’s financial position, results of operations or cash flows.

          The purchase prices and related allocations for the TelaPoint and Pacific Pride acquisitions have not been finalized. The Company is not aware of any information that indicates the final purchase price allocations will differ materially from the preliminary estimates, although the Company expects to complete any outstanding asset valuations no later than one year from the date of acquisition.

          The following is a reconciliation of the cost of the Pacific Pride acquisition with the net assets acquired and the ultimate allocation to goodwill:

          The changes in goodwill during the first three months of 2008 were as follows:

During the first quarter of 2008, no goodwill was written off due to impairment.

     The changes in intangible assets during the first three months of 2008 were as follows:

          The Company expects amortization expense related to the definite-lived intangible assets above as follows: $3,567 for April 1, 2008 through December 31, 2008; $3,976 for 2009; $3,632 for 2010; $3,190 for 2011; $2,717 for 2012; and $2,368 for 2013.

          Other intangible assets consist of the following:

          The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computations for the three months ended March 31, 2008 and 2007:

          Effective January 1, 2008, the Company adopted SFAS No. 157. This standard establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS No. 157, among other things, requires the Company to maximize the use of observable inputs when measuring fair value. The Company recorded no change to January 1, 2008, retained earnings as a result of adopting SFAS No. 157.

          The Company holds mortgage-backed securities, fixed income and equity securities, derivatives and certain other financial instruments which are carried at fair value. The Company determines fair value based upon quoted prices when available or through the use of alternative approaches, such as model pricing, when market quotes are not readily accessible or available. The Company carries certain of its liabilities at fair value, specifically its derivative liabilities. In determining the fair value of the Company’s obligations, various factors are considered including:  closing exchange or over-the-counter market price quotations; time value and volatility factors underlying options and derivatives; price activity for equivalent instruments; and the Company’s own-credit standing.

          These valuation techniques may be based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

          The following table presents the Company’s assets and liabilities that are measured at fair value and the related hierarchy levels:

     Litigation

          The Company is involved in pending litigation in the usual course of business. In the opinion of management, such litigation will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

          The Company operates in two reportable segments, fleet and MasterCard. The fleet segment provides customers with payment and transaction processing services specifically designed for the needs of vehicle fleet customers. In February 2008 the Company acquired Pacific Pride. The operations of this entity have been included in the fleet segment. The MasterCard segment provides customers with a payment processing solution for their corporate purchasing and transaction monitoring needs. The Company’s chief decision maker evaluates the operating results of the Company’s reportable segments based upon revenues and “adjusted net income,” which is defined by the Company as net income adjusted for fair value changes of fuel price derivatives and the amortization of acquired intangible assets. These adjustments are reflected net of the tax impact.

          The following table presents the Company’s reportable segment results for the three months ended March 31, 2008 and 2007:

          The following table reconciles adjusted net income to net income:

          Wright Express is a leading provider of payment processing and information management services to the vehicle fleet industry. We facilitate and manage transactions for vehicle fleets through our proprietary closed network of major oil companies, fuel retailers and vehicle maintenance providers. We provide fleets with detailed transaction data, analytical tools and purchase control capabilities. Our operations are organized as follows:

          Below are some key items from the first quarter of 2008:

     Fleet

          The following table reflects comparative operating results and key operating statistics within our fleet segment:

          Payment processing revenue increased $15.5 million for the three months ended March 31, 2008, compared to the same period last year. The increase was primarily due to a 34 percent increase in the average price per gallon of fuel and a 5 percent increase in payment processing transactions over the first quarter of the prior year. These increases resulted in additional revenues of $19.9 million. Our net payment processing rate declined 12 basis points from the first quarter of 2007 for an offset to payment processing revenues of $4.1 million. This decline was due to higher fuel prices and increased rebates to large customers. Going forward we expect similar decreases to our net payment processing rate. In addition, we anticipate pressure from merchants to lower rates.

          Transaction processing revenue increased $0.5 million for the three months ended March 31, 2008, compared to the same period in 2007. The increase in revenue, as well as the increase in transaction processing transactions, is due to the acquisition of Pacific Pride.

          The 20 percent increase in account servicing revenue is primarily due to two factors. First, the revenues from TelaPoint are in the results for the three months ended March 31, 2008, but not in the results for the same period in the prior year. TelaPoint generated approximately $0.9 million in account servicing revenue during the current period. Second, average number of vehicles serviced increased 4 percent period over period. This increase generated approximately $0.2 million of additional revenue in the current period.

          Our finance fees have increased $2.1 million for the three months ended March 31, 2008, over the same period in the prior year to $7.6 million. The increase in late fees correlates to the increase in our average accounts receivable balance subject to late fees.

          Provision for credit losses were $9.8 million in the three months ended March 31, 2008, compared to $5.8 million for the same period last year. We generally measure our credit loss performance by calculating credit losses as a percentage of total fuel expenditures on payment processing transactions (“Fuel Expenditures”). This metric for credit losses was 28.1 basis points of Fuel Expenditures for the three months ended March 31, 2008, compared to 23.3 basis points of Fuel Expenditures for the same period last year. Higher accounts receivable balances during 2008 have resulted in an increase to credit losses of approximately $3.1 million for the three months ended March 31, 2008, as compared to the same period in the prior year. Higher charge-off rates during the three months ended March 31, 2008, increased credit losses by $1.7 million as compared to the same period in the prior year. These increases were offset by a reduction in our specific loss reserves of $1.1 million.

          Operating interest expense increased $1.8 million for the three months ended March 31, 2008, compared to the same period in 2007. The increase in operating interest expense is primarily due to our total average operating debt balance, which consists of our deposits and borrowed federal funds, increasing to $605.8 million for the first quarter of this year as compared to $442.3 million for the first quarter of 2007.

          Salary and other personnel expenses increased $1.0 million for the three months ended March 31, 2008, as compared to the same period last year. Additional stock-based compensation contributed $0.5 million to the increase. The first quarter of 2007 does not have expense related to TelaPoint which was acquired in August 2007. Salary and other personnel expenses related to TelaPoint totaled $0.3 million for the three months ended March 31, 2008.

          Depreciation and amortization expenses increased $1.1 million for the three months ended March 31, 2008, as compared to the same period in 2007. This increase is due to the addition of capital assets as we enhance our product features and functionality and the amortization of intangible assets from the acquisition of TelaPoint and Pacific Pride.

          We own fuel price-sensitive derivative instruments that we purchase on a periodic basis to manage the impact of volatility in fuel prices on our cash flows. Our derivative instruments do not qualify for hedge accounting under Statement of Financial Accounting Standards (“SFAS”) No. 133,Accounting for Derivative Instruments and Hedging Activities. Accordingly, gains and losses on our fuel price-sensitive derivative instruments affect our net income. The following table illustrates the relationship between our realized and unrealized losses, the estimated collar range and the average fuel price for each period covered:

          The difference between the average ceiling price on the derivative instruments and actual average fuel price was greater in the first quarter of 2008 as compared to the difference in the first quarter of 2007. As a result, realized losses were $7.0 million in the first quarter of 2008 compared to realized losses of $0.1 million for the first quarter of 2007.

     MasterCard

          The following table reflects comparative operating results and key operating statistics within our MasterCard segment:

          Payment processing revenue and the related operating expenses increased due to higher MasterCard purchase volume, primarily driven by new business from our single use account card. Offsetting a portion of the increase in payment processing revenue during 2008 was an increase in rebates as some of our customers have reached higher payout tiers.

          Our primary source of liquidity is management operating cash, which we define as cash from operations adjusted for changes in deposits, borrowed federal funds and purchased fleet card receivables. Management operating cash is not a measure in accordance with generally accepted accounting principles (“GAAP”). During the first quarter of 2008, we generated approximately $32.3 million in management operating cash as compared to a use of approximately $11.9 million of management operating cash in 2007.

          In addition to the $32.3 million of management operating cash we generated during the first quarter of 2008, we also borrowed an additional $47.6 million on our revolving credit facility. These cash increases were offset by a $31.5 million use of cash to acquire the assets of Pacific Pride and a $29.3 million use of cash to purchase treasury stock.

     Management Operating Cash

          We focus on management operating cash as a key element in achieving maximum stockholder value, and it is the primary measure we use internally to monitor cash flow performance from our core operations. Since deposits and borrowed federal funds are used to finance our accounts receivable, we believe that they are a recurring and necessary use and source of cash. As such, management considers deposits and borrowed federal funds when evaluating our operating activities. For the same reason, we believe that management operating cash may also be useful to investors as one means of evaluating our performance. However, management operating cash is a non-GAAP measure and should not be considered a substitute for, or superior to, net cash (used for) provided by operating activities as presented on the consolidated statement of cash flows in accordance with GAAP.

          The table below reconciles net cash provided by (used for) operating activities to management operating cash:

          Our bank subsidiary, FSC, utilizes certificates of deposit to finance our accounts receivable. FSC issues certificates of deposit in denominations of $100,000 or less in various maturities ranging between three months and three years and with fixed interest rates ranging from 3.40 percent to 5.45 percent. The interest rates on these certificates of deposit have lowered over the past few months. We anticipate benefiting from these lower rates, but there will be a delay as approximately one-third of our certificate of deposit portfolio will mature in the second quarter of 2008. As of March 31, 2008, we had approximately $534 million of deposits outstanding. Certificates of deposit are subject to regulatory capital requirements.

          FSC also utilizes federal funds lines of credit to supplement the financing of our accounts receivable. Our federal funds lines of credit were $160 million as of March 31, 2008. At March 31, 2008, we had outstanding borrowings of approximately $96 million with an interest rate of 2.54 percent.

     Short-term Liquidity

          Our credit agreement contains various financial covenants requiring us to maintain certain financial ratios. In addition to the financial covenants, the credit agreement contains various customary restrictive covenants. FSC is not subject to certain of these restrictions. We have been, and expect to continue to be, in compliance with all material covenants and restrictions.

          Management believes that we can adequately fund our cash needs during the next 12 months.

     Long-term Liquidity

          Management assesses our long-term liquidity requirements periodically. Based on the results of these assessments, we may elect to increase our borrowing capacity or issue additional equity instruments.

     Off-balance Sheet Arrangements

          We have no material changes to our off-balance sheet arrangements as discussed in our Annual Report on Form 10-K for the year ended December 31, 2007.

     Purchase of Treasury Shares

          The following table presents stock repurchase program activity from January 1, 2008 through March 31, 2008 and February 12, 2007 (the date of inception of the plan), through March 30, 2007:

          We have no material changes to our critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the year ended December 31, 2007.

     Recently Adopted Accounting Standards

          See Note 1 to the condensed consolidated financial statements of this report for further details of recently adopted accounting standards.

     New Accounting Pronouncements

          See Note 1 to the condensed consolidated financial statements of this report for further details of new accounting pronouncements not yet adopted.

          We have no material changes to the disclosure on this matter made in our Annual Report on Form 10-K for the year ended December 31, 2007.

          The principal executive officer and principal financial officer of Wright Express Corporation evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. “Disclosure controls and procedures” are controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms, is recorded, processed, summarized and reported, and is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, the principal executive officer and principal financial officer of Wright Express Corporation concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2008.

          There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2008, our most recently completed fiscal quarter, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

          As of the date of this filing, we are not involved in any material legal proceedings. We also were not involved in any material legal proceedings that were terminated during the first quarter of 2008. However, from time to time, we are subject to other legal proceedings and claims in the ordinary course of business, none of which we believe are likely to have a material adverse effect on our financial position, results of operations or cash flows.

          In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

          The following table provides information about the Company’s purchases of shares of the Company’s common stock during the quarter ended March 31, 2008:

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.