WEX INC.
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission file number: 001-32426
WRIGHT EXPRESS CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 01-0526993 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 97 Darling Avenue, South Portland, Maine | 04106 | |
| (Address of principal executive offices) | (Zip Code) |
(207) 773-8171
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
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.
þ
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
o
Yes
o
No
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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o
Yes
þ
No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at April 26, 2010 | |
| Common Stock, $0.01 par value per share | 38,790,106 shares |
TABLE OF CONTENTS
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| EX-10.1 | ||||||||
| EX-10.2 | ||||||||
| EX-10.3 | ||||||||
| EX-10.4 | ||||||||
| EX-10.5 | ||||||||
| EX-10.6 | ||||||||
| EX-10.7 | ||||||||
| EX-10.8 | ||||||||
| EX-10.9 | ||||||||
| EX-10.10 | ||||||||
| EX-10.11 | ||||||||
| EX-10.12 | ||||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32.1 | ||||||||
| EX-32.2 | ||||||||
FORWARD-LOOKING STATEMENTS
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. Forward-looking 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
performance 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; the Company’s failure to maintain or renew key agreements; failure to expand the
Company’s technological capabilities and service offerings as rapidly as the Company’s competitors;
the actions of regulatory bodies, including bank regulators, or possible changes in banking
regulations impacting the Company’s industrial loan bank and the Company as the corporate parent;
the uncertainties of litigation; the effects of general economic conditions on fueling patterns and
the commercial activity of fleets; the effects of the Company’s international business expansion
efforts; the impact and range of credit losses; the amount of full year interest rates; financial
loss if we determine it necessary to unwind our derivative instrument position prior to the
expiration of the contract; as well as other risks and uncertainties identified in Item 1A of our
Annual Report for the year ended December 31, 2009, filed on
Form 10-K
with the Securities and
Exchange Commission on February 26, 2010. Our forward-looking statements and these factors do not
reflect the potential future impact of any alliance, 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. We disclaim any obligation to update
any forward-looking statements as a result of new information, future events or otherwise.
- 2 -
Table of Contents
PART I
| Item 1. Financial Statements. | ||
WRIGHT EXPRESS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
| March 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
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Assets
|
||||||||
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Cash and cash equivalents
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$ | 12,375 | $ | 39,304 | ||||
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Accounts receivable (less reserve for credit losses of $10,338 in 2010 and $10,660 in 2009)
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948,970 | 844,152 | ||||||
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Available-for-sale securities
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10,072 | 10,596 | ||||||
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Fuel price derivatives, at fair value
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2,935 | 6,152 | ||||||
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Property, equipment and capitalized software (net of accumulated depreciation of
$76,661 in 2010 and $72,955 in 2009)
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47,155 | 44,991 | ||||||
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Deferred income taxes, net
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176,579 | 183,602 | ||||||
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Goodwill
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315,163 | 315,227 | ||||||
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Other intangible assets, net
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33,367 | 34,815 | ||||||
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Other assets
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18,169 | 20,823 | ||||||
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Total assets
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$ | 1,564,785 | $ | 1,499,662 | ||||
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Liabilities and Stockholders’ Equity
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Accounts payable
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$ | 358,075 | $ | 283,149 | ||||
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Accrued expenses
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25,024 | 30,861 | ||||||
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Income taxes payable
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1,331 | 1,758 | ||||||
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Deposits
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406,233 | 423,287 | ||||||
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Borrowed federal funds
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76,603 | 71,723 | ||||||
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Fuel price derivatives, at fair value
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3,603 | — | ||||||
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Revolving line-of-credit facility
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112,400 | 128,000 | ||||||
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Other liabilities
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1,996 | 1,815 | ||||||
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Amounts due under tax receivable agreement
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107,753 | 107,753 | ||||||
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Preferred stock; 10,000 shares authorized:
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Series A non-voting convertible, redeemable preferred stock;
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No shares issued and outstanding in 2010, 0.1 shares issued and outstanding in 2009
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— | 10,000 | ||||||
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Total liabilities
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1,093,018 | 1,058,346 | ||||||
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Commitments and contingencies (Note 8)
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Stockholders’ Equity
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Common stock $0.01 par value; 175,000 shares authorized, 41,748 in 2010
and 41,167 in 2009 shares issued; 38,848 in 2010 and 38,196 in 2009 shares outstanding
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417 | 412 | ||||||
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Additional paid-in capital
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124,236 | 112,063 | ||||||
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Retained earnings
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430,692 | 412,138 | ||||||
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Other comprehensive loss, net of tax:
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Net unrealized gain on available-for-sale securities
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57 | 23 | ||||||
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Net unrealized loss on interest rate swaps
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(293 | ) | (176 | ) | ||||
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Net foreign currency translation adjustment
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(332 | ) | (134 | ) | ||||
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Accumulated other comprehensive loss
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(568 | ) | (287 | ) | ||||
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Less treasury stock at cost, 2,722 shares in 2010 and 2009
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(83,010 | ) | (83,010 | ) | ||||
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Total stockholders’ equity
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471,767 | 441,316 | ||||||
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Total liabilities and stockholders’ equity
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$ | 1,564,785 | $ | 1,499,662 | ||||
| See notes to condensed consolidated financial statements. | ||
- 3 -
Table of Contents
WRIGHT EXPRESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
| Three months ended | ||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
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Service Revenues
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Payment processing revenue
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$ | 57,764 | $ | 44,314 | ||||
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Transaction processing revenue
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4,159 | 4,298 | ||||||
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Account servicing revenue
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8,269 | 8,959 | ||||||
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Finance fees
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8,384 | 7,064 | ||||||
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Other
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4,564 | 2,799 | ||||||
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Total service revenues
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83,140 | 67,434 | ||||||
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Product Revenues
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Hardware and equipment sales
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706 | 1,064 | ||||||
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Total revenues
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83,846 | 68,498 | ||||||
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Expenses
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Salary and other personnel
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19,620 | 17,853 | ||||||
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Service fees
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7,594 | 6,182 | ||||||
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Provision for credit losses
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5,911 | 4,235 | ||||||
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Technology leasing and support
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2,824 | 2,160 | ||||||
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Occupancy and equipment
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2,044 | 2,388 | ||||||
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Depreciation and amortization
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5,873 | 5,245 | ||||||
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Operating interest expense
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1,442 | 4,138 | ||||||
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Cost of hardware and equipment sold
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543 | 993 | ||||||
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Other
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5,802 | 5,980 | ||||||
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Total operating expenses
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51,653 | 49,174 | ||||||
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Operating income
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32,193 | 19,324 | ||||||
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Financing interest expense
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(726 | ) | (2,020 | ) | ||||
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Net realized and unrealized (losses) gains on fuel price derivatives
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(1,780 | ) | 653 | |||||
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Increase in amount due under tax receivable agreement
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— | (570 | ) | |||||
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Income before income taxes
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29,687 | 17,387 | ||||||
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Provision for income taxes
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11,133 | 6,410 | ||||||
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Net income
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18,554 | 10,977 | ||||||
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Changes in available-for-sale securities, net of tax effect
of $18 in 2010 and $32 in 2009
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34 | 57 | ||||||
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Changes in interest rate swaps, net of tax effect of $(69)
in 2010 and $406 in 2009
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(117 | ) | 700 | |||||
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Foreign currency translation
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(198 | ) | (24 | ) | ||||
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Comprehensive income
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$ | 18,273 | $ | 11,710 | ||||
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Earnings per share:
|
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Basic
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$ | 0.48 | $ | 0.29 | ||||
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Diluted
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$ | 0.48 | $ | 0.28 | ||||
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Weighted average common shares outstanding:
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Basic
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38,334 | 38,339 | ||||||
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Diluted
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39,122 | 39,177 | ||||||
| See notes to condensed consolidated financial statements. | ||
- 4 -
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Three months ended | ||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
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Cash flows from operating activities
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Net income
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$ | 18,554 | $ | 10,977 | ||||
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Adjustments to reconcile net income to net cash provided by operating activities:
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Fair value change of fuel price derivatives
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6,820 | 6,471 | ||||||
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Stock-based compensation
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1,545 | 1,364 | ||||||
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Depreciation and amortization
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6,030 | 5,400 | ||||||
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Deferred taxes
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7,073 | 1,031 | ||||||
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Provision for credit losses
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5,911 | 4,235 | ||||||
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Impairment of internal-use software
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— | 421 | ||||||
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Changes in operating assets and liabilities, net of effects of acquisition:
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Accounts receivable
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(110,802 | ) | (606 | ) | ||||
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Other assets
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2,497 | (2,091 | ) | |||||
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Accounts payable
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74,950 | 41,649 | ||||||
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Accrued expenses
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(6,021 | ) | (5,405 | ) | ||||
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Income taxes
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(424 | ) | 5,195 | |||||
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Other liabilities
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187 | (1,723 | ) | |||||
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Amounts due under tax receivable agreement
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— | 570 | ||||||
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Net cash provided by operating activities
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6,320 | 67,488 | ||||||
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Cash flows from investing activities
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Purchases of property and equipment
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(6,663 | ) | (4,293 | ) | ||||
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Reinvestment of dividends on available-for-sale securities
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— | (40 | ) | |||||
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Purchases of available-for-sale securities
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(39 | ) | — | |||||
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Maturities of available-for-sale securities
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613 | 356 | ||||||
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Net cash used for investing activities
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(6,089 | ) | (3,977 | ) | ||||
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Cash flows from financing activities
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Excess tax benefits from equity instrument share-based payment arrangements
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582 | — | ||||||
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Repurchase of share-based awards to satisfy tax withholdings
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(955 | ) | (418 | ) | ||||
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Proceeds from stock option exercises
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1,017 | — | ||||||
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Net decrease in deposits
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(17,054 | ) | (189,291 | ) | ||||
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Net increase in borrowed federal funds
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4,880 | — | ||||||
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Net decrease in revolving line-of-credit facility
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(15,600 | ) | (34,000 | ) | ||||
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Net cash used for financing activities
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(27,130 | ) | (223,709 | ) | ||||
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Effect of exchange rate changes on cash and cash equivalents
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(30 | ) | (31 | ) | ||||
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Net decrease in cash and cash equivalents
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(26,929 | ) | (160,229 | ) | ||||
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Cash and cash equivalents, beginning of period
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39,304 | 183,117 | ||||||
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Cash and cash equivalents, end of period
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$ | 12,375 | $ | 22,888 | ||||
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Supplemental cash flow information
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Interest paid
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$ | 1,317 | $ | 9,751 | ||||
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Income taxes paid
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$ | 3,904 | $ | 182 | ||||
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Conversion
of preferred stock shares and accrued preferred dividends to common stock shares
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$ | 10,004 | $ | — | ||||
| See notes to condensed consolidated financial statements. | ||
- 5 -
Table of Contents
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except
per share data)
(unaudited)
(unaudited)
1. Basis of Presentation
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 (“GAAP”) 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, 2009.
These condensed consolidated financial statements should be read in conjunction with the financial
statements that are included in the Company’s Annual Report filed on Form 10-K for the year ended
December 31, 2009, filed with the Securities and Exchange Commission (“SEC”) on February 26, 2010.
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-months ended March 31, 2010, are not necessarily
indicative of the results that may be expected for any future quarter(s) or the year ending
December 31, 2010.
The condensed consolidated statement of income for the period ended March 31, 2009, has been
corrected for an immaterial error related to the classification of customer discounts for
electronic payments. Payment processing revenue decreased from $44,992 to $44,314 and operating
interest expense decreased from $4,816 to $4,138. Operating income and net income were not impacted
by this change, nor was there any impact on either cash flows or the balance sheet.
2. Goodwill and Other Intangible Assets
Goodwill
The changes in goodwill during the first three months of 2010 were as follows:
| Fleet | MasterCard | |||||||||||
| Segment | Segment | Total | ||||||||||
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Balance at January 1, 2010
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$ | 305,514 | $ | 9,713 | $ | 315,227 | ||||||
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Impact of foreign currency translation
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(64 | ) | — | (64 | ) | |||||||
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Balance at March 31, 2010
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$ | 305,450 | $ | 9,713 | $ | 315,163 | ||||||
Other Intangible Assets
The changes in other intangible assets during the first three months of 2010 were as follows:
| Net Carrying | Net Carrying | |||||||||||||||
| Amount, December | Impact of foreign | Amount, March 31, | ||||||||||||||
| 31, 2009 | Amortization | currency translation | 2010 | |||||||||||||
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Definite-lived intangible assets
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Software
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$ | 13,565 | $ | (551 | ) | $ | — | $ | 13,014 | |||||||
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Customer relationships
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16,731 | (808 | ) | (76 | ) | 15,847 | ||||||||||
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Trade name
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54 | (13 | ) | — | 41 | |||||||||||
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Indefinite-lived intangible assets
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Trademarks and trade names
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4,465 | — | — | 4,465 | ||||||||||||
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Total
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$ | 34,815 | $ | (1,372 | ) | $ | (76 | ) | $ | 33,367 | ||||||
- 6 -
Table of Contents
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
The Company expects amortization expense related to the definite-lived intangible assets
above to be as follows: $4,073 for April 1, 2010 through December 31, 2010; $4,710 for 2011;
$4,075 for 2012; $3,459 for 2013; $2,481 for 2014 and $2,258 for 2015.
Other intangible assets consist of the following:
| March 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Gross | Gross | |||||||||||||||||||||||
| Carrying | Accumulated | Net Carrying | Carrying | Accumulated | Net Carrying | |||||||||||||||||||
| Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
|
Definite-lived intangible assets
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Software
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$ | 16,300 | $ | (3,286 | ) | $ | 13,014 | $ | 16,300 | $ | (2,735 | ) | $ | 13,565 | ||||||||||
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Customer relationships
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24,782 | (8,935 | ) | 15,847 | 24,858 | (8,127 | ) | 16,731 | ||||||||||||||||
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Trade name
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100 | (59 | ) | 41 | 100 | (46 | ) | 54 | ||||||||||||||||
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$ | 41,182 | $ | (12,280 | ) | 28,902 | $ | 41,258 | $ | (10,908 | ) | 30,350 | ||||||||||||
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Indefinite-lived intangible assets
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Trademarks and trade names
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4,465 | 4,465 | ||||||||||||||||||||||
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Total
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$ | 33,367 | $ | 34,815 | ||||||||||||||||||||
3. Earnings per Common Share
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, 2010 and 2009:
| Three months ended | ||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Income available for common stockholders – Basic
|
$ | 18,554 | $ | 10,977 | ||||
|
Convertible, redeemable preferred stock dividend
|
40 | 82 | ||||||
|
|
||||||||
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Income available for common stockholders – Diluted
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$ | 18,594 | $ | 11,059 | ||||
|
|
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Weighted average common shares outstanding – Basic
|
38,334 | 38,339 | ||||||
|
Unvested restricted stock units
|
173 | 383 | ||||||
|
Stock options
|
205 | 11 | ||||||
|
Convertible, redeemable preferred stock
|
410 | 444 | ||||||
|
|
||||||||
|
Weighted average common shares outstanding – Diluted
|
39,122 | 39,177 | ||||||
- 7 -
Table of Contents
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
4. Derivative Instruments
The Company is exposed to certain risks relating to its ongoing business operations. The
primary risks managed by using derivative instruments are interest rate risk and commodity price
risk. Interest rate swap arrangements are entered into to manage interest rate risk associated with
the Company’s variable-rate borrowings. The Company also enters into put and call option contracts
based on the wholesale price of gasoline and retail price of diesel fuel, which settle on a monthly
basis. These put and call option contracts, or fuel price derivative instruments, are designed to
reduce the volatility of the Company’s cash flows associated with its fuel price-related earnings
exposure.
Accounting guidance requires companies to recognize all derivative instruments as either
assets or liabilities at fair value in the statement of financial position. The Company designates
interest rate swap arrangements as cash flow hedges of the forecasted interest payments on a
portion of its variable-rate credit agreement. The Company’s fuel price derivative instruments do
not qualify for hedge accounting treatment under current guidance, and therefore, no such hedging
designation has been made.
Cash Flow Hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the effective
portion of the gain or loss on the derivative is reported as a component of other comprehensive
income and reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. Gains and losses on the derivative representing either hedge
ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in
current earnings. As of March 31, 2010, the Company had the following outstanding interest rate
swap arrangements that were entered into to hedge forecasted interest payments:
| Weighted- | Aggregate | |||||||
| Average | Notional | |||||||
| Base Rate | Amount | |||||||
|
Interest rate swap arrangements settling through July 2011
|
1.35 | % | $ | 50,000 | ||||
Derivatives Not Designated as Hedging Instruments
For derivative instruments that are not designated as hedging instruments, the gain or loss on
the derivative is recognized in current earnings. As of March 31, 2010, the Company had the
following put and call option contracts which settle on a monthly basis:
| Aggregate | ||||
| Notional | ||||
| Amount | ||||
| (gallons) (a) | ||||
|
Fuel price derivative instruments – unleaded fuel
|
||||
|
Option contracts settling April 2010 – September 2011
|
30,070 | |||
|
|
||||
|
Fuel price derivative instruments – diesel
|
||||
|
Option contracts settling April 2010 – September 2011
|
13,510 | |||
|
|
||||
|
Total fuel price derivative instruments
|
43,580 | |||
| (a) | The settlement of the put and call option contracts is based upon the New York Mercantile Exchange’s New York Harbor Reformulated Gasoline Blendstock for Oxygen Blending and the U.S. Department of Energy’s weekly retail on-highway diesel fuel price for the month. |
- 8 -
Table of Contents
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
The following table presents information on the location and amounts of derivative fair
values in the condensed consolidated balance sheets:
| Derivatives Classified as Assets | Derivatives Classified as Liabilities | |||||||||||||||||||||||||||||||
| March 31, 2010 | December 31, 2009 | March 31, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||
| Balance | Balance | Balance | Balance | |||||||||||||||||||||||||||||
| Sheet | Fair | Sheet | Fair | Sheet | Fair | Sheet | Fair | |||||||||||||||||||||||||
| Location | Value | Location | Value | Location | Value | Location | Value | |||||||||||||||||||||||||
|
Derivatives designated as
hedging instruments
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Interest rate contracts
|
Other assets | $ | — | Other assets | $ | — | Accrued expenses | $ | 464 | Accrued expenses | $ | 278 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Derivatives not designated
as hedging instruments
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
Fuel price | Fuel price | Fuel price | Fuel price | ||||||||||||||||||||||||||||
|
|
derivatives, | derivatives, | derivatives, | derivatives, | ||||||||||||||||||||||||||||
|
Commodity contracts
|
at fair value | 2,935 | at fair value | 6,152 | at fair value | 3,603 | at fair value | — | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total derivatives
|
$ | 2,935 | $ | 6,152 | $ | 4,067 | $ | 278 | ||||||||||||||||||||||||
The following table presents information on the location and amounts of derivative gains
and losses in the condensed consolidated statements of income:
| Amount of Gain | ||||||||||||||||||||||||||||||||
| or (Loss) | ||||||||||||||||||||||||||||||||
| Reclassified | ||||||||||||||||||||||||||||||||
| from | Amount of Gain or | |||||||||||||||||||||||||||||||
| Accumulated | (Loss) Recognized in | |||||||||||||||||||||||||||||||
| Amount of Gain or | OCI into | Location of Gain or | Income on Derivative | |||||||||||||||||||||||||||||
| (Loss) Recognized in | Income | (Loss) Recognized in | (Ineffective Portion and Amount | |||||||||||||||||||||||||||||
| OCI on Derivative | Location of Gain or | (Effective | Income on Derivative | Excluded from | ||||||||||||||||||||||||||||
| Derivatives in | (Effective Portion) (a) | (Loss) Reclassified | Portion) | (Ineffective Portion | Effectiveness Testing) | |||||||||||||||||||||||||||
| Cash Flow | Three months ended | from Accumulated | Three months ended | and Amount Excluded | Three months ended | |||||||||||||||||||||||||||
| Hedging | March 31, | OCI into Income | March 31, | from Effectiveness | March 31, | |||||||||||||||||||||||||||
| Relationships | 2010 | 2009 | (Effective Portion) | 2010 | 2009 | Testing) (b) | 2010 | 2009 | ||||||||||||||||||||||||
|
Interest rate contracts
|
$ | (117 | ) | $ | 700 | Financing interest | $ | (140 | ) | $ | (1,233 | ) | Financing interest | $ | — | $ | — | |||||||||||||||
|
|
expense | expense | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| Amount of Gain or | ||||||||||||
| (Loss) Recognized in | ||||||||||||
| Income on Derivative | ||||||||||||
| Derivatives Not | Location of Gain or | Three months ended | ||||||||||
| Designated as | (Loss) Recognized in | March 31, | ||||||||||
| Hedging Instruments | Income on Derivative | 2010 | 2009 | |||||||||
|
|
Net realized and | |||||||||||
|
|
unrealized gains | |||||||||||
|
|
(losses) on fuel | |||||||||||
|
Commodity contracts
|
price derivatives | $ | (1,780 | ) | $ | 653 | ||||||
| (a) | The amount of gain or (loss) recognized in OCI on the Company’s interest rate swap arrangements has been recorded net of tax impacts of $(69) in 2010 and $406 in 2009. | |
| (b) | No ineffectiveness was reclassified into earnings nor was any amount excluded from effectiveness testing. |
- 9 -
Table of Contents
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
5. Fair Value
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. 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:
| • | Level 1 – Quoted prices for identical instruments in active markets. | ||
| • | Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. | ||
| • | Level 3 – Instruments whose significant value drivers are unobservable. |
- 10 -
Table of Contents
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
The following table presents the Company’s assets and liabilities that are measured at
fair value and the related hierarchy levels:
| Fair Value Measurements | ||||||||||||||||
| at Reporting Date Using | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active | Significant | |||||||||||||||
| Markets for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| March 31, | Assets | Inputs | Inputs | |||||||||||||
| 2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
|
Assets:
|
||||||||||||||||
|
|
||||||||||||||||
|
Mortgage-backed securities
|
$ | 2,616 | $ | — | $ | 2,616 | $ | — | ||||||||
|
Asset-backed securities
|
3,069 | — | 3,069 | — | ||||||||||||
|
Municipal bonds
|
101 | — | 101 | — | ||||||||||||
|
Equity securities
|
4,286 | 4,286 | — | — | ||||||||||||
|
|
||||||||||||||||
|
Total available-for-sale securities
|
$ | 10,072 | $ | 4,286 | $ | 5,786 | $ | — | ||||||||
|
|
||||||||||||||||
|
Executive deferred compensation plan trust
(a)
|
$ | 1,947 | $ | 1,947 | $ | — | $ | — | ||||||||
|
|
||||||||||||||||
|
Fuel price derivatives — diesel
|
$ | 2,010 | $ | — | $ | — | $ | 2,010 | ||||||||
|
Fuel price derivatives — unleaded fuel
|
925 | — | 925 | — | ||||||||||||
|
|
||||||||||||||||
|
Total fuel price derivatives — assets
|
$ | 2,935 | $ | — | $ | 925 | $ | 2,010 | ||||||||
|
|
||||||||||||||||
|
Liabilities:
|
||||||||||||||||
|
|
||||||||||||||||
|
July 2009 interest rate swap arrangements with a base
rate of 1.35% and an aggregate notional amount of $50,000
(b)
|
$ | 464 | $ | — | $ | 464 | $ | — | ||||||||
|
|
||||||||||||||||
|
Fuel price derivatives — diesel
|
$ | 1,294 | $ | — | $ | — | $ | 1,294 | ||||||||
|
Fuel price derivatives — unleaded fuel
|
2,309 | — | 2,309 | — | ||||||||||||
|
|
||||||||||||||||
|
Total fuel price derivatives — liabilities
|
$ | 3,603 | $ | 2,309 | $ | 1,294 | ||||||||||
| (a) | The fair value of these instruments is recorded in other assets. | |
| (b) | The fair value of these instruments is recorded in accrued expenses. |
The following table presents a reconciliation of the beginning and ending balances for
assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3)
during the three months ended March 31, 2010:
| Fuel Price | ||||
| Derivatives – | ||||
| Diesel | ||||
|
Beginning balance
|
$ | 2,641 | ||
|
Total gains or (losses) — realized/unrealized
|
||||
|
Included in earnings
(a)
|
(1,925 | ) | ||
|
Included in other comprehensive income
|
— | |||
|
Purchases, issuances and settlements
|
— | |||
|
Transfers in/(out) of Level 3
|
— | |||
|
|
||||
|
Ending balance
|
$ | 716 | ||
| (a) | Gains and losses (realized and unrealized) included in earnings for the three months ended March 31, 2010, are reported in net realized and unrealized losses on fuel price derivatives on the condensed consolidated statements of income. |
- 11 -
Table of Contents
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
Available-for-sale securities and executive deferred compensation plan trust
When available, the Company uses quoted market prices to determine the fair value of available-for-sale securities; such items are classified in Level 1 of the fair-value hierarchy. These securities primarily consist of exchange-traded equity securities.
For mortgage-backed and asset-backed debt securities and bonds, the Company generally uses quoted prices for recent trading activity of assets with similar characteristics to the debt security or bond being valued. The securities and bonds priced using such methods are generally classified as Level 2.
Fuel price derivatives and interest rate swap arrangements
The majority of
derivatives entered into by the Company are executed over the counter and so are valued using internal valuation techniques as no quoted
market prices exist for such instruments. The valuation technique and inputs depend on the type of derivative and the nature of the
underlying instrument. The principal technique used to value these instruments is a comparison of the spot price of the underlying
instrument to its related futures curve adjusted for the Company’s assumptions of volatility and present value, where appropriate.
The fair values of derivative contracts reflect the expected cash the Company will pay or receive upon settlement of the respective contracts.
The key inputs depend upon the type of derivative and the nature of the underlying instrument and include interest rate yield curves, the spot price of the underlying instrument, volatility, and correlation. The item is placed in either Level 2 or Level 3 depending on the observability of the significant inputs to the model. Correlation and items with longer tenures are generally less observable.
6. Preferred Stock
On March 6, 2010, the Company initiated redemption of the outstanding shares of Series A
non-voting convertible, redeemable preferred stock for $101 per share, plus all accrued but unpaid
dividends. Each holder elected to exercise its right to convert its holdings into common stock. As
a consequence of these elections, the Company issued 445 shares of its common stock and retired 0.1
shares of preferred stock.
7. Stock-Based Compensation
During the first quarter of 2010, the Company awarded stock options, restricted stock units,
and performance-based restricted stock units to employees under the 2005 Equity and Incentive Plan
(the “2010 grant”). Expense associated with the performance-based restricted stock units may
increase or decrease due to changes in the probability of the Company achieving pre-established
performance metrics. For the three months ended March 31, 2010, total stock-based compensation cost
recognized was approximately $1.5 million, of which approximately $0.2 million was related to the
2010 grant. As of March 31, 2010, total unrecognized compensation cost related to non-vested stock
options, restricted stock units, and performance-based restricted stock units under the 2010 grant
was approximately $7 million, to be recognized over the 2.9 year remaining vesting period of these
awards.
The Company used the Black-Scholes option-pricing model to determine the fair value of stock
option awards. Compensation costs will be recognized over the 3 year vesting period from the date
of the grant. The fair value of the stock options granted in the first quarter of 2010 was
calculated using the following weighted-average assumptions:
| 2010 | ||||
| Grant | ||||
|
Weighted average expected life (in years)
|
6.00 | |||
|
Weighted average risk-free rate
|
2.70 | % | ||
|
Weighted average volatility
|
46.00 | % | ||
|
Weighted average dividend yield
|
0.00 | % | ||
|
Weighted average fair value
|
$ | 14.00 | ||
8. Commitments and Contingencies
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.
- 12 -
Table of Contents
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
9. Subsequent Event
On April 15, 2010, the Company purchased put option contracts and sold call option contracts,
designed to be a costless collar, on the wholesale price of gasoline with Merrill Lynch
Commodities, Inc. and the retail price of diesel fuel with Wells Fargo Bank, N.A. (collectively,
the “Contracts”). The Contracts have an aggregate notional amount of approximately 8,450 gallons of
gasoline and diesel fuel and will expire on a monthly basis during the last three quarters of 2011.
The settlement of the Contracts is based upon the New York Mercantile Exchange’s New York Harbor
Reformulated Gasoline Blendstock for Oxygen Blending and the U.S. Department of Energy’s weekly
retail on-highway diesel fuel price for the month. The Contracts lock in a weighted average retail
floor price of approximately $3.03 per gallon and a weighted average retail ceiling price of
approximately $3.09 per gallon.
10. Segment Information
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. 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, the amortization of acquired intangible assets, asset
impairment charges related to its internally developed software, non-cash adjustments related to
the tax receivable agreement and gains on the extinguishment of a portion of the tax receivable
agreement. 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, 2010 and 2009:
| Operating | Depreciation | |||||||||||||||||||
| Total | Interest | and | Provision for | Adjusted Net | ||||||||||||||||
| Revenues | Expense | Amortization | Income Taxes | Income | ||||||||||||||||
|
Three months ended March 31, 2010
|
||||||||||||||||||||
|
Fleet
|
$ | 73,410 | $ | 1,228 | $ | 4,446 | $ | 12,655 | $ | 21,092 | ||||||||||
|
MasterCard
|
10,436 | 214 | 55 | 1,550 | 2,582 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 83,846 | $ | 1,442 | $ | 4,501 | $ | 14,205 | $ | 23,674 | ||||||||||
|
|
||||||||||||||||||||
|
Three months ended March 31, 2009
|
||||||||||||||||||||
|
Fleet
|
$ | 61,861 | $ | 3,528 | $ | 3,891 | $ | 9,659 | $ | 15,879 | ||||||||||
|
MasterCard
|
6,637 | 610 | 74 | 218 | 373 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 68,498 | $ | 4,138 | $ | 3,965 | $ | 9,877 | $ | 16,252 | ||||||||||
- 13 -
Table of Contents
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (concluded)
(in thousands, except per share data)
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (concluded)
(in thousands, except per share data)
(unaudited)
The following table reconciles adjusted net income to net income:
| Three months ended | ||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Adjusted net income
|
$ | 23,674 | $ | 16,252 | ||||
|
Unrealized losses on fuel price derivatives
|
(6,820 | ) | (6,471 | ) | ||||
|
Amortization of acquired intangible assets
|
(1,372 | ) | (1,280 | ) | ||||
|
Asset impairment charge
|
— | (421 | ) | |||||
|
Non-cash adjustments related to the tax receivable agreement
|
— | (570 | ) | |||||
|
Tax impact of the above transactions
|
3,072 | 3,467 | ||||||
|
|
||||||||
|
Net income
|
$ | 18,554 | $ | 10,977 | ||||
The tax impact of the foregoing adjustments is the difference between the Company’s GAAP
tax provision and a pro forma tax provision based upon the Company’s adjusted net income before
taxes. The methodology utilized for calculating the Company’s adjusted net income tax provision is
the same methodology utilized in calculating the Company’s GAAP tax provision.
- 14 -
Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
We intend for this discussion to provide the reader with information that will assist in
understanding our financial statements, the changes in key items in those financial statements from
year to year, and the primary factors that accounted for those changes, as well as how certain
accounting estimates affect our financial statements. The discussion also provides information
about the financial results of the two segments of our business to provide a better understanding
of how those segments and their results affect our financial condition and results of operations as
a whole. This discussion should be read in conjunction with our audited consolidated financial
statements as of December 31, 2009, the notes accompanying those financial statements and
management’s discussion and analysis as contained in our Annual Report on Form 10-K filed with the
SEC on February 26, 2010 and in conjunction with the unaudited condensed consolidated financial
statements and notes in
Item 1
of
Part I of
this report.
The condensed consolidated statement of income for the period ended March 31, 2009,
has been corrected for an immaterial error related to the classification of customer
discounts for electronic payments. Payment processing revenue
decreased from $45.0 million
to $44.3 million and operating interest expense decreased from $4.8
million to $4.1 million. Operating
income and net income were not impacted by this change, nor was there any impact on
either cash flows or the balance sheet.
Overview
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:
| • | Fleet — The fleet segment provides customers with payment and transaction processing services specifically designed for the needs of the vehicle fleet industry. This segment also provides information management and account services to these fleet customers. | ||
| • | MasterCard — The MasterCard segment provides customers with a payment processing solution for their corporate purchasing and transaction monitoring needs. Our corporate MasterCard charge card product provides commercial travel and entertainment and purchase capabilities to businesses in industries that can utilize our information management functionality. |
Summary
Below are selected items from the first quarter of 2010:
| • | Average number of vehicles serviced decreased 5 percent from the first quarter of 2009 to approximately 4.5 million as fleets have reduced their number of vehicles due to economic conditions. | ||
| • | Total fleet transactions processed declined 2 percent from the first quarter of 2009 to 61.8 million. Payment processing transactions decreased less than one percent to 49.1 million, while transaction processing transactions decreased 9 percent to 12.7 million. | ||
| • | Average expenditure per payment processing transaction increased 37 percent to $58.80 from $40.78 for the same period last year. This increase was driven by higher average retail fuel prices. The average fuel price per gallon during the three months ended March 31, 2010, was $2.76, a 38 percent increase over the same period last year. | ||
| • | Realized gains on our fuel price derivatives were $5.0 million compared to realized gains of $7.1 million for the first quarter of 2009. | ||
| • | Credit losses expense in the fleet segment was $5.7 million for the three months ended March 31, 2010, versus $3.4 million for the three months ended March 31, 2009. | ||
| • | Total MasterCard purchase volume grew $204 million to $853 million for the three months ended March 31, 2010, an increase of 31 percent over the same period last year. MasterCard revenue grew 57 percent, as compared to the first quarter of 2009, to $10.4 million. | ||
| • | Our operating interest expense, which includes interest accruing on deposits and borrowed federal funds, decreased to $1.4 million during the three months ended March 31, 2010, from $4.1 million during the three months ended March 31, 2009. | ||
| • | Our effective tax rate was 37.5 percent for the three months ended March 31, 2010 and 36.9 percent for the three months ended March 31, 2009. The rate fluctuated due to changes in the mix of earnings among different taxing jurisdictions. Although not a significant factor in the current quarter, our tax rate may also fluctuate due to the impacts that rate mix changes have on our net deferred tax assets. |
- 15 -
Table of Contents
Results of Operations
Fleet
The following table reflects comparative operating results and key operating statistics within
our fleet segment:
| Three months ended | ||||||||||||||||
| March 31, | Increase (decrease) | |||||||||||||||
| (in thousands) | 2010 | 2009 | Amount | Percent | ||||||||||||
|
Service Revenues
|
||||||||||||||||
|
Payment processing revenue
|
$ | 48,713 | $ | 38,310 | $ | 10,403 | 27 | % | ||||||||
|
Transaction processing revenue
|
4,159 | 4,298 | (139 | ) | (3) | % | ||||||||||
|
Account servicing revenue
|
8,258 | 8,945 | (687 | ) | (8) | % | ||||||||||
|
Finance fees
|
8,281 | 6,984 | 1,297 | 19 | % | |||||||||||
|
Other
|
3,293 | 2,260 | 1,033 | 46 | % | |||||||||||
|
Total service revenues
|
72,704 | 60,797 | 11,907 | 20 | % | |||||||||||
|
Product Revenues
|
||||||||||||||||
|
Hardware and equipment sales
|
706 | 1,064 | (358 | ) | (34) | % | ||||||||||
|
Total revenues
|
73,410 | 61,861 | 11,549 | 19 | % | |||||||||||
|
Total operating expenses
|
45,349 | 43,128 | 2,221 | 5 | % | |||||||||||
|
Operating income
|
28,061 | 18,733 | 9,328 | 50 | % | |||||||||||
|
Financing interest expense
|
(726 | ) | (2,020 | ) | 1,294 | (64) | % | |||||||||
|
Net realized and unrealized losses on derivative instruments
|
(1,780 | ) | 653 | (2,433 | ) | (373) | % | |||||||||
|
Increase in amount due to Avis under tax receivable agreement
|
— | (570 | ) | 570 | 100 | % | ||||||||||
|
Income before taxes
|
25,555 | 16,796 | 8,759 | 52 | % | |||||||||||
|
Provision for income taxes
|
9,583 | 6,192 | 3,391 | 55 | % | |||||||||||
|
Net income
|
$ | 15,972 | $ | 10,604 | $ | 5,368 | 51 | % | ||||||||
| Three months ended | ||||||||||||||||
| March 31, | Increase (decrease) | |||||||||||||||
| (in thousands, except per transaction and per gallon data) | 2010 | 2009 | Amount | Percent | ||||||||||||
|
Key operating statistics
|
||||||||||||||||
|
Payment processing revenue:
|
||||||||||||||||
|
Payment processing transactions
|
49,118 | 49,297 | (179 | ) | — | |||||||||||
|
Average expenditure per payment processing transaction
|
$ | 55.80 | $ | 40.78 | $ | 15.02 | 37 | % | ||||||||
|
Average price per gallon of fuel
|
$ | 2.76 | $ | 2.00 | $ | 0.76 | 38 | % | ||||||||
|
Transaction processing revenue:
|
||||||||||||||||
|
Transaction processing transactions
|
12,662 | 13,991 | (1,329 | ) | (9 | )% | ||||||||||
|
Account servicing revenue:
|
||||||||||||||||
|
Average number of vehicles serviced
(a)
|
4,503 | 4,718 | (215 | ) | (5 | )% | ||||||||||
| (a) | Does not include Pacific Pride vehicle information. |
Payment processing revenue increased $10.4 million for the three months ended March 31,
2010, compared to the same period last year. The increase was
primarily due to the increase in the average price per gallon of fuel.
- 16 -
Table of Contents
Our finance fees have increased $1.3 million for the three months ended March 31, 2010, over
the same period in the prior year. The increase in late fees is related to the increase in our
accounts receivable balances.
The following table compares selected expense line items within our Fleet segment for the
three months ended March 31:
| Increase | ||||||||||||
| (in thousands) | 2010 | 2009 | (decrease) | |||||||||
|
Expense
|
||||||||||||
|
Provision for credit losses
|
$ | 5,666 | $ | 3,356 | 69 | % | ||||||
|
Operating interest expense
|
$ | 1,228 | $ | 3,528 | (65 | )% | ||||||
|
Salary and other personnel
|
$ | 18,877 | $ | 17,183 | 10 | % | ||||||
|
Depreciation and amortization
|
$ | 5,818 | $ | 5,171 | 13 | % | ||||||
Provision for credit losses was $5.7 million in the three months ended March 31, 2010,
compared to $3.4 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 21 basis points of
Fuel Expenditures for the three months ended March 31, 2010, compared to 17 basis points of Fuel
Expenditures for the same period last year. We use a roll rate methodology to calculate the amount
necessary for our ending receivable reserve balance adequacy. This methodology takes into account
total receivable balances, recent charge off and recovery experience and the dollars that are
delinquent to calculate the total reserve. In addition, management undertakes a detailed evaluation
of the receivable balances to refine our overall reserve adequacy. The expense we recognized in the
quarter is the amount necessary to bring the reserve to its required level after charge offs and
recoveries. Higher accounts receivable balances in 2010 have resulted in an increase to credit
losses of approximately $1.3 million for the three months ended March 31, 2010, as compared to the
same period in the prior year. The remaining difference is primarily due to lower recoveries, as
compared to the same period in the prior year, on amounts previously charged off.
Operating interest expense decreased $2.3 million for the three months ended March 31, 2010,
compared to the same period in 2009. Approximately $2.9 million of the decrease in operating
interest expense is due to lower interest rates. For the first quarter of 2010, the average
interest rate was 1.2 percent, as compared to an average interest rate of 3.9 percent for the first
quarter of 2009. Offsetting this decrease was an increase in our total average operating debt
balance, which consists of our deposits and borrowed federal funds,
to $472 million for the first
quarter of this year as compared to $427 million for the first quarter of 2009. Most of our higher
rate certificates of deposits have matured which will stabilize our future rates at a relatively
low level.
Salary and other personnel expenses increased $1.7 million for the three months ended
March 31, 2010, as compared to the same period last year. This increase was primarily due to
additional personnel in our international operations which added $1.3 million in expense over the
same period in the prior year.
Depreciation and amortization expenses increased $0.6 million for the three months ended March
31, 2010, as compared to the same period in 2009. This increase is primarily due to new assets
being placed into service.
- 17 -
Table of Contents
We own fuel price derivative instruments that we purchase on a periodic basis to manage the
impact of volatility in fuel prices on our cash flows. These fuel price derivative instruments do
not qualify for hedge accounting. Accordingly, both realized and unrealized gains and losses on our
fuel price derivative instruments affect our net income. Activity related to the changes in fair
value and settlements of these instruments and the changes in average fuel prices in relation to
the underlying strike price of the instruments is shown in the following table:
|
Three
months ended
March 31, |
||||||||
| 2010 | 2009 | |||||||
|
Fuel price derivatives, at fair value, beginning of period
|
$ | 6,152 | $ | 49,294 | ||||
|
Net change in fair value
|
(1,780 | ) | 653 | |||||
|
Cash receipts on settlement
|
(5,040 | ) | (7,124 | ) | ||||
|
Fuel price derivatives, at fair value, end of period
|
$ | (668 | ) | $ | 42,823 | |||
|
Collar range:
|
||||||||
|
Floor
|
$ | 3.25 | $ | 2.58 | ||||
|
Ceiling
|
$ | 3.31 | $ | 2.64 | ||||
|
Average fuel price, beginning of period
|
$ | 2.70 | $ | 1.97 | ||||
|
Average fuel price, end of period
|
$ | 2.81 | $ | 2.01 | ||||
Fuel prices increased during the first quarter of 2010. The fair value of the fuel price
derivative instruments held at March 31, 2010, decreased from December 31, 2009. The average fuel
price moved closer to the floor of the collar by $0.11 from the beginning of the quarter to the end
of the quarter. In comparison, fuel prices were stable during the first quarter of 2009. The
average fuel price at the end of the period moved $0.04 closer to the floor of the collar,
resulting in an insignificant change in the fair value of the instruments.
We expect that our fuel price derivatives program will continue to be important to our
business model going forward, and we intend to purchase derivatives in the future. Over time, we
have reduced our exposure to fuel price volatility because of the fixed fee component of our
pricing arrangements.
- 18 -
Table of Contents
MasterCard
The following table reflects comparative operating results and key operating statistics within
our MasterCard segment:
| Three months ended | ||||||||||||||||
| March 31, | Increase (decrease) | |||||||||||||||
| (in thousands) | 2010 | 2009 | Amount | Percent | ||||||||||||
|
Revenues
|
||||||||||||||||
|
Payment processing revenue
|
$ | 9,051 | $ | 6,004 | $ | 3,047 | 51 | % | ||||||||
|
Account servicing revenue
|
11 | 14 | (3 | ) | (21) | % | ||||||||||
|
Finance fees
|
103 | 80 | 23 | 29 | % | |||||||||||
|
Other
|
1,271 | 539 | 732 | 136 | % | |||||||||||
|
|
||||||||||||||||
|
Total revenues
|
10,436 | 6,637 | 3,799 | 57 | % | |||||||||||
|
|
||||||||||||||||
|
Total operating expenses
|
6,304 | 6,046 | 258 | 4 | % | |||||||||||
|
|
||||||||||||||||
|
Operating income
|
4,132 | 591 | 3,541 | 599 | % | |||||||||||
|
Provision for income taxes
|
1,550 | 218 | 1,332 | 611 | % | |||||||||||
|
Net income
|
$ | 2,582 | $ | 373 | $ | 2,209 | 592 | % | ||||||||
| Three months ended | ||||||||||||||||
| March 31, | Increase (decrease) | |||||||||||||||
| (in thousands) | 2010 | 2009 | Amount | Percent | ||||||||||||
|
Key operating statistics
|
||||||||||||||||
|
Payment processing revenue:
|
||||||||||||||||
|
MasterCard purchase volume
|
$ | 852,631 | $ | 649,048 | $ | 203,583 | 31 | % | ||||||||
Revenues
Payment processing revenue increased due to higher MasterCard purchase volume, primarily
driven by new business from our single use account product in the online travel service and
insurance/warranty markets as well as increased market penetration with our corporate charge card
product. The MasterCard net interchange rate for the first quarter of 2010 was up 13
basis points as compared to the first quarter of last year, primarily due to an increase in the
interchange rates adopted by MasterCard in April of 2009.
Other revenue has increased $0.7 million over the same period in the prior year, primarily
from increased foreign online travel service fees.
Operating Expenses
Service fees increased $1.1 million during the first quarter of 2010 as compared to the same
period in the prior year primarily due to increased volume.
Credit loss was $0.6 million lower during the first quarter of 2010 as compared to the same
period in the prior year primarily due to a bankruptcy that occurred during the first quarter of
2009.
Operating interest decreased $0.4 million during the first quarter of 2010 as compared to the
same period in the prior year primarily due to a sharp decrease in interest rates.
- 19 -
Table of Contents
Liquidity, Capital Resources and Cash Flows
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, we consider
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 provided by (used for) operating
activities as presented on the consolidated statement of cash flows in accordance with GAAP.
During the first quarter of 2010, we used approximately $5.9 million in management operating
cash as compared to approximately $121.8 million of management operating cash used in the first
quarter of 2009. The significant usage of management operating cash during 2009 is due to the
maturities of a significant amount of our certificates of deposit that we had previously issued.
The rapid decline in fuel prices during the fourth quarter of 2008 led to decreasing accounts
receivable balances with which maturing certificates of deposit could not keep pace.
In addition to the $5.9 million of management operating cash we used during the first quarter
of 2010, we also paid down approximately $16 million on our revolving credit facility. The usage of
management operating cash was primarily due to an increase in working capital requirements.
Management Operating Cash
The table below reconciles net cash provided by operating activities to change in management
operating cash:
| Three months ended | ||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Net cash provided by operating activities
|
$ | 6,320 | $ | 67,488 | ||||
|
Net decrease in deposits
|
(17,054 | ) | (189,291 | ) | ||||
|
Net increase in borrowed federal funds
|
4,880 | — | ||||||
|
Change in management operating cash
|
$ | (5,854 | ) | $ | (121,803 | ) | ||
Our bank subsidiary, Wright Express Financial Services Corporation (“FSC”), utilizes
certificates of deposit to finance our accounts receivable. FSC issued certificates of deposit in
various maturities ranging between three months and two years and with fixed interest rates ranging
from 0.35 percent to 4.00 percent as of March 31, 2010. As of March 31, 2010, we had approximately
$398 million of deposits outstanding. Most of our higher-rate certificates of deposits have matured
and this should stabilize our future rates at a relatively low level. 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. We have approximately $63 million in lines of credit available on our federal funds
lines as of March 31, 2010.
Liquidity
We continue to have appropriate access to short-term borrowing instruments to fund our
accounts receivable. Our cash balance dropped approximately $27 million as deposits decreased
approximately $16 million and we paid approximately $17 million on our revolving credit facility.
We have approximately two years left on our revolving credit facility. We are currently paying
a rate of LIBOR plus 45 basis points, which is better than the market rates at March 31, 2010. We
had approximately $336 million available to us under this agreement as of March 31, 2010. We paid
down $16 million in financing debt during the current quarter and ended the period with a balance
outstanding of $112.4 million.
- 20 -
Table of Contents
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.
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, 2009.
Purchase of Treasury Shares
We did not repurchase any shares of common stock during the quarter ended March 31, 2010.
Critical Accounting Policies and Estimates
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, 2009.
Recently Adopted Accounting Standards
None
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, 2009.
Evaluation of Disclosure Controls and Procedures
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, 2010.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
the fiscal quarter ended March 31, 2010, 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.
- 21 -
Table of Contents
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 2010. 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, 2009, 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.
- 22 -
Table of Contents
| Exhibit No. | Description | |||||
|
|
3.1 | Certificate of Incorporation (incorporated by reference to Exhibit No. 3.1 to our Current Report on Form 8-K filed with the SEC on March 1, 2005, File No. 001-32426) | ||||
|
|
||||||
|
|
3.2 | Amended and Restated By-Laws (incorporated by reference to Exhibit No. 3.1 to our Current Report on Form 8-K filed with the SEC on November 20, 2008, File No. 001-32426) | ||||
|
|
||||||
|
|
4.1 | Rights Agreement, dated as of February 16, 2005 by and between Wright Express Corporation and Wachovia Bank, National Association (incorporated by reference to Exhibit No. 4.1 to our Current Report on Form 8-K filed with the SEC on March 1, 2005, File No. 001-32426) | ||||
|
|
||||||
|
*
|
10.1 | Wright Express Corporation Amended and Restated Short Term Incentive Program** | ||||
|
|
||||||
|
*
|
10.2 | Wright Express Corporation Amended and Restated Long Term Incentive Program** | ||||
|
|
||||||
|
*
|
10.3 | Form of Wright Express Corporation Long Term Incentive Program 2010 Growth Grant Restricted Stock Unit Award Agreement | ||||
|
|
||||||
|
*
|
10.4 | Form of Wright Express Corporation Long Term Incentive Program 2010 Growth Grant Performance-Based Restricted Stock Unit Award Agreement | ||||
|
|
||||||
|
*
|
10.5 | Form of Wright Express Corporation Long Term Incentive Program 2010 Growth Grant Stock Non-Statutory Stock Option Award Agreement | ||||
|
|
||||||
|
*
|
10.6 | ISDA Master Agreement between Barclays Bank PLC and Wright Express Corporation, dated as of March 10, 2010 | ||||
|
|
||||||
|
*
|
10.7 | ISDA Schedule to the Master Agreement between Barclays Bank PLC and Wright Express Corporation, dated as of March 10, 2010 | ||||
|
|
||||||
|
*
|
10.8 | Credit Support Annex to the Schedule to the ISDA Master Agreement between Barclays Bank PLC and Wright Express Corporation, dated as of March 10, 2010 | ||||
|
|
||||||
|
*
|
10.9 | The First Amendment, dated as of March 23, 2010, to the Schedule to the ISDA Master Agreement dated as of July 18, 2007 between Wells Fargo Bank, N.A. (formerly known as Wachovia Bank, National Association) and Wright Express Corporation | ||||
|
|
||||||
|
*
|
10.10 | ISDA Master and Consolidation Agreement, dated as of March 23, 2010, to the Schedule to the Master Agreement dated as of July 18, 2007 between Wells Fargo Bank, N.A. (formerly known as Wachovia Bank, National Association) and Wright Express Corporation | ||||
|
|
||||||
|
*
|
10.11 | Credit Support Annex to the Schedule to the ISDA Master Agreement, dated as of July 18, 2007, between Wachovia Bank, National Association, and Wright Express Corporation | ||||
|
|
||||||
|
*
|
10.12 | Form of confirmation evidencing purchases of diesel fuel put options and call options by Wright Express Corporation from Wells Fargo Bank, NA | ||||
|
|
||||||
|
*
|
31.1 | Certification of Chief Executive Officer of Wright Express Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended | ||||
|
|
||||||
|
*
|
31.2 | Certification of Chief Financial Officer of Wright Express Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended | ||||
|
|
||||||
|
*
|
32.1 | Certification of Chief Executive Officer of Wright Express Corporation pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code | ||||
|
|
||||||
|
*
|
32.2 | Certification of Chief Financial Officer of Wright Express Corporation pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code | ||||
|
|
||||||
|
*
|
These exhibits have been filed with this Quarterly Report on Form 10-Q. | |||||
|
|
||||||
|
**
|
Portions of exhibits 10.1 and 10.2 have been omitted pursuant to a request for confidential treatment. | |||||
- 23 -
Table of Contents
SIGNATURE
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.
|
WRIGHT EXPRESS CORPORATION
|
||||
| April 30, 2010 | By: | /s/ Melissa D. Smith | ||
| Melissa D. Smith | ||||
|
CFO and Executive Vice
President,
Finance and Operations
(principal financial officer) |
||||
- 24 -
Table of Contents
EXHIBIT INDEX
| Exhibit No. | Description | |||||
|
|
3.1 | Certificate of Incorporation (incorporated by reference to Exhibit No. 3.1 to our Current Report on Form 8-K filed with the SEC on March 1, 2005, File No. 001-32426) | ||||
|
|
||||||
|
|
3.2 | Amended and Restated By-Laws (incorporated by reference to Exhibit No. 3.1 to our Current Report on Form 8-K filed with the SEC on November 20, 2008, File No. 001-32426) | ||||
|
|
||||||
|
|
4.1 | Rights Agreement, dated as of February 16, 2005 by and between Wright Express Corporation and Wachovia Bank, National Association (incorporated by reference to Exhibit No. 4.1 to our Current Report on Form 8-K filed with the SEC on March 1, 2005, File No. 001-32426) | ||||
|
|
||||||
|
*
|
10.1 | Wright Express Corporation Amended and Restated Short Term Incentive Program** | ||||
|
|
||||||
|
*
|
10.2 | Wright Express Corporation Amended and Restated Long Term Incentive Program** | ||||
|
|
||||||
|
*
|
10.3 | Form of Wright Express Corporation Long Term Incentive Program 2010 Growth Grant Restricted Stock Unit Award Agreement | ||||
|
|
||||||
|
*
|
10.4 | Form of Wright Express Corporation Long Term Incentive Program 2010 Growth Grant Performance-Based Restricted Stock Unit Award Agreement | ||||
|
|
||||||
|
*
|
10.5 | Form of Wright Express Corporation Long Term Incentive Program 2010 Growth Grant Stock Non-Statutory Stock Option Award Agreement | ||||
|
|
||||||
|
*
|
10.6 | ISDA Master Agreement between Barclays Bank PLC and Wright Express Corporation, dated as of March 10, 2010 | ||||
|
|
||||||
|
*
|
10.7 | ISDA Schedule to the Master Agreement between Barclays Bank PLC and Wright Express Corporation, dated as of March 10, 2010 | ||||
|
|
||||||
|
*
|
10.8 | Credit Support Annex to the Schedule to the ISDA Master Agreement between Barclays Bank PLC and Wright Express Corporation, dated as of March 10, 2010 | ||||
|
|
||||||
|
*
|
10.9 | The First Amendment, dated as of March 23, 2010, to the Schedule to the ISDA Master Agreement dated as of July 18, 2007 between Wells Fargo Bank, N.A. (formerly known as Wachovia Bank, National Association) and Wright Express Corporation | ||||
|
|
||||||
|
*
|
10.10 | ISDA Master and Consolidation Agreement, dated as of March 23, 2010, to the Schedule to the Master Agreement dated as of July 18, 2007 between Wells Fargo Bank, N.A. (formerly known as Wachovia Bank, National Association) and Wright Express Corporation | ||||
|
|
||||||
|
*
|
10.11 | Credit Support Annex to the Schedule to the ISDA Master Agreement, dated as of July 18, 2007, between Wachovia Bank, National Association, and Wright Express Corporation | ||||
|
|
||||||
|
*
|
10.12 | Form of confirmation evidencing purchases of diesel fuel put options and call options by Wright Express Corporation from Wells Fargo Bank, NA | ||||
|
|
||||||
|
*
|
31.1 | Certification of Chief Executive Officer of Wright Express Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended | ||||
|
|
||||||
|
*
|
31.2 | Certification of Chief Financial Officer of Wright Express Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended | ||||
|
|
||||||
|
*
|
32.1 | Certification of Chief Executive Officer of Wright Express Corporation pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code | ||||
|
|
||||||
|
*
|
32.2 | Certification of Chief Financial Officer of Wright Express Corporation pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code | ||||
|
|
||||||
|
*
|
These exhibits have been filed with this Quarterly Report on Form 10-Q. | |||||
|
|
||||||
|
**
|
Portions of exhibits 10.1 and 10.2 have been omitted pursuant to a request for confidential treatment. | |||||
- 25 -
TABLE OF CONTENTS
Part I OfItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 6. Exhibits