UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | | | | | | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | | | | |
| | SECURITIES EXCHANGE ACT OF 1934
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| | For the quarterly period ended | | September 30, 2006 | | |
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| | OR |
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | | | | |
| | SECURITIES EXCHANGE ACT OF 1934 | | | | |
| | For the transition period from | | | | to | | | | |
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| | Commission file number | | 001-32426
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WRIGHT EXPRESS CORPORATION
(Exact name of Registrant as specified in its charter)
| | |
Delaware | | 01-0526993 |
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| | |
(State or other jurisdiction of incorporation) | | (I.R.S Employer Identification No.) |
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| | 97 Darling Avenue | | |
| | South Portland, ME 04106 | | |
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| | (Address of principal executive office) | | |
| | | | |
| | (207) 773-8171 | | |
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| | (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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days.
Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero Accelerated filero Non-accelerated filerþ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ
There were 40,390,877 shares of common stock $0.01 par value outstanding as of November 15, 2006.
WRIGHT EXPRESS CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements.
WRIGHT EXPRESS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2006 | | | 2005 | |
| | (unaudited) | | | | | |
| | | | | | | |
|
Assets | | | | | | | | |
Cash and cash equivalents | | $ | 23,178 | | | $ | 44,994 | |
Accounts receivable (less reserve for credit losses of $7,433 in 2006 and $4,627 in 2005) | | | 839,293 | | | | 652,132 | |
Available-for-sale securities | | | 8,050 | | | | 20,878 | |
Property, equipment and capitalized software, net | | | 39,299 | | | | 38,543 | |
Deferred income taxes, net | | | 383,889 | | | | 403,078 | |
Intangible assets, net | | | 2,421 | | | | 2,421 | |
Goodwill | | | 272,861 | | | | 272,861 | |
Other assets | | | 15,232 | | | | 13,388 | |
| | | | | | |
Total assets | | $ | 1,584,223 | | | $ | 1,448,295 | |
| | | | | | | |
| | | | | | |
| | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | |
Accounts payable | | $ | 360,007 | | | $ | 254,381 | |
Accrued expenses | | | 23,855 | | | | 22,197 | |
Deposits | | | 381,335 | | | | 338,251 | |
Borrowed federal funds | | | 22,376 | | | | 39,027 | |
Revolving line-of-credit facility | | | 51,000 | | | | 53,000 | |
Term loan, net | | | 140,560 | | | | 167,508 | |
Derivative instruments, at fair value | | | 14,534 | | | | 36,710 | |
Other liabilities | | | 1,147 | | | | 331 | |
Amounts due to Cendant Corporation under tax receivable agreement | | | 418,359 | | | | 424,277 | |
Preferred stock; 10,000 shares authorized: | | | | | | | | |
Series A non-voting convertible preferred stock; 0.1 shares authorized, issued and outstanding | | | 10,000 | | | | 10,000 | |
| | | | | | | |
| | | | | | |
| | | | | | | |
Total liabilities | | | 1,423,173 | | | | 1,345,682 | |
Commitments and contingencies (Note 10) | | | | | | | | |
Stockholders’ Equity | | | | | | | | |
Common stock $0.01 par value; 175,000 shares authorized; 40,370 shares issued and outstanding as of September 30, 2006, 40,210 shares issued and outstanding as of December 31, 2005 | | | 404 | | | | 402 | |
Additional paid-in capital | | | 85,984 | | | | 82,894 | |
Retained earnings | | | 74,303 | | | | 18,653 | |
Other comprehensive income (loss), net of tax: | | | | | | | | |
Net unrealized gain on interest rate swaps | | | 462 | | | | 748 | |
Net unrealized loss on available-for-sale securities | | | (103 | ) | | | (84 | ) |
| | | | | | | |
| | | | | | |
Accumulated other comprehensive income | | | 359 | | | | 664 | |
| | | | | | | |
| | | | | | |
Total stockholders’ equity | | | 161,050 | | | | 102,613 | |
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Total liabilities and stockholders’ equity | | $ | 1,584,223 | | | $ | 1,448,295 | |
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See notes to condensed consolidated financial statements.
Page 3 of 31
WRIGHT EXPRESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | |
| | Three months ended | | | Nine months ended | |
| | September 30, | | | September 30, | |
| | | | | | | |
| | | | | | |
| | 2006 | | | 2005 | | | 2006 | | | 2005 | |
| | | | | | | |
|
Revenues | | | | | | | | | | | | | | | | |
Payment processing revenue | | $ | 59,256 | | | $ | 50,271 | | | $ | 163,905 | | | $ | 126,889 | |
Transaction processing revenue | | | 4,701 | | | | 4,526 | | | | 13,254 | | | | 12,921 | |
Account servicing revenue | | | 6,098 | | | | 5,868 | | | | 17,939 | | | | 17,279 | |
Finance fees | | | 6,157 | | | | 4,143 | | | | 16,638 | | | | 10,390 | |
Other | | | 3,477 | | | | 2,587 | | | | 8,755 | | | | 9,429 | |
| | | | | | | |
| | | | | | | | | | | | |
| | | | | | | |
Total revenues | | | 79,689 | | | | 67,395 | | | | 220,491 | | | | 176,908 | |
| | | | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | |
Salary and other personnel | | | 15,236 | | | | 13,463 | | | | 44,786 | | | | 45,630 | |
Service fees | | | 3,313 | | | | 3,045 | | | | 9,730 | | | | 9,592 | |
Provision for credit losses | | | 4,998 | | | | 2,326 | | | | 11,218 | | | | 7,203 | |
Technology leasing and support | | | 2,076 | | | | 2,270 | | | | 5,873 | | | | 6,446 | |
Occupancy and equipment | | | 1,547 | | | | 1,569 | | | | 4,842 | | | | 4,443 | |
Depreciation and amortization | | | 2,734 | | | | 2,526 | | | | 7,940 | | | | 7,182 | |
Operating interest expense | | | 6,911 | | | | 4,139 | | | | 17,560 | | | | 9,592 | |
Other | | | 3,741 | | | | 3,987 | | | | 11,990 | | | | 11,388 | |
| | | | | | | |
| | | | | | | | | | | | |
| | | | | | | |
Total operating expenses | | | 40,556 | | | | 33,325 | | | | 113,939 | | | | 101,476 | |
| | | | | | | |
| | | | | | | | | | | | |
| | | | | | | |
Operating income | | | 39,133 | | | | 34,070 | | | | 106,552 | | | | 75,432 | |
| | | | | | | | | | | | | | | | |
Financing interest expense | | | (3,592 | ) | | | (3,740 | ) | | | (10,986 | ) | | | (9,259 | ) |
Net realized and unrealized gains (losses) on derivative instruments | | | 18,138 | | | | (38,450 | ) | | | (9,849 | ) | | | (79,994 | ) |
| | | | | | | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | 53,679 | | | | (8,120 | ) | | | 85,717 | | | | (13,821 | ) |
Provision (benefit) for income taxes | | | 19,235 | | | | (1,935 | ) | | | 30,067 | | | | (4,147 | ) |
| | | | | | | |
| | | | | | | | | | | | |
| | | | | | | |
Net income (loss) | | | 34,444 | | | | (6,185 | ) | | | 55,650 | | | | (9,674 | ) |
| | | | | | | | | | | | | | | | |
Change in net unrealized loss on available-for-sale securities, net of tax effect of $50 and $(12) in 2006 and $(22) and $(25) in 2005 | | | 99 | | | | (53 | ) | | | (19 | ) | | | (59 | ) |
Change in net unrealized gain on interest rate swaps, net of tax effect of $(169) and $(132) in 2006 | | | (334 | ) | | | 617 | | | | (286 | ) | | | 630 | |
and $262 and $270 in 2005 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | |
Comprehensive income (loss) | | $ | 34,209 | | | $ | (5,621 | ) | | $ | 55,345 | | | $ | (9,103 | ) |
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| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Earnings (loss) per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.85 | | | $ | (0.15 | ) | | $ | 1.38 | | | $ | (0.24 | ) |
Diluted | | $ | 0.83 | | | $ | (0.15 | ) | | $ | 1.34 | | | $ | (0.24 | ) |
| | | | | | | | | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | | | | | | | | | |
Basic | | | 40,362 | | | | 40,194 | | | | 40,313 | | | | 40,189 | |
Diluted | | | 41,538 | | | | 40,194 | | | | 41,499 | | | | 40,189 | |
|
See notes to condensed consolidated financial statements.
Page 4 of 31
WRIGHT EXPRESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| | | | | | | | |
| | Nine months ended | |
| | September 30, | |
| | | | | | | |
| | | |
| | 2006 | | | 2005 | |
| | | | | | | |
|
Cash flows from operating activities | | | | | | | | |
Net income (loss) | | $ | 55,650 | | | $ | (9,674 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | | | |
Net unrealized (gain) loss on derivative instruments | | | (22,176 | ) | | | 57,566 | |
Stock-based compensation | | | 2,402 | | | | 6,434 | |
Depreciation and amortization | | | 8,748 | | | | 8,131 | |
Deferred taxes | | | 27,719 | | | | (6,520 | ) |
Provision for credit losses | | | 11,218 | | | | 7,203 | |
Loss (gain) on disposal of property and equipment | | | 42 | | | | (118 | ) |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (198,379 | ) | | | (362,753 | ) |
Other assets | | | (2,518 | ) | | | (846 | ) |
Accounts payable | | | 105,626 | | | | 162,111 | |
Accrued expenses | | | 1,658 | | | | 2,863 | |
Other liabilities | | | 816 | | | | (39 | ) |
Amounts due to Cendant under tax receivable agreement | | | (14,685 | ) | | | (10,923 | ) |
Due to/from related parties | | | — | | | | 45,051 | |
| | | | | | | |
| | | | | | |
Net cash used in operating activities | | | (23,879 | ) | | | (101,514 | ) |
Cash flows from investing activities | | | | | | | | |
Purchases of property and equipment | | | (8,738 | ) | | | (7,899 | ) |
Sales of property and equipment | | | — | | | | 125 | |
Purchases of available-for-sale securities | | | (2,120 | ) | | | (3,115 | ) |
Maturities of available-for-sale securities | | | 14,917 | | | | 330 | |
| | | | | | | |
| | | | | | |
Net cash provided by (used in) investing activities | | | 4,059 | | | | (10,559 | ) |
Cash flows from financing activities | | | | | | | | |
Dividends paid | | | — | | | | (305,887 | ) |
Excess tax benefits of equity instrument share-based payment arrangements | | | 302 | | | | — | |
Payments in lieu of issuing shares of common stock | | | (682 | ) | | | — | |
Proceeds from stock option exercises | | | 1,451 | | | | — | |
Net increase in deposits | | | 43,084 | | | | 219,562 | |
Net decrease in borrowed federal funds | | | (16,651 | ) | | | (27,097 | ) |
Net (repayments) borrowings on revolving line of credit | | | (2,000 | ) | | | 50,000 | |
Loan origination fees paid for revolving line of credit | | | — | | | | (1,704 | ) |
Borrowings on term loan, net of loan origination fees of $2,884 in 2005 | | | — | | | | 217,116 | |
Repayments on term loan | | | (27,500 | ) | | | (40,500 | ) |
| | | | | | | |
| | | | | | |
Net cash (used in) provided by financing activities | | | (1,996 | ) | | | 111,490 | |
| | | | | | | |
| | | | | | |
Net change in cash and cash equivalents | | | (21,816 | ) | | | (583 | ) |
Cash and cash equivalents, beginning of period | | | 44,994 | | | | 31,806 | |
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Cash and cash equivalents, end of period | | $ | 23,178 | | | $ | 31,223 | |
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Page 5 of 31
WRIGHT EXPRESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
(unaudited)
| | | | | | | | |
| | Nine months ended | |
| | September 30, | |
| | | | | | | |
| | | |
| | 2006 | | | 2005 | |
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|
Supplemental cash flow information: | | | | | | | | |
Interest paid | | $ | 26,889 | | | $ | 14,013 | |
Income taxes paid | | $ | 1,032 | | | $ | 8,293 | |
Significant non-cash transactions during the nine months ended September 30, 2006 are discussed in Note 9,“Income Taxes.”
During the nine months ended September 30, 2005 the following significant non-cash transactions occurred:
| • | | The tax basis of our assets increased as a result of our initial public offering creating a deferred tax asset. We entered into a tax receivable agreement with Cendant Corporation, our former parent company (see Note 11,“Tax Receivable Agreement”). |
|
| • | | We issued 40,000 shares of common stock upon the completion of our initial public offering and as part of the conversion from a Delaware limited liability company to a Delaware corporation. We did not receive any proceeds from this offering as our former parent company received all common stock proceeds from the offering concurrent with its sale of 100 percent of its interest in us. |
|
| • | | We issued 0.1 shares of preferred stock as part of the conversion from a Delaware limited liability company to a Delaware corporation. We did not receive any proceeds from this offering as our former parent company received all preferred stock proceeds from this conversion. |
See notes to condensed consolidated financial statements.
Page 6 of 31
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
1. Nature of Business and Basis of Presentation
Wright Express Corporation (“we,” “our,” “us,” the “company” or “Wright Express”) is a leading provider of payment processing and information management services to the vehicle fleet industry. We utilize our wholly owned bank subsidiary, Wright Express Financial Services Corporation (“FSC”), a Utah-chartered industrial bank that is regulated, supervised and regularly examined by the Utah Department of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”) to facilitate and manage transactions for vehicle fleets through our proprietary closed network of major oil companies, fuel retailers and vehicle maintenance providers.
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in our annual report on Form 10-K/A for the year ended December 31, 2005 and filed with the SEC on November 20, 2006.
In the opinion of our management, the accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and reflect all adjustments of a normal recurring nature considered necessary to present fairly results of the interim periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. All adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of our financial position, results of operations and cash flows at the dates and for the periods presented have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year or any future interim period.
Our results of operations and cash flows for the period from January 1, 2005 through February 22, 2005, which are included in the amounts reported on the condensed consolidated statements of income and condensed consolidated statements of cash flows for the nine months ended September 30, 2005, reflect our historical results of operations and cash flows as a business unit divested by Cendant Corporation (“Cendant”), our former parent company currently named Avis Budget Group, in the initial public offering (“IPO”). As a result, the accompanying condensed consolidated financial statements for the nine months ended September 30, 2005, may not necessarily reflect our results of operations and cash flows in the future or what our results of operations and cash flows would have been had we been a stand-alone public company during these periods. See Note 7, “Related Parties,” for a more detailed description of transactions with our former parent company.
Certain amounts have been reclassified in our condensed consolidated financial statements to conform to the 2006 presentation and the presentation in our annual report on Form 10-K/A for the year ended December 31, 2005. During the quarter ended September 30, 2005, the Company incorrectly reported changes in cash from deposits and borrowed federal funds as operating activities. In these condensed consolidated financial statements, this error has been corrected and the statements of cash flows properly report changes in cash related to deposits and borrowed federal funds as financing activities. This correction decreases cash flows from operations from $90,951 (as originally reported) to $(101,514) and increases cash flows from financing from $(80,975) (as originally reported) to $111,490 for the nine months ended September 30, 2005.
2. Stock-based Compensation
We adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-based Payment,” on July 1, 2005, and chose to transition using the “modified prospective” method. SFAS 123(R) is a revision of SFAS No. 123, “Accounting for Stock-based Compensation,” which supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. SFAS 123(R) requires all share-based payments to employees be recognized in earnings based on their grant date fair values over the corresponding service period and also requires an estimation of forfeitures when calculating compensation expense. We did not recognize any additional compensation cost associated with unvested share-based awards as a result of this adoption.
Page 7 of 31
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
Prior to adopting SFAS 123(R), we accounted for stock-based compensation using the fair value method of accounting as prescribed by SFAS 123. We transitioned to SFAS 123 under the provisions of SFAS No. 148, “Accounting for Stock-based Compensation – Transition and Disclosure.” SFAS 148 provided alternative methods of transition for a voluntary change to the fair value based method of accounting. As a result, we expensed employee stock awards over their vesting periods based upon the fair value of the award on the date of the grant.
Prior to February 22, 2005, Cendant granted stock options and Restricted Stock Units (“RSUs”) to our employees. On February 22, 2005 we converted substantially all vested and unvested Cendant stock options into vested options to purchase our common stock. We recorded a one-time charge of $1,524 for this conversion during the nine months ended September 30, 2005. This charge is included in salary and other personnel expenses on our condensed consolidated statements of income and comprehensive income.
The table below summarizes the conversion-date fair value of stock options converted at February 22, 2005 and the assumptions used to calculate the conversion-date fair value using the Black-Scholes option-pricing model:
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| |
| | | | | | Weighted | | | | | | | | | | |
Weighted average | | Weighted average | | | average | | | Weighted average | | | Weighted average | | | Weighted average | |
expected life | | exercise price | | | volatility | | | risk-free rate | | | dividend yield | | | fair value | |
|
5.3 years | | $13.72 per share | | | 30.00 | % | | | 3.38 | % | | | 0.00 | % | | $7.29 per share |
| | | | | | | | | | | | | | | | | | | | |
|
Employee stock options granted by Cendant generally had a 10-year term, vested ratably over periods ranging from two to five years and were granted with exercise prices at the then-current fair market value. All Cendant stock options converted to options to purchase our common stock have the remainder of their original lives, are fully vested and were converted such that an employee received 1.27 options to purchase our common stock for each Cendant stock option. The activity of the stock option plan related to our employees consisted of:
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| | | | | | | |
| | Nine months ended September 30, |
| | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | Weighted | | | | | | | Weighted | |
| | | | | | Average | | | | | | | Average | |
| | | | | | Exercise | | | | | | | Exercise | |
| | Options | | | Price | | | Options | | | Price | |
Wright Express stock options | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding at January 1 | | | 530 | | | $ | 13.72 | | | | — | | | | — | |
Granted | | | — | | | | — | | | | 555 | | | $ | 13.72 | |
Exercised | | | (105 | ) | | $ | 13.81 | | | | (13 | ) | | $ | 13.55 | |
| | | | | | | | | | | | |
Outstanding at September 30 | | | 425 | | | $ | 13.70 | | | | 542 | | | $ | 13.72 | |
| | | | | | | |
| | | | | | | | | | | | |
| | | | | | | |
|
Also on February 22, 2005, we converted all Cendant RSUs into shares of our common stock. We recorded a one-time charge associated with the conversion of Cendant RSUs into Wright Express common stock during the nine months ended September 30, 2005, totaling $3,955. This charge has been included in salary and other personnel expenses on our condensed consolidated statements of income and comprehensive income.
Page 8 of 31
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
Under our stock-based compensation programs, we issued RSUs and Performance Based Restricted Stock Units (“PSUs”) during the first nine months of 2006 and RSUs during 2005. The RSUs and PSUs vest over four years. The number of PSUs that will be received is based on year-end financial results and corporate objectives. The number of PSUs issued may vary from 0 percent up to 200 percent, or up to 126 shares, depending on the achievement of corporate goals, at a weighted average grant price of $27.66 per share. The RSU activity under the 2005 Wright Express Corporation Equity and Incentive Plan and the 2006 annual grant related to our employees consisted of:
| | | | | | | | | | | | | | | | |
| |
| | Nine months ended September 30, | |
| | 2006 | | | 2005 | |
�� | | | | | | Weighted | | | | | | | Weighted | |
| | Restricted | | | Average Grant | | | Restricted | | | Average Grant | |
| | Stock Units | | | Price | | | Stock Units | | | Price | |
|
Wright Express RSUs | | | | | | | | | | | | | | | | |
|
Outstanding at January 1 | | | 565 | | | $ | 19.41 | | | | — | | | | — | |
Granted | | | 79 | | | $ | 27.64 | | | | 349 | | | $ | 18.00 | |
Vested | | | (53 | ) | | $ | 18.00 | | | | — | | | | — | |
Forfeited or canceled(1) | | | (38 | ) | | $ | 18.47 | | | | (20 | ) | | $ | 18.00 | |
| | | | | | | | | | | | |
Outstanding at September 30 | | | 553 | | | $ | 20.78 | | | | 329 | | | $ | 18.00 | |
| | | | | | | |
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| | | | | | | |
|
| | |
(1) | | Includes RSUs withheld for income tax purposes. We paid cash on behalf of employees to offset the minimum tax liabilities in lieu of issuing common stock. |
We recorded compensation expense related to PSUs and RSUs issued in 2006 of $204 during the third quarter of 2006 and $404 year-to-date. The expense related to the PSUs is recorded at 100 percent, or 63 shares, in anticipation of us achieving our corporate goals. These expenses are recorded in salary and other personnel expenses on our condensed consolidated statements of income and comprehensive income.
We recorded compensation expense related to previously issued RSUs of $646 during the three months ended September 30, 2006 and $1,999 during the nine months ended September 30, 2006, as compared to $403 during the three months ended September 30, 2005, and $853 during the nine months ended September 30, 2005. These expenses are recorded in salary and other personnel expenses on our condensed consolidated statements of income and comprehensive income.
Page 9 of 31
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
The following table illustrates the effect on net income if the fair value based method had been applied to all employee stock awards granted for all periods presented:
| | | | | | | | |
| |
| | Nine months ended | |
| | September 30, | |
| | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | | |
|
Reported net income (loss) | | $ | 55,650 | | | $ | (9,674 | ) |
Add back: | | | | | | | | |
Stock-based employee compensation expense included In reported net income (loss), net of tax | | | 1,559 | | | | 4,504 | |
Less: | | | | | | | | |
Total stock-based employee compensation expense, net of tax(1) | | | (1,559 | ) | | | (4,650 | ) |
| | | | | | |
Pro forma net income (loss) | | $ | 55,650 | | | $ | (9,820 | ) |
| | | | | | | |
| | | | | | |
| | | | | | | |
Earnings (loss) per share, as reported: | | | | | | | | |
Basic | | $ | 1.38 | | | $ | (0.24 | ) |
Diluted | | $ | 1.34 | | | $ | (0.24 | ) |
| | | | | | | | |
Pro forma earnings (loss) per share: | | | | | | | | |
Basic | | $ | 1.38 | | | $ | (0.24 | ) |
Diluted | | $ | 1.34 | | | $ | (0.24 | ) |
|
| | |
(1) | | Determined under the fair value based method for all awards. |
3. Reserves for Credit Losses
The following table presents changes in reserves for credit losses related to accounts receivable:
| | | | | | | | | | | | | | | | |
|
| | Three months ended | | | Nine months ended | |
| | September 30, | | | September 30, | |
| | | | | | | |
| | 2006 | | | 2005 | | | 2006 | | | 2005 | |
| | | | | | | |
|
Balance, beginning of period | | $ | 5,188 | | | $ | 4,715 | | | $ | 4,627 | | | $ | 4,212 | |
Provision for credit losses | | | 4,998 | | | | 2,326 | | | | 11,218 | | | | 7,203 | |
Charge-offs | | | (3,609 | ) | | | (2,468 | ) | | | (11,468 | ) | | | (8,575 | ) |
Recoveries of amounts previously charged-off | | | 856 | | | | 805 | | | | 3,056 | | | | 2,538 | |
| | | | | | | | | | | | |
Balance, end of period | | $ | 7,433 | | | $ | 5,378 | | | $ | 7,433 | | | $ | 5,378 | |
| | | | | | | |
| | | | | | | | | | | | |
| | | | | | | |
|
Page 10 of 31
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
4. Goodwill and Other Intangible Assets
Our annual goodwill impairment test, performed as of October 1, 2006, did not identify any impairment for the period ended September 30, 2006.
Goodwill and other intangible assets are allocated to the following business segments:
| | | | | | | | |
| |
| | | | | | | |
| | September 30, 2006 | | | December 31, 2005 | |
| | | | | | | |
| | | | | | |
| | Net Carrying | | | Net Carrying | |
| | Amount | | | Amount | |
| | | | | | | |
|
Unamortized Intangible Assets | | | | | | | | |
Goodwill | | | | | | | | |
Fleet | | $ | 263,148 | | | $ | 263,148 | |
MasterCard | | | 9,713 | | | | 9,713 | |
| | | | | | |
Total | | $ | 272,861 | | | $ | 272,861 | |
| | | | | | |
Trademark | | | | | | | | |
Fleet | | $ | 2,339 | | | $ | 2,339 | |
MasterCard | | | 82 | | | | 82 | |
| | | | | | |
Total | | $ | 2,421 | | | $ | 2,421 | |
| | | | | | |
|
5. Deposits and Borrowed Federal Funds
The following table presents information about deposits:
| | | | | | | | |
|
| | | | | | | |
| | September 30, | | | December 31, | |
| | 2006 | | | 2005 | |
| | | | | | | |
|
Certificates of deposits with maturities within 1 year | | $ | 252,266 | | | $ | 294,171 | |
Certificates of deposits with maturities greater than 1 year and less than 5 years | | | 124,607 | | | | 39,276 | |
Non-interest bearing deposits | | | 4,462 | | | | 4,778 | |
Money market deposits | | | — | | | | 26 | |
| | | | | | |
Total | | $ | 381,335 | | | $ | 338,251 | |
| | | | | | | |
| | | | | | |
Weighted average cost of funds on certificates of deposit | | | 5.22 | % | | | 3.98 | % |
|
The following table presents the average interest rates for deposits and borrowed federal funds:
| | | | | | | | | | | | | | | | |
|
| | | | | | | |
| | Three months ended | | | Nine months ended | |
| | September 30, | | | September 30, | |
| | | | | | | |
| | | | | | |
| | 2006 | | | 2005 | | | 2006 | | | 2005 | |
| | | | | | | |
|
Average interest rate: | | | | | | | | | | | | | | | | |
Deposits | | | 5.06 | % | | | 3.55 | % | | | 4.72 | % | | | 3.22 | % |
Borrowed federal funds | | | 5.43 | % | | | 3.66 | % | | | 5.13 | % | | | 3.31 | % |
| | | | | | | | | | | | | | | | |
Average debt balance | | $ | 429,919 | | | $ | 339,159 | | | $ | 386,246 | | | $ | 286,743 | |
|
Page 11 of 31
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
We had federal funds lines of credit of $130,000 at September 30, 2006 and $110,000 at December 31, 2005. The weighted average rate on the outstanding lines of credit was 5.50 percent at September 30, 2006 and 4.35 percent at December 31, 2005.
6. Derivative Instruments
We use derivative instruments as part of our overall strategy to manage our exposure to fluctuations in fuel prices and to reduce the impact of interest rate volatility on earnings. We do not use derivatives for trading or speculative purposes. All derivatives are recorded at fair value either as other assets or other liabilities on the consolidated balance sheets in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Gains or losses related to derivative instruments that do not qualify for hedge accounting treatment are recognized currently in earnings. Our interest rate derivatives are designated as cash flow hedges in accordance with SFAS No. 133 and, accordingly, the change in fair value associated with the effective portion of these derivative instruments that qualify for hedge accounting treatment under SFAS No. 133 is recorded as a component of other comprehensive income and the ineffective portion, if any, is reported currently in earnings. Amounts included in other comprehensive income are reclassified into earnings in the same period during which the hedged item affects earnings.
Fuel Price Derivatives
Our current derivative instruments are in the form of put and call option contracts (“Options”) based on the wholesale price of unleaded gasoline and the retail price of diesel fuel, which expire on a monthly basis through the fourth quarter of 2008. The Options are intended to reduce the volatility that changes to retail fuel prices during any given month would have on our cash flows subject to fuel price variations.
In January 2005, we entered into Options based on the then current market price of unleaded gasoline, which were to expire on a monthly basis through December 2006. The contracts that extended past March 2005 were terminated in January 2005 by our former parent company and resulted in a realized loss of $8,450.
Realized losses on the Options totaled $12,926 for the three months ended September 30, 2006, and $32,025 for the nine months ended September 30, 2006, as compared to realized losses of $8,705 for the three months ended September 30, 2005 and $22,428 for the nine months ended September 30, 2005. The 2005 realized losses included the realized loss from termination of the original Options. We recognized unrealized gains of $31,064 for the three months ended September 30, 2006 and $22,176 for the nine months ended September 30, 2006. We recognized unrealized losses of $29,745 for the three months ended September 30, 2005 and $57,566 for the nine months ended September 30, 2005 for the change in fair value of the Options which has been recorded in net realized and unrealized losses on derivative instruments in the condensed consolidated statements of income and comprehensive income. Management intends to hold the Options until their scheduled expirations.
Interest Rate Swaps
In April 2005, we entered into two interest rate swaps (the “Swaps”) for the purpose of hedging the variability on a portion of the future interest payments on our variable rate debt instruments. The following table presents information about the Swaps:
| | | | |
|
Weighted average fixed base rate | | | 3.85 | % |
| | | | |
Aggregate notional amount of the Swaps: | | | | |
For the period April 24, 2006 through October 22, 2006 | | $ | 100,000 | |
For the period October 23, 2006 through April 23, 2007 | | $ | 80,000 | |
|
Page 12 of 31
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
Realized gains on the Swaps totaled $378 for the three months ended September 30, 2006 and $884 for the nine months ended September 30, 2006. Realized losses on these derivative instruments totaled $134 for the three months ended September 30, 2005 and $344 for the nine months ended September 30, 2005. These amounts have been recorded in financing interest expense on the condensed consolidated statements of income and comprehensive income. Unrealized losses on the Swaps totaled $503 ($334 net of tax) for the three months ended September 30, 2006, and $418 ($286 net of tax) for the nine months ended September 30, 2006. Unrealized gains on the Swaps totaled $879 ($617 net of tax) for the three months ended September 30, 2005, and $900 ($630 net of tax) for the nine months ended September 30, 2005. These amounts have been recorded in accumulated other comprehensive income on the condensed consolidated balance sheets. No ineffectiveness was reclassified into earnings during the three months and nine months ended September 30, 2006 or 2005.
7. Related Parties
Activity with Cendant recorded in due to related parties consisted of:
| | | | | | | | |
|
| | Three and nine months ended | |
| | September 30, | |
|
| | | |
| | 2006 | | | 2005 | |
|
|
Due to Cendant, beginning balance | | $ | — | | | $ | 91,466 | |
Income taxes | | | — | | | | (5,970 | ) |
Payroll-related charges | | | — | | | | 4,127 | |
Corporate allocations | | | — | | | | 813 | |
Dividend to forgive balance due from Cendant | | | — | | | | 8,687 | |
MasterCard line of credit activity | | | — | | | | (4,073 | ) |
Cash payments | | | — | | | | (95,050 | ) |
|
| | | | |
Due to Cendant, ending balance | | $ | — | | | $ | — | |
|
| | | | |
|
|
Cendant administered our payroll and related expenses during 2005. We reimbursed Cendant for the administration and the related costs of the payroll expenses. During the three and nine month periods ended September 30, 2005, Cendant provided information technology services, telecommunication services and internal audit services. Amounts paid to Cendant for related party transactions are reflected in the table above. As of February 22, 2005, Cendant was no longer a related party of Wright Express.
Page 13 of 31
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
8. Earnings per Share
For purposes of calculating basic and diluted earnings per share, we used the following weighted average common shares outstanding:
| | | | | | | | | | | | | | | | |
|
|
| | Three months ended | | Nine months ended |
|
| | September 30, | | September 30, |
|
| | | | |
| | 2006 | | 2005 | | 2006 | | 2005 |
|
|
Weighted average common shares outstanding – Basic | | | 40,362 | | | | 40,194 | | | | 40,313 | | | | 40,189 | |
Unvested restricted stock units | | | 554 | | | | — | | | | 549 | | | | — | |
Stock options | | | 178 | | | | — | | | | 193 | | | | — | |
Convertible, redeemable preferred stock | | | 444 | | | | — | | | | 444 | | | | — | |
|
| | | | | | | | |
Weighted average common shares outstanding – Diluted | | | 41,538 | | | | 40,194 | | | | 41,499 | | | | 40,189 | |
|
| | | | | | | | |
The following were not included inWeighted average common shares outstanding - - Dilutedbecause they are anti-dilutive: | | | | | | | | | | | | | | | | |
Unvested restricted stock units | | | — | | | | 330 | | | | — | | | | 340 | |
Stock options | | | — | | | | 174 | | | | — | | | | 135 | |
Convertible, redeemable preferred stock | | | — | | | | 444 | | | | — | | | | 444 | |
|
| | | | | | | | |
Total | | | — | | | | 948 | | | | — | | | | 919 | |
|
| | | | | | | | |
|
|
9. Income Taxes
In the third quarter of 2006, we reevaluated our prior year tax provision based on the final filing of 2005 tax returns and recorded a tax benefit of approximately $1,300. In addition, we received final tax information relative to our initial public offering. This resulted in our adjusting both amounts due to Cendant (by approximately $8,767) and our deferred tax asset (by approximately $10,314) — such adjustments were offset in additional paid-in-capital.
10. Commitments and Contingencies
Litigation
On October 14, 2003, Enron Corporation (“Enron”) filed preference and fraudulent transfer claims against FSC in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) seeking the return of $2,779 paid to us prior to the Enron bankruptcy. Enron added additional claims for allegedly preferential transfers and sought an additional $526 by way of an amended complaint on December 1, 2003. We filed an answer on July 30, 2004 asserting various defenses. On March 31, 2006, the parties filed a joint motion seeking Bankruptcy Court’s approval of a settlement agreement, under which: (i) FSC would pay Enron $705; (ii) Enron would grant FSC, pursuant to section 502(h) of the United States Bankruptcy Code, an allowed Class 4 General Unsecured Claim in the fixed, liquidated amount of $705; and (iii) the parties would agree to mutually release all claims arising under Chapter 5 of the United States Bankruptcy Code that the parties have against each other. On April 27, 2006, the Bankruptcy Court issued an order approving the settlement. On May 12, 2006, we paid Enron $705. We then sold our 502(h) claim on May 15, 2006 in exchange for $268.
11. Tax Receivable Agreement
As a consequence of the Company’s separation from Cendant, the Company increased the tax basis of its tangible and intangible assets to their fair market value. This increase in tax basis allows the Company the ability to reduce the amount of future tax payments to the extent that the Company has future taxable income. As a result of the increase in tax basis, the Company is entitled to future tax benefits of $527.661. The Company is obligated, however, pursuant to its Tax Receivable Agreement with Cendant, to pay to Cendant, on an after-tax basis, 85% of the amount of tax the Company saves for each tax period as a result of these increased tax benefits. The Company has recorded $418,359 for this obligation to Cendant as a liability on the condensed consolidated balance sheets. For the nine months ended September 30, 2006, we paid Cendant $14,685 in accordance with the Tax Receivable Agreement.
Page 14 of 31
WRIGHT EXPRESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share data)
(unaudited)
12. Segment Information
Our chief decision maker evaluates the operating results of our reportable segments based upon revenues and “adjusted net income,” which is defined as net income, the most directly comparable GAAP financial measure, adjusted for fair value changes of derivative instruments, losses in 2005 related to the termination of the derivative contracts that extended past March 2005 (as discussed in Note 6, “Derivative Instruments”) and stock-based compensation costs related to the conversion and vesting of equity instruments in conjunction with our IPO in 2005 (as discussed in Note 2, “Stock-based Compensation”). Our presentation of adjusted net income is a non-GAAP measure and may not be comparable to similarly titled measures used by other companies. The accounting policies of the operating segments are generally the same as those described in the summary of significant accounting policies in Note 2, “Summary of Significant Accounting Policies,” in Wright Express’s annual report on Form 10-K/A for the fiscal year ended December 31, 2005. The following table presents our operating segment results for the three months and nine months ended September 30, 2006 and 2005:
| | | | | | | | | | | | | | | | | | | | |
|
| | | | | | Operating | | | Depreciation | | | | | | | |
| | | | | | Interest | | | and | | | Provision for | | | Adjusted Net | |
| | Total Revenues | | | Expense | | | Amortization | | | Income Taxes | | | Income | |
|
|
Three months ended September 30, 2006 | | | | | | | | | | | | | | | | | | | | |
Fleet | | $ | 74,885 | | | $ | 6,401 | | | $ | 2,696 | | | $ | 6,554 | | | $ | 15,869 | |
MasterCard | | | 4,804 | | | | 510 | | | | 38 | | | | 101 | | | | 91 | |
|
| | | | | | | | | | |
Total | | $ | 79,689 | | | $ | 6,911 | | | $ | 2,734 | | | $ | 6,655 | | | $ | 15,960 | |
|
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2005 | | | | | | | | | | | | | | | | | | | | |
Fleet | | $ | 63,249 | | | $ | 3,917 | | | $ | 2,481 | | | $ | 7,805 | | | $ | 12,859 | |
MasterCard | | | 4,146 | | | | 222 | | | | 45 | | | | 413 | | | | 549 | |
|
| | | | | | | | | | |
Total | | $ | 67,395 | | | $ | 4,139 | | | $ | 2,526 | | | $ | 8,218 | | | $ | 13,408 | |
|
| | | | | | | | | | |
|
|
| | | | | | | | | | | | | | | | | | | | |
|
| | | | | | Operating | | | Depreciation | | | | | | | |
| | | | | | Interest | | | and | | | Provision for | | | Adjusted Net | |
| | Total Revenues | | | Expense | | | Amortization | | | Income Taxes | | | Income | |
|
|
Nine months ended September 30, 2006 | | | | | | | | | | | | | | | | | | | | |
Fleet | | $ | 207,263 | | | $ | 16,353 | | | $ | 7,827 | | | $ | 20,182 | | | $ | 40,474 | |
MasterCard | | | 13,228 | | | | 1,207 | | | | 113 | | | | 1,012 | | | | 1,873 | |
|
| | | | | | | | | | |
Total | | $ | 220,491 | | | $ | 17,560 | | | $ | 7,940 | | | $ | 21,194 | | | $ | 42,347 | |
|
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2005 | | | | | | | | | | | | | | | | | | | | |
Fleet | | $ | 164,291 | | | $ | 9,061 | | | $ | 7,040 | | | $ | 21,055 | | | $ | 34,477 | |
MasterCard | | | 12,617 | | | | 531 | | | | 142 | | | | 954 | | | | 1,432 | |
|
| | | | | | | | | | |
Total | | $ | 176,908 | | | $ | 9,592 | | | $ | 7,182 | | | $ | 22,009 | | | $ | 35,909 | |
|
| | | | | | | | | | |
|
|
Page 15 of 31
WRIGHT EXPRESS CORPORATION
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 | | | Nine months ended | |
| | September 30, | | | September 30, | |
|
| | 2006 | | | 2005 | | | 2006 | | | 2005 | |
|
|
Adjusted net income | | $ | 15,960 | | | $ | 13,408 | | | $ | 42,347 | | | $ | 35,909 | |
Unrealized gains (losses) on derivative instruments | | | 31,064 | | | | (29,745 | ) | | | 22,176 | | | | (57,566 | ) |
Loss related to the termination of the derivative contracts that extended past March 2005 | | | — | | | | — | | | | — | | | | (8,450 | ) |
Costs associated with the conversion of equity instruments and the vesting of restricted cash units | | | — | | | | — | | | | — | | | | (5,723 | ) |
Tax impact | | | (12,580 | ) | | | 10,152 | | | | (8,873 | ) | | | 26,156 | |
|
| | | | | | | | |
Net income (loss) | | $ | 34,444 | | | $ | (6,185 | ) | | $ | 55,650 | | | $ | (9,674 | ) |
|
| | | | | | | | |
|
|
13. Subsequent Events
On October 4, 2006, we purchased put option contracts and sold call option contracts, designed to be a costless collar, on the price of gasoline and diesel fuel (collectively the “Options”). The Options have an aggregate notional amount of approximately 9.25 million gallons of gasoline and diesel fuel and will expire on a monthly basis during the second, third and fourth quarters of 2008. The settlement of the Options is based upon the U.S. Department of Energy’s weekly retail on-highway national US average diesel price and the New York Mercantile Exchange nearby unleaded gasoline contracts for the month. The Options lock in a weighted average floor price of approximately $2.47 per gallon and a weighted average ceiling price of approximately $2.53 per gallon.
On October 27, 2006, we sold all of our 27.6 shares of MasterCard Class B stock for $61.42 per share in a private sale. These shares did not have a market and had been received by us during MasterCard Corporation’s initial public offering. We recorded, at the time of the sale, a pretax realized gain of $1,694 related to the sale of these securities.
Page 16 of 31
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 you 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 financial statements as of December 31, 2005, the notes accompanying those financial statements as contained in our annual report on Form 10-K/A filed with the SEC on November 20, 2006 and in conjunction with the unaudited condensed consolidated financial statements and notes inItem 1of this report.
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. In addition, we facilitate and manage transactions for corporate purchasing for customers in all industries with our MasterCard product. Our operations are organized as follows:
| • | | Fleet – The fleet operating 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 services to these fleet customers. |
|
| • | | MasterCard – The MasterCard operating segment provides customers with a payment processing solution for their corporate purchasing and transaction monitoring needs. The MasterCard products are used by businesses to facilitate purchases of products and utilize our information management capabilities. |
Financial Summary
| • | | In our fleet operating segment, transaction volume this quarter reflects a number of factors affecting the comparability between quarters. For the three months ended September 30, 2005, we experienced unusually high transaction volume due to the post-hurricane recovery efforts. In addition, there were more business days in the third quarter of 2005. Our contract with UPS terminated at the end of May 2006 and some of our private label strategic relationships sold locations. We expect the effects of these two items to continue into the fourth quarter of 2006. Without the above factors, transaction volume would have grown between 7 percent and 9 percent from the third quarter last year. |
|
| • | | Average number of vehicles serviced increased to 4.3 million as of September 30, 2006, a 5 percent increase from the three months ended September 30, 2005 and a 7 percent increase for the nine months ended September 30, 2006. |
|
| • | | Fuel price per gallon averaged $2.87 for the three months ended September 30, 2006, compared with $2.57 for the same period a year ago, an increase of 12 percent. Fuel price per gallon averaged $2.72 for the nine months ended September 30, 2006, compared with $2.26 for the same period a year ago, an increase of 20 percent. Our average expenditure per fuel payment processing transaction increased to $57.95 for the three months ended September 30, 2006, an increase of 14 percent from the same period last year. Our average expenditure per fuel payment processing transaction increased to $54.81 for the nine months ended September 30, 2006, an increase of 22 percent from the same period last year. |
Page 17 of 31
| • | | Credit losses in our fleet operating segment were 12.5 basis points of total fuel expenditures on payment processing transactions for the three months ended September 30, 2006, and 12.9 basis points of total fuel expenditures on payment processing transactions for the nine months ended September 30, 2006. Credit losses in our fleet operating segment were $3.7 million for the three months ended September 30, 2006, and $9.9 million for the nine months ended September 30, 2006. |
|
| • | | During the three months ended September 30, 2006, we specifically increased our loan loss reserves by $2.2 million for one customer who holds accounts in our fleet and MasterCard segments. We continue to engage in good faith discussions concerning repayment of past due balances and expect to maintain our relationship with this customer while negotiations are ongoing. Our reserve is based on our continuing analysis of our ability to recover these amounts. |
|
| • | | Our average interest rate for operating debt increased from 3.5 percent for the three months ended September 30, 2005, to 5.1 percent for the three months ended September 30, 2006. Our average interest rate for operating debt increased from 3.2 percent for the nine months ended September 30, 2005, to 4.8 percent for the nine months ended September 30, 2006. |
|
| • | | Total MasterCard purchase volume grew to $365.7 million for the three months ended September 30, 2006, an increase of 45 percent over the same period last year, and grew to $967.8 million for the nine months ended September 30, 2006, an increase of 32 percent over the same period last year. |
|
| • | | The effective tax rate was 35.8 percent for the three months ended September 30, 2006, and 35.1 percent for the nine months ended September 30, 2006. Quarterly fluctuations in the effective tax rate are due to our unrealized losses on our fuel derivative instruments and the impact of these losses on the state component of our effective tax rate. As the price of fuel changes and impacts our fuel price derivatives, our effective tax rate fluctuates. Included in the provision for income taxes for the three months ended September 30, 2006 is a $1.3 million benefit relating to adjustments to reflect the effective state rates upon filing our income tax returns. |
Page 18 of 31
Results of Operations
Fleet
The following table reflects comparative operating results and key operating statistics within our fleet operating segment:
(in millions, except per transaction and per gallon data)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | | | | | | Nine months ended | | | | |
| | September 30, | | | Increase | | | September 30, | | | Increase | |
|
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | (decrease) | | | 2006 | | | 2005 | | | (decrease) | |
|
|
Revenues | | | | | | | | | | | | | | | | | | | | | | | | |
Payment processing revenue | | $ | 54.8 | | | $ | 46.7 | | | | 17 | % | | $ | 152.0 | | | $ | 117.5 | | | | 29 | % |
Transaction processing revenue | | | 4.7 | | | | 4.5 | | | | 4 | % | | | 13.2 | | | | 12.9 | | | | 2 | % |
Account servicing revenue | | | 6.2 | | | | 5.9 | | | | 5 | % | | | 18.0 | | | | 17.3 | | | | 4 | % |
Finance fees | | | 6.0 | | | | 4.1 | | | | 46 | % | | | 16.4 | | | | 10.3 | | | | 59 | % |
Other | | | 3.2 | | | | 2.2 | | | | 45 | % | | | 7.7 | | | | 6.3 | | | | 22 | % |
|
| | | | | | | | | | | | | | | | |
Total revenues | | | 74.9 | | | | 63.4 | | | | 18 | % | | | 207.3 | | | | 164.3 | | | | 26 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses | | | 35.9 | | | | 30.1 | | | | 19 | % | | | 103.6 | | | | 91.3 | | | | 13 | % |
|
| | | | | | | | | | | | | | | | |
Operating income | | | 39.0 | | | | 33.3 | | | | 17 | % | | | 103.7 | | | | 73.0 | | | | 42 | % |
Financing interest expense | | | (3.6 | ) | | | (3.8 | ) | | | (5 | )% | | | (11.0 | ) | | | (9.3 | ) | | | 18 | % |
Net realized and unrealized (losses) gains on derivative instruments | | | 18.1 | | | | (38.5 | ) | | | NM | | | | (9.9 | ) | | | (80.0 | ) | | | NM | |
|
| | | | | | | | | | | | | | | | |
Income (loss) before taxes | | | 53.5 | | | | (9.0 | ) | | | NM | | | | 82.8 | | | | (16.3 | ) | | | NM | |
Provision (benefit) for income taxes | | | 19.2 | | | | (2.3 | ) | | | NM | | | | 29.1 | | | | (5.2 | ) | | | NM | |
|
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 34.3 | | | $ | (6.7 | ) | | | NM | | | $ | 53.7 | | | $ | (11.1 | ) | | | NM | |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Key operating statistics | | | | | | | | | | | | | | | | | | | | | | | | |
Payment processing revenue: | | | | | | | | | | | | | | | | | | | | | | | | |
Payment processing transactions | | | 46.8 | | | | 44.3 | | | | 6 | % | | | 136.3 | | | | 122.7 | | | | 11 | % |
Average expenditure per payment processing transaction | | $ | 57.95 | | | $ | 50.72 | | | | 14 | % | | $ | 54.81 | | | $ | 44.92 | | | | 22 | % |
Average price per gallon of fuel | | $ | 2.87 | | | $ | 2.57 | | | | 12 | % | | $ | 2.72 | | | $ | 2.26 | | | | 20 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Transaction processing revenue: | | | | | | | | | | | | | | | | | | | | | | | | |
Transaction processing transactions | | | 15.0 | | | | 16.5 | | | | (9 | )% | | | 44.7 | | | | 47.5 | | | | (6) | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Account servicing revenue: | | | | | | | | | | | | | | | | | | | | | | | | |
Average number of vehicles serviced | | | 4.34 | | | | 4.14 | | | | 5 | % | | | 4.30 | | | | 4.02 | | | | 7 | % |
|
|
NM – The result of the calculation is not meaningful. | | | | | | | | | |
Payment processing revenue increased $8.1 million for the three months ended September 30, 2006, as compared to the same period in the prior year. This increase is primarily due to a 12 percent increase in the average price per gallon of fuel as well as a 6 percent increase in the number of payment processing transactions.
Payment processing revenue increased $34.5 million for the nine months ended September 30, 2006 as compared to the same period in the prior year. This increase is primarily due to a 20 percent increase in the average price per gallon of fuel as well as an 11 percent increase in the number of payment processing transactions.
Transaction processing transactions decreased by approximately 1.5 million transactions for the three months ended September 30, 2006, and decreased by approximately 2.8 million transactions for the nine months ended September 30, 2006. This is primarily due to conversions of portfolios to payment processing and the sale of certain locations by our private label partner, as discussed above.
Page 19 of 31
Finance fees increased $1.9 million for the three months ended September 30, 2006, and increased $6.1 million for the nine months ended September 30, 2006, primarily due to higher average daily account receivable balances subject to late fees, due to elevated fuel prices and an increase in payment processing transactions. The remainder of the increase is primarily due to the ongoing changes we have made to the formula for calculating balances subject to finance fees and the annual percentage rates used to calculate finance fees.
Salary and other personnel expense increased $1.7 million for the three months ended September 30, 2006, and decreased $1.2 million for the nine months ended September 30, 2006. The increase for the three months ended September 30, 2006, was due to a $0.8 million increase in selling expenses, as a result of our growth in vehicles serviced. This increase in selling expenses was due primarily to an increase in commissions of $0.3 million and $0.2 million for additional sales personnel and support. Operating as a stand-alone, publicly traded company, increased salary and other personnel expense $0.5 million for general and administrative staff. Stock compensation increased $0.4 million during the third quarter as we expensed RSUs and PSUs related to our employee incentive programs. The decrease for the nine months ended September 30, 2006, in salary and other personnel expense was due to the non-recurring charge of $5.7 million in the first quarter of 2005 associated with the issuance of common stock in exchange for Cendant restricted stock units and options to purchase shares of our common stock in exchange for Cendant stock options held by our employees in 2005. The decrease was offset by increases in selling costs of $1.9 million, primarily due to $0.9 million in commissions, $0.6 million in salary and contractor expense and $0.4 million in other expenses associated with our growth in vehicles serviced.
Credit losses in our fleet operating segment were $3.7 million for the three months ended September 30, 2006, and $9.9 million for the nine months ended September 30, 2006. Credit losses were $2.1 million for the three months ended September 30, 2005, and $6.6 million for the nine months ended September 30, 2005. The increase in credit losses is primarily due to reserves related to one customer totaling approximately $1.1 million. Without the one time reserve, our credit loss would have been 8.6 basis points of total fuel expenditures.
Service fees increased $0.5 million for the three months ended September 30, 2006, and increased $1.2 million for the nine months ended September 30, 2006. These increases were primarily related to merger and acquisition expenses as we explored growth opportunities.
Operating interest expense increased $2.5 million for the three months ended September 30, 2006 and $7.3 million during the nine months ended September 30, 2006, compared to the same periods in the prior year, as we incurred fees to finance our receivables related to our funded payment processing transactions. The increase in our interest expense results from to an increase in weighted average interest rates to 5.1 percent in the three months ended September 30, 2006, compared to 3.5 percent for the same period in the prior year. The weighted average interest rates increased to 4.8 percent in the nine months ended September 30, 2006, compared to 3.2 percent for the same period in the prior year. Our average debt balance for the three months ended September 30, 2006 totaled $429.9 million, as compared to our average debt balance of $339.2 million for the same period in the prior year. Our average debt balance for the nine months ended September 30, 2006 totaled $386.2 million, as compared to our average debt balance of $286.7 million for the same period in the prior year. Changes in interest rates could create volatility in our operating interest expense.
Finance interest expense is related to the corporate credit facility that we entered into in February 2005 and the preferred stock that we issued as part of our IPO. Finance interest expense decreased $0.2 for the three months ended September 30, 2006 as compared to the same period in the prior year, which is primarily attributable to lower balances at higher interest rates. Interest expense for the nine months ended September 30, 2006 increased $1.7 million over the same period in the prior year. Interest expense for 2005 reflects approximately seven months of expense as compared to the nine months of expense in 2006. Also contributing to the increase in interest expense during the nine months ended September 30, 2006, was an increase in the one-month LIBOR rate.
We own fuel price-sensitive derivative instruments that we purchase on a periodic basis to manage the impact that volatility in fuel prices has on our cash flows. Our derivative instruments do not qualify for hedge accounting under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities”. Gains and losses on our fuel price-sensitive derivative instruments affect our net income. Of the total losses, approximately $12.9 million for the three months ended September 30, 2006, and $8.7 million for the three months ended September 30, 2005, and approximately $32.0 million for the nine months ended September 30, 2006, and $22.4 million for the nine months
Page 20 of 31
ended September 30, 2005, were net realized losses. We recognized unrealized gains of approximately $31.1 for the three months ended September 30, 2006. We recognized unrealized losses of approximately $29.7 million for the same period a year ago. We recognized unrealized gains of approximately $22.2 million for the nine months ended September 30, 2006, and recognized unrealized losses of $57.6 million for the nine months ended September 30, 2005.
MasterCard
The following table reflects comparative operating results and key operating statistics within our MasterCard operating segment:
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | | | | | | Nine months ended | | | | |
| | September 30, | | | Increase | | | September 30, | | | Increase | |
| | 2006 | | | 2005 | | | (decrease) | | | 2006 | | | 2005 | | | (decrease) | |
|
|
Revenues | | | | | | | | | | | | | | | | | | | | | | | | |
Payment processing revenue | | $ | 4.4 | | | $ | 3.6 | | | | 22 | % | | $ | 11.9 | | | $ | 9.4 | | | | 27 | % |
Finance fees | | | 0.1 | | | | — | | | | NM | | | | 0.2 | | | | — | | | | NM | |
Other | | | 0.3 | | | | 0.5 | | | | (40 | )% | | | 1.1 | | | | 3.2 | | | | (66 | )% |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total revenues | | | 4.8 | | | | 4.1 | | | | 17 | % | | | 13.2 | | | | 12.6 | | | | 5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses | | | 4.6 | | | | 3.2 | | | | 44 | % | | | 10.3 | | | | 10.2 | | | | 1 | % |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income before taxes | | | 0.2 | | | | 0.9 | | | | (78 | )% | | | 2.9 | | | | 2.4 | | | | 21 | % |
Provision for income taxes | | | 0.1 | | | | 0.4 | | | | (75 | )% | | | 1.0 | | | | 1.0 | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 0.1 | | | $ | 0.5 | | | | (80 | )% | | $ | 1.9 | | | $ | 1.4 | | | | 36 | % |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Key operating statistics | | | | | | | | | | | | | | | | | | | | | | | | |
Payment processing revenue: | | | | | | | | | | | | | | | | | | | | | | | | |
Total MasterCard purchase volume | | $ | 365.7 | | | $ | 252.4 | | | | 45 | % | | $ | 967.8 | | | $ | 733.7 | | | | 32 | % |
|
|
NM – The result of the calculation is not meaningful. | | | | | | | | | | | | | | | |
Additional business, primarily driven by new customers on our purchase card product continues to drive growth in our MasterCard segment. Our MasterCard purchase volume grew by over $110 million in the third quarter compared to the same period in 2005. As discussed in previous periodic filings, the loss of the Jackson Hewitt stored-value program in 2005 primarily impacted comparability for the first three months of the year due to the seasonality of the activity. The program only generated $0.1 of income before taxes in 2005. The absence of the program in 2006 primarily contributed to the decrease in other revenue for the nine months ended September 30, 2006.
Operating expenses increased by $1.4 million during the three months ended September 30, 2006, and $0.1 million during the nine months ended September 30, 2006. The increase during the three months ended September 30, 2006, was primarily related to an increase in the credit loss reserve of $1.1 million. This increase was the result of recording a reserve pertaining to one customer as discussed in the summary section. In addition, processing expenses increased due to increased spend. Operating expenses remained relatively flat for the nine months ended September 30, 2006, versus the same period in 2005 primarily due to a decrease in service fees related to the Jackson Hewitt stored value program, offset by an increase in the credit loss reserve.
As a member bank of MasterCard, our wholly-owned bank subsidiary received $0.5 million from MasterCard as part of MasterCard’s Initial Public Offering. These proceeds were included in other revenues for the nine months ended September 30, 2006. We have sold our remaining 27,578 shares of MasterCard Class B stock during the fourth quarter of 2006 for a pre-tax gain of approximately $1.7 million.
Page 21 of 31
Liquidity, Capital Resources and Cash Flows
The following table summarizes our financial position at September 30, 2006 compared to December 31, 2005:
(in millions)
| | | | | | | | | | | | | | | | |
| | September 30, | | | December 31, | | | Change |
|
| | 2006 | | | 2005 | | | Amount | | | Percent | |
|
|
Assets | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 23.2 | | | $ | 45.0 | | | $ | (21.8 | ) | | | (48 | )% |
Accounts receivable, net | | | 839.3 | | | | 652.1 | | | | 187.2 | | | | 29 | % |
Deferred income taxes | | | 383.9 | | | | 403.1 | | | | (19.2 | ) | | | (5 | )% |
All other assets | | | 337.8 | | | | 348.1 | | | | (10.3 | ) | | | (3 | )% |
|
| | | | | | | | | | |
Total assets | | $ | 1,584.2 | | | $ | 1,448.3 | | | $ | 135.9 | | | | 9 | % |
|
| | | | | | | | | | |
Liabilities and stockholders’ equity | | | | | | | | | | | | | | | | |
Accounts payable | | $ | 360.0 | | | $ | 254.4 | | | $ | 105.6 | | | | 42 | % |
Deposits and borrowed federal funds | | | 403.7 | | | | 377.3 | | | | 26.4 | | | | 7 | % |
Due to Cendant under tax receivable agreement | | | 418.4 | | | | 424.3 | | | | (5.9 | ) | | | (1 | )% |
All other liabilities | | | 241.1 | | | | 289.7 | | | | (48.6 | ) | | | (17 | )% |
|
| | | | | | | | | | |
Total liabilities | | | 1.423.2 | | | | 1,345.7 | | | | 77.5 | | | | 6 | % |
Stockholders’ equity | | | 161.0 | | | | 102.6 | | | | 58.4 | | | | 57 | % |
|
| | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 1,584.2 | | | $ | 1,448.3 | | | $ | 135.9 | | | | 9 | % |
|
| | | | | | | | | | |
|
|
Net accounts receivable have increased as a result of our payment processing transaction growth and significantly higher fuel prices that increased our average expenditure per payment processing transaction. As a result of our higher accounts receivable balance, accounts payable, deposits and borrowed federal funds have increased to fund this balance.
Our operations for the nine months ended September 30, 2006, used approximately $24 million of cash. This amount was lower than the decrease of approximately $102 million for the same period a year ago. Cash used by operations increased period over period by approximately $78 million as accounts receivable balance has increased due to increases in fuel prices and number of fuel transactions. During the nine months ended September 30, 2006, we had a $15 million security mature which resulted in cash from investing activities of $4 million compared to cash used for investing activities of approximately $11 million for the same period a year ago. During the nine months of 2006 we paid down approximately $28 million in principal of our financing debt.
For the nine months ended September 30, 2006, we used approximately $9 million for capital expenditures primarily to enhance our product features and functionality and to acquire information systems and personal computer office equipment. This amount was consistent with capital expenditures during the same period a year ago.
As a consequence of our separation from Cendant, we increased the tax basis of our tangible and intangible assets to their fair market value. This increase in tax basis allows us the ability to reduce the amount of future tax payments to the extent that the Company has future taxable income. We are obligated, however, pursuant to our Tax Receivable Agreement with Cendant, to pay to Cendant, on an after-tax basis, 85% of the amount of tax we save for each tax period as a result of these increased tax benefits. We have recorded approximately $418 million for this obligation to Cendant as a liability on the condensed consolidated balance sheets. During the third quarter of 2006, we received final tax information relative to this transaction. This resulted in our adjusting both amounts due to Cendant (by approximately $9 million) and our deferred tax asset (by approximately $10 million).
Management believes that we can adequately fund our cash needs during the next 12 months. We have three main sources of liquidity in addition to cash from operating activities.
Our bank subsidiary, FSC, utilizes certificates of deposit to finance the 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 effective annual fixed rates ranging from 4.45 percent to 5.45 percent. As of September 30, 2006, we had approximately $381 million of deposit outstanding. Certificate of deposit borrowings are subject to regulatory capital requirements.
FSC also utilize federal funds lines of credit to supplement the financing of the accounts receivable. Our federal funds lines of credit were increased to $130 million in July of 2006. At September 30, 2006, we had outstanding borrowings of approximately $22 million.
Page 22 of 31
In addition, we have a revolving line-of-credit facility agreement (“Revolver”) that provides a total available line-of-credit of $130 million. At September 30, 2006 we had outstanding borrowings on the Revolver of $51 million.
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 that limit the Company’s ability to pay dividends, sell or transfer all or substantially all of our property or assets, incur more indebtedness or make guarantees, grant or incur liens on our assets, make investments, loans, advances or acquisitions, engage in mergers, consolidations, liquidations or dissolutions, enter into sales or leasebacks and change our accounting policies or reporting practices. FSC is not subject to certain of these restrictions.
Application of Critical Accounting Policies and Estimates
Many accounting estimates and assumptions involved in the application of accounting principles generally accepted in the United States of America have a material impact on reported financial condition and operating performance and on the comparability of such reported information over different reporting periods. We base our estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions. On an ongoing basis, we evaluate our estimates and judgments that we believe are most important to the portrayal of our financial condition and results of operations. We regard an accounting estimate or assumption underlying our financial statements to be most important to the portrayal of our financial condition and results of operations and therefore a “critical accounting estimate” where:
| • | | The nature of the estimates or assumptions is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and |
|
| • | | The impact of the estimates and assumptions on financial condition or operating performance is material. |
Reserve for Credit Losses
Our reserve for credit losses is an estimate of the amounts currently recorded in gross accounts receivable that will ultimately not be collected. The reserve reduces the accounts receivable balances as reported in the financial statements to their net realizable value. Management estimates these reserves based on assumptions and other considerations, including a review of accounts receivable balances which become past due, past loss experience, customer payment patterns, current economic conditions, and known fraud activity in the portfolio and industry averages.
Management utilizes a model to calculate the level of the reserve for credit losses which includes such factors as:
| • | | a six-month rolling average of actual charge-off experience; |
|
| • | | amounts currently due; |
|
| • | | the age of the balances; and |
|
| • | | estimated bankruptcy rates. |
In addition to the model, management uses their judgment to ensure that the reserve for credit losses that is established is reasonable and appropriate.
Page 23 of 31
Management believes the current assumptions and other considerations used to estimate the reserve for credit losses are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating the reserves, the resulting change could have a material adverse effect on our consolidated results of operations, and in certain situations could have a material adverse effect on our financial condition.
The following table summarizes the impact that differences in estimated loss rates would have on the reserve for credit losses at September 30, 2006:
| | | | |
|
Change in Reserve and Related Provision (in thousands) | | Impact |
|
|
Balance as reported September 30, 2006 | | $ | 7,433 | |
Increase in loss rate by: | | | | |
10% | | $ | 406 | |
20% | | $ | 812 | |
30% | | $ | 1,217 | |
|
Income Taxes
In calculating our effective tax rate we apportion income among various state tax jurisdictions. Although we believe that the estimates and judgments utilized to calculate the effective tax rate are reasonable, actual results may differ by a material amount.
Significant judgment is required in determining if any valuation allowance recorded against deferred tax assets is necessary. In assessing the need for a valuation allowance, we consider all available evidence including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. We have not currently recorded a valuation allowance based on the analysis and tax planning performed to date.
Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain statements that are forward-looking and are not statements of historical facts. 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 such 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:
| • | | Our revenues are largely dependent on fuel prices, which are prone to significant volatility. |
| • | | Our derivative instruments may expose us to the risk of financial loss if we determine it necessary to unwind our position prior to the expiration of the contract. |
| • | | Our failure to respond to competitive pressures with reduced fees or increased levels of capabilities and services. |
| • | | Major oil companies who have not traditionally provided universally accepted transaction processing may issue competing products and information management services specifically tailored to their fleet customers. |
| • | | Our failure to maintain or renew key agreements could adversely affect the number of fleet customer relationships we maintain or the number of locations that accept our payment processing services. In this regard, our top five strategic relationships are two of the largest North American oil companies and three of the largest domestic fleet management companies. |
Page 24 of 31
| • | | A decrease in demand for fuel as a result of a general downturn in the economic conditions in the United States or an increase in popularity of automobiles powered by alternative fuel sources, such as “hybrid” vehicle technology. |
| • | | Our failure to expand our technological capabilities and service offerings as rapidly as our competitors. |
| • | | Our failure to adequately assess and monitor credit risks of our customers could result in a significant increase in our bad debt expense. |
| • | | The actions of regulatory bodies, including bank and securities regulators. |
| • | | Acts of terrorism, war, or civil disturbance. |
| • | | A decline in general economic conditions. |
| • | | Our ability to achieve earnings forecasts, which are generated based on projected volumes. There can be no assurance that we will achieve the projected level of fuel and service transactions. |
| • | | The uncertainties of litigation, as well as other risks and uncertainties detailed from time to time in our Company’s Securities and Exchange Commission filings, including the risk factors included inItem 1Aof our annual report on Form 10-K/A for the year ended December 31, 2005. |
The forward-looking statements speak only as of the date of this quarterly report and undue reliance should not be placed on these statements.
Changes in Accounting Policies and Recently Issued Accounting Pronouncements
During the three months ended September 30, 2006, there were no changes to accounting policies that had or are expected to have a material effect on our financial position or results of operations.
Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.” This Statement amends FASB Statements No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” This Statement is effective after the first fiscal year that begins after September 15, 2006. We believe that the adoption of this standard will have no material impact on our financial statements.
In June 2006 the FASB issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”(“FIN 48”). This Statement clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are analyzing the impact of this Interpretation on the Financial Statements and have not determined the effect, if any, this Interpretation will have on our results of operations or financial position.
In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). 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 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. We are evaluating the impact, if any, the adoption of SFAS No. 157 will have on our results of operations or financial position.
Page 25 of 31
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”(“SAB 108”), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 is effective for fiscal years ending after November 15, 2006. Early application is encouraged, but not required. We are assessing the impact, if any, the adoption of SAB No. 108 will have on our results of operations or financial position.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The following Quantitative and Qualitative Disclosures about Market Risk should be read in conjunction with our annual report on Form 10-K/A filed with the Securities and Exchange Commission on November 20, 2006.
Commodity Price Risk
The following table reflects the estimated quarterly effect of changes in the price of gas, without the effect of our fuel price derivative instruments:
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
|
(in thousands, except per gallon data) | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
|
Change in price per gallon | | $ | (0.30 | ) | | $ | (0.20 | ) | | $ | (0.10 | ) | | $ | 0.10 | | | $ | 0.20 | | | $ | 0.30 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Effect on: | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | (6,066 | ) | | $ | (4,044 | ) | | $ | (2,022 | ) | | $ | 2,022 | | | $ | 4,044 | | | $ | 6,066 | |
Expenses | | | (1,031 | ) | | | (687 | ) | | | (344 | ) | | | 344 | | | | 687 | | | | 1,031 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Operating income | | $ | (5,035 | ) | | $ | (3,357 | ) | | $ | (1,678 | ) | | $ | 1,678 | | | $ | 3,357 | | | $ | 5,035 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
We use derivative instruments to manage the impact of volatility in fuel prices. We enter into put and call Option based on the wholesale price of unleaded gasoline and retail price of diesel fuel, which expire on a monthly basis according to the schedule below. The Options are intended to lock in a range of prices during any given quarter on a portion of our forecasted earnings subject to fuel price variations. Our fuel-price risk management program is designed to purchase derivative instruments to manage the Company’s fuel-price-related earnings exposure going forward. We plan to continue locking in about 90 percent of our earnings exposure every quarter, on a rolling basis. The following table presents information about the Options as of October 31, 2006:
| | | | | | | | | | | | |
| |
| | | | | | Weighted | | | Average Price | (b) |
| | Percentage(a) | | | Floor | | | Ceiling | |
|
|
For the period October 1, 2006 through December 31, 2006(c) | | | 90 | % | | $ | 1.88 | | | $ | 1.95 | |
For the period January 1, 2007 through June 30, 2007 | | | 90 | % | | $ | 2.29 | | | $ | 2.36 | |
For the period July 1, 2007 through September 30, 2007 | | | 90 | % | | $ | 2.32 | | | $ | 2.39 | |
For the period October 1, 2007 through December 31, 2007 | | | 90 | % | | $ | 2.41 | | | $ | 2.48 | |
For the period January 1, 2008 through March 31, 2008 | | | 90 | % | | $ | 2.53 | | | $ | 2.60 | |
For the period April 1, 2008 through June 30, 2008 | | | 90 | % | | $ | 2.59 | | | $ | 2.65 | |
For the period July 1, 2008 through September 30, 2008 | | | 60 | % | | $ | 2.57 | | | $ | 2.64 | |
For the period October 1, 2008 through December 31, 2008 | | | 30 | % | | $ | 2.47 | | | $ | 2.53 | |
| | | | | | | | | | | | |
|
(a) | | Represents the percentage of the Company’s forecasted revenue subject to fuel price variations to which the Options pertain in 2006 and the percentage of the Company’s forecasted earnings subject to fuel price variations to which the Options pertain in 2007 and beyond. |
(b) | | Weighted average price is the Company’s estimate of the retail price equivalent of the underlying strike price of the Options. |
(c) | | Options that expire during 2006 are based only on unleaded gasoline. |
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, with the participation of our management, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2006. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management has concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective. Notwithstanding the material weaknesses discussed below, our Chief Executive Officer and Chief Financial Officer have concluded that the financial statements included in this Form 10-Q/A present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.
Our Chief Executive Officer and Chief Financial Officer, in conjunction with management, have determined that as of September 30, 2006 the Company has a material weakness relating to the controls over accounting for goodwill and related deferred income taxes. Specifically, the Company’s procedures did not operate effectively to detect certain errors in the computation of goodwill in 2001 and the related effects that the initial public offering in 2005 had on the tax treatment of such goodwill.
Remediation Status
To remedy this material weakness, the Company has engaged additional resources to add an additional layer to the preparation and review of any similar transactions and strengthened internal resources with subject matter expertise. These changes either have been, or are in the process of being, implemented.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during 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 the Company has, or is in the process of, implementing changes to its internal control over the accounting for goodwill and the associated deferred income taxes subsequent to the period covered by this report. The Company will continue to assess these changes and will supplement them as necessary.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
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 third quarter of 2006.
Item 1A. Risk Factors.
Except as provided below, there has not been a material change to the risk factors as set forth in our annual report on Form 10-K/A for the fiscal year ended December 31, 2005.
Historical transactions with our former parent company may adversely affect our financial statements.
Historical transactions with our former parent company, Cendant Corporation, may be reviewed from time to time by external parties that may include, but are not limited to, former subsidiaries or operating companies of Cendant Corporation. While management does not believe, nor has any knowledge of any transaction that would be in error or otherwise adjusted, corrections to the financial statements of Cendant Corporation could adversely affect our financial statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
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Item 6. Exhibits.
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Exhibit No. | | Description |
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| | | 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 of Wright Express Corporation (incorporated by reference to Exhibit No. 3.1 to our current report on Form 8-K filed with the SEC on March 9, 2006, File No. 001-32426). |
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* | | | 10.1 | | | ISDA Credit Support Annex to the Schedule Master Agreement between Bank of America, N.A. (successor to Fleet National Bank) and Wright Express Corporation, dated as of August 28, 2006. |
| | | | | | |
* | | | 10.2 | | | Amendment to the ISDA Master Agreement between Bank of America, N.A. (successor to Fleet National Bank) and Wright Express Corporation, dated as of August 28, 2006. |
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* | | | 10.3 | | | Form of confirmation evidencing purchases of diesel put options and call options by Wright Express Corporation from Bank of America , N.A. |
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* | | | 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. |
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* | | | 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 the Chapter 63 of Title 18 of the United States Code. |
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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 | |
Date: November 20, 2006 | By: | /s/ Melissa D. Smith | |
|
| | Melissa D. Smith | |
| | Senior Vice President and Chief Financial Officer (Principal Financial Officer) | |
|
Page 30 of 31
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 of Wright Express Corporation (incorporated by reference to Exhibit No. 3.1 to our current report on Form 8-K filed with the SEC on March 9, 2006, File No. 001-32426). |
| | | | | | |
* | | | 10.1 | | | ISDA Credit Support Annex to the Schedule Master Agreement between Bank of America, N.A. (successor to Fleet National Bank) and Wright Express Corporation, dated as of August 28, 2006. |
| | | | | | |
* | | | 10.2 | | | Amendment to the ISDA Master Agreement between Bank of America, N.A. (successor to Fleet National Bank) and Wright Express Corporation, dated as of August 28, 2006. |
| | | | | | |
* | | | 10.3 | | | Form of confirmation evidencing purchases of diesel put options and call options by Wright Express Corporation from Bank of America , N.A. |
| | | | | | |
* | | | 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 the Chapter 63 of Title 18 of the United States Code. |
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* | | | | | | Filed herewith |
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