World Kinect Corporation (WKC) — Form 10-Q
Reporting period: Quarter ended September 30, 2023; comparisons are with the quarter and nine months ended September 30, 2022. Unaudited results are presented in U.S. dollars. The company, formerly World Fuel Services Corporation, changed its name in June 2023 as part of its transformation into a diversified energy and solutions provider. Its reportable segments are aviation, land and marine.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $12,245.3 million | $15,661.3 million | $35,707.6 million | $45,165.4 million |
| Gross profit | $281.4 million | $322.3 million | $825.8 million | $806.7 million |
| Income from operations | $73.3 million | $100.3 million | $213.3 million | $194.4 million |
| Net income attributable to World Kinect | $34.9 million | $42.5 million | $87.7 million | $93.2 million |
| Diluted EPS | $0.58 | $0.68 | $1.41 | $1.48 |
| Gross margin | 2.3% | 2.1% | 2.3% | 1.8% |
| Operating margin | 0.6% | 0.6% | 0.6% | 0.4% |
Revenue fell 22% in Q3 and 21% year to date, mainly reflecting lower fuel prices across segments and lower marine volumes. Q3 gross profit declined 13%, primarily because marine gross profit fell $40.2 million; nine-month gross profit rose 2%, led by a $107.8 million improvement in aviation, partly offset by declines in land and marine. Nine-month operating income improved despite revenue contraction, while higher interest expense and other financing costs weighed on pretax income. Q3 net income was also lower year over year.
Segment results
- Aviation: Q3 revenue decreased 18% to $6.0 billion as average price per gallon fell 22%; volumes rose 4%. Q3 operating income was $58.6 million, slightly above prior year. Nine-month operating income increased to $150.7 million from $58.5 million, principally because 2022 included significant inventory losses amid extreme backwardation and price volatility.
- Land: Q3 revenue decreased 21% to $4.0 billion, mainly on lower fuel prices; volumes increased 2%. Q3 operating income rose 43% to $31.8 million, supported by sustainability-related growth and lower operating expenses. Nine-month operating income decreased 7% to $82.6 million, with lower gross profit partly offset by reduced expenses.
- Marine: Q3 revenue declined 33% to $2.3 billion; volume fell 16% and average price per metric ton fell 20%. Operating income declined 74% to $12.4 million. Nine-month operating income fell 49% to $63.0 million. Management cited lower fuel prices and volatility, increased competition and softer resale demand compared with the exceptional 2022 market.
Cash flow, balance sheet and capital
- Operating cash flow: $266.8 million for the first nine months of 2023, compared with $229.3 million in 2022. Management attributed the increase principally to lower fuel prices and related working-capital movements, as well as cash from derivative activity.
- Investing cash flow: $77.4 million used, including $67.9 million of capital expenditures. The prior-year period used $699.2 million, including $641.7 million for the Flyers acquisition.
- Financing cash flow: $140.4 million used, including dividends of $25.7 million, share repurchases of $50.0 million, deferred acquisition consideration of $62.9 million, and convertible-note hedge costs net of warrant proceeds. Cash increased $37.2 million to $335.6 million.
- Liquidity: Current assets were $4.59 billion and current liabilities $4.11 billion at September 30, 2023. Accounts receivable were $2.88 billion; 94% were less than 60 days outstanding. The company stated cash, Credit Facility availability and operating cash flows were expected to fund working capital and capital expenditure needs for at least 12 months. Actual revolver availability is subject to covenant limits and is not clearly stated in the filing text.
- Debt: Total debt was $875.3 million, including $812.3 million long-term debt and $63.0 million current maturities; cash was $335.6 million. The revolving Credit Facility had no balance at period end and has a stated capacity of up to $1.5 billion, subject to terms and covenants. The $350 million, 3.25% convertible senior notes mature in 2028. The term loan and Credit Facility mature in 2027.
- Other balance-sheet items: Total assets were $7.48 billion and total equity $1.98 billion. Supplier-finance obligations included in accounts payable were $197.1 million, down from $246.8 million at year-end 2022.
Material changes, outlook and risks
- Q3 revenue and gross profit declined, with marine the principal source of the quarterly gross-profit decrease. Year-to-date operating income improved, mainly due to aviation’s recovery from prior-year inventory losses.
- Management expects full-year 2023 marine results to be materially below the segment’s extraordinary 2022 results. The filing provides no consolidated quantitative earnings or revenue guidance.
- June’s $350 million convertible-note issue carried 3.25% interest. The company spent $70.5 million on note hedges, received $40.0 million from warrant sales and repurchased approximately 2.24 million shares for $50.0 million in connection with the offering. The hedge is intended to mitigate dilution up to an effective conversion price of approximately $40.14; warrants could dilute shares above their strike price.
- Key stated risks include fuel-price and derivative volatility, customer and counterparty credit exposure, working-capital and financing needs, interest rates, supplier credit terms, geopolitical and supply disruptions, and environmental and climate-related regulation. Derivative credit clauses could require up to $100.6 million of additional collateral at September 30, 2023.
- Tax matters include proposed Danish assessments of approximately $13.6 million, $19.0 million and $22.0 million for 2015–2017; the company disputes them. The company notes that proposed assessments for 2018–2019 have not been received and could be materially larger if a similar methodology applies. It also contests South Korean and Brazilian tax matters. Reserves for claims and other matters were not material, but adverse outcomes could affect results or cash flows.
- The company reported effective disclosure controls at September 30, 2023 and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether marine demand, competition and profitability stabilize, and how results compare with management’s expectation of materially lower full-year 2023 performance versus 2022.
- Actual borrowing availability under the $1.5 billion Credit Facility, covenant headroom and sensitivity to working-capital or earnings changes.
- Cash conversion and working-capital movements, including use and cost of receivables purchase agreements and supplier-finance programs.
- Potential cash, earnings or share-dilution effects of the convertible notes, note hedges and warrants, including counterparty performance.
- Outcomes and timing of Danish, South Korean and Brazilian tax disputes and other contingencies, and any resulting changes to reserves or cash requirements.
- Whether the improvement in year-to-date gross and operating profit is sustainable as fuel prices and market volatility evolve.