Business context and reporting period
World Fuel Services Corporation (the filing’s registrant; World Kinect Energy Services is identified as its energy-management brand) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company distributes fuel and related products and services in aviation, land and marine markets, and provides energy-management and payment solutions.
Results were materially affected by COVID-19, lower fuel prices and reduced customer activity. Demand improved moderately in the third quarter from the second quarter but remained well below pre-pandemic levels.
Financial performance and liquidity
Amounts are in U.S. dollars; financial statement figures are in millions unless indicated.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $4,482.7 | $9,322.7 | $15,656.2 | $27,460.9 |
| Gross profit | $214.0 | $305.7 | $686.6 | $825.3 |
| Income from operations | $38.8 | $93.6 | $121.5 | $239.2 |
| Net income attributable to World Fuel | $82.0 | $48.2 | $113.1 | $122.4 |
| Diluted earnings per share | $1.29 | $0.73 | $1.76 | $1.84 |
- Revenue fell 52% in Q3 and 43% for the nine-month period. Gross profit declined 30% and 17%, respectively. Gross margin was approximately 4.8% in Q3 2020 versus 3.3% in Q3 2019, and 4.4% versus 3.0% for the nine-month periods.
- Q3 net income benefited from an $80.0 million pretax gain on the sale of Multi Service payment solutions (MSTS). Without treating that gain as recurring, reported net income should be viewed in context of the steep decline in operating income.
- Nine-month operating cash flow was $490.6 million versus $168.7 million in 2019; investing cash flow was positive $86.9 million versus negative $55.1 million; financing cash flow was negative $188.8 million versus negative $103.1 million. Operating cash flow benefited substantially from working-capital movements.
- Cash was $572.7 million at September 30, 2020, up from $186.1 million at year-end 2019. Total debt was $526.6 million, down from $628.8 million; there were no Credit Facility borrowings and $1.3 billion of stated unused capacity, subject to financial ratios and other conditions. The company reported compliance with debt covenants.
- Current assets were $2,534.8 million and current liabilities $1,557.0 million. Accounts receivable fell to $1,244.1 million from $2,891.9 million, while the allowance for credit losses rose to $51.8 million from $35.5 million.
Material changes versus prior comparable periods
- All three segments experienced lower Q3 revenue and gross profit. Aviation revenue fell 66%, primarily reflecting lower jet-fuel prices and a 53% volume decline; land revenue fell 36%, and marine revenue fell 39%.
- Q3 segment operating income declined in aviation and marine, while land operating income increased to $18.8 million from $13.4 million, helped by cost reductions. For the nine months, aviation operating income fell to $67.3 million from $215.4 million; land and marine operating income increased.
- Operating expenses declined 17% in Q3, reflecting lower compensation and cost initiatives, partly offset by bad-debt expense. Nine-month expenses included an $18.6 million office-footprint impairment and $7.7 million of restructuring charges.
- Non-operating results swung to income of $69.0 million in Q3 from expense of $22.8 million, principally due to the MSTS sale gain and lower interest and receivables-program costs.
Outlook, commentary, risks and unusual items
- Management expected pandemic-related pressure on customer activity and company results to continue through the balance of 2020 and into 2021; the filing gives no numerical earnings or revenue guidance. Management said available cash, Credit Facility capacity and operating cash flows were expected to fund working capital and capital expenditures for at least 12 months, based on information then available.
- The aviation business faced sharply reduced commercial air travel and lower Afghanistan-related government activity as U.S. troop levels declined. The NATO-related contract had been renewed through December 2021, with a further one-year option at NATO’s discretion.
- Marine activity and profitability were pressured by pandemic-related demand weakness and lower fuel prices. Earlier-period marine results had benefited from IMO 2020 fuel-market changes. Land performance reflected uneven regional conditions; UK results and World Kinect Energy Services growth partly offset North American weakness.
- MSTS was sold on September 30, 2020 for $303.5 million gross cash proceeds at closing, with $268.4 million net of divested cash, plus $75.0 million of deferred consideration, including $50.0 million contingent on financial targets. The sale generated an $80.0 million pretax gain. The company also acquired the UVair fuel business for a stated purchase price of $159.0 million.
- Credit risk is elevated: the company recorded $57.9 million of bad-debt provision during the first nine months, and wrote off $53.1 million of receivables. Management warned that prolonged or more severe pandemic effects could increase credit losses, impair assets, and weaken liquidity. It reported no goodwill or long-lived-asset impairment as of September 30, apart from the office-related impairment already recorded.
- Other risks include volatile fuel prices and derivatives, customer and counterparty defaults, covenant-based borrowing limits, reduced Afghanistan-related activity, and tax disputes. Tax authorities were examining matters in Denmark, South Korea and the U.S.; the filing also describes Brazilian and Korean tax disputes. An unfavorable resolution could materially affect results or cash flows.
Most important facts for investors to verify
- Whether aviation, marine and land volumes and margins recover, and how prolonged pandemic effects affect customer credit and bad-debt expense.
- How much future earnings depend on Afghanistan-related government activity and the NATO contract, including troop reductions and renewal terms.
- The final MSTS sale proceeds, deferred and contingent consideration, and whether the reported earnings improvement can be sustained without the disposal gain.
- Cash-flow quality after separating working-capital movements and asset-sale proceeds from recurring operating performance; also confirm available borrowing capacity under covenant limits.
- Developments in tax audits and disputes, derivative exposures, and potential impairment or restructuring charges.