Business context and reporting period
This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019. The filing identifies the registrant as World Fuel Services Corporation; it describes Kinect as the company’s land-segment energy-management platform. The company distributes fuel and related products and services across aviation, land and marine markets, and offers energy-management and payment solutions.
Financial performance and liquidity
Amounts are in millions of dollars except per-share data. Third-quarter comparisons are with Q3 2018; nine-month comparisons are with the corresponding 2018 period.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $9,322.7 | $10,429.5 | $27,460.9 | $29,761.7 |
| Gross profit | $305.7 | $266.7 | $825.3 | $756.3 |
| Income from operations | $93.6 | $78.2 | $239.2 | $196.4 |
| Net income attributable to World Fuel | $48.2 | $38.2 | $122.4 | $98.1 |
| Diluted EPS | $0.73 | $0.56 | $1.84 | $1.45 |
| Operating cash flow | Not separately presented | Not separately presented | $168.7 | $(316.0) |
Q3 gross, operating and net margins were approximately 3.3%, 1.0% and 0.5%, respectively, versus 2.6%, 0.8% and 0.4% a year earlier. Nine-month margins were approximately 3.0%, 0.9% and 0.4%, versus 2.5%, 0.7% and 0.3%. Interest expense and other financing costs, net, were $19.5 million in Q3 and $59.1 million year to date.
Cash and cash equivalents were $218.5 million at September 30, 2019, compared with $211.7 million at December 31, 2018. Total debt was $687.4 million, including $150.0 million drawn on the revolving credit facility and $518.9 million in term loans. The company reported $1.1 billion of unused revolving capacity, subject to financial ratios and other conditions, and stated it was compliant with its financial covenants. Current liabilities were $2,910.5 million and current assets $3,969.5 million. The filing says cash, facility availability and operating cash flows were expected to meet working-capital and capital expenditure needs for at least 12 months.
Year-to-date investing cash use was $55.1 million, including $59.5 million of capital expenditures; financing cash use was $103.1 million, including $65.4 million of share repurchases and $14.6 million of dividends. The 2018 cash-flow comparison was affected by accounting presentation of retained interests in receivables sales.
Material changes versus prior comparable period
- Q3 revenue fell 10.6%, while gross profit rose 14.6%, operating income rose 19.8%, and attributable net income rose to $48.2 million from $38.2 million. Revenue declined in all three segments, primarily reflecting lower fuel prices; marine revenue also reflected lower volumes.
- Q3 gross profit increased across aviation, land and marine. Management attributed improvement to stronger government-related and core commercial activity, payment solutions growth, improved marine resale profitability, and supply disruptions and price volatility in Asia.
- For the first nine months, revenue fell 7.7%, but gross profit increased 9.1% and operating income increased 21.8%. Segment operating income improved in all three segments.
- Operating expenses rose 12.5% in Q3 and 4.7% year to date, including higher incentive compensation and bad-debt provisions. A large aviation customer’s bankruptcy contributed to the higher bad-debt provision.
- Operating cash flow improved by $484.7 million year over year to positive $168.7 million, principally due to changes in receivables, payables and derivatives, including timing effects.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management described aviation market conditions as strong, identified weather and portfolio repositioning as pressures on land, and cited marine market stabilization and IMO 2020-related supply imbalances and volatility as potential opportunities.
- NATO exercised the first of three one-year renewal options under its contract during Q3. Government-related sales are important to profitability but can vary with military activity, troop deployments, logistics, supply disruptions and contract renewals.
- The company is continuing a restructuring program intended to streamline operations and reallocate resources; it incurred $6.3 million of restructuring charges in the first nine months of 2019 and expected program activities to be completed by year-end 2019.
- Reported nine-month 2019 net income included $6.6 million of discrete tax benefits and $3.4 million of operating income recorded in 2019 that should have been recognized in prior periods. Management said these items were not material to the periods identified; excluding them, nine-month net income would have been $113.5 million, or $1.70 diluted EPS.
- Tax exposures include South Korean assessments and disputes, a Brazilian indirect-tax assessment, and Danish transfer-pricing matters. The company says it is contesting these matters; unfavorable resolution could materially affect results or cash flows in the period of resolution.
- Q3 non-operating expenses increased, principally due to litigation-related accruals. The DOJ closed its investigation into the company’s aviation fuel activities without taking action. Other ordinary-course claims remain, though the company reported no current proceeding it expects to have a material adverse effect.
- Key risks disclosed include fuel-price volatility, customer and counterparty credit, receivables collection, derivatives and collateral requirements, liquidity and trade credit, NATO-related activity, supply and logistics disruptions, regulation including IMO 2020, foreign exchange, litigation and tax outcomes. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the registrant identity and any relationship to the requested “World Kinect Corp” name; this filing is by World Fuel Services Corporation.
- Assess how much of the reported 2019 earnings improvement came from recurring segment performance versus the $6.6 million discrete tax benefit and $3.4 million prior-period operating-income correction.
- Track the aviation customer bankruptcy, bad-debt exposure, and the company’s accounts-receivable sale program and associated fees.
- Monitor NATO contract renewals and government-related profitability, plus the sustainability of marine gains amid IMO 2020 implementation and market volatility.
- Review available credit capacity and covenant headroom, derivative-related collateral exposure, and outcomes of the South Korean, Brazilian and Danish tax matters.