World Fuel Services Corporation (World Kinect) — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. The filing registrant is World Fuel Services Corporation, which identifies World Kinect as its global energy management brand.
Business context and financial performance
The company distributes fuel and related services in aviation, land and marine markets, and provides energy advisory and fulfillment services. Results remained affected by COVID-19-related weakness in transportation demand.
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $5,957.9 million | $8,015.2 million | Down 26% |
| Gross profit | $191.6 million | $258.7 million | Down 26% |
| Income from operations | $37.6 million | $70.8 million | Down 47% |
| Net income attributable to World Fuel | $18.9 million | $41.4 million | Down 54% |
| Diluted EPS | $0.30 | $0.63 | Down $0.33 |
| Operating cash flow | $103.4 million | $9.5 million | Up $93.9 million |
Gross margin was approximately 3.2% of revenue, broadly unchanged from Q1 2020; operating margin declined to approximately 0.6% from 0.9%. The effective income tax rate increased to 31.8% from 27.7%.
- Aviation: Revenue fell 44% to $2.1 billion and operating income fell 21% to $23.0 million. Aviation volume declined 38%, reflecting depressed air travel and lower Afghanistan-related government activity.
- Land: Revenue rose 4% to $2.2 billion, while gross profit fell 16% to $89.5 million. Operating income increased 28% to $32.8 million, helped by cost reductions and improved North American natural gas performance.
- Marine: Revenue fell 22% to $1.7 billion and operating income fell 81% to $6.4 million. Lower volumes and the absence of the prior-year benefit from IMO 2020-related supply imbalances and price volatility weighed on results.
Liquidity, debt and cash flow
Cash and cash equivalents were $735.3 million at March 31, 2021, versus $658.8 million at December 31, 2020. Total debt was $523.5 million, including $500.1 million of term loans; there were no borrowings under the $1.3 billion revolving credit facility, which had $1.3 billion unused. The facility matures in July 2024, and the company reported compliance with its financial covenants.
Operating cash flow was $103.4 million, with working-capital movements a significant factor. Investing cash outflow was $2.7 million, compared with $149.0 million in Q1 2020, which included the UVair acquisition. Financing cash outflow was $20.8 million. Current assets were $3.06 billion and current liabilities $2.09 billion. The company said available cash, credit availability and operating cash flows were expected to meet working-capital and capital expenditure needs for at least the next 12 months.
Changes, outlook and risks
- Revenue and profit declined year over year, chiefly due to pandemic-driven aviation weakness and lower marine profitability. Operating expenses fell 18% to $154.0 million, reflecting cost reductions, the sale of the MultiService payment solutions business and lower credit-loss provision.
- Management said pandemic impacts were expected to continue through 2021, with recovery timing uncertain. No specific earnings or revenue guidance was provided.
- The U.S. and NATO announced troop withdrawals from Afghanistan in April 2021. The company expected this to cause an additional material decline in sales to NATO there.
- The North American land restructuring plan was expected to be finalized by the end of Q2 2021. Q1 restructuring charges were $2.1 million; accrued restructuring charges at quarter-end were $7.6 million.
- Unsecured customer credit exposure, fuel-price volatility, counterparty performance, liquidity and derivatives are key risks. Management reported no impairment at quarter-end, but said a more severe or prolonged pandemic or Afghanistan-related downturn could potentially result in impairments.
- Tax matters include a proposed Danish assessment of approximately $15.7 million received April 28, 2021 for tax year 2015, which the company disputes, and ongoing Danish, South Korean, U.S. and Brazilian tax matters. The filing says unfavorable outcomes could materially affect results or cash flows.
Important facts for investors to verify
- Whether aviation demand and marine volumes recover, and the extent of further Afghanistan-related sales declines.
- Whether cost reductions and the land restructuring can sustain operating profitability amid lower gross profit.
- Working-capital and receivables trends: net receivables rose to $1.67 billion; 96% were less than 60 days outstanding. The company also reported $389.5 million of receivables sold but still outstanding under its receivables programs.
- Progress and potential exposure from tax examinations and appeals, particularly the proposed Danish assessment and South Korean matters.
- Credit-facility availability under financial-ratio limits, compliance with debt covenants, and the effect of fuel prices and customer credit conditions on liquidity.