World Fuel Services Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter ended June 30, 2011; results are unaudited. The filing identifies the registrant as World Fuel Services Corporation, not World Kinect Corp. Financial amounts below are in U.S. dollars; millions are used unless noted.
Business context and financial performance
The company markets and distributes aviation, marine, and land fuels and related services. Revenue and cost of revenue are sensitive to fuel prices, while profitability also depends on sales volumes, margins, operating costs, and credit losses.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $8,708.7 | $4,397.3 | $15,788.1 | $8,315.3 |
| Gross profit | $165.1 | $107.6 | $301.9 | $206.4 |
| Income from operations | $66.1 | $45.1 | $121.6 | $87.2 |
| Net income attributable to World Fuel | $50.2 | $37.0 | $91.3 | $70.7 |
| Diluted EPS | $0.70 | $0.61 | $1.28 | $1.17 |
| Gross margin | 1.90% | 2.45% | 1.91% | 2.48% |
Q2 revenue increased 98.0%, gross profit 53.5%, operating income 46.7%, and net income 35.8% year over year. Six-month increases were 89.9%, 46.3%, 39.5%, and 29.2%, respectively. Revenue growth reflected higher fuel prices and increased volumes, including sales from acquisitions; gross margin as a share of revenue declined. Q2 operating expenses rose 58.4%, including higher compensation, bad-debt provision, and general and administrative costs. Interest and financing costs also increased.
- Segments, Q2: Aviation revenue/gross profit were $3,364.8 million/$82.0 million; marine $3,533.0 million/$50.7 million; land $1,810.9 million/$32.4 million. Land and aviation growth included acquired businesses. Marine six-month operating income declined 2.0%, with shipping-industry weakness cited for lower first-quarter gross profit per ton.
- Adjusted measures: Management reported non-GAAP diluted EPS of $0.81 for Q2 and $1.46 for the first six months, excluding after-tax share-based compensation and acquired-intangible amortization. These are supplemental, non-GAAP measures.
Cash flow, debt, and liquidity
- For the six months, operating cash flow was negative $137.7 million, versus positive $23.8 million in 2010. Management attributed the change primarily to working-capital needs from higher sales volume and fuel prices, including increases in receivables and inventory.
- Investing cash use was $113.4 million, primarily reflecting acquisitions; financing provided $126.3 million, mainly from net revolving-credit borrowings. Cash fell to $149.7 million from $272.9 million at year-end.
- At June 30, current assets were $2,793.9 million and current liabilities $1,880.8 million (current ratio approximately 1.49). Total debt was $182.8 million: $15.8 million short-term and $167.0 million long-term. Revolver borrowings were $138.0 million; $51.3 million of letters of credit were issued under that facility. The company reported compliance with its financial covenants.
- On July 28, after quarter-end, the company amended its credit agreement, adding a $250 million term loan, extending revolving and term facilities to July 2016, and changing certain pricing and covenant terms. Term-loan proceeds were used to repay revolving borrowings. The filing says the company believed cash, facilities, and operating cash flow would cover working capital and capital expenditures for at least 12 months.
- The receivables purchase facility was increased to $100 million; $60.8 million of receivables had been sold by June 30, with a $3.0 million retained beneficial interest. Letters of credit and bank guarantees across facilities totaled $136.8 million.
Acquisitions, outlook, risks, and contingencies
- 2011 acquisitions included Nordic Camp Supply, completed March 1 for an estimated $94.8 million, and Ascent Aviation Group, completed April 1 for an estimated $48.9 million, plus an immaterial acquisition. Their reported-period contribution to revenue and net income was not significant. Purchase-price allocations remained preliminary. Goodwill recorded for 2011 acquisitions was $33.2 million.
- No specific earnings or revenue guidance is provided. Management cautioned that interim results are not necessarily indicative of full-year results and that actual results may differ materially from forward-looking statements.
- Key risks include customer and counterparty creditworthiness and collections, fuel-price and foreign-exchange volatility, hedge effectiveness, supplier/customer performance, working-capital demands, acquisition integration, government-customer concentration, high-risk operating locations, credit-facility covenants, and changes in economic, regulatory, or geopolitical conditions.
- Pending matters include Brendan Airways’ claim seeking $4.5 million plus interest and attorney fees; the company disputes the claim. In Miami Airport environmental litigation, the company says any potential liability should be covered by county indemnification. Reserves for these matters were described as not significant, but management could not estimate ultimate exposure and noted an adverse ruling could materially affect results.
- Other notable items: a $5.2 million Henty acquisition earn-out liability; $41.1 million of unrecognized tax liabilities; and $3.2 million of vendor liability accruals derecognized in the first half, reducing cost of revenue.
Important facts for investors to verify
- How much of revenue and earnings growth came from volume and acquisitions versus higher fuel prices, and whether segment margins remain pressured.
- Whether working-capital requirements and negative operating cash flow persist, and how receivables quality and collections develop.
- The amended credit agreement’s actual pricing, covenant headroom, repayment schedule, and effect of the term-loan refinancing on borrowing costs and leverage.
- Final purchase-price allocations and integration performance for acquisitions, along with the Henty earn-out exposure.
- Developments in the Brendan Airways and Miami Airport matters and any changes to tax contingencies or derivative-related collateral requirements.