World Fuel Services Corporation — Q1 2020 Form 10-Q
Issuer note: The supplied filing is for World Fuel Services Corporation (NYSE: INT), not an issuer named World Kinect Corp. The filing describes World Kinect as its energy-management platform.
Business context and reporting period
Unaudited results cover the three months ended March 31, 2020, compared with Q1 2019. The company distributes fuel and related products and services across aviation, land and marine markets, and provides energy-management and payment solutions. Amounts below are in millions of U.S. dollars except per-share data.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $8,015.2 | $8,678.8 | Down 7.6% |
| Gross profit | $258.7 | $251.1 | Up 3.1% |
| Gross margin | 3.2% | 2.9% | Up about 0.3 percentage points |
| Operating income | $70.8 | $70.4 | Up 0.6% |
| Operating margin | 0.9% | 0.8% | Up about 0.1 percentage points |
| Net income attributable to World Fuel | $41.4 | $37.2 | Up 11.3% |
| Diluted EPS | $0.63 | $0.55 | Up 14.5% |
| Operating cash flow | $9.5 | $10.8 | Down $1.3 |
Net margin was approximately 0.5% versus 0.4%. Segment operating income was $29.1 aviation, $25.7 land and $33.9 marine, compared with $55.6, $21.0 and $13.5, respectively, in Q1 2019. Revenue fell in aviation and land, while marine revenue rose; marine and land operating results improved, but aviation declined substantially.
Financial position, cash flow and liquidity
- Cash and cash equivalents were $537.0 at March 31, 2020, versus $186.1 at year-end 2019. Current assets were $3,533.8 and current liabilities $2,109.3, a current ratio of approximately 1.7.
- Total debt was $1,199.5, up from $628.8 at year-end; cash-adjusted debt was approximately $662.5, versus $442.7. Long-term debt increased to $1,145.9.
- Operating cash flow was $9.5; investing cash outflow was $149.0, including $130.5 for an acquisition; financing cash inflow was $507.0, reflecting net borrowings. Cash increased by $351.0 during the quarter.
- The company reported $630.0 outstanding under its revolving credit facility and $512.6 of term loans. Unused facility capacity was $0.6 billion, constrained in part by financial ratios. The company said it was in compliance with its financial covenants and believed available cash, facility capacity and operating cash flows were sufficient for at least 12 months.
- Net derivative obligations were $124.9, principally due within one year. Letters of credit and bank guarantees totaled $416.9.
Material changes and unusual items
- Revenue decreased $663.6, primarily reflecting lower fuel prices and weaker aviation and land sales; marine revenue increased due in part to higher prices associated with IMO 2020 low-sulfur fuel requirements.
- Operating expenses rose 4.0% to $187.9, including higher bad-debt provision amid increased customer credit risk. The allowance for credit losses was $56.1 at quarter-end, including an $11.1 adoption adjustment to opening retained earnings for the expected-credit-loss standard.
- The company acquired the UVair aviation fuel business for estimated consideration of $161.0, including $30.0 due to sellers. The acquisition’s Q1 contribution was not material to consolidated revenue or net income.
- Share repurchases totaled $55.6, including 2.2 million shares under the announced program. Quarterly dividends declared were $0.10 per share, or $6.5 in total.
- Q1 results included $1.7 of restructuring costs. A broader restructuring plan was being developed in response to business conditions and the pandemic.
- Large derivative fair-value movements reflected market volatility; the filing reported $113.5 of gains on non-designated derivatives. These items may make reported results less reflective of underlying trading activity.
Outlook, management commentary and risks
Management said COVID-19 had a limited adverse effect on Q1 results but that demand and sales had fallen sharply after quarter-end. It expected a more significant impact in Q2 2020, with the full-year effect dependent on the pandemic’s duration and economic recovery. Commercial aviation and cruise-related marine activity were especially exposed. Management expected lower aviation volumes and profitability in Q2; it also expected marine volume and profitability to be more affected by the pandemic and lower fuel prices, while forecasting Q2 marine results generally consistent with Q2 2019. No quantified company-wide earnings or revenue guidance was provided.
Management cited customer credit deterioration, delayed payments or defaults, fuel-price volatility, derivative counterparty exposure, reduced trade credit, covenant-based facility availability, and potential goodwill or other asset impairments as key risks. The company also highlighted possible declines in NATO-related activity, which has been material to segment profitability. Tax examinations and disputes in Denmark, South Korea, Brazil and the U.S. could result in adverse adjustments; outcomes and timing were uncertain. A Danish proposed adjustment of approximately $5.2 was received on April 30, 2020, after quarter-end.
Important facts for investors to verify
- Whether post-quarter demand, customer collections and bad-debt reserves deteriorated beyond the assumptions used at March 31.
- How much revolving-credit availability remains under the facility’s leverage restrictions if earnings decline, and whether covenant compliance is maintained.
- The eventual scope, costs and savings of the restructuring, and any changes to dividends or buybacks.
- Whether Q1 marine gains linked to IMO 2020 and market volatility are repeatable, and how aviation and land results develop as restrictions change.
- Final purchase accounting for the UVair acquisition, and the resolution and potential financial impact of material tax disputes.