Business context and reporting period
The filing is World Fuel Services Corporation’s Form 10-K for the fiscal year ended December 31, 2018, filed March 1, 2019. Although the request metadata names World Kinect Corp, the registrant in the filing is World Fuel Services Corporation; Kinect is its energy-services platform. The company distributes fuel and related services in aviation, land and marine markets, and offers energy and payment-management services.
Financial performance and position
- Revenue: $39.75 billion, up 18.0% from $33.70 billion in 2017. Gross profit was $1.02 billion, up 9.3%; gross margin was approximately 2.6%.
- Profit: Operating income was $259.7 million versus $45.6 million in 2017; operating margin was approximately 0.7%. Net income attributable to World Fuel was $127.7 million, or $1.89 per diluted share, compared with a net loss of $170.2 million, or $2.50 per share, in 2017. The 2017 result included substantial impairment, restructuring and one-time tax charges.
- Cash flow: Operating cash flow was negative $182.5 million, compared with negative $133.6 million in 2017. Investing activities provided $286.0 million, including $369.8 million in receipts of retained interests associated with receivables sales; financing used $257.1 million. Cash declined $160.6 million to $211.7 million.
- Liquidity and debt: Current assets were $3.97 billion and current liabilities $2.94 billion (current ratio approximately 1.35). Total debt was $701.0 million, down from $910.2 million; cash less total debt was approximately negative $489 million. The company reported $985.9 million of unused revolving credit capacity, subject to borrowing limitations and covenants, and stated liquidity was sufficient for at least 12 months. It was in compliance with its debt covenants at year-end.
- Other measures: Capital expenditures were $72.3 million. Dividends declared were $0.24 per share. Accounts receivable, net, was $2.74 billion, with a $39.4 million bad-debt allowance.
Material changes versus 2017
- Aviation revenue increased 31.5%, supported by higher fuel prices and volume growth; segment operating income rose to $250.6 million. Land revenue grew 3.9%, but volume fell 5.9% as the company exited lower-return activities; segment gross profit was nearly flat. Marine revenue rose 12.8% on higher fuel prices, while volume fell 10.7%; the segment returned to operating profit of $37.8 million from a $57.8 million loss.
- Operating expenses declined 14.4% to $758.8 million, mainly because 2017 included $91.9 million of impairments and $59.6 million of restructuring charges. 2018 still included $17.1 million of restructuring charges.
- 2018 income tax provision was $55.9 million, versus $149.2 million in 2017. The prior year included the Tax Act’s one-time transition tax; the company finalized its estimate at $145.5 million.
- Receivables-purchase agreements were amended in 2018 to allow sale of 100% of qualifying receivables, for a discount based on LIBOR plus 1%–3%. Receivables sold under the programs were $508.2 million at year-end; related fees and interest were $19.9 million for 2018.
Outlook, commentary and risks
- Management expects government-related activity to remain strong through 2019, but its profit contribution to decrease versus 2018. Government sales, principally supporting NATO operations in Afghanistan, represented approximately 15% of consolidated gross profit in 2018. The NATO contract expires in December 2019 and has three one-year renewal options at NATO’s discretion.
- No specific consolidated revenue or earnings guidance is provided. Management is continuing portfolio rationalization, cost reductions, acquisition-synergy efforts and investment in automation and technology. It expects marine volumes to have stabilized and sees potential customer opportunities from IMO 2020 low-sulfur fuel rules, while noting uncertainty about fuel availability and prices.
- Key exposures include unsecured customer credit, fuel-price and derivative volatility, working-capital and trade-credit availability, and dependence on government business. Other significant risks include tax disputes, environmental and operating liabilities, cybersecurity, foreign exchange and Brexit, and changing regulation. The company disclosed an ongoing U.S. Department of Justice investigation into aviation fuel supply activities at an airport in Central America.
- Fourth-quarter 2018 unaudited results were revenue of $9.99 billion and net income attributable to World Fuel of $29.6 million, or $0.44 per diluted share. Fourth-quarter market volatility reduced the company’s market capitalization below book value at year-end; management’s goodwill impairment testing resulted in no 2018 impairment.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded controls were effective as of year-end.
Important facts for investors to verify
- Whether NATO renews its contract and how any changes in troop deployments affect the unusually high-margin government business.
- Underlying operating cash generation, working-capital movements and the company’s reliance on receivables sales; compare cash-flow presentation carefully because accounting changes reclassified certain receipts to investing activities.
- Customer credit quality, the rising bad-debt allowance, and the costs and availability of supplier trade credit as fuel prices fluctuate.
- Debt availability under the leverage covenant, floating-rate exposure, and the company’s ability to meet debt maturities, particularly in 2021.
- Developments in tax assessments and litigation, including the DOJ investigation, and the potential effects of IMO 2020 and other regulatory changes.