Business context and reporting period
The supplied filing is World Fuel Services Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018; it is not filed under the name WORLD KINECT CORP. World Fuel distributes fuel and related products and services across aviation, land and marine markets, and offers energy management services through its Kinect platform.
Financial performance and position
All amounts are in U.S. dollars; financial statement amounts are in millions unless indicated otherwise.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $10,150.8 | $8,086.2 | $19,332.2 | $16,280.4 |
| Gross profit | $246.2 | $231.0 | $489.6 | $462.4 |
| Income from operations | $61.1 | $51.2 | $118.3 | $101.6 |
| Net income attributable to World Fuel | $28.7 | $30.0 | $59.9 | $61.4 |
| Diluted EPS | $0.42 | $0.44 | $0.88 | $0.89 |
| Gross margin | 2.4% | 2.9% | 2.5% | 2.8% |
| Operating margin | 0.6% | 0.6% | 0.6% | 0.6% |
Revenue grew 25.5% in Q2 and 18.7% year to date, driven in part by higher fuel prices. Q2 operating income rose 19.2%, but attributable net income and diluted EPS declined. Higher financing costs and a larger tax provision weighed on earnings. Effective tax rates were 29.7% in Q2 and 24.6% year to date, versus 13.2% and 13.5%, respectively, in 2017; 2018 rates included discrete tax benefits.
Segment trends: Q2 aviation operating income increased to $64.2 from $49.7, while land declined to $10.2 from $12.2 and marine was $7.9 versus $7.2. Aviation gains reflected government-related and international resale activity. Marine gross profit fell 8.2% in Q2 and 7.7% year to date amid weak market conditions and lower volumes.
For the six months, operating cash flow was negative $228.6, versus negative $0.6 in 2017. Working-capital movements, including receivables, inventory and payables, were the main drivers; cash receipts from retained interests in receivables sales were classified as investing cash flow under a newly adopted accounting standard. Investing activities provided $199.5 and financing activities used $154.7. Cash fell to $187.6 at June 30 from $372.3 at year-end 2017.
Total debt was $765.3 at June 30, down from $910.2 at December 31, 2017; cash less total debt was approximately negative $577.7. The company reported $931.8 of unused capacity under its $1.16 billion credit facility and compliance with its financial covenants. Total assets were $5,757.0 and total liabilities $3,981.7. Receivables were $2,951.9 and accounts payable $2,536.0.
Material changes, outlook and risks
- Q2 revenue increases reflected higher average fuel prices and greater aviation volumes; aviation volumes rose 2.9%, while marine volumes fell 12.9% and land volumes declined by 39.9 million gallons.
- Management expected government-related activity to remain strong in 2018, but aviation and land profit contribution from government business to be lower than in 2017 due to reduced margins on a NATO contract. It expected marine volumes and operating margins to remain lower for the rest of 2018 versus 2017. No consolidated earnings or revenue guidance was provided.
- The company continued an enterprise-wide restructuring and portfolio review, expecting most activities to be completed over the next 18 months; the ultimate cost could not be reasonably estimated. It recorded $7.0 of restructuring charges in the first half and had $28.7 accrued at June 30.
- Management said cash, facility availability and operating cash generation should be sufficient for working capital and capital expenditures for at least 12 months, while identifying liquidity and working capital as priorities. Higher fuel prices can increase funding needs and strain supplier credit and customer payment capacity.
- Risks include weak maritime and offshore markets, variability in government contracts and conflict-zone logistics, fuel-price and derivative exposure, customer and counterparty credit, and tax/legal disputes. The company disclosed a DOJ investigation into aviation fuel supply activity at a Central American airport and material tax assessments and examinations, including South Korean assessments it is appealing. An adverse outcome could affect results or cash flows.
- Disclosure controls were deemed effective at a reasonable assurance level; no material change in internal control over financial reporting was reported during the quarter.
Investor verification priorities
- Confirm the intended issuer: the supplied 10-Q is for World Fuel Services Corporation, notwithstanding the request metadata naming WORLD KINECT CORP.
- Assess whether revenue growth translates into durable gross profit and earnings, given higher fuel prices, narrower gross margin and different segment trends.
- Track working-capital cash use, receivables-sale program activity, cash levels and actual availability under the credit facility.
- Review progress and costs of restructuring, the effects of reduced government-contract margins, and the expected marine-market recovery or further volume declines.
- Evaluate tax and DOJ matters, derivative exposures and any potential liquidity impact; outcomes and timing are uncertain.
- Reconcile six-month general and administrative expense: the consolidated income statement reports $147.2, while the MD&A expense table reports $143.2.