World Fuel Services Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing also reports quarterly results. The registrant is World Fuel Services Corporation, notwithstanding the request metadata naming World Kinect Corp. The company provides energy procurement, fuel supply, transaction and payment services through aviation, marine and land segments.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $27.016 billion | $30.381 billion | Down 11.1% |
| Gross profit | $899.0 million | $861.0 million | Up 4.4% |
| Income from operations | $188.9 million | $245.7 million | Down 23.1% |
| Net income attributable to World Fuel | $126.5 million | $174.5 million | Down 27.5% |
| Diluted EPS | $1.81 | $2.47 | Down 26.7% |
| Operating cash flow | $205.2 million | $447.5 million | Down $242.2 million |
Gross margin increased to approximately 3.3% from 2.8%; operating margin declined to approximately 0.7% from 0.8%. Revenue fell largely with lower fuel prices, while gross profit rose overall. Aviation and land gross profit increased, but marine gross profit fell.
- Segment results: Aviation revenue was $10.914 billion and operating income $160.5 million; marine revenue was $7.183 billion and operating income $30.2 million; land revenue was $8.919 billion and operating income $70.8 million. Aviation operating income improved by $28.3 million; marine fell by $42.7 million and land by $30.6 million.
- Cash and working capital: Cash and cash equivalents were $698.6 million, up from $582.5 million. Accounts receivable rose to $2.344 billion from $1.813 billion. Current assets were $3.837 billion and current liabilities $2.183 billion, a current ratio of approximately 1.76.
- Debt: Total debt was $1.186 billion, up from $772.2 million, including $840.0 million of term loans and $325.2 million drawn under the revolving credit facility. Unused facility capacity was $926.5 million; the company reported compliance with debt covenants at year-end. Cash less total debt was approximately $487.7 million net debt.
- Investing and financing: Investing cash outflow was $428.5 million, principally reflecting acquisitions; financing cash inflow was $340.9 million, principally reflecting increased net borrowing. Capital expenditures were $36.1 million. Dividends declared were $0.24 per share; $77.2 million remained under the share repurchase authorization.
- Q4 results: Revenue was $7.792 billion, gross profit $222.3 million, and net income attributable to World Fuel $2.2 million, or diluted EPS of $0.03, versus $49.9 million and $0.71 per diluted share in Q4 2015.
Material changes and notable items
- FY revenue declined as average fuel prices fell. Aviation fuel volume increased 12.4%; marine volume decreased 4.0%; land volume increased 8.8%. Marine weakness reflected sluggish shipping and offshore markets, lower price volatility and weaker demand for risk-management products.
- Operating expenses rose 15.4% to $710.1 million, including increased compensation, acquisition-related costs and higher bad-debt provision ($15.4 million versus $7.5 million). Non-operating expenses increased to $46.7 million, including higher financing costs and a $7.5 million write-off related to a former joint venture partner’s bankruptcy.
- The company acquired PAPCO and APP in July and certain ExxonMobil aviation fueling operations in Canada and France in November and the U.K. and France in December. The ExxonMobil transaction’s approximate total purchase price is $260 million; remaining locations were expected to close in the first half of 2017, subject to consents and other conditions. Acquisition spending was a major use of cash, and debt increased materially.
- In Q4, the company wrote off $5.8 million of Hanjin Shipping receivables; approximately $7.0 million remained outstanding, net of anticipated insurance recoveries. It also recorded a $7.5 million write-off involving a former joint venture partner.
- The company revised prior-period financial information for an income-tax accounting error it determined was not material to previously issued statements. The cumulative correction was approximately $20 million; FY 2015 net income attributable to World Fuel was revised down by $12.4 million to $174.5 million, and diluted EPS by $0.17 to $2.47. The filing states the correction did not affect reported cash flows for 2014 or 2015.
Outlook, risks and contingencies
- Management expected adverse shipping-market conditions to continue into 2017. Marine cost reductions were substantially completed, with a 2016 charge of approximately $4.0 million; additional cost-reduction initiatives across the business were planned. No specific consolidated earnings or revenue guidance was provided.
- Management said aviation delivered strong results while marine and land were challenged. Aviation benefited from increased resale volume and government-related activity; management cautioned that military demand can vary significantly. Land growth is supported by acquisitions, but weather can affect demand.
- A global ERP upgrade was in planning/design, with expected total cost of $30–$40 million over three years. Management cited execution, cost-overrun and integration risks. It stated cash, facility availability and operating cash flows were expected to cover working capital and capital needs for at least the next 12 months.
- Key risks include customer and counterparty credit exposure, fuel-price and derivative volatility, supplier and service-provider performance, competition, industry weakness, acquisition integration, foreign exchange, cybersecurity, regulatory and environmental obligations, and debt covenants. A 1% interest-rate change was estimated to change interest expense by $11.7 million over the next 12 months.
- The DOJ was investigating aviation fuel supply industry activity, including certain company activity at an airport in Central America; the company said it was cooperating. Tax matters include South Korean assessments and a pre-assessment notice totaling approximately $28.0 million, plus disputes in Brazil and other jurisdictions. Gross unrecognized income-tax liabilities, including interest and penalties, were $68.6 million.
- The company appealed an insurer’s challenge to coverage for an $18 million fuel theft. A court judgment in November 2016 required the insurer to pay approximately $24.5 million, including damages and interest, but the insurer appealed; recovery was not assured. The company also disclosed that environmental or other claims could exceed insurance coverage.
Investor verification priorities
- Review the drivers of the steep Q4 earnings decline, including segment operating results, tax items, derivative mark-to-market effects and other unusual charges.
- Assess whether operating cash flow can recover from the 2016 decline, given higher receivables, inventory needs and acquisition-related working capital.
- Verify acquisition integration, remaining ExxonMobil closings and returns relative to purchase price and added debt.
- Track marine-market conditions, planned cost reductions and whether management’s cost actions offset lower margins and volumes.
- Monitor Hanjin collections and insurance recoveries, the former joint venture balance, the DOJ inquiry, tax disputes and the insurer appeal.
- Evaluate debt maturity and refinancing exposure, covenant headroom, floating-rate sensitivity, and the funding and execution of the ERP project.