World Fuel Services Corporation — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filed February 24, 2011. This is an annual report, not a standalone fourth-quarter filing. The filing identifies the registrant as World Fuel Services Corporation, notwithstanding the request metadata naming WORLD KINECT CORP.
Business context and key financial metrics
World Fuel markets and distributes aviation, marine and land fuels and related services worldwide. It primarily resells fuel and uses third parties for delivery and storage. Results are sensitive to fuel prices, sales volumes, gross profit per unit, customer credit and working-capital requirements.
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $19.131 billion | $11.295 billion |
| Gross profit / gross margin | $442.1 million / 2.31% | $375.6 million / 3.32% |
| Operating income / operating margin | $180.9 million / 0.95% | $154.0 million / 1.36% |
| Net income attributable to World Fuel | $146.9 million | $117.1 million |
| Diluted EPS | $2.31 | $1.96 |
| Cash from operating activities | $(35.7) million | $77.9 million |
| Cash and cash equivalents at year-end | $272.9 million | $298.8 million |
| Total debt at year-end | $41.6 million | $16.6 million |
Current assets were $2.068 billion and current liabilities $1.358 billion at year-end, a current ratio of approximately 1.52. The company reported $1.387 billion of net receivables and $211.5 million of inventory. It had no borrowings under its $800 million revolving credit facility, which expires in September 2015; $72.0 million of letters of credit were outstanding under that facility. Total equity was $1.127 billion.
FY2010 revenue increased 69.4%, while gross profit rose 17.7% and operating income 17.4%. Net income increased 25.4%; diluted EPS rose 17.9%. The lower gross and operating margins reflect the much faster growth in revenue than profit. Management attributed revenue growth to higher fuel prices, increased volumes and acquisitions. Marine gross profit declined 2.1% and operating income declined 13.3%; aviation and land operating income increased.
Fourth-quarter results and material changes
Unaudited Q4 2010 revenue was $5.829 billion, gross profit $123.6 million, net income attributable to World Fuel $39.4 million and diluted EPS $0.56. Q4 2009 figures were $3.545 billion, $102.0 million, $34.5 million and $0.57, respectively. Thus, quarterly revenue and gross profit rose, while diluted EPS was slightly lower.
FY2010 operating cash flow turned negative primarily because higher sales volumes and oil prices increased receivables, inventory and prepaid expenses. Investing cash outflow was $180.3 million, including $177.8 million for acquisitions, net of cash acquired. Financing provided $190.0 million, primarily reflecting $218.8 million in net proceeds from a September public offering of 9.2 million shares at $25 per share.
The company completed five 2010 acquisitions: FOS, Lakeside, Western, Gib Oil and Hiller. Their estimated aggregate purchase price was $238.2 million; purchase-price allocations for most remained subject to change at year-end. Excluding FOS, the 2010 acquisitions contributed $779.2 million of revenue and $4.3 million of net income for the periods included. Goodwill rose to $287.4 million from $153.8 million. The company recorded a $9.8 million reduction to cost of revenue from derecognized vendor liability accruals in 2010.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management stated that available cash, the credit facility and expected operating cash flows were believed sufficient for working capital and capital expenditures for at least 12 months, while cautioning that financing and trade-credit availability could change.
- Key operating risks include unsecured customer credit exposure, counterparty and supplier performance, volatile fuel prices, imperfect hedging, foreign-exchange movements, fuel-supply interruptions, competition and economic weakness in customer industries. Higher fuel prices can increase funding needs and constrain purchasing capacity.
- Derivative use creates market, valuation and counterparty risks. The filing notes that some aviation hedging uses heating-oil futures as a proxy for jet fuel, which may not track jet-fuel prices closely. The company was evaluating the potential effects of the Dodd-Frank Act’s new swaps regulation.
- OFAC had issued subpoenas concerning transactions involving Cuba and Sudan; the company’s review also considered Iran. World Fuel reported potential sanctions or license-reporting violations involving very small revenue amounts, said it was cooperating and strengthening compliance, and could not predict the review’s outcome or any penalties.
- Brendan Airways sought $4.5 million plus interest and attorney fees in a pending overcharge dispute; the company disputed the claims. Miami-Dade County had identified the company as a potentially responsible party in airport contamination remediation, which World Fuel disputed and believed was subject to county indemnification. Recorded reserves for the described proceedings were not significant; ultimate exposure was not estimable.
- Unrecognized tax liabilities were $39.5 million at year-end. The filing also describes environmental, regulatory, insurance and litigation exposures, including potential cleanup obligations and risks from international anti-corruption and sanctions compliance.
- Cash dividends were $0.15 per share for 2010. The credit facility imposes dividend limits, including a revised formula beginning in fiscal 2011.
Most important facts for investors to verify
- Whether the company can convert reported earnings into operating cash flow as receivables, inventory and fuel prices fluctuate.
- Acquisition integration, final purchase-price allocations, acquired-company profitability and the risk of goodwill or intangible-asset impairment.
- Marine segment profitability trends and the effect of competition and customer mix on gross profit per unit.
- Customer credit quality, receivables aging and expected credit losses, particularly given the $1.387 billion receivables balance.
- Developments in the OFAC review, the Brendan Airways litigation and the Miami airport environmental matter.
- Compliance with credit-facility covenants, debt maturities and dividend restrictions, and the continuing availability of supplier credit and letters of credit.