World Fuel Services Corporation — Q1 2011 Form 10-Q
Entity note: The supplied filing is for World Fuel Services Corporation, not World Kinect Corp. It covers the unaudited quarter ended March 31, 2011; comparisons are with Q1 2010 unless stated otherwise. Amounts below are in U.S. dollars.
Business context and results
World Fuel is a global fuel logistics company operating aviation, marine, and land segments. The quarter’s results include Nordic Camp Supply (NCS) from its March 1, 2011 acquisition date. Management cautions that interim results are not necessarily indicative of full-year results.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $7.079 billion | $3.918 billion | +80.7% |
| Gross profit | $136.8 million | $98.8 million | +38.4% |
| Operating income | $55.5 million | $42.1 million | +31.8% |
| Net income attributable to World Fuel | $41.1 million | $33.7 million | +22.0% |
| Diluted EPS | $0.58 | $0.56 | +3.6% |
| Operating cash flow | $(144.5) million | $16.6 million | Decrease of $161.1 million |
Gross margin was approximately 1.9% versus 2.5% a year earlier; operating margin was approximately 0.8% versus 1.1%. Revenue growth reflected higher fuel prices, increased volumes, and acquisitions. Management notes that fuel prices materially affect reported revenue and cost of revenue, while price movements can also affect gross profit through inventory accounting.
Segments and material changes
- Aviation: Revenue rose 81.3% to $2.647 billion; gross profit increased 45.0% to $70.1 million and operating income rose 43.0% to $38.2 million. Growth reflected higher prices, volume, and acquired businesses.
- Marine: Revenue increased 42.9% to $2.999 billion, but gross profit grew only 2.1% to $40.2 million and operating income fell 13.3% to $17.4 million. Management cited weaker shipping-industry conditions and lower gross profit per metric ton.
- Land: Revenue increased to $1.433 billion from $359.7 million; gross profit rose to $26.4 million and operating income to $10.7 million, primarily reflecting the Western and Lakeside acquisitions.
- Operating expenses rose 43.3% to $81.2 million, driven mainly by acquired-business and growth-related compensation, acquired-intangible amortization, systems development, depreciation, and travel. Net interest and financing costs increased, primarily in connection with the new credit facility.
Financial position, cash flow, and liquidity
- At March 31, cash and cash equivalents were $93.4 million, down from $272.9 million at year-end 2010. Accounts receivable was $1.892 billion and inventory was $312.4 million. Current assets were $2.511 billion and current liabilities $1.719 billion.
- Short- and long-term debt totaled $81.5 million, compared with $41.6 million at December 31, 2010. The $800 million revolving credit facility had $40 million drawn; it expires in September 2015. The company reported compliance with its financial covenants.
- Operating cash outflow was mainly attributed to working-capital needs as sales volume and fuel prices increased, including a $457.6 million increase in receivables and a $64.1 million increase in inventory, partly offset by higher payables.
- Investing cash outflow was $69.6 million, including $67.0 million for acquisitions, net of cash acquired. Financing provided $33.4 million, mainly from net revolving-credit borrowings. Cash declined by $179.5 million during the quarter.
- Management said cash, credit-facility availability, and operating cash flows were expected to be sufficient for working capital and capital expenditures for at least the next 12 months, while noting that liquidity depends on collections, supplier terms, commodity prices, and financing availability.
- In March, the company entered a receivables purchase agreement allowing sales of up to $50 million. It sold $38.7 million of receivables in the quarter and received $34.8 million in cash, retaining a $3.9 million beneficial interest.
Acquisitions, outlook, risks, and contingencies
- NCS was acquired for an estimated $94.9 million, comprising $67.4 million cash and $27.5 million in shares. Its preliminary purchase-price allocation included $12.9 million of goodwill and $15.2 million of identifiable intangible assets; valuation remained incomplete. NCS’s reported-quarter contribution was not significant.
- After quarter-end, on April 1, 2011, the company completed its acquisition of Ascent Aviation Group for an estimated $42.4 million. Ascent is not included in the quarter’s financial statements.
- No specific earnings or revenue guidance was provided. The filing discusses expectations and risks but gives no numerical full-year outlook.
- Principal risks cited include customer and counterparty creditworthiness, fuel-price volatility and hedging effectiveness, supplier and customer performance, customer concentration, economic and industry conditions, foreign exchange, acquisition integration and growth management, high-risk operating locations, credit-facility covenants, and regulatory, tax, and litigation matters.
- Pending matters include Brendan Airways’ claim seeking $4.5 million plus interest and attorney’s fees, which the company intends to contest, and potential liability relating to Miami International Airport environmental remediation, which the company believes should be covered by county indemnification. Recorded reserves for these matters were described as not significant; ultimate exposure could not be estimated.
- The Henty acquisition earn-out liability was estimated at £3.2 million ($5.2 million) at quarter-end. Unrecognized tax liabilities were $39.9 million; settlement timing could not be reasonably estimated.
- Management reported effective disclosure controls as of March 31, 2011 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the company identity: this filing is for World Fuel Services Corporation, rather than the company named in the request metadata.
- Assess whether working-capital cash outflows and lower cash balances are temporary, and monitor receivables collection, inventory, supplier credit, and liquidity after acquisitions.
- Separate organic growth from acquisition and fuel-price effects; review the final NCS purchase accounting and Ascent’s subsequent contribution.
- Track marine-segment profitability, where operating income declined despite higher revenue.
- Review derivative exposures, counterparty and fuel-price risks, credit-facility availability and covenants, and the resolution or evolution of the disclosed litigation and tax liabilities.