Business context and reporting period
The filing is World Fuel Services Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The registrant named in the filing is World Fuel Services Corporation, not World Kinect Corp. The company markets and distributes aviation, marine and land fuels and related services. Financial amounts below are in U.S. dollars; unless noted, figures are in millions.
Financial performance and position
- Second quarter: Revenue was $10,479.6, up 8.9% year over year; gross profit was $188.5, up 9.5%; operating income was $68.7, down 5.0%; and net income attributable to World Fuel was $51.0, up 5.0%. Diluted EPS was $0.71 versus $0.68.
- First six months: Revenue was $20,663.6, up 8.2%; gross profit was $370.8, up 12.6%; operating income was $135.7, up 3.1%; and net income attributable to World Fuel was $99.7, up 5.0%. Diluted EPS was $1.38 versus $1.32.
- Margins: Second-quarter gross margin was approximately 1.80% versus 1.79% a year earlier; operating margin was 0.66% versus 0.75%. Six-month gross margin was 1.79% versus 1.72%; operating margin was 0.66% versus 0.69%. Fuel distribution is a high-volume, low-margin business.
- Cash flow: Six-month operating cash flow was $134.6, compared with cash used of $56.9 in 2012. Investing used $32.3 and financing used $41.0. Cash increased to $232.5 from $172.7 at year-end; operating cash flow benefited from working-capital changes and lower cash collateral deposits.
- Liquidity and debt: Current assets were $3,684.1 and current liabilities $2,504.6 at June 30 (current ratio approximately 1.47). Short- and long-term debt totaled $351.4, down from $380.3 at December 31, 2012. Cash available for use by U.S. subsidiaries was $127.4. The company reported compliance with credit-facility and term-loan covenants and said available funds and operating cash flows should meet working-capital and capital expenditure needs for at least 12 months.
Material changes versus the prior comparable period
- Second-quarter revenue grew across all segments; land revenue rose 20.1%, principally reflecting acquired businesses. Lower average fuel prices partly offset higher volumes in aviation and marine.
- Second-quarter operating income declined as operating expenses rose 20.0%, with acquisition-related costs and higher bad-debt provision among the contributors. Aviation operating income increased, while marine and land operating income declined.
- For the first half, aviation operating income improved 30.2%, but marine operating income fell 29.0%, reflecting lower gross profit per ton and higher expenses. Land operating income rose 8.9%, with acquisition-related gross profit largely offset by higher costs.
- Receivables increased to $2,588.0 from $2,193.9 at year-end; accounts payable also increased, to $2,210.5 from $1,814.8.
Outlook, commentary, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management expects liquidity to be adequate for at least the next 12 months, while noting that fuel prices, customer collections, trade credit and financing-market conditions could affect liquidity.
- Lac-Mégantic derailment: On July 6, 2013, a train carrying about 50,000 barrels of crude oil associated with the company’s 50%-owned joint ventures derailed in Quebec, causing deaths, environmental damage and property destruction. The company and related parties were sued, and a Quebec order required recovery of spilled oil and remediation. Potential costs could not be estimated; insurance adequacy is uncertain, although management expected losses on the crude oil and tanker-cars to be insured. Additional regulation of rail shipments could increase costs.
- Customer credit: STX Pan Ocean filed for bankruptcy protection. As of July 25, receivables were $12.9 from STX Pan Ocean and $9.6 from its parent, STX Corporation. The company was pursuing settlement and other recovery avenues but could not assure full recovery.
- Other litigation: Cathay Pacific claims approximately $34.0 related to alleged contaminated fuel. The company recorded no accrual, could not estimate a loss range, and said it intended to defend the claim and believed insurance should cover any liability.
- Fuel-price and foreign-exchange exposure, derivative and counterparty risk, customer credit, acquisition integration, and environmental and legal claims remain relevant risks. Management reported effective disclosure controls as of June 30, 2013.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for World Fuel Services Corporation, despite the supplied World Kinect Corp metadata.
- Track the financial and insurance consequences of the Lac-Mégantic incident, including litigation, remediation orders and any subsequent estimates or accruals.
- Monitor collection of the $22.5 million in STX-related receivables and the company’s bad-debt provision.
- Assess whether operating cash flow remains sustainable given the large receivables balance and its sensitivity to working-capital movements.
- Separate acquisition-driven growth from underlying segment performance, especially marine and land operating profitability.