World Kinect Corporation (NYSE: WKC) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; unaudited, compared with the corresponding 2022 periods. The company changed its name from World Fuel Services Corporation to World Kinect Corporation in June 2023. It operates aviation, land and marine energy businesses and provides related energy-management and sustainability solutions. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $10,980.7 million | $17,122.1 million | $23,462.3 million | $29,504.1 million |
| Gross profit | $281.7 million | $253.4 million | $544.4 million | $484.4 million |
| Income from operations | $75.5 million | $52.8 million | $140.1 million | $94.1 million |
| Net income attributable to World Kinect | $29.9 million | $24.4 million | $52.7 million | $50.7 million |
| Diluted EPS | $0.48 | $0.39 | $0.84 | $0.80 |
- Revenue fell 36% in Q2 and 20% for the first half, primarily as fuel prices declined across all segments. Gross profit rose 11% in Q2 and 12% for the first half. Calculated gross margin increased to about 2.6% from 1.5% in Q2, and to 2.3% from 1.6% for the first half.
- Operating margin was approximately 0.7% in Q2 versus 0.3% a year earlier; first-half operating margin was approximately 0.6% versus 0.3%. Net income improved in Q2 but only modestly for the first half.
- Net interest expense and other financing costs rose to $32.5 million in Q2 from $26.5 million, and to $66.8 million for the first half from $40.9 million. Management cited higher interest rates and receivables-purchase-program fees; first-half non-operating expense also reflected foreign-currency losses.
- Cash flow: First-half operating cash flow was $186.5 million, compared with cash used of $29.2 million in 2022. Investing activities used $56.1 million, including $46.5 million of capital expenditures. Financing activities used $129.3 million. Cash was $293.9 million at June 30, down from $298.4 million at year-end. Working-capital movements, lower fuel prices and derivative activity influenced operating cash flow.
- Debt and liquidity: Total debt was $877.8 million, compared with $845.7 million at year-end; cash was $293.9 million. Debt included $350 million principal of 3.250% convertible notes issued June 26, 2023, reported net of issuance costs, and $479.3 million of term loans. No amount was outstanding on the revolving credit facility at June 30. The facility provides up to $1.5 billion, subject to covenants and availability limits. Management said cash, facility availability and expected operating cash flows should meet working-capital and capital-expenditure needs for at least 12 months.
- Current assets were $4,045.1 million and current liabilities $3,572.0 million at June 30. Accounts receivable was $2,473.3 million, down from $3,294.1 million at year-end; accounts payable was $2,708.7 million, down from $3,529.5 million.
Material changes and segment performance
- Aviation: Q2 revenue decreased 34%, but operating income rose to $58.1 million from a $6.9 million loss. Gross profit increased $75.4 million, reflecting recovery from 2022 inventory losses amid extreme backwardation and volatility, plus improved margins. First-half aviation operating income was $92.1 million, up from $0.7 million; volumes grew 4%.
- Land: Q2 revenue declined 33% and operating income fell 25% to $24.6 million. First-half operating income declined 23% to $50.8 million. Lower fuel prices and weaker liquid-fuel activity weighed on results; sustainability offerings and natural gas and power activity partly offset the declines.
- Marine: Q2 revenue fell 44% and operating income fell 62% to $19.8 million. First-half operating income declined 33% to $50.6 million. Lower prices and volumes, reduced resale demand, competition and softer macroeconomic demand affected performance.
- First-half operating expenses rose 4%, mainly from higher compensation and general and administrative costs. First-half tax expense was $14.0 million versus $3.8 million; both periods included discrete tax benefits.
Outlook, risks and unusual items
- No specific numerical earnings or revenue guidance is provided. Management expects marine full-year 2023 performance to be materially below the exceptional 2022 results if lower oil prices and reduced volatility persist. It also describes land as positioned to grow market share and continues to invest in sustainability and lower-carbon offerings.
- The company issued $350 million of 3.250% convertible notes due 2028, with an initial conversion price of about $28.43 per share. It spent $70.5 million on note hedges and received $40.0 million from warrant sales; management says the transactions raise the effective conversion price to $40.14. It also used approximately $50 million to repurchase 2.24 million shares in a privately negotiated transaction. The company identifies unsecured counterparty exposure on the note hedges and potential dilution from warrants above their strike price.
- Receivables sold under purchase agreements totaled $6.0 billion in the first half, with $22.8 million of related fees. Confirmed supplier-finance obligations included in accounts payable were $207.4 million at June 30.
- Key risks include fuel-price and derivative volatility, customer and counterparty credit, working-capital and financing needs, higher interest rates, supplier/customer nonperformance, economic conditions, climate and environmental regulation, cyber incidents, and integration of acquisitions. Derivative liabilities with credit-contingent features could require up to $111.2 million of additional collateral at June 30.
- Tax and legal matters include proposed Danish tax assessments of approximately $56.5 million for 2015–2017, with possible further assessments for 2018–2019; the company contests the assessments. It also contests South Korean assessments of approximately $26.1 million and a Brazilian assessment of approximately $13.5 million. Reserves for claims were not material; adverse outcomes could nevertheless affect results or cash flows. The Singapore supplier-bank dispute was settled, with approximately $20 million recovered in Q1 2023.
- Management reported disclosure controls were effective at a reasonable assurance level and no material change in internal control during the quarter. The filing reports no material changes in market-risk exposures since year-end.
Important facts for investors to verify
- Whether improved aviation profitability can be sustained after comparison with the unusually weak, volatile 2022 period.
- Whether marine results decline as management anticipates, and how land and sustainability-related growth develops.
- Operating cash flow quality and working-capital needs, including the effect of fuel prices, derivatives, receivables sales and supplier financing.
- Actual revolving-credit availability under leverage and other covenants, and the effect of higher borrowing costs on earnings.
- Convertible-note, hedge and warrant terms, including counterparty performance and potential dilution.
- Developments in the Danish, South Korean and Brazilian tax disputes and any resulting cash exposure.