World Fuel Services Corporation — Q1 2019 Form 10-Q
Entity note: The filing identifies the registrant as World Fuel Services Corporation (NYSE: INT), not “WORLD KINECT CORP.” Verify that this is the intended filing.
Business context and reporting period
The unaudited filing covers the three months ended March 31, 2019, compared with the same period in 2018. The company distributes fuel and related products and services in aviation, land and marine markets, and also provides energy-management and transaction-management services.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $8,678.8 million | $9,181.3 million | Down 5.5% |
| Gross profit | $251.1 million | $243.4 million | Up 3.1% |
| Income from operations | $70.4 million | $57.2 million | Up 23.0% |
| Net income attributable to World Fuel | $37.2 million | $31.2 million | Up 19.2% |
| Diluted EPS | $0.55 | $0.46 | Up $0.09 |
| Operating cash flow | $10.8 million | ($228.8) million | Improved $239.6 million |
Gross margin was approximately 2.9% versus 2.7%; operating margin was 0.8% versus 0.6%. Revenue fell mainly with lower fuel prices and reduced land and marine volumes. Operating profit benefited from cost efficiencies and improved segment performance. Interest expense and other financing costs, net, increased to $19.4 million from $16.3 million.
Q1 investing cash use was $18.5 million, versus $86.1 million of cash provided in the prior-year quarter; financing cash use was $10.9 million versus $80.8 million. Capital expenditures were $21.8 million. Cash and cash equivalents were $194.0 million at quarter-end, down from $211.7 million at December 31, 2018. Total debt, including finance leases, was $695.5 million, compared with $701.0 million. The company reported $986.2 million of unused Credit Facility capacity and said liquidity was sufficient for at least the next 12 months. Current assets were $3,894.7 million and current liabilities $2,873.2 million.
Material changes and segment trends
- Aviation: Revenue declined 0.9% to $4,252.7 million; gross profit rose 4.0% to $114.3 million and operating income rose to $55.6 million. Volumes were flat, while government-related business and international fueling supported profitability.
- Land: Revenue fell 12.8% to $2,493.6 million; gross profit was nearly flat at $101.5 million and operating income rose to $21.0 million. Lower prices, unseasonably warm U.K. weather, and withdrawal from certain lower-return activities weighed on results.
- Marine: Revenue declined 4.7% to $1,932.5 million as volumes fell 10.0%; higher average fuel prices partly offset the volume decline. Gross profit increased 12.8% to $35.2 million and operating income rose to $13.5 million.
- Adoption of the new lease standard on January 1, 2019 added $167.3 million of right-of-use assets and $173.6 million of lease liabilities at adoption. Management did not expect a material effect on operating results or cash flows.
Outlook, unusual items, and risks
No numerical earnings or revenue guidance is provided. Management expected government-related activity to remain strong through the rest of 2019, but anticipated lower associated profit contribution than in 2018. It described aviation market conditions as strong, land results as affected by portfolio repositioning and warm winter weather, and marine profitability as benefiting from cost initiatives. Management cited IMO 2020, effective January 1, 2020, as a potential opportunity for customer solutions. It continued portfolio rationalization, restructuring, and investment in automation and technology; most restructuring activities were expected to be completed in 2019, though the ultimate cost was not estimable.
Reported Q1 2019 net income includes a $3.2 million discrete tax benefit and $3.4 million of operating income, both relating to items that should have been recognized in prior periods. The company determined the misstatements were not material to current or prior periods; excluding them, it reported net income of $31.7 million, or $0.47 per diluted share. The filing also notes that the April 25 earnings release reflected an $8.8 million discrete tax benefit, while this 10-Q includes a $5.6 million reserve against that benefit.
Risks include fuel-price and working-capital volatility, customer and counterparty credit exposure, dependence of aviation profitability on government activity (including NATO-related business), supply and logistics disruptions, derivatives and hedging, and execution of restructuring and technology initiatives. Tax matters include South Korean assessments and disputes, Brazilian indirect-tax proceedings, Danish transfer-pricing review, and a U.S. tax examination; unfavorable outcomes could materially affect results or cash flows. The company also reported cooperation with a U.S. Department of Justice investigation into aviation fuel supply activities at a Central American airport. Management reported disclosure controls were effective at a reasonable assurance level and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended issuer: the supplied company label says WORLD KINECT CORP, but the filing is for World Fuel Services Corporation (INT).
- Assess normalized earnings against reported results, especially the prior-period tax benefit and operating-income correction and the reserve described in MD&A.
- Track cash conversion and working-capital movements: Q1 operating cash flow was positive but modest, and the company cited receivables, payables, and derivatives as key year-over-year drivers.
- Review the extent of government-related profit exposure and management’s expectation for lower contribution versus 2018.
- Monitor tax disputes, the DOJ investigation, credit-facility covenant compliance, and the company’s ability to realize restructuring and technology benefits.