Business context and reporting period
This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016. The filing identifies the registrant as World Fuel Services Corporation; this differs from the supplied company label, World Kinect Corp. The company operates aviation, land and marine fuel and related-services businesses.
Key financial metrics
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2015 periods.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $6,633.0 | $8,496.4 | $11,823.9 | $15,837.1 |
| Gross profit | $218.5 | $190.4 | $440.0 | $404.0 |
| Income from operations | $45.6 | $41.6 | $106.6 | $109.2 |
| Net income attributable to World Fuel | $30.0 | $30.5 | $81.6 | $80.9 |
| Diluted EPS | $0.43 | $0.43 | $1.17 | $1.13 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $201.0 | $177.8 |
Gross margin was approximately 3.3% in Q2 and 3.7% for the first half, versus approximately 2.2% and 2.6%, respectively, in 2015. Operating margin was approximately 0.7% in Q2 and 0.9% for the first half, compared with 0.5% and 0.7%. Revenue fell substantially, principally reflecting lower fuel prices; gross profit increased, while first-half operating income declined modestly.
At June 30, cash and cash equivalents were $737.2, total current assets $3,514.8 and current liabilities $1,911.7 (current ratio approximately 1.84). Total debt was $796.5, comprising $28.8 short-term and $767.7 long-term debt. The company reported $809.1 of unused capacity under its $1.26 billion revolving credit facility and compliance with its debt covenants. Operating cash flow was $201.0; capital expenditures were $23.3. Cash increased $154.7 during the first half.
Material changes versus prior comparable periods
- Q2 revenue decreased 21.9%; first-half revenue decreased 25.3%. Lower average fuel prices drove declines across all segments. Aviation and land volumes increased, while marine volumes declined slightly.
- Q2 gross profit rose 14.8% and first-half gross profit rose 8.9%. Aviation and land improved, supported by volume, acquired businesses and other business activity; marine gross profit declined 5.0% in Q2 and 17.7% for the first half.
- Q2 net income attributable to World Fuel decreased 1.6%; first-half net income increased 1.0%. First-half operating expenses rose 13.1%, including acquisition-related and growth-support costs, while corporate overhead also increased.
- First-half operating cash flow increased to $201.0 from $177.8. Receivables used $230.1 of cash, partly offset by a $190.0 cash contribution from accounts payable and other working-capital movements.
- Cash increased from $582.5 at December 31, 2015. Total debt rose from $772.2 to $796.5.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management expected adverse shipping-market conditions to continue through the second half of 2016, while anticipating seasonal improvement in marine activity in the quarter ending September 30. It cited aviation opportunities from passenger growth and route expansion, and ongoing cost-reduction initiatives.
- Management estimated the multi-year ERP upgrade would cost $30–$40 million over three years. It expected cash, available credit and operating cash flows to cover working-capital and capital-expenditure needs for at least 12 months.
- The planned acquisition of ExxonMobil-affiliated aviation fueling operations at 83 airports had an expected purchase price of approximately $260 million, intended to be funded with cash. Closing was subject to consents and other conditions, with most locations expected to close in the second half of 2016. PAPCO and APP acquisitions closed July 1, 2016, after the reporting date.
- On June 23, 2016, the U.K. voted to leave the European Union. The filing warned of potential currency, economic and customer-spending impacts. Other cited risks include fuel-price and derivative exposure, customer and counterparty credit, weak marine and offshore markets, supply disruptions, acquisition integration, and debt covenant compliance.
- On July 20, 2016, the company disclosed that the U.S. Department of Justice was investigating the aviation fuel supply industry, including certain company activities at an airport in Central America. The company said it was cooperating.
- A fuel theft loss of approximately $18 million is recorded as an insurance receivable. A court granted summary judgment for coverage, but the insurer appealed and the company cross-appealed; recovery is not assured.
- The company corrected prior-period income-tax accounting for foreign-currency translation on certain intercompany loans. Management considered the prior errors nonmaterial to previously issued statements, but reported cumulative corrections of approximately $20 million, including approximately $12.5 million attributable to 2015; comparative periods in this filing were revised.
- Q2 tax expense included a $2.4 million net discrete charge related to uncertain tax positions; the first-half provision included a $1.6 million net discrete benefit. The filing also reported a $3.8 million gain on the May 2016 sale of Pester’s retail business.
Important facts for investors to verify
- Confirm the registrant identity: the filing is for World Fuel Services Corporation, not World Kinect Corp.
- Review the revised 2015 comparative figures and the disclosed income-tax correction, including its effects on prior-period earnings and equity.
- Monitor DOJ investigation developments and the disputed insurance recovery, including any potential financial impact.
- Track the ExxonMobil aviation-operations transaction, its closing conditions, final cost and funding, and integration of the July acquisitions.
- Assess whether marine-market weakness, higher operating costs and working-capital movements affect cash generation, margins and debt.
- Check the impact of Brexit-related currency and economic changes, derivative exposures, and the company’s ability to maintain covenant compliance and liquidity.