WORLD KINECT CORP quarterly report, Q2 FY2010

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Business context and reporting period

World Fuel Services Corporation (the registrant named in the filing; the request metadata says World Kinect Corp.) filed this unaudited Form 10-Q for the quarter ended June 30, 2010. It markets marine, aviation and land fuel and related services worldwide. Dollar amounts below are in millions unless stated otherwise. Interim results are not necessarily indicative of full-year results.

Financial performance and liquidity

Quarter ended June 30, 2010

  • Revenue was $4,397.3, up 73.6% from $2,533.3 in Q2 2009. Management attributed the increase to higher fuel prices and sales volumes.
  • Gross profit was $107.6, up 17.5%; gross margin was approximately 2.45%, versus 3.62% a year earlier. Operating income rose 24.7% to $45.1; operating margin was approximately 1.03%, versus 1.43%.
  • Net income attributable to World Fuel was $37.0, up 33.3%; diluted EPS was $0.61, versus $0.46. Net margin was approximately 0.84%, versus 1.10%.

Six months ended June 30, 2010

  • Revenue was $8,315.3, up 82.9%; gross profit was $206.4, up 15.4%. Gross margin was approximately 2.48%, versus 3.93% in the prior-year period.
  • Operating income increased 25.9% to $87.2; net income attributable to World Fuel rose 31.9% to $70.7. Diluted EPS was $1.17, versus $0.91.
  • Operating cash flow was $23.8, down from $121.0. The filing attributes the decline mainly to working-capital changes associated with increased sales volume and fuel prices. Investing cash outflow was $12.5, compared with $60.5; financing cash outflow was $11.4, compared with $22.9.

Balance sheet and funding

  • At June 30, cash and cash equivalents were $297.4 and short-term investments were $10.0. Total assets were $1,943.4; shareholders’ equity including noncontrolling interest was $801.0.
  • Total reported debt was $11.0 ($6.3 short-term and $4.7 long-term), down from $16.6 at December 31, 2009. Current assets were $1,655.2 and current liabilities $1,088.1; working capital was $567.1.
  • The $475.0 revolving credit facility had $362.1 available at quarter-end and expires in December 2012. Letters of credit under that facility were $112.9. The company reported covenant compliance. A separate $160.0 receivables facility had no receivables sold and matured in September 2010 unless extended.
  • Unrecognized tax liabilities were $39.0; management said the timing of settlement could not be reasonably estimated. Outstanding letters of credit and bank guarantees under the revolving facility and other credit lines totaled $123.2.

Material changes versus the prior comparable period

  • Growth was strongest in aviation: Q2 revenue rose to $1,691.0 from $832.2, and operating income to $28.7 from $17.7. Marine Q2 revenue rose to $2,276.7, while operating income increased modestly to $24.0.
  • For the six-month period, marine gross profit fell 5.5% to $82.6 and operating income fell 15.4% to $44.0, primarily due to lower gross profit per metric ton and higher expenses. Aviation gross profit rose 41.1% to $101.3 and operating income rose 88.4% to $55.4. Land operating income declined 17.0% to $4.1.
  • Operating expenses increased 12.7% in Q2 and 8.7% for the six-month period, including higher compensation, bad-debt provision and general and administrative costs. Bad-debt provisions were $1.7 in Q2 and $2.1 year to date.
  • Cash conversion weakened materially as receivables and other working-capital needs expanded. Accounts receivable increased to $1,115.9 from $951.4 at year-end.

Outlook, management commentary, risks and unusual items

  • No specific earnings or revenue guidance is provided. Management said existing cash, credit availability and operating cash flows were expected to be sufficient for working capital and capital expenditures for at least the next twelve months, while warning that changing conditions could reduce financing availability.
  • In July 2010, after quarter-end, the company acquired the Lakeside wholesale fuel distribution business for an estimated $44.2; the purchase-price allocation was not yet available. It acquired FOS in January for $14.9, primarily for marine fuel storage; the acquisition’s contribution was described as not significant.
  • A $1.9 gain on short-term investments was recognized in Q2 after the company collected the investment’s full $10.0 par value in July. The filing reports $10.0 of short-term investments at June 30.
  • Henty’s contingent earn-out had a June 30 fair value of $6.2 and a maximum potential payment of approximately $13.6, subject to operating targets through April 2012.
  • Key risks include customer and counterparty creditworthiness, fuel-price volatility, derivative effectiveness and counterparty performance, supplier credit and fuel availability, foreign exchange, economic conditions in shipping and aviation, acquisition integration, and compliance with credit-facility covenants. The company disclosed derivative provisions that could require $2.0 of additional collateral or settlement if specified contingent features were triggered.
  • The filing describes pending airport environmental, Panama, Brendan Airways and TransContinental-related litigation. Reserves were not significant, but management said adverse outcomes could materially affect financial condition, results or cash flows; ultimate exposure could not be estimated.
  • The Dodd-Frank Act was signed into law on July 21, 2010. The company was evaluating its potential impact on swaps-market regulation, costs and liquidity requirements; effects could not yet be predicted. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Confirm the registrant identity: the filing is for World Fuel Services Corporation, despite the metadata naming World Kinect Corp.
  • Assess whether rising revenue translates into sustainable gross profit and margins, particularly given lower marine year-to-date profitability and the low-margin fuel distribution model.
  • Track receivables, bad-debt provisions and operating cash flow; the company’s six-month operating cash flow fell substantially despite higher earnings.
  • Review the status and terms of the September 2010 receivables facility, the December 2012 revolving facility, covenant compliance and letters-of-credit capacity.
  • Monitor the Lakeside acquisition’s final purchase accounting and integration, Henty earn-out exposure, litigation developments, and the financial and regulatory effects of derivative activity.