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INT > SEC Filings for INT > Form 10-Q on 30-Apr-2013All Recent SEC Filings

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Form 10-Q for WORLD FUEL SERVICES CORP


30-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our 2012 10-K Report and the consolidated financial statements and related notes in "Item 1 - Financial Statements" appearing elsewhere in this 10-Q Report. The following discussion may contain forward-looking statements, and our actual results may differ significantly from the results suggested by these forward-looking statements. Some factors that may cause our results to differ materially from the results and events anticipated or implied by such forward-looking statements are described in "Item 1A - Risk Factors" of our 2012 10-K Report.

Forward-Looking Statements

Certain statements made in this report and the information incorporated by reference in it, or made by us in other reports, filings with the Securities and Exchange Commission ("SEC"), press releases, teleconferences, industry conferences or otherwise, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words "believe," "anticipate," "expect," "estimate," "project," "could," "would," "will," "will be," "will continue," "will likely result," "plan," or words or phrases of similar meaning.

Forward-looking statements are estimates and projections reflecting our best judgment and involve risks, uncertainties or other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. The Company's actual results may differ materially from the future results, performance or achievements expressed or implied by the forward-looking statements. These statements are based on our management's expectations, beliefs and assumptions concerning future events affecting us, which in turn are based on currently available information.

Examples of forward-looking statements in this 10-Q Report include, but are not limited to, our expectations regarding our business strategy, business prospects, operating results, effectiveness of internal controls to manage risk, working capital, liquidity, capital expenditure requirements and future acquisitions. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the cost, terms and availability of fuel from suppliers, pricing levels, the timing and cost of capital expenditures, outcome of pending litigation, competitive conditions, general economic conditions and synergies relating to acquisitions, joint ventures and alliances. These assumptions could prove inaccurate. Although we believe that the estimates and projections reflected in the forward-looking statements are reasonable, our expectations may prove to be incorrect.

Important factors that could cause actual results to differ materially from the results and events anticipated or implied by such forward-looking statements include, but are not limited to:

customer and counterparty creditworthiness and our ability to collect accounts receivable and settle derivative contracts;

changes in the market price of fuel;

changes in the political, economic or regulatory conditions generally and in the markets in which we operate;

our failure to effectively hedge certain financial risks and the use of derivatives;

non-performance by counterparties or customers to derivative contracts;

changes in credit terms extended to us from our suppliers;

non-performance of suppliers on their sale commitments and customers on their purchase commitments;

loss of, or reduced sales to a significant government customer;

non-performance of third-party service providers;

adverse conditions in the industries in which our customers operate, including a continuation of the global recession and its impact on the airline and shipping industries;


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currency exchange fluctuations;

failure of the fuel we sell to meet specifications;

our ability to manage growth;

our ability to integrate acquired businesses;

material disruptions in the availability or supply of fuel;

risks associated with the storage, transportation and delivery of petroleum products;

risks associated with operating in high risk locations, such as Iraq and Afghanistan;

uninsured losses;

          the impact of natural disasters, such as hurricanes;



          our failure to comply with restrictions and covenants in our senior
revolving credit facility ("Credit Facility") and our senior term loans ("Term
Loans");

the liquidity and solvency of banks within our Credit Facility and Term Loans;

increases in interest rates;

declines in the value and liquidity of cash equivalents and investments;

our ability to retain and attract senior management and other key employees;

changes in U.S. or foreign tax laws or changes in the mix of taxable income among different tax jurisdictions;

our ability to comply with U.S. and international laws and regulations including those related to anti-corruption, economic sanction programs and environmental matters;

increased levels of competition;

the outcome of litigation; and

other risks, including those described in "Item 1A - Risk Factors" in our 2012 10-K Report and those described from time to time in our other filings with the SEC.

We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all of those risks, nor can we assess the impact of all of those risks on our business or the extent to which any factor may cause actual results to differ materially from those contained in any forward-looking statement. The forward-looking statements in this 10-Q Report are based on assumptions management believes are reasonable. However, due to the uncertainties associated with forward-looking statements, you should not place undue reliance on any forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and unless required by law, we expressly disclaim any obligation or undertaking to publicly update any of them in light of new information, future events, or otherwise.

For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").


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Overview

We are a leading global fuel logistics company, principally engaged in the marketing, sale and distribution of aviation, marine, and land fuel products and related services on a worldwide basis. We compete by providing our customers with value-added benefits, including single-supplier convenience, competitive pricing, the availability of trade credit, price risk management, logistical support, fuel quality control and fuel procurement outsourcing. We have three reportable operating business segments: aviation, marine, and land. We primarily contract with third parties for the delivery and storage of fuel products, however, in some cases we own storage and transportation assets for strategic purposes. Additionally, we offer transaction management services which consist of card payment solutions and merchant processing services to customers in the aviation, marine and land transportation industries. In our aviation segment, we offer fuel and related services to major commercial airlines, second and third-tier airlines, cargo carriers, regional and low cost carriers, airports, fixed based operators, corporate fleets, fractional operators, private aircraft, military fleets and to the U.S. and foreign governments. In our marine segment, we offer fuel and related services to a broad base of marine customers, including international container and tanker fleets, commercial cruise lines, yachts and time-charter operators, as well as to the U.S. and foreign governments. In our land segment, we offer fuel and related services to petroleum distributors operating in the land transportation market, retail petroleum operators, and industrial, commercial and government customers and we engage in crude oil marketing activities.

In our aviation and land segments, we primarily purchase and resell fuel, and we do not act as brokers. Profit from our aviation and land segments is primarily determined by the volume and the gross profit achieved on fuel resales and a percentage of card payment and processing revenue. In our marine segment, we primarily purchase and resell fuel and also act as brokers for others. Profit from our marine segment is determined primarily by the volume and gross profit achieved on fuel resales and by the volume and commission rate of the brokering business. Our profitability in our segments also depends on our operating expenses, which may be significantly affected to the extent that we are required to provide for potential bad debt.

Our revenue and cost of revenue are significantly impacted by world oil prices, as evidenced in part by our revenue and cost of revenue fluctuations in recent fiscal years, while our gross profit is not necessarily impacted by changes in world oil prices. However, significant movements in fuel prices during any given financial period can have a significant impact on our gross profit, either positively or negatively depending on the direction, volatility and timing of such price movements.

We may experience decreases in future sales volumes and margins as a result of the ongoing deterioration in the world economy, the decline of the transportation industry, natural disasters and continued conflicts and instability in the Middle East, Asia and Latin America, as well as potential future terrorist activities and possible military retaliation. In addition, because fuel costs represent a significant part of our customers' operating expenses, volatile and/or high fuel prices can adversely affect our customers' businesses, and, consequently, the demand for our services and our results of operations. Our hedging activities may not be effective to mitigate volatile fuel prices and may expose us to counterparty risk. See "Item 1A - Risk Factors" of our 2012 10-K Report.

Reportable Segments

We have three reportable operating segments: aviation, marine and land. Corporate expenses are allocated to each segment based on usage, where possible, or on other factors according to the nature of the activity. We evaluate and manage our business segments using the performance measurement of income from operations. Financial information with respect to our business segments is provided in Note 9 to the accompanying consolidated financial statements included in this 10-Q Report.


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Results of Operations

Our results of operations include (i) the results of the acquisition of certain assets of CarterEnergy Corporation in our land segment commencing on September 1, 2012, its acquisition date, and (ii) the results of the acquisition of certain assets of Multi Service Corporation, primarily in our land segment, commencing on December 31, 2012, its acquisition date.

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Revenue. Our revenue for the first quarter of 2013 was $10.2 billion, an increase of $0.7 billion, or 7.4%, as compared to the first quarter of 2012. Our revenue during these periods was attributable to the following segments (in thousands):

For the Three Months ended

                             March 31,
                        2013             2012       $ Change

Aviation segment   $     3,930,588    $ 3,411,547   $ 519,041
Marine segment           3,717,139      3,904,191    (187,052 )
Land segment             2,536,302      2,163,317     372,985
                   $    10,184,029    $ 9,479,055   $ 704,974

Our aviation segment revenue for the first quarter of 2013 was $3.9 billion, an increase of $0.5 billion, or 15.2% as compared to the first quarter of 2012. Of the increase in aviation segment revenue, $0.4 billion was due to increased volume principally attributable to new and existing customers and $0.1 billion was due to an increase in the average price per gallon sold as a result of higher average jet fuel prices in the first quarter of 2013 as compared to the first quarter of 2012.

Our marine segment revenue for the first quarter of 2013 was $3.7 billion, a decrease of $0.2 billion, or 4.8%, as compared to the first quarter of 2012. Of the decrease in marine segment revenue, $0.4 billion was due to a decrease in the average price per metric ton sold as a result of lower average marine fuel prices in the first quarter of 2013 as compared to the first quarter of 2012, which was partially offset by $0.2 billion in increased volume attributable to new and existing customers.

Our land segment revenue for the first quarter of 2013 was $2.5 billion, an increase of $0.4 billion, or 17.2%, as compared to the first quarter of 2012. The increase in land segment revenue was principally due to the inclusion of revenue from acquired businesses.

Gross Profit. Our gross profit for the first quarter of 2013 was $182.4 million, an increase of $25.1 million, or 16.0% as compared to the first quarter of 2012. Our gross profit during these periods was attributable to the following segments (in thousands):

For the Three Months ended

                              March 31,
                        2013              2012        $ Change

Aviation segment   $       76,984    $       64,914   $  12,070
Marine segment             41,682            55,077     (13,395 )
Land segment               63,713            37,244      26,469
                   $      182,379    $      157,235   $  25,144

Our aviation segment gross profit for the first quarter of 2013 was $77.0 million, an increase of $12.1 million, or 18.6%, as compared to the first quarter of 2012. Of the increase in aviation segment gross profit, $7.1 million was due to increased volume attributable to new and existing customers, $3.7 million was due to gross profit from acquired businesses and $1.3 million was principally due to fluctuations in customer mix.

Our marine segment gross profit for the first quarter of 2013 was $41.7 million, a decrease of $13.4 million, or 24.3%, as compared to the first quarter of 2012. Of the decrease in marine segment gross profit, $16.9 million was due to decreased gross profit per metric ton sold principally due to a further shift in business mix to lower risk, lower margin business and a lack of price volatility during the quarter. This was partially offset by $3.5 million in increased volume attributable to new and existing customers.


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Our land segment gross profit for the first quarter of 2013 was $63.7 million, an increase of $26.5 million, or 71.1%, as compared to the first quarter of 2012. Of the increase in land segment gross profit, $20.4 million was due to gross profit from acquired businesses and $6.1 million was due to higher gross profit per gallon sold principally due to fluctuations in customer mix.

Operating Expenses. Total operating expenses for the first quarter of 2013 were $115.4 million, an increase of $17.5 million, or 17.8%, as compared to the first quarter of 2012. The following table sets forth our expense categories (in thousands):

                                        For the Three Months ended
                                                March 31,
                                          2013              2012        $ Change

Compensation and employee benefits   $        69,429    $      54,527   $  14,902
Provision for bad debt                         1,103              141         962
General and administrative                    44,906           43,311       1,595
                                     $       115,438    $      97,979   $  17,459

The $14.9 million increase in compensation and employee benefits was principally due to the inclusion of expenses from acquired businesses. The $1.0 million increase in provision for bad debt was principally due to an overall increase in the accounts receivable balance. The $1.6 million increase in general and administrative expenses was due to $5.9 million related to the inclusion of expenses from acquired businesses, which was partially offset by $4.3 million in decreased expenses due to efforts to drive greater operational efficiencies.

Income from Operations. Our income from operations for the first quarter of 2013 was $66.9 million, an increase of $7.7 million, or 13.0%, as compared to the first quarter of 2012. Income from operations during these periods was attributable to the following segments (in thousands):

                                      For the Three Months ended
                                              March 31,
                                        2013              2012         $ Change

Aviation segment                   $       34,880    $       26,833   $    8,047
Marine segment                             15,259            27,445      (12,186 )
Land segment                               27,380            16,200       11,180
                                           77,519            70,478        7,041
Corporate overhead - unallocated           10,578            11,222         (644 )
                                   $       66,941    $       59,256   $    7,685

Our aviation segment income from operations for the first quarter of 2013 was $34.9 million, an increase of $8.0 million, or 30.0%, as compared to the first quarter of 2012. This increase resulted from $12.1 million in higher gross profit, which was partially offset by increased operating expenses of $4.1 million. Of the increase in aviation segment operating expenses, $2.6 million was related to the inclusion of acquired businesses.

Our marine segment income from operations for the first quarter of 2013 was $15.3 million, a decrease of $12.2 million, or 44.4%, as compared to the first quarter of 2012. This decrease resulted from $13.4 million in lower gross profit, which was partially offset by decreased operating expenses of $1.2 million.

Our land segment income from operations for the first quarter of 2013 was $27.4 million, an increase of $11.2 million, or 69.0%, as compared to the first quarter of 2012. This increase resulted from $26.5 million in higher gross profit, which was partially offset by increased operating expenses of $15.3 million. Of the increase in land segment operating expenses, $14.1 million was related to the inclusion of acquired businesses.

Corporate overhead costs not charged to the business segments for the first quarter of 2013 were $10.6 million, a decrease of $0.6 million, or 5.7%, as compared to the first quarter of 2012.


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Non-Operating Expenses, net. For the first quarter of 2013, we had non-operating expenses, net of $3.5 million, a decrease of $0.6 million as compared to the first quarter of 2012. This decrease was principally due to a $1.1 million decrease in interest expense and other financing costs, net as a result of lower average borrowing rates under the Credit Facility in the first quarter of 2013 as compared to the first quarter of 2012 and $0.5 million in earnings from our equity investments in the first quarter of 2013. This was partially offset by a $1.0 million change resulting from foreign currency exchange losses of $0.5 million for the first quarter of 2013 as compared to foreign currency exchange gains of $0.5 million for the first quarter of 2012.

Income Taxes. For the first quarter of 2013, our effective income tax rate was 19.4% and our income tax provision was $12.3 million, as compared to an effective income tax rate of 12.0% and an income tax provision of $6.6 million for the first quarter of 2012. The higher effective income tax rate for the first quarter of 2013 resulted principally from differences in the results of our subsidiaries in tax jurisdictions with different income tax rates as compared to the first quarter of 2012 and an income tax benefit of $3.3 million for a discrete item related to a change in estimate for an uncertain tax position recorded in the first quarter of 2012.

Net Income and Diluted Earnings per Common Share. Our net income for the first quarter of 2013 was $48.7 million, an increase of $2.3 million, or 5.0%, as compared to the first quarter of 2012. Diluted earnings per common share for the first quarter of 2013 was $0.68 per common share, an increase of $0.03 per common share, or 4.6%, as compared to the first quarter of 2012.

Non-GAAP Net Income and Non-GAAP Diluted Earnings per Common Share. Our non-GAAP net income for the first quarter of 2013 was $55.0 million, an increase of $2.1 million, or 4.0%, as compared to the first quarter of 2012. Non-GAAP diluted earnings per common share for the first quarter of 2013 was $0.77 per common share, an increase of $0.03 per common share, or 4.1%, as compared to the first quarter of 2012. The following table sets forth the reconciliation between our net income and non-GAAP net income for the first quarter of 2013 and 2012 (in thousands):

                                                         For the Three Months ended
                                                                 March 31,
                                                           2013              2012

Net income attributable to World Fuel                 $       48,725    $       46,415
Share-based compensation expense, net of income
taxes of $1,329 and $904 for 2013 and 2012,
respectively                                                   2,543             2,001
Intangible asset amortization expense, net of
income taxes of $2,113 and $245 for 2013 and 2012,
respectively                                                   3,732             4,466
Non-GAAP net income attributable to World Fuel        $       55,000    $       52,882

The following table sets forth the reconciliation between our diluted earnings per common share and non-GAAP diluted earnings per common share for the first quarter of 2013 and 2012:

                                                        For the Three Months ended
                                                                 March 31,
                                                          2013               2012

Diluted earnings per common share                    $         0.68     $         0.65
Share-based compensation expense, net of income
taxes                                                          0.04               0.03
Intangible asset amortization expense, net of
income taxes                                                   0.05               0.06
Non-GAAP diluted earnings per common share           $         0.77     $         0.74


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The non-GAAP financial measures exclude costs associated with share-based compensation and amortization of acquired intangible assets, primarily because we do not believe they are reflective of the Company's core operating results. We believe the exclusion of share-based compensation from operating expenses is useful given the variation in expense that can result from changes in the fair value of our common stock, the effect of which is unrelated to the operational conditions that give rise to variations in the components of our operating costs. Also, we believe the exclusion of the amortization of acquired intangible assets is useful for purposes of evaluating operating performance of our core operating results and comparing them period-over-period. We believe that these non-GAAP financial measures, when considered in conjunction with our financial information prepared in accordance with GAAP, are useful to investors to further aid in evaluating the ongoing financial performance of the Company and to provide greater transparency as supplemental information to our GAAP results. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. In addition, our presentation of non-GAAP net income and non-GAAP earnings per common share may not be comparable to the presentation of such metrics by other companies. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measure.

Liquidity and Capital Resources



Cash Flows



The following table reflects the major categories of cash flows for the three
months ended March 31, 2013 and 2012.  For additional details, please see the
consolidated statements of cash flows.



                                               For the Three Months ended
                                                       March 31,
                                                 2013              2012

Net cash provided by operating activities   $       109,510    $      48,792
Net cash used in investing activities               (12,949 )         (4,153 )
Net cash used in financing activities              (109,053 )         (9,151 )

Operating Activities. For the three months ended March 31, 2013, net cash provided by operating activities was $109.5 million as compared to $48.8 million for the first three months of 2012. The $60.7 million increase in operating cash flows was primarily due to favorable year-over-year changes in working capital items.

Investing Activities. For the three months ended March 31, 2013, net cash used in investing activities was $12.9 million as compared to $4.2 million for the first three months of 2012. The $8.7 million increase in cash used in investing activities was principally due to capital expenditures for fuel transportation equipment and the upgrade and expansion of one of our inventory storage facilities during the first three months of 2013.

Financing activities. For the three months ended March 31, 2013, net cash used in financing activities was $109.1 million as compared $9.2 million for the first three months of 2012. The $99.9 million increase in cash used in financing activities was principally due to net repayments of borrowings under our Credit Facility in the first three months of 2013 as compared to the first three months of 2012.

Other Liquidity Measures

Cash and Cash Equivalents. As of March 31, 2013 and December 31, 2012, we had . . .

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