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

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Form 10-Q for WORLD FUEL SERVICES CORP


30-Oct-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 and Part II of this 10-Q 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, ability to collect outstanding accounts receivable, potential liabilities and the extent of any insurance coverage, the impact of litigation and other proceedings, 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 and other proceedings, 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;

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

† the impact of the Lac-Mιgantic derailment and related matters;

† 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 the costs associated in defending any actions; and

† other risks, including those described in "Item 1A - Risk Factors" in our 2012 10-K Report and Part II of this 10-Q Report, as well as 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 and Part II of this 10-Q 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 10 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 September 30, 2013 Compared to Three Months Ended September 30, 2012

Revenue. Our revenue for the third quarter of 2013 was $10.5 billion, an increase of $0.6 billion, or 5.9%, as compared to the third quarter of 2012. Our revenue during these periods was attributable to the following segments (in thousands):

For the Three Months ended

                           September 30,
                        2013             2012       $ Change

Aviation segment   $     4,179,018    $ 3,823,338   $ 355,680
Marine segment           3,575,777      3,630,094     (54,317 )
Land segment             2,738,866      2,458,241     280,625
                   $    10,493,661    $ 9,911,673   $ 581,988

Our aviation segment revenue for the third quarter of 2013 was $4.2 billion, an increase of $0.4 billion, or 9.3%, as compared to the third quarter of 2012. The increase in aviation segment revenue was due to increased volume attributable to new and existing customers.

Our marine segment revenue for the third quarter of 2013 was $3.6 billion, a decrease of $0.1 billion, or 1.5%, as compared to the third quarter of 2012. The decrease in marine segment revenue was principally due to decreased volume in the third quarter of 2013 as compared to the third quarter of 2012.

Our land segment revenue for the third quarter of 2013 was $2.7 billion, an increase of $0.3 billion, or 11.4%, as compared to the third quarter of 2012. The increase in land segment revenue was principally due to revenue from acquired businesses.

Gross Profit. Our gross profit for the third quarter of 2013 was $186.3 million, an increase of $5.6 million, or 3.1%, as compared to the third quarter of 2012. Our gross profit during these periods was attributable to the following segments (in thousands):

For the Three Months ended

                            September 30,
                        2013              2012         $ Change

Aviation segment   $       89,758    $       84,197   $    5,561
Marine segment             40,223            53,960      (13,737 )
Land segment               56,360            42,595       13,765
                   $      186,341    $      180,752   $    5,589

Our aviation segment gross profit for the third quarter of 2013 was $89.8 million, an increase of $5.6 million, or 6.6%, as compared to the third quarter of 2012. Of the increase in aviation segment gross profit, $8.2 million was due to increased volume attributable to new and existing customers and $2.5 million was due to gross profit from acquired businesses. These increases were partially offset by $5.1 million in lower gross profit per gallon sold principally due to fluctuations in customer mix.

Our marine segment gross profit for the third quarter of 2013 was $40.2 million, a decrease of $13.7 million, or 25.5%, as compared to the third quarter of 2012. Of the decrease in marine segment gross profit, $11.8 million was due to decreased gross profit per metric ton sold principally due to limited price volatility during the third quarter of 2013 and fluctuations in customer mix. The remaining $1.9 million was due to decreased sales volume.


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Our land segment gross profit for the third quarter of 2013 was $56.4 million, an increase of $13.8 million, or 32.3%, as compared to the third quarter of 2012. Of the increase in land segment gross profit, $19.1 million was due to gross profit from acquired businesses, which was partially offset by $5.3 million in lower gross profit per gallon sold principally driven by lower margins in our crude oil marketing activities.

Operating Expenses. Total operating expenses for the third quarter of 2013 were $122.1 million, an increase of $12.4 million, or 11.3%, as compared to the third quarter of 2012. The following table sets forth our expense categories (in thousands):

                                        For the Three Months ended
                                              September 30,
                                          2013              2012        $ Change

Compensation and employee benefits   $       72,184    $       65,843   $   6,341
Provision for bad debt                        1,863             3,631      (1,768 )
General and administrative                   48,091            40,230       7,861
                                     $      122,138    $      109,704   $  12,434

The increase in compensation and employee benefits was due to $10.6 million related to the inclusion of expenses from acquired businesses, which was partially offset by $4.3 million principally due to decreased incentive based compensation. The $7.9 million increase in general and administrative expenses was principally due to the inclusion of expenses from acquired businesses.

Income from Operations. Our income from operations for the third quarter of 2013 was $64.2 million, a decrease of $6.8 million, or 9.6%, as compared to the third quarter of 2012. Income from operations during these periods was attributable to the following segments (in thousands):

                                      For the Three Months ended
                                            September 30,
                                        2013              2012        $ Change

Aviation segment                   $       41,002    $       39,808   $   1,194
Marine segment                             17,019            27,296     (10,277 )
Land segment                               15,106            18,185      (3,079 )
                                           73,127            85,289     (12,162 )
Corporate overhead - unallocated            8,924            14,241      (5,317 )
                                   $       64,203    $       71,048   $  (6,845 )

Our aviation segment income from operations for the third quarter of 2013 was $41.0 million, an increase of $1.2 million, or 3.0%, as compared to the third quarter of 2012. This increase resulted from $5.6 million in higher gross profit, which was partially offset by increased operating expenses of $4.4 million.

Our marine segment income from operations for the third quarter of 2013 was $17.0 million, a decrease of $10.3 million, or 37.7%, as compared to the third quarter of 2012. This decrease resulted from $13.7 million in lower gross profit, which was partially offset by decreased operating expenses of $3.4 million.

Our land segment income from operations for the third quarter of 2013 was $15.1 million, a decrease of $3.1 million, or 16.9%, as compared to the third quarter of 2012. This decrease resulted from increased operating expenses of $16.9 million principally related to the inclusion of acquired businesses and $5.3 million in lower gross profit per gallon sold principally driven by lower margins in our crude oil marketing activities. The aggregate decrease of $22.2 million was partially offset by $19.1 million in gross profit from acquired businesses.

Corporate overhead costs not charged to the business segments for the third quarter of 2013 were $8.9 million, a decrease of $5.3 million, or 37.3%, as compared to the third quarter of 2012. The decrease in corporate overhead costs not charged to the business segments was attributable to decreases in compensation and employee benefits, principally incentive based compensation and in general and administrative expenses, principally professional fees.


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Non-Operating Expenses, net. For the third quarter of 2013, we had non-operating expenses, net of $5.7 million, an increase of $2.2 million, or 64.8%, as compared to the third quarter of 2012. This increase was principally due to a $1.5 million increase in interest expense and other financing costs, net, as a result of higher average borrowings in the third quarter of 2013 as compared to the third quarter of 2012.

Income Taxes. For the third quarter of 2013, our effective income tax rate was 14.0% and our income tax provision was $8.2 million, as compared to an effective income tax rate of 21.7% and an income tax provision of $14.7 million for the third quarter of 2012. The effective income tax rate for the third quarter of 2013 was reduced from 16.4% to 14.0% due to an income tax benefit of $1.4 million for a discrete item resulting from a lapse in the statute of limitations. The lower effective income tax rate is also attributable to differences in the results of our subsidiaries in tax jurisdictions with different income tax rates as compared to the third quarter of 2012.

Net (Loss) Income Attributable to Noncontrolling Interest. For the third quarter of 2013, net loss attributable to noncontrolling interest was $1.2 million as compared to net income attributable to noncontrolling interest of $1.4 million for the third quarter of 2012.

Net Income and Diluted Earnings per Common Share. Our net income for the third quarter of 2013 and 2012 was $51.5 million. Diluted earnings per common share for the third quarter of 2013 and 2012 was $0.72 per common share.

Non-GAAP Net Income and Non-GAAP Diluted Earnings per Common Share. Our non-GAAP net income for the third quarter of 2013 and 2012 was $57.9 million. Non-GAAP diluted earnings per common share for the third quarter of 2013 and 2012 was $0.81 per common share. The following table sets forth the reconciliation between our net income and non-GAAP net income for the third quarter of 2013 and 2012 (in thousands):

                                                       For the Three Months ended
                                                             September 30,
                                                         2013              2012

Net income attributable to World Fuel               $       51,472    $       51,494
Share-based compensation expense, net of income
taxes of $1,472 and $1,117 for 2013 and 2012,
respectively                                                 2,909             2,475
Intangible asset amortization expense, net of
income taxes of $1,970 and $680 for 2013 and
2012, respectively                                           3,501             3,953
Non-GAAP net income attributable to World Fuel      $       57,882    $       57,922

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

                                                        For the Three Months ended
                                                               September 30,
                                                         2013                2012

Diluted earnings per common share                   $          0.72     $          0.72
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          $          0.81     $          0.81


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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.

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Revenue. Our revenue for the first nine months of 2013 was $31.2 billion, an increase of $2.1 billion, or 7.4%, as compared to the first nine months of 2012. Our revenue during these periods was attributable to the following segments (in thousands):

For the Nine Months ended

                           September 30,
                        2013            2012        $ Change

Aviation segment   $   11,854,676   $ 10,782,756   $ 1,071,920
Marine segment         11,260,025     11,301,429       (41,404 )
Land segment            8,042,593      6,925,340     1,117,253
                   $   31,157,294   $ 29,009,525   $ 2,147,769

Our aviation segment revenue for the first nine months of 2013 was $11.9 billion, an increase of $1.1 billion, or 9.9%, as compared to the first nine months of 2012. The increase in aviation segment revenue was due to increased volume principally attributable to new and existing customers.

Our marine segment revenue for the first nine months of 2013 and 2012 was $11.3 billion. Of the decrease in marine segment revenue, $0.7 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 nine months of 2013 as compared to the first nine months of 2012, which was principally offset by increased volume attributable to new and existing customers.

Our land segment revenue for the first nine months of 2013 was $8.0 billion, an increase of $1.1 billion, or 16.1%, as compared to the first nine months of 2012. The increase in land segment revenue was principally due to revenue from acquired businesses.

Gross Profit. Our gross profit for the first nine months of 2013 was $557.2 million, an increase of $47.1 million, or 9.2%, as compared to the first nine months of 2012. Our gross profit during these periods was attributable to the following segments (in thousands):

For the Nine Months ended

                            September 30,
                        2013              2012        $ Change
. . .
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