10-Q 1 a12-7006_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM                      TO                      

 

COMMISSION FILE NUMBER 1-9533

 

GRAPHIC

 

WORLD FUEL SERVICES CORPORATION

(Exact name of registrant as specified in its charter)

 

Florida

 

59-2459427

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

9800 N.W. 41st Street, Suite 400

Miami, Florida

 

33178

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s Telephone Number, including area code: (305) 428-8000

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The registrant had a total of 71,887,000 shares of common stock, par value $0.01 per share, issued and outstanding as of April 25, 2012.

 

 

 



Table of Contents

 

Table of Contents

 

Part I.

Financial Information

 

 

 

 

 

 

General

1

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011

2

 

 

Consolidated Statements of Income and Comprehensive Income for the Three Months ended March 31, 2012 and 2011

3

 

 

Consolidated Statements of Shareholders' Equity for the Three Months ended March 31, 2012 and 2011

4

 

 

Consolidated Statements of Cash Flows for the Three Months ended March 31, 2012 and 2011

5

 

 

Notes to the Consolidated Financial Statements

7

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

 

 

 

 

 

Item 4.

Controls and Procedures

25

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

 

 

 

 

 

Item 6.

Exhibits

26

 

 

 

 

Signatures

 

 

 

 



Table of Contents

 

Part I — Financial Information

 

General

 

The following unaudited consolidated financial statements and notes thereto of World Fuel Services Corporation and its subsidiaries have been prepared in accordance with the instructions to Quarterly Reports on Form 10-Q and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States. In the opinion of management, all adjustments necessary for a fair presentation of the financial information, which are of a normal and recurring nature, have been made for the interim periods reported. Results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results for the entire fiscal year. The unaudited consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012 (“10-Q Report”) should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (“2011 10-K Report”). World Fuel Services Corporation (“World Fuel” or the “Company”) and its subsidiaries are collectively referred to in this 10-Q Report as “we,” “our” and “us.”

 

1



Table of Contents

 

Item 1.       Financial Statements

 

World Fuel Services Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited - In thousands, except per share data)

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

242,593

 

$

205,415

 

Accounts receivable, net

 

2,290,085

 

2,160,561

 

Inventories

 

450,285

 

472,584

 

Prepaid expenses

 

172,990

 

109,297

 

Other current assets

 

200,680

 

174,370

 

Total current assets

 

3,356,633

 

3,122,227

 

  

 

 

 

 

 

Property and equipment, net

 

89,509

 

90,710

 

Goodwill

 

348,214

 

346,246

 

Identifiable intangible assets, net

 

101,943

 

107,620

 

Non-current other assets

 

29,505

 

30,443

 

Total assets

 

$

3,925,804

 

$

3,697,246

 

  

 

 

 

 

 

Liabilities:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term debt

 

$

20,516

 

$

17,800

 

Accounts payable

 

1,880,861

 

1,739,678

 

Customer deposits

 

83,907

 

105,554

 

Accrued expenses and other current liabilities

 

225,450

 

163,110

 

Total current liabilities

 

2,210,734

 

2,026,142

 

 

 

 

 

 

 

Long-term debt

 

265,147

 

269,348

 

Non-current income tax liabilities, net

 

46,194

 

47,703

 

Other long-term liabilities

 

8,153

 

7,335

 

Total liabilities

 

2,530,228

 

2,350,528

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

World Fuel shareholders’ equity:

 

 

 

 

 

Preferred stock, $1.00 par value; 100 shares authorized, none issued

 

 

 

Common stock, $0.01 par value; 100,000 shares authorized, 71,887 and 71,154 issued and outstanding as of March 31, 2012 and December 31, 2011, respectively

 

719

 

712

 

Capital in excess of par value

 

503,636

 

502,551

 

Retained earnings

 

879,973

 

836,222

 

Accumulated other comprehensive loss

 

(3,717

)

(6,524

)

Total World Fuel shareholders’ equity

 

1,380,611

 

1,332,961

 

Noncontrolling interest equity

 

14,965

 

13,757

 

Total equity

 

1,395,576

 

1,346,718

 

Total liabilities and equity

 

$

3,925,804

 

$

3,697,246

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

2



Table of Contents

 

World Fuel Services Corporation and Subsidiaries

Consolidated Statements of Income and Comprehensive Income

(Unaudited - In thousands, except per share data)

 

 

 

For the Three Months

 

 

 

ended March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Revenue

 

$

9,479,055

 

$

7,079,406

 

Cost of revenue

 

9,321,820

 

6,942,638

 

Gross profit

 

157,235

 

136,768

 

Operating expenses:

 

 

 

 

 

Compensation and employee benefits

 

54,527

 

47,069

 

Provision for bad debt

 

141

 

796

 

General and administrative

 

43,311

 

33,378

 

 

 

97,979

 

81,243

 

Income from operations

 

59,256

 

55,525

 

Non-operating expenses, net:

 

 

 

 

 

Interest expense and other financing costs, net

 

(4,661

)

(2,525

)

Other income (expense), net

 

566

 

(928

)

 

 

(4,095

)

(3,453

)

Income before income taxes

 

55,161

 

52,072

 

Provision for income taxes

 

6,615

 

10,415

 

Net income including noncontrolling interest

 

48,546

 

41,657

 

Net income attributable to noncontrolling interest

 

2,131

 

548

 

Net income attributable to World Fuel

 

$

46,415

 

$

41,109

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.65

 

$

0.59

 

 

 

 

 

 

 

Basic weighted average common shares

 

70,998

 

69,970

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.65

 

$

0.58

 

 

 

 

 

 

 

Diluted weighted average common shares

 

71,774

 

70,982

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

Net income including noncontrolling interest

 

$

48,546

 

$

41,657

 

Other comprehensive income:

 

 

 

 

 

Foreign currency translation adjustment

 

2,807

 

701

 

Comprehensive income including noncontrolling interest

 

51,353

 

42,358

 

Comprehensive income attributable to noncontrolling interest

 

2,131

 

548

 

Comprehensive income attributable to World Fuel

 

$

49,222

 

$

41,810

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

3



Table of Contents

 

World Fuel Services Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(Unaudited - In thousands)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

Other

 

World Fuel

 

Noncontrolling

 

 

 

 

 

Common Stock

 

Excess of

 

Retained

 

Comprehensive

 

Shareholders’

 

Interest

 

 

 

 

 

Shares

 

Amount

 

Par Value

 

Earnings

 

Loss

 

Equity

 

Equity

 

Total

 

Balance as of December 31, 2011

 

71,154

 

$

712

 

$

502,551

 

$

836,222

 

$

(6,524

)

$

1,332,961

 

$

13,757

 

$

1,346,718

 

Net income

 

 

 

 

46,415

 

 

46,415

 

2,131

 

48,546

 

Distribution of noncontrolling interest

 

 

 

 

 

 

 

(923

)

(923

)

Cash dividends declared

 

 

 

 

(2,664

)

 

(2,664

)

 

(2,664

)

Amortization of share-based payment awards

 

 

 

2,435

 

 

 

2,435

 

 

2,435

 

Issuance of common stock related to share-based payment awards

 

758

 

7

 

2,722

 

 

 

2,729

 

 

2,729

 

Purchases of common stock tendered by employees to satisfy the required withholding taxes related to share-based payment awards

 

(25

)

 

(4,072

)

 

 

(4,072

)

 

(4,072

)

Other comprehensive income

 

 

 

 

 

2,807

 

2,807

 

 

2,807

 

Balance as of March 31, 2012

 

71,887

 

$

719

 

$

503,636

 

$

879,973

 

$

(3,717

)

$

1,380,611

 

$

14,965

 

$

1,395,576

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Noncontrolling

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

Other

 

World Fuel

 

Interest

 

 

 

 

 

Common Stock

 

Excess of

 

Retained

 

Comprehensive

 

Shareholders’

 

(Deficit)

 

 

 

 

 

Shares

 

Amount

 

Par Value

 

Earnings

 

Income

 

Equity

 

Equity

 

Total

 

Balance as of December 31, 2010

 

69,602

 

$

696

 

$

468,963

 

$

652,796

 

$

4,753

 

$

1,127,208

 

$

(644

)

$

1,126,564

 

Net income

 

 

 

 

41,109

 

 

41,109

 

548

 

41,657

 

Initial noncontrolling interest upon consolidation of joint venture

 

 

 

 

 

 

 

614

 

614

 

Cash dividends declared

 

 

 

 

(2,645

)

 

(2,645

)

 

(2,645

)

Amortization of share-based payment awards

 

 

 

2,265

 

 

 

2,265

 

 

2,265

 

Issuance of common stock related to share-based payment awards including income tax benefit of $2,915

 

561

 

6

 

4,358

 

 

 

4,364

 

 

4,364

 

Issuance of common stock related to acquisition

 

691

 

7

 

27,491

 

 

 

27,498

 

 

27,498

 

Purchases of common stock tendered by employees to satisfy the required withholding taxes related to share-based payment awards

 

(49

)

(1

)

(6,415

)

 

 

(6,416

)

 

(6,416

)

Other comprehensive income

 

 

 

 

 

701

 

701

 

 

701

 

Balance as of March 31, 2011

 

70,805

 

$

708

 

$

496,662

 

$

691,260

 

$

5,454

 

$

1,194,084

 

$

518

 

$

1,194,602

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4



Table of Contents

 

World Fuel Services Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited - In thousands)

 

 

 

For the Three Months ended March 31,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income including noncontrolling interest

 

$

48,546

 

$

41,657

 

Adjustments to reconcile net income including noncontrolling interest to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

9,659

 

8,167

 

Provision for bad debt

 

141

 

796

 

Share-based payment award compensation costs

 

2,904

 

2,865

 

Deferred income tax provision

 

10,730

 

123

 

Extinguishment of liabilities

 

(3,490

)

(819

)

Foreign currency losses (gains), net

 

2,274

 

(818

)

Other

 

(743

)

446

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

Accounts receivable, net

 

(127,281

)

(457,573

)

Inventories

 

23,010

 

(64,061

)

Prepaid expenses

 

(63,607

)

7,476

 

Other current assets

 

(35,155

)

(12,223

)

Non-current other assets

 

280

 

960

 

Accounts payable

 

143,990

 

331,061

 

Customer deposits

 

(22,336

)

(9,407

)

Accrued expenses and other current liabilities

 

62,665

 

6,923

 

Non-current income tax, net and other long-term liabilities

 

(2,795

)

(59

)

Total adjustments

 

246

 

(186,143

)

Net cash provided by (used in) operating activities

 

48,792

 

(144,486

)

Cash flows from investing activities:

 

 

 

 

 

Acquisition of business, net of cash acquired

 

(90

)

(67,000

)

Capital expenditures

 

(3,948

)

(2,628

)

Issuance of notes receivable

 

(325

)

 

Repayment of notes receivable

 

210

 

 

Net cash used in investing activities

 

(4,153

)

(69,628

)

Cash flows from financing activities:

 

 

 

 

 

Borrowings under senior revolving credit facility

 

815,000

 

374,000

 

Repayments under senior revolving credit facility

 

(815,000

)

(334,000

)

Repayments of debt other than senior revolving credit facility

 

(1,492

)

(463

)

Dividends paid on common stock

 

(2,664

)

(2,598

)

Distribution of noncontrolling interest

 

(923

)

 

Federal and state tax benefits resulting from tax deductions in excess of the compensation cost recognized for share-based payment awards

 

 

2,915

 

Purchases of stock tendered by employees to satisfy the required withholding taxes related to share-based payment awards

 

(4,072

)

(6,416

)

Net cash (used in) provided by financing activities

 

(9,151

)

33,438

 

Effect of exchange rate changes on cash and cash equivalents

 

1,690

 

1,157

 

Net increase (decrease) in cash and cash equivalents

 

37,178

 

(179,519

)

Cash and cash equivalents, as of beginning of period

 

205,415

 

272,893

 

Cash and cash equivalents, as of end of period

 

$

242,593

 

$

93,374

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

5



Table of Contents

 

Supplemental Schedule of Noncash Investing and Financing Activities:

 

Cash dividends declared of $0.0375 per share for the three months ended March 31, 2012 and 2011, but not yet paid, totaled $2.7 million and $2.6 million, respectively, as of March 31, 2012 and 2011 and were paid in April 2012 and 2011.

 

As of March 31, 2012, we had accrued capital expenditures totaling $0.9 million, which was recorded in accrued expenses and other current liabilities.

 

In March 2012, we recorded a $0.7 million increase for our estimated amounts payable to the sellers of Ascent Aviation Group, Inc. (“Ascent”) and goodwill related to a tax adjustment per the election under Section 338(h)(10) of the Internal Revenue Code of 1986 pursuant to the purchase agreement.

 

In January 2011, upon the consolidation of a joint venture that was previously accounted for as an equity investment, we recorded an initial noncontrolling interest of $0.6 million relating to its net assets.

 

In March 2012 and March 2011, we granted equity awards to certain employees of which $2.7 million and $1.5 million, respectively, was previously recorded in accrued expenses and other current liabilities.

 

In connection with our March 2011 acquisition, we issued equity of $27.5 million.  The following table presents the assets acquired, net of cash and liabilities assumed:

 

 

 

For the Three Months

 

 

 

ended March 31, 2011

 

 

 

 

 

Assets acquired, net of cash

 

$

127,360

 

Liabilities assumed

 

$

32,979

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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Table of Contents

 

World Fuel Services Corporation and Subsidiaries

Notes to the Consolidated Financial Statements

(Unaudited)

 

1.     Significant Accounting Policies

 

Except as updated below, the significant accounting policies we use for quarterly financial reporting are the same as those disclosed in Note 1 of the “Notes to the Consolidated Financial Statements” included in our 2011 10-K Report.

 

Basis of Presentation

 

The accompanying consolidated financial statements and related notes to the consolidated financial statements include our accounts and those of our majority-owned or controlled subsidiaries, after elimination of all significant intercompany accounts, transactions, and profits.

 

Certain amounts in prior periods have been reclassified to conform to the current period’s presentation.

 

Accounts Receivable Purchase Agreement

 

As of March 31, 2012, we had sold accounts receivable of $58.1 million and recorded a retained beneficial interest of $8.6 million.  During the three months ended March 31, 2012 and 2011, the fees and interest paid under a receivables purchase agreement were not significant.

 

Goodwill

 

During the three months ended March 31, 2012, based on our ongoing fair value assessment of certain of our 2011 acquisitions, we reclassified $2.9 million in goodwill from our aviation segment to our land segment and increased aviation segment goodwill by $1.8 million as a result of the reclassification of $1.1 million from identifiable intangible assets and a $0.7 million purchase price adjustment.  We had an additional goodwill increase of $0.2 million as a result of foreign currency translation adjustments of our Brazilian subsidiary in our marine segment.

 

Extinguishment of Liability

 

In the normal course of business, we accrue liabilities for fuel and services received for which invoices have not yet been received.  These liabilities are derecognized, or extinguished, if either (i) payment is made to relieve our obligation for the liability or (ii) we are legally released from our obligation for the liability, such as when our legal obligations with respect to such liabilities lapse or otherwise no longer exist.  During the three months ended March 31, 2012, we derecognized vendor liability accruals in the amount of $3.5 million, as compared to $0.8 million during the three months ended March 31, 2011, which is reflected as a reduction of cost of revenue in the accompanying consolidated statements of income and comprehensive income.

 

Recent Accounting Pronouncements

 

Disclosure About Offsetting Assets and Liabilities.  In December 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update (“ASU”) which requires companies to disclose information about financial instruments that have been offset and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Companies will be required to provide both net (offset amounts) and gross information in the notes to the financial statements for relevant assets and liabilities that are offset. This update is effective at the beginning of our 2013 fiscal year and will be applied retrospectively. We do not believe adoption of this new guidance will have a significant impact on our consolidated financial statements and disclosures.

 

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Disclosure Relating to Comprehensive Income.  In June 2011, the FASB issued an ASU aimed at increasing the prominence of items reported in other comprehensive income in the financial statements. This update requires companies to present comprehensive income in a single statement below net income or in a separate statement of comprehensive income immediately following the income statement. This ASU became effective on a retrospective basis at the beginning of our 2012 fiscal year.  In December 2011, the FASB issued an ASU to defer the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. All other provisions of this update are currently in effect.  The adoption of this ASU resulted in the inclusion of consolidated statements of comprehensive income for the periods presented below the consolidated statements of income.

 

Fair Value Measurements.  In May 2011, the FASB issued an ASU to provide a consistent definition of fair value and common requirements for measurement and disclosure of fair value between International Financial Reporting Standards and U.S. Generally Accepted Accounting Principles. This ASU changes some fair value measurement principles and enhances disclosure requirements related to activities in Level 3 of the fair value hierarchy. The guidance became effective on a prospective basis at the beginning of our 2012 fiscal year. The adoption of this ASU did not have a material impact on our consolidated financial statements and disclosures.

 

2.     Derivatives

 

We enter into financial derivative contracts in order to mitigate the risk of market price fluctuations in aviation, marine and land fuel, to offer our customers fuel pricing alternatives to meet their needs and to mitigate the risk of fluctuations in foreign currency exchange rates.  We also enter into proprietary derivative transactions, primarily intended to capitalize on arbitrage opportunities related to basis or time spreads related to fuel products we sell.  We have applied the normal purchase and normal sales exception (“NPNS”), as provided by accounting guidance for derivative instruments and hedging activities, to certain of our physical forward sales and purchase contracts.  While these contracts are considered derivative instruments under the guidance for derivative instruments and hedging activities, they are not recorded at fair value, but rather are recorded in our consolidated financial statements when physical settlement of the contracts occurs.  If it is determined that a transaction designated as NPNS no longer meets the scope of the exception, the fair value of the related contract is recorded as an asset or liability on the consolidated balance sheet and the difference between the fair value and the contract amount is immediately recognized through earnings.

 

The following describes our derivative classifications:

 

Cash Flow Hedges.  Includes certain of our foreign currency forward contracts we enter into in order to mitigate the risk of currency exchange rate fluctuations.

 

Fair Value Hedges.  Includes derivatives we enter into in order to hedge price risk associated with our inventory and certain firm commitments relating to fixed price purchase and sale contracts.

 

Non-designated Derivatives.  Includes derivatives we primarily enter into in order to mitigate the risk of market price fluctuations in aviation, marine and land fuel in the form of swaps or futures as well as certain fixed price purchase and sale contracts and proprietary trading. In addition, non-designated derivatives are also entered into to hedge the risk of currency rate fluctuations.

 

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Table of Contents

 

As of March 31, 2012, our derivative instruments, at their respective fair value positions were as follows (in thousands, except mark-to-market prices):

 

Hedge Strategy

 

Settlement
Period

 

Derivative Instrument

 

Notional

 

Unit

 

Mark-to-
Market
Prices

 

Mark-to-
Market

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Hedge

 

2012

 

Commodity contracts for firm commitment hedging (long)

 

992

 

GAL

 

$

0.18

 

$

179

 

 

 

2012

 

Commodity contracts for firm commitment hedging (short)

 

3,780

 

GAL

 

(0.08

)

(318

)

 

 

2012

 

Commodity contracts for inventory hedging (short)

 

50,384

 

GAL

 

0.06

 

2,848

 

 

 

2012

 

Commodity contracts for inventory hedging (short)

 

72

 

MT

 

6.36

 

458

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Designated

 

2012

 

Commodity contracts (long)

 

128,366

 

GAL

 

$

0.08

 

$

10,610

 

 

 

2012

 

Commodity contracts (short)

 

199,585

 

GAL

 

(0.11

)

(21,789

)

 

 

2012

 

Commodity contracts (long)

 

2,678

 

MT

 

49.70

 

133,103

 

 

 

2012

 

Commodity contracts (short)

 

2,235

 

MT

 

(47.07

)

(105,170

)

 

 

2013

 

Commodity contracts (long)

 

4,516

 

GAL

 

0.24

 

1,106

 

 

 

2013

 

Commodity contracts (short)

 

9,670

 

GAL

 

(0.05

)

(470

)

 

 

2013

 

Commodity contracts (long)

 

73

 

MT

 

23.38

 

1,707

 

 

 

2013

 

Commodity contracts (short)

 

31

 

MT

 

(42.23

)

(1,309

)

 

 

2014

 

Commodity contracts (long)

 

3

 

MT

 

20.33

 

61

 

 

 

2014

 

Commodity contracts (short)

 

6

 

MT

 

(11.67

)

(70

)

 

 

2012

 

Foreign currency contracts (long)

 

8,636

 

CAD

 

(0.00

)

(29

)

 

 

2012

 

Foreign currency contracts (short)

 

15,236

 

CAD

 

(0.00

)

(11

)

 

 

2012

 

Foreign currency contracts (long)

 

2,289,069

 

CLP

 

(0.00

)

(43

)

 

 

2012

 

Foreign currency contracts (long)

 

636

 

EUR

 

0.02

 

14

 

 

 

2012

 

Foreign currency contracts (short)

 

16,000

 

EUR

 

(0.00

)

(50

)

 

 

2012

 

Foreign currency contracts (long)

 

14,947

 

GBP

 

0.01

 

208

 

 

 

2012

 

Foreign currency contracts (short)

 

90,806

 

GBP

 

(0.01

)

(1,160

)

 

 

2012

 

Foreign currency contracts (long)

 

164,573

 

MXN

 

(0.00

)

(104

)

 

 

2012

 

Foreign currency contracts (short)

 

69,684

 

MXN

 

0.00

 

44

 

 

 

2012

 

Foreign currency contracts (long)

 

27

 

AUD

 

(0.04

)

(1

)

 

 

2012

 

Foreign currency contracts (short)

 

269

 

AUD

 

0.02

 

5

 

 

 

2012

 

Foreign currency contracts (long)

 

893

 

BRL

 

0.03

 

26

 

 

 

2012

 

Foreign currency contracts (short)

 

2,623

 

BRL

 

(0.02

)

(63

)

 

 

2012

 

Foreign currency contracts (short)

 

11,001

 

DKK

 

(0.00

)

(2

)

 

 

2012

 

Foreign currency contracts (short)

 

21,800,000

 

COP

 

(0.00

)

(23

)

 

 

2013

 

Foreign currency contracts (long)

 

10,430

 

GBP

 

0.00

 

24

 

 

 

2013

 

Foreign currency contracts (short)

 

23,315

 

GBP

 

0.00

 

41

 

 

 

 

 

 

 

 

 

 

 

 

 

$

16,655

 

 

9



Table of Contents

 

The following table presents information about our derivative instruments measured at fair value and their locations on the consolidated balance sheets (in thousands):

 

 

 

 

 

As of

 

 

 

 

 

March 31,

 

December 31,

 

 

 

Balance Sheet Location

 

2012

 

2011

 

Derivative assets:

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

$

4,213

 

$

528

 

Commodity contracts

 

Accrued expenses and other current liabilities

 

 

22

 

 

 

 

 

4,213

 

550

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

153,230

 

59,185

 

Commodity contracts

 

Non-current other assets

 

2,225

 

2,065

 

Commodity contracts

 

Accrued expenses and other current liabilities

 

6,985

 

3,231

 

Commodity contracts

 

Other long-term liabilities

 

43

 

40

 

Foreign currency contracts

 

Other current assets

 

254

 

1,912

 

Foreign currency contracts

 

Non-current other assets

 

98

 

1,082

 

Foreign currency contracts

 

Accrued expenses and other current liabilities

 

883

 

 

Foreign currency contracts

 

Other long-term liabilities

 

35

 

 

 

 

 

 

163,753

 

67,515

 

 

 

 

 

$

167,966

 

$

68,065

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

$

1,026

 

$

1,519

 

Commodity contracts

 

Accrued expenses and other current liabilities

 

 

21

 

 

 

 

 

1,026

 

1,540

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

95,140

 

37,713

 

Commodity contracts

 

Non-current other assets

 

241

 

2

 

Commodity contracts

 

Accrued expenses and other current liabilities

 

48,564

 

16,434

 

Commodity contracts

 

Other long-term liabilities

 

779

 

1,213

 

Foreign currency contracts

 

Other current assets

 

66

 

413

 

Foreign currency contracts

 

Non-current other assets

 

102

 

481

 

Foreign currency contracts

 

Accrued expenses and other current liabilities

 

2,080

 

124

 

Foreign currency contracts

 

Other long-term liabilities

 

146

 

 

 

 

 

 

147,118

 

56,380

 

 

 

 

 

$

148,144

 

$

57,920

 

 

The following table presents the effect and financial statement location of our derivative instruments and related hedged items in fair value hedging relationships on our consolidated statements of income and comprehensive income (in thousands):

 

 

 

 

 

Realized and Unrealized
Gain (Loss)

 

 

 

 

 

Realized and Unrealized
Gain (Loss)

 

Derivatives

 

Location

 

2012

 

2011

 

Hedged Items

 

Location

 

2012

 

2011

 

Three months ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Revenue

 

$

265

 

$

10,687

 

Firm commitments

 

Revenue

 

$

(201

)

$

(11,433

)

Commodity contracts

 

Cost of revenue

 

(1,417

)

(7,461

)

Firm commitments

 

Cost of revenue

 

739

 

8,037

 

Commodity contracts

 

Cost of revenue

 

(26,329

)

(40,259

)

Inventories

 

Cost of revenue

 

29,428

 

47,341

 

 

 

 

 

$

(27,481

)

$

(37,033

)

 

 

 

 

$

29,966

 

$

43,945

 

 

There were no gains or losses for the three months ended March 31, 2012 and 2011 that were excluded from the assessment of the effectiveness of our fair value hedges.

 

10



Table of Contents

 

The following table presents the effect and financial statement location of our derivative instruments not designated as hedging instruments on our consolidated statements of income and comprehensive income (in thousands):

 

 

 

 

 

Realized and Unrealized

 

Derivatives

 

Location

 

Gain (Loss)

 

 

 

 

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

 

 

 

 

 

Commodity contracts

 

Revenue

 

$

(223

)

$

1,558

 

Commodity contracts

 

Cost of revenue

 

7,021

 

663

 

Foreign currency contracts

 

Revenue

 

(1,552

)

 

Foreign currency contracts

 

Other income (expense), net

 

(1,662

)

(1,909

)

 

 

 

 

$

3,584

 

$

312

 

 

We enter into derivative instrument contracts which may require us to periodically post collateral. Certain of these derivative contracts contain clauses that are similar to credit-risk-related contingent features, including material adverse change, general adequate assurance and internal credit review clauses that may require additional collateral to be posted and/or settlement of the instruments in the event an aforementioned clause is triggered.  The triggering events are not a quantifiable measure; rather they are based on good faith and reasonable determination by the counterparty that the triggers have occurred. The net liability position for such contracts, the collateral posted and the amount of assets required to be posted and/or to settle the positions should a contingent feature be triggered was $2.3 million as of March 31, 2012.

 

3.     Earnings per Common Share

 

The following table sets forth the computation of basic and diluted earnings per common share for the periods presented (in thousands, except per share amounts):

 

 

 

For the Three Months ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

Net income attributable to World Fuel

 

$

46,415

 

$

41,109

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted average common shares for basic earnings per common share

 

70,998

 

69,970

 

Effect of dilutive securities

 

776

 

1,012

 

Weighted average common shares for diluted earnings per common share

 

71,774

 

70,982

 

 

 

 

 

 

 

Weighted average anti-dilutive securities which are not included in the calculation of diluted earnings per common share

 

54

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.65

 

$

0.59

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.65

 

$

0.58

 

 

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Table of Contents

 

4.     Interest Expense and Other Financing Costs, net

 

The following table provides additional information about our interest expense and other financing costs, net, for the periods presented (in thousands):

 

 

 

For the Three Months ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Interest income

 

$

272

 

$

79

 

Interest expense and other financing costs

 

(4,933

)

(2,604

)

 

 

$

(4,661

)

$

(2,525

)

 

5.     Income Taxes

 

Our income tax provision for the periods presented and the respective effective tax rates for such periods are as follows (in thousands, except for tax rates):

 

 

 

For the Three Months ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Income tax provision

 

$

6,615

 

$

10,415

 

 

 

 

 

 

 

Effective income tax rate

 

12.0

%

20.0

%

 

Our provision for income taxes for each of the three-month periods ended March 31, 2012 and 2011 were calculated based on the estimated annual effective tax rate for the full 2012 fiscal year, adjusted for an income tax benefit of $3.3 million for a discrete item related to a change in estimate in an uncertain tax position, and 2011 fiscal year.  The actual effective tax rate for the full 2012 fiscal year may be materially different as a result of differences between estimated versus actual results and the geographic tax jurisdictions in which the results are earned.

 

6.     Commitments and Contingencies

 

Legal Matters

 

We are involved in litigation and administrative proceedings primarily arising in the normal course of our business. In the opinion of management, our liability, if any, under any other pending litigation or administrative proceedings, even if determined adversely, would not materially affect our financial condition, results of operations or cash flows. As of March 31, 2012, we had recorded certain reserves which were not significant.

 

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Table of Contents

 

7.     Fair Value Measurements

 

The carrying amounts of cash and cash equivalents, accounts receivable, net, accounts payable and accrued expenses and other current liabilities approximate fair value based on the short-term maturities of these instruments.  We believe the carrying values of our notes receivable and debt approximate fair value since these instruments bear interest either at variable rates or fixed rates which are not significantly different than market rates.  Based on the fair value hierarchy, notes receivable of $7.0 million as of March 31, 2012 and $6.8 million as of December 31, 2011 are categorized in Level 3, the debt under our Term Loan Facility of $250.0 million as of March 31, 2012 and December 31, 2011 is categorized in Level 2 and all other debt of $35.7 million as of March 31, 2012 and $37.1 million as of December 31, 2011 is categorized in Level 3.

 

The following table presents information about our assets and liabilities that are measured at estimated fair value on a recurring basis (in thousands):

 

 

 

Level 1

 

Level 2

 

Level 3

 

Sub-Total

 

Netting
and
Collateral

 

Total

 

As of March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

$

33,122

 

$

133,574

 

$

 

$

166,696

 

$

(128,148

)

$

38,548

 

Foreign currency contracts

 

 

1,270

 

 

1,270

 

(1,086

)

184

 

Hedged item commitments

 

 

443

 

 

443

 

(27

)

416

 

Total

 

$

33,122

 

$

135,287

 

$

 

$

168,409

 

$

(129,261

)

$

39,148

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

$

25,534

 

$

120,216

 

$

 

$

145,750

 

$

(103,865

)

$

41,885

 

Foreign currency contracts

 

 

2,394

 

 

2,394

 

(1,086

)

1,308

 

Hedged item inventories

 

 

438

 

 

438

 

 

438

 

Hedged item commitments

 

 

157

 

 

157

 

(27

)

130

 

Earn-out

 

 

 

4,323

 

4,323

 

 

4,323

 

Total

 

$

25,534

 

$

123,205

 

$

4,323

 

$

153,062

 

$

(104,978

)

$

48,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

$

14,038

 

$

51,033

 

$

 

$

65,071

 

$

(43,275

)

$

21,796

 

Foreign currency contracts

 

 

2,994

 

 

2,994

 

(893

)

2,101

 

Hedged item inventories

 

 

3,216

 

 

3,216

 

 

3,216

 

Hedged item commitments

 

 

206

 

 

206

 

 

206

 

Total

 

$

14,038

 

$

57,449

 

$

 

$

71,487

 

$

(44,168

)

$

27,319

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

$

10,148

 

$

46,754

 

$

 

$

56,902

 

$

(43,291

)

$

13,611

 

Foreign currency contracts

 

 

1,018

 

 

1,018

 

(893

)

125

 

Hedged item inventories

 

 

24

 

 

24

 

 

24

 

Earn-out

 

 

 

4,194

 

4,194

 

 

4,194

 

Total

 

$

10,148

 

$

47,796

 

$

4,194

 

$

62,138

 

$

(44,184

)

$

17,954

 

 

Fair value of commodity contracts and hedged item commitments is derived using forward prices that take into account commodity prices, basis differentials, interest rates, credit risk ratings, option volatility and currency rates.  Fair value of hedged item inventories is derived using spot commodity prices and basis differentials.  Fair value of foreign currency contracts is derived using forward prices that take into account interest rates, credit risk ratings and currency rates.

 

For our derivative contracts, we may enter into master netting, collateral and offset agreements with counterparties. These agreements provide us the ability to offset a counterparty’s rights and obligations, request additional collateral when necessary or liquidate the collateral in the event of counterparty default. We net fair value of cash collateral paid or received against fair value amounts recognized for net derivative positions executed with the same counterparty under the same master netting or offset agreement.

 

As of March 31, 2012, included within netting and collateral in the above table, the amounts recognized for the obligation to return cash collateral and the right to reclaim cash collateral that have been offset against fair value assets and fair value liabilities were $24.7 million and $0.4 million, respectively. As of December 31, 2011, included within netting and collateral in the above table, the amounts recognized for the obligation to return cash collateral and the right to reclaim cash collateral that have been offset against fair value assets and fair value liabilities were $1.0 million and $0.8 million, respectively.

 

13



Table of Contents

 

The following table presents information about our assets and liabilities that are measured at fair value on a recurring basis that utilized Level 3 inputs for the periods presented (in thousands):

 

 

 

Beginning
of Period,
(Liabilities)
Assets

 

Realized and
Unrealized
Losses
Included in
Earnings

 

Settlements

 

End of
Period,
Liabilities

 

Change in
Unrealized
Losses
Relating to
Instruments

Still Held as of end
of Period

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earn-out

 

(4,194

)

(129

)

 

(4,323

)

(129

)

Total

 

$

(4,194

)

$

(129

)

$

 

$

(4,323

)

$

(129

)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts, net

 

$

90

 

$

 

$

(90

)

$

 

$

 

Earn-out

 

(5,012

)

(139

)

 

(5,151

)

(139

)

Total

 

$

(4,922

)

$

(139

)

$

(90

)

$

(5,151

)

$

(139

)

 

Our policy is to recognize transfers between Level 1, 2 or 3 as of the beginning of the reporting period in which the event or change in circumstances caused the transfer to occur.  There were no transfers between Level 1, 2 or 3 during the periods presented.  In addition, there were no Level 3 purchases, sales or issuances for the periods presented.

 

Earn-out Relating to 2009 Acquisition

 

In connection with an acquisition made in 2009, we entered into an earn-out agreement with the sellers based on achieving certain operating targets over a three year period ending April 3, 2012.  As of March 31, 2012 and 2011, the estimated fair value of the earn-out liability is $4.3 million and $5.2 million, respectively.  During the three months ended March 31, 2012 and 2011, there was a $0.1 million Level 3 adjustment related to unrealized foreign currency losses.  The impact of the acquisition’s revenue and net income did not have a significant impact on our results for the three months ended March 31, 2012 and 2011.

 

8.     Business Segments

 

Based on the nature of operations and quantitative thresholds pursuant to accounting guidance for segment reporting, we have three reportable operating business segments: aviation, marine and land.  Corporate expenses are allocated to the segments based on usage, where possible, or on other factors according to the nature of the activity.  The results of operations of Nordic Camp Supply ApS and certain affiliates (“NCS”) are included in our aviation segment commencing on March 1, 2011, its acquisition date, and since January 1, 2012, a portion of NCS activity is now included in our land segment.  The results of operations include the results of Ascent in our aviation segment commencing on April 1, 2011, its acquisition date.  The accounting policies of the reportable operating segments are the same as those described in the Summary of Significant Accounting Policies (see Note 1).

 

14



Table of Contents

 

Information concerning our revenue, gross profit and income from operations by segment is as follows (in thousands):

 

 

 

For the Three Months ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Revenue:

 

 

 

 

 

Aviation segment

 

$

3,411,547

 

$

2,646,592

 

Marine segment

 

3,904,191

 

2,999,419

 

Land segment

 

2,163,317

 

1,433,395

 

 

 

$

9,479,055

 

$

7,079,406

 

 

 

 

 

 

 

Gross profit:

 

 

 

 

 

Aviation segment

 

$

64,914

 

$

70,128

 

Marine segment

 

55,077

 

40,215

 

Land segment

 

37,244

 

26,425

 

 

 

$

157,235

 

$

136,768

 

 

 

 

 

 

 

Income from operations:

 

 

 

 

 

Aviation segment

 

$

26,833

 

$

38,170

 

Marine segment

 

27,445

 

17,355

 

Land segment

 

16,200

 

10,663

 

 

 

70,478

 

66,188

 

Corporate overhead – unallocated

 

11,222

 

10,663

 

 

 

$

59,256

 

$

55,525

 

 

Information concerning our accounts receivable, net and total assets by segment is as follows (in thousands):

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Accounts receivable, net:

 

 

 

 

 

Aviation segment, net of allowance for bad debt of $8,419 and $8,441 as of March 31, 2012 and December 31, 2011, respectively

 

$

608,959

 

$

569,086

 

Marine segment, net of allowance for bad debt of $9,422 and $9,495 as of March 31, 2012 and December 31, 2011, respectively

 

1,260,189

 

1,261,340

 

Land segment, net of allowance for bad debt of $6,456 and $6,365 as of March 31, 2012 and December 31, 2011, respectively

 

420,937

 

330,135

 

 

 

$

2,290,085

 

$

2,160,561

 

 

 

 

 

 

 

Total assets:

 

 

 

 

 

Aviation segment

 

$

1,290,714

 

$

1,149,031

 

Marine segment

 

1,573,637

 

1,568,378

 

Land segment

 

932,108

 

816,595

 

Corporate

 

129,345

 

163,242

 

 

 

$

3,925,804

 

$

3,697,246

 

 

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Table of Contents

 

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

 

The following discussion should be read in conjunction with our 2011 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 2011 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 loan facility (“Term Loan Facility”);

 

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

 

·      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 2011 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 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 and in some cases own storage and transportation assets for strategic purposes. 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 the U.S. and foreign governments, and we also offer a private label charge card to customers in the general aviation industry and charge card processing services in connection with the purchase of aviation fuel and related services. 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. Additionally, we also operate a small number of retail gas stations in the U.S. and Gibraltar.

 

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 in the case of the aviation segment, a percentage of processed charge card 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 and 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 2011 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 8 to the accompanying consolidated financial statements included in this 10-Q Report.

 

Results of Operations

 

The results of operations of Nordic Camp Supply ApS and certain affiliates (“NCS”) are included in our aviation segment commencing on March 1, 2011, its acquisition date, and since January 1, 2012, a portion of NCS activity is now included in our land segment.  The results of operations include the results of Ascent Aviation Group, Inc. (“Ascent”) in our aviation segment commencing on April 1, 2011, its acquisition date.

 

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Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

 

Revenue.  Our revenue for the first quarter of 2012 was $9.5 billion, an increase of $2.4 billion, or 33.9%, as compared to the first quarter of 2011.  Our revenue during these periods was attributable to the following segments (in thousands):

 

 

 

For the Three Months ended

 

 

 

 

 

March 31,

 

 

 

 

 

2012

 

2011

 

$ Change

 

 

 

 

 

 

 

 

 

Aviation segment

 

$

3,411,547

 

$

2,646,592

 

$

764,955

 

Marine segment

 

3,904,191

 

2,999,419

 

904,772

 

Land segment

 

2,163,317

 

1,433,395

 

729,922

 

 

 

$

9,479,055

 

$

7,079,406

 

$

2,399,649

 

 

Our aviation segment contributed $3.4 billion in revenue for the first quarter of 2012, an increase of $0.8 billion, or 28.9% as compared to the first quarter of 2011.  Of the total increase in aviation segment revenue, $0.5 billion was due to increased sales volume primarily from additional sales to both new and existing customers as well as incremental sales derived from the NCS and Ascent acquisitions.  The remaining increase of $0.3 billion was due to an increase in the average price per gallon sold as a result of higher world oil prices in the first quarter of 2012 as compared to the first quarter of 2011.

 

Our marine segment contributed $3.9 billion in revenue for the first quarter of 2012, an increase of $0.9 billion, or 30.2%, as compared to the first quarter of 2011.  Of the total increase in marine segment revenue, $0.7 billion was due to an increase in the average price per metric ton sold as a result of higher world oil prices in the first quarter of 2012 as compared to the first quarter of 2011. The remaining increase of $0.2 billion was due to increased sales volume from additional sales to both new and existing customers.

 

Our land segment contributed $2.2 billion in revenue for the first quarter of 2012, an increase of $0.7 billion, or 50.9%, as compared to the first quarter of 2011.  Of the total increase in land segment revenue, $0.5 billion was primarily due to increased sales volume to both new and existing customers.  The remaining increase of $0.2 billion was due to an increase in the average price per gallon sold as a result of higher world oil prices in the first quarter of 2012 as compared to the first quarter of 2011.

 

Gross Profit.  Our gross profit for the first quarter of 2012 was $157.2 million, an increase of $20.5 million, or 15.0%, as compared to the first quarter of 2011.  Our gross profit during these periods was attributable to the following segments (in thousands):

 

 

 

For the Three Months ended

 

 

 

 

 

March 31,

 

 

 

 

 

2012

 

2011

 

$ Change

 

 

 

 

 

 

 

 

 

Aviation segment

 

$

64,914

 

$

70,128

 

$

(5,214

)

Marine segment

 

55,077

 

40,215

 

14,862

 

Land segment

 

37,244

 

26,425

 

10,819

 

 

 

$

157,235

 

$

136,768

 

$

20,467

 

 

Our aviation segment gross profit for the first quarter of 2012 was $64.9 million, a decrease of $5.2 million, or 7.4%, as compared to the first quarter of 2011. The decrease in aviation segment gross profit was due to $20.8 million in decreased gross profit per gallon sold primarily due to a change in customer mix for the quarter, partially offset by $15.6 million in increased sales volume to both new and existing customers and sales derived from the NCS and Ascent acquisitions.

 

Our marine segment gross profit for the first quarter of 2012 was $55.1 million, an increase of $14.9 million, or 37.0%, as compared to the first quarter of 2011. The increase in marine segment gross profit was due to $12.5 million in increased gross profit per metric ton sold primarily due to fluctuations in customer mix, certain higher margin business activity and an improvement in market conditions.  The remaining increase of $2.4 million was due to increased sales volume to both new and existing customers.

 

Our land segment gross profit for the first quarter of 2012 was $37.2 million, an increase of $10.8 million, or 40.9%, as compared to the first quarter of 2011. The increase in land segment gross profit was due to $14.0 million in increased sales volume to both new and existing customers and sales derived from the NCS acquisition, partially offset by $3.2 million in decreased gross profit per gallon sold primarily due to market conditions.

 

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Operating Expenses.  Total operating expenses for the first quarter of 2012 were $98.0 million, an increase of $16.7 million, or 20.6%, as compared to the first quarter of 2011.  The following table sets forth our expense categories (in thousands):

 

 

 

For the Three Months ended

 

 

 

 

 

March 31,

 

 

 

 

 

2012

 

2011

 

$ Change

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

$

54,527

 

$

47,069

 

$

7,458

 

Provision for bad debt

 

141

 

796

 

(655

)

General and administrative

 

43,311

 

33,378

 

9,933

 

 

 

$

97,979

 

$

81,243

 

$

16,736

 

 

Of the total increase in operating expenses, $7.5 million was related to compensation and employee benefits and $9.9 million was related to general and administrative expenses. This was partially offset by a decrease of $0.7 million related to provision for bad debt.  The increase in compensation and employee benefits was primarily due to compensation related to the inclusion of the acquired businesses, compensation for new hires to support our growing global business and increases in incentive-based compensation. The increase in general and administrative expenses was primarily due to the inclusion of the acquired businesses, as well as increases related to professional fees, insurance and depreciation.

 

Income from Operations.  Our income from operations for the first quarter of 2012 was $59.3 million, an increase of $3.7 million, or 6.7%, as compared to the first quarter of 2011.  Income from operations during these periods was attributable to the following segments (in thousands):

 

 

 

For the Three Months ended

 

 

 

 

 

March 31,

 

 

 

 

 

2012

 

2011

 

$ Change

 

 

 

 

 

 

 

 

 

Aviation segment

 

$

26,833

 

$

38,170

 

$

(11,337

)

Marine segment

 

27,445

 

17,355

 

10,090

 

Land segment

 

16,200

 

10,663

 

5,537

 

 

 

70,478

 

66,188

 

4,290

 

Corporate overhead - unallocated

 

11,222

 

10,663

 

559

 

 

 

$

59,256

 

$

55,525

 

$

3,731</