10-Q 1 a12-12796_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 JUNE 30, 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 72,063,000 shares of common stock, par value $0.01 per share, issued and outstanding as of July 25, 2012.

 

 

 



Table of Contents

 

Table of Contents

 

Part I.

Financial Information

 

 

General

1

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

2

 

 

Consolidated Statements of Income and Comprehensive Income for the Three and Six Months ended June 30, 2012 and 2011

3

 

 

Consolidated Statements of Shareholders’ Equity for the Six Months ended June 30, 2012 and 2011

4

 

 

Consolidated Statements of Cash Flows for the Six Months ended June 30, 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

17

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

 

 

Item 6.

Exhibits

30

 

 

 

 

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 and six months ended June 30, 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 June 30, 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

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

136,676

 

$

205,415

 

Accounts receivable, net

 

2,124,645

 

2,160,561

 

Inventories

 

557,390

 

472,584

 

Prepaid expenses

 

158,239

 

109,297

 

Other current assets

 

319,895

 

174,370

 

Total current assets

 

3,296,845

 

3,122,227

 

 

 

 

 

 

 

Property and equipment, net

 

92,597

 

90,710

 

Goodwill

 

353,547

 

346,246

 

Identifiable intangible assets, net

 

103,739

 

107,620

 

Non-current other assets

 

41,166

 

30,443

 

Total assets

 

$

3,887,894

 

$

3,697,246

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term debt

 

$

23,780

 

$

17,800

 

Accounts payable

 

1,774,508

 

1,739,678

 

Customer deposits

 

98,478

 

105,554

 

Accrued expenses and other current liabilities

 

190,978

 

163,110

 

Total current liabilities

 

2,087,744

 

2,026,142

 

 

 

 

 

 

 

Long-term debt

 

308,212

 

269,348

 

Non-current income tax liabilities, net

 

43,013

 

47,703

 

Other long-term liabilities

 

9,857

 

7,335

 

Total liabilities

 

2,448,826

 

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, 72,058 and 71,154 issued and outstanding as of June 30, 2012 and December 31, 2011, respectively

 

721

 

712

 

Capital in excess of par value

 

506,213

 

502,551

 

Retained earnings

 

925,887

 

836,222

 

Accumulated other comprehensive loss

 

(14,603

)

(6,524

)

Total World Fuel shareholders’ equity

 

1,418,218

 

1,332,961

 

Noncontrolling interest equity

 

20,850

 

13,757

 

Total equity

 

1,439,068

 

1,346,718

 

Total liabilities and equity

 

$

3,887,894

 

$

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

 

For the Six Months

 

 

 

ended June 30,

 

ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

9,618,797

 

$

8,708,709

 

$

19,097,852

 

$

15,788,115

 

Cost of revenue

 

9,446,674

 

8,543,607

 

18,768,494

 

15,486,245

 

Gross profit

 

172,123

 

165,102

 

329,358

 

301,870

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

56,183

 

54,877

 

110,710

 

101,946

 

Provision for bad debt

 

641

 

3,531

 

782

 

4,327

 

General and administrative

 

42,941

 

40,591

 

86,252

 

73,969

 

 

 

99,765

 

98,999

 

197,744

 

180,242

 

Income from operations

 

72,358

 

66,103

 

131,614

 

121,628

 

Non-operating expenses, net:

 

 

 

 

 

 

 

 

 

Interest expense and other financing costs, net

 

(5,437

)

(4,298

)

(10,098

)

(6,823

)

Other (expense) income, net

 

(88

)

(83

)

478

 

(1,011

)

 

 

(5,525

)

(4,381

)

(9,620

)

(7,834

)

Income before income taxes

 

66,833

 

61,722

 

121,994

 

113,794

 

Provision for income taxes

 

11,951

 

11,049

 

18,566

 

21,464

 

Net income including noncontrolling interest

 

54,882

 

50,673

 

103,428

 

92,330

 

Net income attributable to noncontrolling interest

 

6,282

 

470

 

8,413

 

1,018

 

Net income attributable to World Fuel

 

$

48,600

 

$

50,203

 

$

95,015

 

$

91,312

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.68

 

$

0.71

 

$

1.34

 

$

1.30

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares

 

71,173

 

70,856

 

71,083

 

70,400

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.68

 

$

0.70

 

$

1.32

 

$

1.28

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average common shares

 

71,767

 

71,558

 

71,773

 

71,299

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

54,882

 

$

50,673

 

$

103,428

 

$

92,330

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(10,886

)

440

 

(8,079

)

1,141

 

Comprehensive income including noncontrolling interest

 

43,996

 

51,113

 

95,349

 

93,471

 

Comprehensive income attributable to noncontrolling interest

 

6,282

 

470

 

8,413

 

1,018

 

Comprehensive income attributable to World Fuel

 

$

37,714

 

$

50,643

 

$

86,936

 

$

92,453

 

 

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

 

 

 

 

95,015

 

 

95,015

 

8,413

 

103,428

 

Distribution of noncontrolling interest

 

 

 

 

 

 

 

(1,320

)

(1,320

)

Cash dividends declared

 

 

 

 

(5,350

)

 

(5,350

)

 

(5,350

)

Amortization of share-based payment awards

 

 

 

5,487

 

 

 

5,487

 

 

5,487

 

Issuance of common stock related to share-based payment awards

 

938

 

9

 

2,721

 

 

 

2,730

 

 

2,730

 

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

 

(34

)

 

(4,546

)

 

 

(4,546

)

 

(4,546

)

Other comprehensive loss

 

 

 

 

 

(8,079

)

(8,079

)

 

(8,079

)

Balance as of June 30, 2012

 

72,058

 

$

721

 

$

506,213

 

$

925,887

 

$

(14,603

)

$

1,418,218

 

$

20,850

 

$

1,439,068

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

91,312

 

 

91,312

 

1,018

 

92,330

 

Initial noncontrolling interest upon consolidation of joint venture

 

 

 

 

 

 

 

614

 

614

 

Capital contribution for joint ventures

 

 

 

 

 

 

 

10,042

 

10,042

 

Cash dividends declared

 

 

 

 

(5,297

)

 

(5,297

)

 

(5,297

)

Amortization of share-based payment awards

 

 

 

4,801

 

 

 

4,801

 

 

4,801

 

Issuance of common stock related to share-based payment awards including income tax benefit of $3,810

 

920

 

9

 

5,257

 

 

 

5,266

 

 

5,266

 

Issuance of common stock related to acquisition

 

691

 

7

 

27,484

 

 

 

27,491

 

 

27,491

 

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

 

(78

)

(1

)

(8,654

)

 

 

(8,655

)

 

(8,655

)

Other comprehensive income

 

 

 

 

 

1,141

 

1,141

 

 

1,141

 

Balance as of June 30, 2011

 

71,135

 

$

711

 

$

497,851

 

$

738,811

 

$

5,894

 

$

1,243,267

 

$

11,030

 

$

1,254,297

 

 

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 Six Months ended June 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income including noncontrolling interest

 

$

103,428

 

$

92,330

 

Adjustments to reconcile net income including noncontrolling interest to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

17,668

 

18,740

 

Provision for bad debt

 

782

 

4,327

 

Share-based payment award compensation costs

 

5,957

 

5,658

 

Deferred income tax provision

 

9,855

 

6,564

 

Extinguishment of liabilities

 

(7,381

)

(3,166

)

Foreign currency gains, net

 

(4,843

)

(411

)

Other

 

1,346

 

893

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

Accounts receivable, net

 

42,097

 

(535,628

)

Inventories

 

(76,710

)

(180,534

)

Prepaid expenses

 

(50,619

)

29,252

 

Other current assets

 

(126,805

)

(53,858

)

Cash collateral deposits held by financial counterparties

 

(128,058

)

(650

)

Non-current other assets

 

(6,137

)

(1,415

)

Accounts payable

 

39,197

 

481,054

 

Customer deposits

 

15,747

 

(14,779

)

Accrued expenses and other current liabilities

 

111,229

 

13,035

 

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

 

(3,676

)

889

 

Total adjustments

 

(160,351

)

(230,029

)

Net cash used in operating activities

 

(56,923

)

(137,699

)

Cash flows from investing activities:

 

 

 

 

 

Acquisitions and other investments, net of cash acquired

 

(29,038

)

(106,013

)

Capital expenditures

 

(9,567

)

(7,394

)

Issuance of notes receivable

 

(401

)

(8,148

)

Repayment of notes receivable

 

401

 

8,148

 

Net cash used in investing activities

 

(38,605

)

(113,407

)

Cash flows from financing activities:

 

 

 

 

 

Borrowings under senior revolving credit facility

 

1,958,000

 

2,416,000

 

Repayments under senior revolving credit facility

 

(1,910,000

)

(2,278,000

)

Borrowings under senior term loans

 

50,000

 

 

Repayments under senior term loans

 

(50,000

)

 

Repayments of other debt

 

(6,103

)

(6,123

)

Dividends paid on common stock

 

(5,350

)

(5,294

)

Payment of earn-out liability

 

(4,304

)

 

Payment of assumed employee benefits

 

 

(5,421

)

Capital contribution for joint venture

 

 

10,000

 

Distribution of noncontrolling interest

 

(1,401

)

 

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

 

 

3,810

 

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

 

(4,546

)

(8,654

)

Net cash provided by financing activities

 

26,296

 

126,318

 

Effect of exchange rate changes on cash and cash equivalents

 

493

 

1,630

 

Net decrease in cash and cash equivalents

 

(68,739

)

(123,158

)

Cash and cash equivalents, as of beginning of period

 

205,415

 

272,893

 

Cash and cash equivalents, as of end of period

 

$

136,676

 

$

149,735

 

 

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

 

5



Table of Contents

 

World Fuel Services Corporation and Subsidiaries

Consolidated Statements of Cash Flows — (Continued)

(Unaudited - In thousands)

 

Supplemental Schedule of Noncash Investing and Financing Activities:

 

Cash dividends declared of $0.0375 per share for the three months ended June 30, 2012 and 2011, but not yet paid, totaled $2.7 million as of June 30, 2012 and 2011, and were paid in July 2012 and 2011, respectively.

 

In connection with our acquisitions during the six months ended June 30, 2012, we issued promissory notes of $2.2 million.  In connection with our acquisitions during the six months ended June 30, 2011, we issued $27.5 million of common stock and a promissory note of $7.5 million.

 

During the six months ended June 30, 2012 and 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 acquisitions for the periods presented, the following table presents the assets acquired, net of cash and liabilities assumed:

 

 

 

For the Six Months ended June 30,

 

 

 

2012

 

2011

 

Assets acquired, net of cash

 

$

28,795

 

$

188,959

 

Liabilities assumed

 

$

3,157

 

$

47,967

 

 

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

 

We have a Receivables Purchase Agreement (“RPA”) to sell up to $125.0 million of certain of our accounts receivable. On our sold receivables, we are charged a discount margin equivalent to a floating market rate plus 2% and certain other fees, as applicable and we retain a beneficial interest in certain of the sold accounts receivable which is included in accounts receivable, net in the accompanying consolidated balance sheets.

 

As of June 30, 2012, we had sold accounts receivable of $96.1 million and retained a beneficial interest of $14.3 million.  During the three and six months ended June 30, 2012, the fees and interest paid under the receivables purchase agreement were not significant.

 

Goodwill

 

During the first six months of 2012, we recorded goodwill of $6.1 million in our aviation segment in connection with two acquisitions completed during the period, which were not material individually or in the aggregate.  In addition, based on our ongoing fair value assessment of certain of our 2011 acquisitions since December 31, 2011, 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 a reduction in goodwill of $0.5 million as a result of foreign currency translation adjustments of our Brazilian subsidiary in our marine segment.

 

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.

 

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 prospective 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.

 

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Table of Contents

 

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.

 

8



Table of Contents

 

As of June 30, 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 inventory hedging (short)

 

63,331

 

GAL

 

$

(0.09

)

$

(5,551

)

 

 

2012

 

Commodity contracts for inventory hedging (short)

 

48

 

MT

 

(34.90

)

(1,675

)

 

 

 

 

 

 

 

 

 

 

 

 

$

(7,226

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Designated

 

2012

 

Commodity contracts (long)

 

222,725

 

GAL

 

$

(0.03

)

$

(6,486

)

 

 

2012

 

Commodity contracts (short)

 

321,090

 

GAL

 

0.08

 

28,814

 

 

 

2012

 

Commodity contracts (long)

 

4,792

 

MT

 

(19.26

)

(92,284

)

 

 

2012

 

Commodity contracts (short)

 

3,366

 

MT

 

21.30

 

71,698

 

 

 

2013

 

Commodity contracts (long)

 

16,298

 

GAL

 

(0.02

)

(263

)

 

 

2013

 

Commodity contracts (short)

 

66,505

 

GAL

 

0.20

 

13,500

 

 

 

2013

 

Commodity contracts (long)

 

1,702

 

MT

 

(28.62

)

(48,704

)

 

 

2013

 

Commodity contracts (short)

 

600

 

MT

 

60.64

 

36,384

 

 

 

2014

 

Commodity contracts (long)

 

3

 

MT

 

(42.00

)

(126

)

 

 

2014

 

Commodity contracts (short)

 

6

 

MT

 

50.17

 

301

 

 

 

2012

 

Foreign currency contracts (long)

 

13,442

 

CAD

 

0.01

 

110

 

 

 

2012

 

Foreign currency contracts (short)

 

13,300

 

CAD

 

(0.01

)

(111

)

 

 

2012

 

Foreign currency contracts (long)

 

1,758,457

 

CLP

 

(0.00

)

(5

)

 

 

2012

 

Foreign currency contracts (short)

 

73,000

 

CLP

 

0.00

 

2

 

 

 

2012

 

Foreign currency contracts (long)

 

2,069

 

EUR

 

0.01

 

11

 

 

 

2012

 

Foreign currency contracts (short)

 

15,834

 

EUR

 

(0.00

)

(74

)

 

 

2012

 

Foreign currency contracts (long)

 

19,812

 

GBP

 

0.00

 

6

 

 

 

2012

 

Foreign currency contracts (short)

 

73,601

 

GBP

 

(0.00

)

(168

)

 

 

2012

 

Foreign currency contracts (long)

 

182,641

 

MXN

 

0.00

 

119

 

 

 

2012

 

Foreign currency contracts (short)

 

44,855

 

MXN

 

(0.00

)

(17

)

 

 

2012

 

Foreign currency contracts (long)

 

491

 

AUD

 

0.02

 

8

 

 

 

2012

 

Foreign currency contracts (short)

 

497

 

AUD

 

(0.02

)

(8

)

 

 

2012

 

Foreign currency contracts (long)

 

2,336

 

BRL

 

0.01

 

12

 

 

 

2012

 

Foreign currency contracts (short)

 

5,100

 

RON

 

(0.00

)

(17

)

 

 

2012

 

Foreign currency contracts (short)

 

17,000

 

DKK

 

(0.00

)

(44

)

 

 

2012

 

Foreign currency contracts (short)

 

14,200,000

 

COP

 

0.00

 

23

 

 

 

2012

 

Foreign currency contracts (long)

 

7,000

 

SGD

 

0.00

 

23

 

 

 

2012

 

Foreign currency contracts (short)

 

11,400

 

SGD

 

(0.01

)

(109

)

 

 

2013

 

Foreign currency contracts (long)

 

27,715

 

GBP

 

(0.02

)

(439

)

 

 

2013

 

Foreign currency contracts (short)

 

43,115

 

GBP

 

0.02

 

795

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,946

 

 

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

 

 

 

 

 

June 30,

 

December 31,

 

 

 

Balance Sheet Location

 

2012

 

2011

 

Derivative assets:

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

$

794

 

$

528

 

Commodity contracts

 

Accrued expenses and other current liabilities

 

 

22

 

 

 

 

 

794

 

550

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

95,748

 

59,185

 

Commodity contracts

 

Non-current other assets

 

9,520

 

2,065

 

Commodity contracts

 

Accrued expenses and other current liabilities

 

142,035

 

3,231

 

Commodity contracts

 

Other long-term liabilities

 

29

 

40

 

Foreign currency contracts

 

Other current assets

 

1,975

 

1,912

 

Foreign currency contracts

 

Non-current other assets

 

165

 

1,082

 

Foreign currency contracts

 

Accrued expenses and other current liabilities

 

75

 

 

 

 

 

 

249,547

 

67,515

 

 

 

 

 

$

250,341

 

$

68,065

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

$

834

 

$

1,519

 

Commodity contracts

 

Accrued expenses and other current liabilities

 

7,186

 

21

 

 

 

 

 

8,020

 

1,540

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

12,659

 

37,713

 

Commodity contracts

 

Non-current other assets

 

214

 

2

 

Commodity contracts

 

Accrued expenses and other current liabilities

 

231,173

 

16,434

 

Commodity contracts

 

Other long-term liabilities

 

457

 

1,213

 

Foreign currency contracts

 

Other current assets

 

1,463

 

413

 

Foreign currency contracts

 

Non-current other assets

 

 

481

 

Foreign currency contracts

 

Accrued expenses and other current liabilities

 

463

 

124

 

Foreign currency contracts

 

Other long-term liabilities

 

172

 

 

 

 

 

 

246,601

 

56,380

 

 

 

 

 

$

254,621

 

$

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 June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Revenue

 

$

 

$

5,518

 

Firm commitments

 

Revenue

 

$

 

$

(5,356

)

Commodity contracts

 

Cost of revenue

 

 

(369

)

Firm commitments

 

Cost of revenue

 

 

274

 

Commodity contracts

 

Cost of revenue

 

36,522

 

6,665

 

Inventories

 

Cost of revenue

 

(32,847

)

(3,045

)

 

 

 

 

$

36,522

 

$

11,814

 

 

 

 

 

$

(32,847

)

$

(8,127

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Revenue

 

$

265

 

$

16,205

 

Firm commitments

 

Revenue

 

$

(201

)

$

(16,789

)

Commodity contracts

 

Cost of revenue

 

(1,417

)

(7,830

)

Firm commitments

 

Cost of revenue

 

739

 

8,311

 

Commodity contracts

 

Cost of revenue

 

10,193

 

(33,594

)

Inventories

 

Cost of revenue

 

(3,419

)

44,296

 

 

 

 

 

$

9,041

 

$

(25,219

)

 

 

 

 

$

(2,881

)

$

35,818

 

 

10



Table of Contents

 

There were no gains or losses for the three and six months ended June 30, 2012 and 2011 that were excluded from the assessment of the effectiveness of our fair value hedges.

 

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

 

 

 

 

 

Gain (Loss)

 

Derivatives

 

Location

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

 

 

 

 

 

 

Commodity contracts

 

Revenue

 

$

(16,549

)

$

1,490

 

Commodity contracts

 

Cost of revenue

 

22,549

 

2,560

 

Foreign currency contracts

 

Revenue

 

824

 

 

Foreign currency contracts

 

Other (expense) income, net

 

978

 

(963

)

 

 

 

 

$

7,802

 

$

3,087

 

 

 

 

 

 

 

 

 

Six months ended June 30,

 

 

 

 

 

 

 

Commodity contracts

 

Revenue

 

$

(16,772

)

$

3,048

 

Commodity contracts

 

Cost of revenue

 

29,570

 

3,223

 

Foreign currency contracts

 

Revenue

 

(728

)

 

Foreign currency contracts

 

Other (expense) income, net

 

(684

)

(2,872

)

 

 

 

 

$

11,386

 

$

3,399

 

 

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 were not significant as of June 30, 2012.

 

3.              Debt

 

On April 10, 2012, we amended our senior revolving credit facility to, among other things, (i) make a $50.0 million prepayment on our senior term loan and (ii) provide for a separate $50.0 million senior term loan for one of our subsidiaries.

 

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

 

For the Six Months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

253

 

$

147

 

$

525

 

$

226

 

Interest expense and other financing costs

 

(5,690

)

(4,445

)

(10,623

)

(7,049

)

 

 

$

(5,437

)

$

(4,298

)

$

(10,098

)

$

(6,823

)

 

4.              Other Comprehensive (Loss) Income and Accumulated Other Comprehensive Loss

 

Our other comprehensive (loss) income consists of foreign currency translation adjustment losses or gains related to our subsidiaries that have a functional currency other than the U.S. dollar and amounted to losses of $10.9 million and $8.1 million for the three and six months ended June 30, 2012, respectively, and gains of $0.4 million and $1.1 million for the three and six months ended June 30, 2011, respectively.  The foreign currency translation adjustment losses for the three and six months ended June 30, 2012 were primarily due to the strengthening of the U.S. dollar as compared to the Brazilian Real.  As of June 30, 2012 and December 31, 2011, our accumulated other comprehensive loss amounted to $14.6 million and $6.5 million, respectively.

 

11



Table of Contents

 

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

 

For the Six Months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

$

11,951

 

$

11,049

 

$

18,566

 

$

21,464

 

 

 

 

 

 

 

 

 

 

 

Effective income tax rate

 

17.9

%

17.9

%

15.2

%

18.9

%

 

Our provision for income taxes for each of the three-month and six-month periods ended June 30, 2012 and 2011 were calculated based on the estimated annual effective tax rate for the full 2012 and 2011 fiscal years.  The provision for income taxes for the six-month period ended June 30, 2012 includes an adjustment for an income tax benefit of $3.3 million for a discrete item related to a change in estimate in an uncertain tax position which was recognized in the three-month period ended March 31, 2012.  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.              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

 

For the Six Months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to World Fuel

 

$

48,600

 

$

50,203

 

$

95,015

 

$

91,312

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares for basic earnings per common share

 

71,173

 

70,856

 

71,083

 

70,400

 

Effect of dilutive securities

 

594

 

702

 

690

 

899

 

Weighted average common shares for diluted earnings per common share

 

71,767

 

71,558

 

71,773

 

71,299

 

 

 

 

 

 

 

 

 

 

 

Weighted average securities which are not included in the calculation of diluted earnings per common share because their impact is anti-dilutive or their performance conditions have not been met

 

774

 

124

 

422

 

70

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.68

 

$

0.71

 

$

1.34

 

$

1.30

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.68

 

$

0.70

 

$

1.32

 

$

1.28

 

 

12



Table of Contents

 

7.              Commitments and Contingencies

 

Legal Matters

 

On April 11, 2012, Cathay Pacific Airways Limited (“Cathay”) filed a writ in the High Court of the Republic of Singapore against one of our subsidiaries, World Fuel Services (Singapore) Pte Ltd. (“WFSS”) alleging property damage and bodily injuries arising out of the emergency landing of a Cathay aircraft in Hong Kong, which Cathay alleges was caused by contaminated fuel supplied by WFSS.  Although not specified in the writ, Cathay claims damages relating to the incident of approximately $34.0 million.  Because the outcome of litigation is inherently uncertain, we cannot estimate the possible loss or range of loss for this matter.  We intend to vigorously defend this claim, and we believe our liability in this matter (if any) should be adequately covered by insurance.  As of June 30, 2012, we have not recorded any accruals associated with this claim.

 

We are involved in litigation and administrative proceedings primarily arising in the normal course of our business.  We are not currently a party to any other pending litigation or administrative proceeding that is expected to have a material adverse effect on our business, financial condition, results of operations or cash flows.  As of June 30, 2012, we had recorded certain accruals which were not significant.

 

8.              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 $6.7 million as of June 30, 2012 and $6.8 million as of December 31, 2011 are categorized in Level 3, the debt under our senior term loans of $250.0 million as of June 30, 2012 and December 31, 2011 is categorized in Level 2 and all other debt of $82.0 million as of June 30, 2012 and $37.1 million as of December 31, 2011 is categorized in Level 3.

 

13



Table of Contents

 

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 June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

$

68,793

 

$

179,333

 

$

 

$

248,126

 

$

(177,205

)

$

70,921

 

Foreign currency contracts

 

 

2,215

 

 

2,215

 

(1,710

)

505

 

Hedged item inventories

 

 

5,642

 

 

5,642

 

 

5,642

 

Total

 

$

68,793

 

$

187,190

 

$

 

$

255,983

 

$

(178,915

)

$

77,068

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

$

94,341

 

$

158,182

 

$

 

$

252,523

 

$

(232,694

)

$

19,829

 

Foreign currency contracts

 

 

2,098

 

 

2,098

 

(1,710

)

388

 

Hedged item inventories

 

 

608

 

 

608

 

 

608

 

Total

 

$

94,341

 

$

160,888

 

$

 

$

255,229

 

$

(234,404

)

$

20,825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 June 30, 2012, we had $139.9 million of cash collateral deposits held by financial counterparties of which $76.9 million have been offset against the total amount of commodity fair value liabilities in the above table and the remaining $63.0 million is included in other current assets in the accompanying consolidated balance sheets.  In addition, as of June 30, 2012, we have offset $21.4 million of cash collateral received from customers against the total amount of commodity fair value assets in the above table.  As of December 31, 2011, we had $11.8 million of cash collateral deposits held by financial counterparties and there were no significant amounts of cash collateral that were offset against the total commodity fair value assets and liabilities in the above table.

 

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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
Gains (Losses)
Included in
Earnings

 

Settlements

 

End of
Period,
Liabilities

 

Change in
Unrealized
Losses
Relating to
Instruments
Still Held at end
of Period

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earn-out

 

$

(4,323

)

$

19

 

$

4,304

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earn-out

 

$

(5,151

)

$

(5

)

$

 

$

(5,156

)

$

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earn-out

 

$

(4,194

)

$

(110

)

$

4,304

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts, net

 

$

90

 

$

 

$

(90

)

$

 

$

 

Earn-out

 

(5,012

)

(144

)

 

(5,156

)

(144

)

Total

 

$

(4,922

)

$

(144

)

$

(90

)

$

(5,156

)

$

(144

)

 

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 significant 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.  The earn-out liability of $4.3 million was paid during the three months ended June 30, 2012.  The impact of the acquisition’s revenue and net income did not have a significant impact on our results for the three and six months ended June 30, 2012 and 2011.

 

9.              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 results 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.  The accounting policies of the reportable operating segments are the same as those described in the Summary of Significant Accounting Policies (see Note 1).

 

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

 

 

 

For the Three Months ended

 

For the Six Months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenue:

 

 

 

 

 

 

 

 

 

Aviation segment

 

$

3,547,871

 

$

3,364,829

 

$

6,959,418

 

$

6,011,421

 

Marine segment

 

3,767,144

 

3,532,983

 

7,671,335

 

6,532,402

 

Land segment

 

2,303,782

 

1,810,897

 

4,467,099

 

3,244,292

 

 

 

$

9,618,797