UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014

 

 

FOR THE TRANSITION PERIOD FROM                      TO                      

 

COMMISSION FILE NUMBER 1-9533

 

 

WORLD FUEL SERVICES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

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 ☒  No ☐

 

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 ☒   No ☐

 

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 ☒   Accelerated filer ☐   Non-accelerated filer ☐   Smaller reporting company ☐

 

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

 

The registrant had a total of 72,064,000 shares of common stock, par value $0.01 per share, issued and outstanding as of October 24, 2014.

 

 

 

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Table of Contents

 

 

 

 

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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 nine months ended September 30, 2014 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 September 30, 2014 (“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, 2013 (“2013 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.”

 

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Item 1.Financial Statements

 

World Fuel Services Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited - In thousands, except per share data)

 

 

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

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World Fuel Services Corporation and Subsidiaries

Consolidated Statements of Income and Comprehensive Income

(Unaudited - In thousands, except per share data)

 

 

 

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

 

 

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World Fuel Services Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity  

(Unaudited - In thousands)

 

 

 

 

 

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

 

 

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World Fuel Services Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited - In thousands)

 

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

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Supplemental Schedule of Noncash Investing and Financing Activities:

 

Cash dividends declared, but not yet paid, were $2.6 million as of September 30, 2014 and $2.7 million as of September 30, 2013.

 

As of September 30, 2013, we had accrued capital expenditures totaling $2.8 million, which were recorded in accounts payable.

 

In connection with our acquisitions, the following table presents the assets acquired, net of cash and liabilities assumed (in thousands):

 

 

 

In connection with our acquisitions during the nine months ended September 30, 2014, we issued $9.0 million of promissory notes.  In connection with our acquisitions during the nine months ended September 30, 2013, we issued $3.0 million of promissory notes and recorded an amount payable to sellers related to a purchase price adjustment of $2.0 million.

 

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

 

 

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World Fuel Services Corporation and Subsidiaries

Notes to the Consolidated Financial Statements

(Unaudited)

 

1.Acquisitions and Significant Accounting Policies

 

Acquisitions

 

2014 Acquisitions

 

On July 29, 2014, we completed the acquisition of all of the outstanding stock of Colt International, L.L.C. (“Colt”) a leading provider of contract fuel and international trip planning services in the general aviation marketplace. Colt is headquartered in Houston, Texas and offers services at more than 3,000 locations.

 

On March 7, 2014, we completed the acquisition of all of the outstanding stock of Watson Petroleum Limited (“Watson Petroleum”) a leading distributor of gasoline, diesel, heating oil, lubricants and other products and related services. Watson Petroleum is headquartered in Brinkworth, England and is one of the largest fuel distributors in the United Kingdom. 

 

In addition to the above acquisitions, in June 2014, we completed an acquisition in our aviation segment which was not significant.

 

The estimated aggregate purchase price for the 2014 acquisitions was $238.5 million, and is subject to change based on the final value of the net assets acquired. The following reconciles the estimated aggregate purchase price for the 2014 acquisitions to the cash paid for the acquisitions, net of cash acquired (in thousands):

 

 

 

 

The estimated purchase price of the 2014 acquisitions was allocated to the assets acquired and liabilities assumed based on their estimated fair value as of the acquisition date. Since the valuations of the assets acquired and liabilities assumed in connection with the 2014 acquisitions have not been finalized, the allocation of the purchase price of these acquisitions may change. The estimated purchase price allocation for the 2014 acquisitions is as follows (in thousands):

 

 

 

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Upon the completion of the acquisition of Watson Petroleum, we made a payment of £13.0 million ($21.7 million) to an escrow account related to an assumed obligation.  As of September 30, 2014, the escrow account balance and corresponding assumed obligation of £13.0 million ($21.1 million) are included in other current assets and accrued expenses and other current liabilities, respectively, in the accompanying consolidated balance sheets.

 

In connection with the 2014 acquisitions, we recorded goodwill of $127.0 million of which $20.5 million is anticipated to be deductible for tax purposes. The identifiable intangible assets consisted of $51.9 million of customer relationships and $3.3 million of other identifiable intangible assets with weighted average lives of 4.2 years and 2.5 years, respectively, as well as $5.8 million of indefinite-lived trademark/trade name rights.

 

The following presents the unaudited pro forma results for 2014 and 2013 as if the 2014 acquisitions had been completed on January 1, 2013 (in thousands, except per share data):

 

 

 

 

The financial position, results of operations and cash flows of the 2014 acquisitions have been included in our consolidated financial statements since their respective acquisition dates and did not have a significant impact on our results for the three and nine months ended September 30, 2014.

 

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 2013 10‑K Report.

 

Goodwill

 

During the first nine months of 2014, we recorded goodwill of $100.4 million in our land segment and goodwill of $26.6 million in our aviation segment in connection with the 2014 acquisitions and we increased land segment goodwill by $0.4 million as a result of a reduction in identifiable intangible assets based on our ongoing fair value assessment of certain of our 2013 acquisitions.  Additionally, we had goodwill decreases of $0.7 million, $0.3 million and $0.1 million as a result of foreign currency translation adjustments of our non-U.S. dollar functional currency subsidiaries in our land, marine and aviation segments, respectively.

 

Other Investments

 

As of September 30, 2014 and December 31, 2013, we had other investments, consisting primarily of equity investments, net of basis adjustments, of $106.4 million and $83.8 million, respectively, which are included within identifiable intangible and other non-current assets in the accompanying consolidated balance sheets.

 

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Recent Accounting Pronouncements

 

Presentation of Financial Statements-Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  In August 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) which requires management of the Company to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. We do not expect the adoption of this new guidance to have an impact on our financial statement disclosures.

 

Compensation-Stock Compensation.  In June 2014, the FASB issued an ASU which includes guidance which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015.  We do not believe the adoption of this new guidance will have a significant impact on our consolidated financial statements and disclosures.

 

Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.  In June 2014, the FASB issued an ASU which changes the accounting for repurchase-to-maturity transactions and repurchase financing arrangements. It also requires additional disclosures about repurchase agreements and other similar transactions. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. We do not believe the adoption of this new guidance will have a significant impact on our consolidated financial statements and disclosures.

 

Revenue from Contracts with Customers.  In May 2014, the FASB issued an ASU which provides guidance for revenue recognition for any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. We are currently evaluating whether the adoption of this new guidance will have a significant impact on our consolidated financial statements and disclosures.

 

Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.  In April 2014, the FASB issued an ASU which changes the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014.  We do not believe the adoption of this new guidance will have a significant impact on our consolidated financial statements and disclosures.

 

Presentation of an Unrecognized Tax Benefit When a Net Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.  In July 2013, the FASB issued an ASU on the presentation of an unrecognized tax benefit when a net operating loss carryforward exists. Under this guidance, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward.  This update became effective at the beginning of our 2014 fiscal year. The adoption of this ASU did not have a significant impact on our consolidated financial statements and disclosures.

 

Foreign Currency Matters Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Foreign Subsidiaries.  In March 2013, the FASB issued an ASU aimed at resolving the diversity in practice of accounting for the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. In addition, the amendments in this ASU resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity.  This update became effective at the beginning of our 2014 fiscal year.  The adoption of this ASU did not have a significant impact on our consolidated financial statements and disclosures.

 

 

 

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Disclosure Obligations Resulting from Joint and Several Liability Arrangements.  In February 2013, the FASB issued an ASU clarifying the guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP.  This update became effective at the beginning of our 2014 fiscal year.  The adoption of this ASU did not have a significant impact on our consolidated financial statements and disclosures.

 

Reclassifications

 

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

 

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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As of September 30, 2014, our derivative instruments, at their respective fair value positions were as follows (in thousands, except weighted average fixed price and weighted average mark-to-market amount): 

 

 

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

 

 

 

 

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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):

 

 

 

 

There were no gains or losses for the three and nine months ended September 30, 2014 and 2013 that were excluded from the assessment of the effectiveness of our fair value hedges.

 

There were no cash flow hedging activities during the three and nine months ended September 30, 2014 and the cash flow hedging activities during the three and nine months ended September 30, 2013 were not significant.

 

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):

 

 

 

 

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. As of September 30, 2014, the net liability position for such contracts is $23.6 million, the collateral posted is $2.2 million and the amount of assets required to be posted and/or to settle the positions should a credit-risk contingent feature be triggered is $21.4 million.  As of December 31, 2013, the net liability position for derivative instrument contracts that contain credit-risk contingent features was not significant.

 

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3.Debt

 

Our debt consisted of the following (in thousands):

 

 

 

 

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

 

 

 

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

 

Our other comprehensive (loss) income, consisting of foreign currency translation adjustments related to our subsidiaries that have a functional currency other than the U.S. dollar and cash flow hedges, was as follows (in thousands):

 

 

 

The foreign currency translation adjustment losses for the nine months ended September 30, 2014 and 2013 were primarily due to the strengthening of the U.S. dollar as compared to the Brazilian Real and the British Pound.  

 

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5.Income Taxes

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

 

 

 

Our provision for income taxes for each of the three-month and nine-month periods ended September 30, 2014 and 2013 were calculated based on the estimated annual effective income tax rate for the full 2014 and 2013 fiscal years. The actual effective income tax rate for the full 2014 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 as well as discrete items resulting from a lapse in the statute of limitations.

 

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):

 

 

 

 

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7.Commitments and Contingencies

 

Legal Matters

 

Lac-Megantic, Quebec 

 

As previously disclosed in “Note 7 — Commitments and Contingencies” in the Notes to the Consolidated Financial Statements included in our 2013 10-K Report, various lawsuits have been filed against us and other third parties related to the July 2013 train derailment in Lac-Mégantic, Quebec. For additional information regarding legal proceedings related to the train derailment, see our 2013 10-K Report and Part II — Item 1 of this 10-Q Report.

 

We are currently unable to determine the probability of loss, or reasonably estimate a range of potential losses related to the proceedings arising from the train derailment. Accordingly, we have not made any provision for these potential losses in our consolidated financial statements.  However, based on estimated losses related to the value of the tank cars involved in the incident, as well as legal and other costs incurred in connection with the incident, which we believe are probable and for which a reasonable estimate can be made, we have recorded total liabilities of $35.3 million.  We believe that a substantial portion of these liabilities are covered by insurance and have recorded total receivables of $34.0 million. As of September 30, 2014, the remaining unpaid liabilities of $19.3 million are included primarily in accrued expenses and other current liabilities and the remaining uncollected receivable of $24.3 million is included in other current assets in the accompanying consolidated balance sheets.

 

Other Contingencies

 

In connection with a theft of fuel product valued at approximately $18.0 million, we recorded an insurance receivable for the full amount of the loss, which is included in other current assets in the accompanying consolidated balance sheets.   On July 31, 2014, our insurer, AGCS Marine Insurance Company (“AGCS”), filed a declaratory judgment action against us in the United States District Court for the Southern District of New York seeking a court ruling that the loss is not covered under our policy.  We believe AGCS’ position is without merit and we intend to vigorously pursue our rights.  However, due to the complexities and uncertainties inherent in litigation, we can provide no assurance that we will recover the full amount of the loss.

 

Other Matters

 

We are a party to various claims, complaints and proceedings arising in the ordinary course of our business including, but not limited to, environmental claims, commercial and governmental contract claims, such as property damage, demurrage, billing and fuel quality claims, as well as bankruptcy preference claims and tax and administrative claims. We have established loss provisions for these ordinary course claims as well as other matters in which losses are probable and can be reasonably estimated. As of September 30, 2014, we had recorded certain reserves which were not significant. For those matters where a reserve has not been established and for which we believe a loss is reasonably possible, as well as for matters where a reserve has been recorded but for which an exposure to loss in excess of the amount accrued is reasonably possible, we believe that such losses will not have a material adverse effect on our consolidated financial statements. However, any adverse resolution of one or more such claims, complaints or proceedings during a particular period could have a material adverse effect on our consolidated financial statements or disclosures for that period.

 

Our estimates regarding potential losses and materiality are based on our judgment and assessment of the claims utilizing currently available information. Although we will continue to reassess our reserves and estimates based on future developments, our objective assessment of the legal merits of such claims may not always be predictive of the outcome and actual results may vary from our current estimates.

 

Executive Non-Renewal Charge

 

In connection with the non-renewal of the employment agreement between the Company and Paul H. Stebbins, the former Executive Chairman of the Board of Directors, we recorded an executive non-renewal charge totaling $4.8 million in May 2014, which included non-cash expenses of $1.1 million related to previously awarded stock compensation. As of September 30, 2014, $0.9 million of the cash portion of the executive non-renewal charge was

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included in accrued expenses and other current liabilities and $2.6 million was included in other long-term liabilities in the accompanying consolidated balance sheets.

 

Nonqualified Deferred Compensation Plan

 

We offer a non-qualified deferred compensation (“NQDC”) plan to certain eligible employees, excluding our named executive officers, whereby the participants may defer a portion of their compensation.  We do not match any participant deferrals under the NQDC plan.  Participants can elect from a variety of investment choices for their deferred compensation and gains and losses on these investments are credited to their respective accounts.  The deferred compensation payable amount under this NQDC plan is subject to the claims of our general creditors and was $2.2 million and $0.9 million as of September 30, 2014 and December 31, 2013, respectively, which was included other long-term liabilities in the accompanying consolidated balance sheets.

 

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 debt and notes receivable 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, our debt of $767.3 million and $463.7 million as of September 30, 2014 and December 31, 2013, respectively, and our notes receivable of $14.0 million and $20.9 million as of September 30, 2014 and December 31, 2013, respectively, are categorized in Level 3.

 

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

 

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The two investment assets of cash surrender value of life insurance and mutual funds are in connection with the NQDC plan and were included in identifiable intangible and other non-current assets in the accompanying consolidated balance sheets.

 

The following table presents information regarding the balance sheet location of our commodity and foreign currency contracts net assets and liabilities (in thousands):

 

 

 

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 September 30, 2014, we had $43.9 million of cash collateral deposits held by financial counterparties, of which $34.7 million have been offset against the total amount of commodity fair value liabilities in the above table and the remaining $9.2 million is included in other current assets in the accompanying consolidated balance sheets.  In addition, as of September 30, 2014, we have offset $2.9 million of cash collateral received from customers against the total amount of commodity fair value assets in the above table.    As of December 31, 2013, we had $13.0 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 liabilities in the above table.   Additionally, as of December 31, 2013, we had offset $4.7 million of cash collateral deposits received from customers against the total amount of commodity fair value assets 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):

 

 

The nature of inputs that are considered Level 3 are modeled inputs. Commodity contracts categorized in Level 3 are due to the significance of the unobservable model inputs to their respective fair values. The unobservable model inputs, such as basis differentials, are based on the difference between the historical prices of our prior transactions and the underlying observable data as well as certain risk related to non-performance.  The effect on our income before income taxes of a 10% change in the model input for non-performance risk would not be significant.

 

There were no transfers between Level 1, 2 or 3 during the periods presented.  In addition, there were no significant Level 3 settlements, purchases, sales or issuances for the periods presented.

 

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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.  Our results of operations include (i) the results of the acquisition of all of the outstanding stock of Watson Petroleum in our land segment commencing on March 7, 2014, its acquisition date, and (ii) the results of the acquisition of all of the outstanding stock of Colt in our aviation segment commencing on July 29, 2014, 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). Information concerning our revenue, gross profit and income from operations by segment is as follows (in thousands):

 

 

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

 

 

 

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

 

The following discussion should be read in conjunction with our 2013 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 2013 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:

 

 

 

 

 

 

 

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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.

 

Overview

 

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

 

In our aviation and land segments, we primarily purchase and resell fuel and other products, and we do not act as brokers. Profit from our aviation and land segments is primarily determined by the volume and the gross profit achieved on fuel resales and a percentage of card payment and processing revenue. In our marine segment, we primarily purchase and resell fuel and other products, 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 previous fiscal years, while our gross profit is not necessarily impacted by changes in world oil prices. However, significant movements in fuel prices during any given financial period can have a significant impact on our gross profit, either positively or negatively depending on the direction, volatility and timing of such price movements.

 

We may experience decreases in future sales volumes and margins as a result of the ongoing deterioration in the world economy, the decline of the transportation industry, natural disasters and continued conflicts and instability in the Middle East, Eastern Europe, 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 2013 10-K Report.

 

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Reportable Segments

 

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

 

Results of Operations

 

Our results of operations include (i) the results of the acquisition of all of the outstanding stock of Watson Petroleum Limited (“Watson Petroleum”) in our land segment commencing on March 7, 2014, its acquisition date, and (ii) the results of the acquisition of all of the outstanding stock of Colt International, L.L.C. (“Colt”) in our aviation segment commencing on July 29, 2014, its acquisition date.

 

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

 

Revenue.  Our revenue for the third quarter of 2014 was $11.7 billion, an increase of $1.2 billion, or 11.6%, as compared to the third quarter of 2013.  Our revenue during these periods was attributable to the following segments (in thousands):

 

 

Our aviation segment revenue for the third quarter of 2014 was $4.7 billion, an increase of $0.5 billion, or 11.9%, as compared to the third quarter of 2013.  Of the increase in aviation segment revenue, $0.7 billion was due to increased volume attributable to new and existing customers, which was partially offset by $0.2 billion due to a decrease in the average price per gallon sold as a result of lower average jet fuel prices in the third quarter of 2014 as compared to the third quarter of 2013.

 

Our marine segment revenue for the third quarter of 2014 was $3.7 billion, an increase of $0.1 billion, or 4.2%, as compared to the third quarter of 2013.  The increase in marine segment revenue was primarily due to increased volume in the third quarter of 2014 as compared to the third quarter of 2013.

 

Our land segment revenue for the third quarter of 2014 was $3.3 billion, an increase of $0.6 billion, or 20.9%, as compared to the third quarter of 2013.  Of the increase in land segment revenue, $0.6 billion was due to revenue from acquired businesses and $0.3 billion was due to increased volume attributable to new and existing customers, which was partially offset by $0.3 billion due to a decrease in the average price per gallon sold as a result of lower average land fuel prices in the third quarter of 2014 as compared to the third quarter of 2013.

 

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Gross Profit.  Our gross profit for the third quarter of 2014 was $214.6 million, an increase of $28.3 million, or 15.2%, as compared to the third quarter of 2013.  Our gross profit during these periods was attributable to the following segments (in thousands):

 

 

Our aviation segment gross profit for the third quarter of 2014 was $96.2 million, an increase of $6.5 million, or 7.2%, as compared to the third quarter of 2013. Of the increase in aviation segment gross profit, $14.0 million was due to increased volume attributable to new and existing customers and $4.9 million was due to gross profit from acquired businesses, which was partially offset by $12.4 million from lower gross profit per gallon sold principally due to fluctuations in customer mix.

 

Our marine segment gross profit for the third quarter of 2014 was $49.4 million, an increase of $9.2 million, or 22.8%, as compared to the third quarter of 2013.  Of the increase in marine segment gross profit, $7.7 million was due to increased gross profit per metric ton sold principally due to certain higher margin business activity and $1.5 million was due to increased volume.

 

Our land segment gross profit for the third quarter of 2014 was $69.0 million, an increase of $12.6 million, or 22.4%, as compared to the third quarter of 2013.  Of the increase in land segment gross profit, $9.8 million was due to gross profit from acquired businesses, $2.2 million was due to increased volume and $2.1 million was due to higher gross profit per gallon sold principally due to fluctuations in customer mix.  Additionally, a land segment joint venture which generated $1.5 million in gross profit for the third quarter of 2013 was deconsolidated effective December 31, 2013 and is not included in our land segment gross profit for the third quarter of 2014.

 

Operating Expenses. Total operating expenses for the third quarter of 2014 were $140.5 million, an increase of $18.4 million, or 15.0%, as compared to the third quarter of 2013. The following table sets forth our expense categories (in thousands):

 

 

The $13.0 million increase in compensation and employee benefits was due to the inclusion of $8.7 million of expenses from acquired businesses and $4.3 million principally related to incentive based compensation.  The $6.0 million increase in general and administrative expenses was principally due to the inclusion of $4.9 million of expenses from acquired businesses and $0.6 million of acquisition related expenses.

 

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Income from Operations. Our income from operations for the third quarter of 2014 was $74.1 million, an increase of $9.9 million, or 15.4%, as compared to the third quarter of 2013. Income from operations during these periods was attributable to the following segments (in thousands):

 

 

 

Our aviation segment income from operations for the third quarter of 2014 was $47.3 million, an increase of $6.3 million, or 15.4%, as compared to the third quarter of 2013. This increase resulted from $6.5 million in higher gross profit, partially offset by increased operating expenses of $0.2 million.

 

Our marine segment income from operations for the third quarter of 2014 was $20.9 million, an increase of $3.9 million, or 23.0%, as compared to the third quarter of 2013. This increase resulted from $9.2 million in higher gross profit, which was partially offset by increased operating expenses of $5.3 million. The increase in marine segment operating expenses was due to a $3.4 million increase in compensation and employee benefits primarily due to higher incentive based compensation, a $0.9 million increase in provision for bad debt and a $1.0 million increase in general and administrative expenses.

 

Our land segment income from operations for the third quarter of 2014 was $19.1 million, an increase of $4.0 million, or 26.5%, as compared to the third quarter of 2013. This increase resulted from $12.6 million in higher gross profit, which was partially offset by increased operating expenses of $8.6 million, principally due to the inclusion of acquired businesses.

 

Corporate overhead costs not charged to the business segments for the third quarter of 2014 were $13.3 million, an increase of $4.3 million, or 48.7%, as compared to the third quarter of 2013.  This increase was primarily attributable to $2.8 million in increased compensation and employee benefits and $0.6 million in acquisition related expenses.

 

Non-Operating Expenses, net. For the third quarter of 2014, we had non-operating expenses, net of $6.2 million, an increase of $0.5 million,  or 8.5%, as compared to the third quarter of 2013. This increase was principally due to a $4.2 million increase in interest expense and other financing costs, net, as a result of higher average borrowings in the third quarter of 2014 as compared to the third quarter of 2013.  This was partially offset by an increase in earnings of $2.0 million from our equity investments in the third quarter of 2014 as compared to the third quarter of 2013.  The increase in earnings from our equity investments is principally related to the deconsolidation of a land segment joint venture effective December 31, 2013, which thereafter is being accounted for under the equity method.

 

Income Taxes.  For the third quarter of 2014, our effective income tax rate was 19.8% and our income tax provision was $13.4 million, as compared to an effective income tax rate of 14.0% and an income tax provision of $8.2 million for the third quarter of 2013.  The higher effective income tax rate is primarily attributable to differences in the results of our subsidiaries in tax jurisdictions with different income tax rates as compared to the third quarter of 2013.

 

Net (Loss) Income Attributable to Noncontrolling Interest. For the third quarter of 2014 and 2013, net loss attributable to noncontrolling interest was $1.2 million.

 

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Net Income and Diluted Earnings per Common Share. Our net income for the third quarter of 2014 was $55.7 million, an increase of $4.2 million, or 8.1%, as compared to the third quarter of 2013. Diluted earnings per common share for the third quarter of 2014 was $0.78 per common share, an increase of $0.06 per common share, or 8.3%, as compared to the third quarter of 2013.

 

Non-GAAP Net Income and Non-GAAP Diluted Earnings per Common Share. Our non-GAAP net income for the third quarter of 2014 was $64.6 million, an increase of $6.7 million, or 11.6%, as compared to the third quarter of 2013. Non-GAAP diluted earnings per common share for the third quarter of 2014 was $0.91 per common share, an increase of $0.10 per common share, or 12.3%, as compared to the third quarter of 2013. The following table sets forth the reconciliation between our net income and non-GAAP net income for the third quarter of 2014 and 2013 (in thousands):

 

The following table sets forth the reconciliation between our diluted earnings per common share and non-GAAP diluted earnings per common share for the third quarter of 2014 and 2013:

 

 

The non-GAAP financial measures exclude costs associated with share-based compensation, amortization of acquired intangible assets and expenses related to the acquisitions of Watson Petroleum and Colt primarily because we do not believe they are reflective of the Company’s core operating results. We believe the exclusion of share-based compensation from operating expenses is useful given the variation in expense that can result from changes in the fair value of our common stock, the effect of which is unrelated to the operational conditions that give rise to variations in the components of our operating costs. Also, we believe the exclusion of the amortization of acquired intangible assets and the expenses related to the acquisitions of Watson Petroleum and Colt are useful for purposes of evaluating operating performance of our core operating results and comparing them period over period. We believe that these non-GAAP financial measures, when considered in conjunction with our financial information prepared in accordance with GAAP, are useful to investors to further aid in evaluating the ongoing financial performance of the Company and to provide greater transparency as supplemental information to our GAAP results. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. In addition, our presentation of non-GAAP net income and non-GAAP diluted earnings per common share may not be comparable to the presentation of such metrics by other companies. Non-GAAP diluted earnings per common share is computed by dividing non-GAAP net income attributable to World Fuel and available to common shareholders by the sum of the weighted average number of shares of common stock, stock units, restricted stock entitled to dividends not subject to forfeiture and vested RSUs outstanding during the period and the number of additional shares of common stock that would have been

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outstanding if our outstanding potentially dilutive securities had been issued. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures.

 

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

 

Revenue. Our revenue for the first nine months of 2014 was $33.6 billion, an increase of $2.4 billion, or 7.9%, as compared to the first nine months of 2013. Our revenue during these periods was attributable to the following segments (in thousands):

 

 

Our aviation segment revenue for the first nine months of 2014 was $13.4 billion, an increase of $1.5 billion, or 12.7%, as compared to the first nine months of 2013.  Of the increase in aviation segment revenue, $2.0 billion was due to increased volume attributable to new and existing customers, which was partially offset by $0.5 billion due to a decrease in the average price per gallon sold as a result of lower average jet fuel prices in the first nine months of 2014 as compared to the first nine months of 2013.

 

Our marine segment revenue for the first nine months of 2014 was $10.7 billion, a decrease of $0.5 billion, or 4.6%, as compared to the first nine months of 2013.  Of the decrease in marine segment revenue, $1.0 billion was due to decreased volume for the first nine months of 2014 as compared to the first nine months of 2013, which was partially offset by $0.5 billion due to an increase in the average price per metric ton sold in the first nine months of 2014 as compared to the first nine months of 2013.

 

Our land segment revenue for the first nine months of 2014 was $9.5 billion, an increase of $1.5 billion, or 18.2%, as compared to the first nine months of 2013.  Of the increase in land segment revenue, $1.5 billion was due to revenue from acquired businesses and $0.8 billion was due to increased volume attributable to new and existing customers, which was partially offset by $0.8 billion due to a decrease in the average price per gallon sold as a result of lower average land fuel prices in the first nine months of 2014 as compared to the first nine months of 2013.

 

Gross Profit.  Our gross profit for the first nine months of 2014 was $594.2 million, an increase of $37.0 million, or 6.6%, as compared to the first nine months of 2013.  Our gross profit during these periods was attributable to the following segments (in thousands):

 

Our aviation segment gross profit for the first nine months of 2014 was $247.0 million, an increase of $4.2 million, or 1.7%, as compared to the first nine months of 2013. Of the increase in aviation segment gross profit, $40.3 million was due to increased volume attributable to new and existing customers and $4.9 million was due to gross profit from acquired businesses, which was partially offset by $41.0 million from lower gross profit per gallon sold principally due to fluctuations in customer mix.

 

 

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Our marine segment gross profit for the first nine months of 2014 was $146.1 million, an increase of $11.9 million, or 8.8%, as compared to the first nine months of 2013.  Of the increase in marine segment gross profit, $23.9 million was due to increased gross profit per metric ton sold principally due to certain higher margin business activity and fluctuations in customer mix.  This was partially offset by $12.0 million in decreased volume due to an increase in market competitiveness.

 

Our land segment gross profit for the first nine months of 2014 was $201.1 million, an increase of $20.9 million, or 11.6%, as compared to the first nine months of 2013.  The increase in land segment gross profit was principally due to $36.7 million in gross profit from acquired businesses and $1.0 million due to higher gross profit per gallon sold principally due to fluctuations in customer mix.  These increases were partially offset by $5.3 million due to decreased volume and $4.2 million in lower gross profit related to our crude oil marketing activities.  Additionally, a land segment joint venture which generated $7.3 million in gross profit for the first nine months of 2013 was deconsolidated effective December 31, 2013 and is not included in our land segment gross profit for the first nine months of 2014.

 

Operating Expenses.  Total operating expenses for the first nine months of 2014 were $395.9 million, an increase of $38.6 million, or 10.8%, as compared to the first nine months of 2013.  The following table sets forth our expense categories (in thousands):

 

The $19.3 million increase in compensation and employee benefits was due to the inclusion of $18.0 million of expenses from acquired businesses and an executive non-renewal charge of $4.8 million related to the non-renewal of the employment agreement of our former Executive Chairman of the Board of Directors.  These increases were partially offset by $2.5 million in decreased share-based compensation.  The $21.5 million increase in general and administrative expenses was due to the inclusion of $13.7 million in expenses from acquired businesses and $7.8 million principally due to increased professional fees, general insurance expenses and acquisition related expenses.

 

Income from Operations.  Our income from operations for the first nine months of 2014 was $198.2 million, a decrease of $1.7 million, or 0.8%, as compared to the first nine months of 2013.  Income from operations during these periods was attributable to the following segments (in thousands):

 

 

Our aviation segment income from operations for the first nine months of 2014 was $114.6 million, an increase of $4.8 million, or 4.4%, as compared to the first nine months of 2013. This increase resulted from $4.2 million in higher gross profit and $0.6 million of decreased operating expenses.

 

Our marine segment income from operations for the first nine months of 2014 was $62.9 million, an increase of $6.6 million, or 11.6%, as compared to the first nine months of 2013. This increase resulted from $11.9 million in higher gross profit, which was partially offset by increased operating expenses of $5.3 million.

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Our land segment income from operations for the first nine months of 2014 was $60.0 million, a decrease of $3.6 million, or 5.6%, as compared to the first nine months of 2013. This decrease resulted from increased operating expenses of $24.5 million, which was partially offset by $20.9 million in higher gross profit.  The increase in land segment operating expenses was principally due to the inclusion of acquired businesses.

 

Corporate overhead costs not charged to the business segments for the first nine months of 2014 were $39.3 million, an increase of $9.4 million, or 31.6%, as compared to the first nine months of 2013.  This increase was primarily attributable to the $4.8 million executive non-renewal charge, $3.8 million in increased professional fees and $1.8 million in acquisition related expenses.

 

Non-Operating Expenses, net. For the first nine months of 2014, we had non-operating expenses, net of $11.9 million, a decrease of $2.1 million, or 15.1%, as compared to the first nine months of 2013. This decrease was principally due to a $4.9 million increase in earnings from our equity investments in the first nine months of 2014 as compared to the first nine months of 2013, which was partially offset by a $4.1 million increase in interest expense and other financing costs, net, as a result of higher average borrowings in the first nine months of 2014 as compared to the first nine months of 2013.  The increase in earnings from our equity investments is principally related to the deconsolidation of a land segment joint venture effective December 31, 2013, which thereafter is being accounted for under the equity method.

 

Income Taxes.  For the first nine months of 2014, our effective income tax rate was 18.8% and our income tax provision was $35.0 million, as compared to an effective income tax rate of 17.3% and an income tax provision of $32.1 million for the first nine months of 2013.  The higher effective income tax rate is primarily attributable to differences in the results of our subsidiaries in tax jurisdictions with different income tax rates as compared to the first nine months of 2013.

 

Net (Loss) Income Attributable to Noncontrolling Interest. For the first nine months of 2014, net loss attributable to noncontrolling interest was $3.3 million as compared to net income attributable to noncontrolling interest of $2.6 million for the first nine months of 2013.

 

Net Income and Diluted Earnings per Common Share. Our net income for the first nine months of 2014 was $154.6 million, an increase of $3.4 million, or 2.2%, as compared to the first nine months of 2013.  Diluted earnings per common share for the first nine months of 2014 was $2.17 per common share, an increase of $0.07 per common share, or 3.3%, as compared to the first nine months of 2013.

 

 

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Non-GAAP Net Income and Non-GAAP Diluted Earnings per Common Share.  Our non-GAAP net income for the first nine months of 2014 was $181.0 million, an increase of $10.6 million, or 6.2%, as compared to the first nine months of 2013.  Non-GAAP diluted earnings per common share for the first nine months of 2014 was $2.54 per common share, an increase of $0.17 per common share, or 7.2%, as compared to the first nine months of 2013.  The following table sets forth the reconciliation between our net income and non-GAAP net income for the first nine months of 2014 and 2013 (in thousands):

 

 

The following table sets forth the reconciliation between our diluted earnings per common share and non-GAAP diluted earnings per common share for the first nine months of 2014 and 2013:

 

The non-GAAP financial measures exclude costs associated with share-based compensation, amortization of acquired intangible assets, expenses related to the acquisitions of Watson Petroleum and Colt and executive non-renewal charge primarily because we do not believe they are reflective of the Company’s core operating results. We believe the exclusion of share-based compensation from operating expenses is useful given the variation in expense that can result from changes in the fair value of our common stock, the effect of which is unrelated to the operational conditions that give rise to variations in the components of our operating costs. Also, we believe the exclusion of the amortization of acquired intangible assets, the expenses related to the acquisitions of Watson Petroleum and Colt and executive non-renewal charge are useful for purposes of evaluating operating performance of our core operating results and comparing them period over period. We believe that these non-GAAP financial measures, when considered in conjunction with our financial information prepared in accordance with GAAP, are useful to investors to further aid in evaluating the ongoing financial performance of the Company and to provide greater transparency as supplemental information to our GAAP results. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. In addition, our presentation of non-GAAP net income and non-GAAP diluted earnings per common share may not be comparable to the presentation of such metrics by other companies. Non-GAAP diluted earnings per common share is computed by dividing non-GAAP net income attributable to World Fuel and available to common shareholders by the sum of the weighted average number of shares of common stock, stock units, restricted stock entitled to dividends not subject to forfeiture and vested RSUs outstanding during the period and the number of additional shares of common stock that would have been outstanding if our outstanding potentially dilutive securities had been issued. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures.

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Liquidity and Capital Resources

 

Cash Flows

 

The following table reflects the major categories of cash flows for the nine months ended September 30, 2014 and 2013.  For additional details, please see the consolidated statements of cash flows.

 

 

 

Operating Activities.  For the nine months ended September 30, 2014, net cash provided by operating activities was $129.1 million as compared to $213.7 million for the first nine months of 2013.  The $84.6 million decrease in operating cash flows was primarily due to year-over-year changes in assets and liabilities, net of acquisitions.

 

Investing Activities. For the nine months ended September 30, 2014, net cash used in investing activities was $290.2 million as compared to $91.2 million for the first nine months of 2013. The $199.0 million increase in cash used in investing activities was principally due to an increase in the cash used for the acquisition of businesses in the first nine months of 2014 as compared to the first nine months of 2013.

 

Financing Activities.  For the nine months ended September 30, 2014, net cash provided by financing activities was $259.9 million as compared to $38.7 million for the first nine months of 2013.  The $221.2 million increase in cash provided by financing activities was principally due to increased net borrowings under our Credit Facility in the first nine months of 2014 as compared to the first nine months of 2013.

 

Other Liquidity Measures

 

Cash and Cash Equivalents.  As of September 30, 2014 and December 31, 2013, we had cash and cash equivalents of $388.5 million and $292.1 million, respectively, of which $80.7 million and $39.7 million, respectively, was available for use by our U.S. subsidiaries without incurring additional costs.  Our primary uses of cash and cash equivalents are to fund accounts receivable, purchase inventory and make strategic investments, primarily acquisitions. We are usually extended unsecured trade credit from our suppliers for our fuel purchases; however, certain suppliers require us to either prepay or provide a letter of credit. Increases in oil prices can negatively affect liquidity by increasing the amount of cash needed to fund fuel purchases as well as reducing the amount of fuel which we can purchase on an unsecured basis from our suppliers.

 

Credit Facility and Term Loans. We have a Credit Facility which permits borrowings of up to $1.1 billion with a sublimit of $400.0 million for the issuance of letters of credit and bankers’ acceptances. Under the Credit Facility, we have the right to request increases in available borrowings up to an additional $150.0 million, subject to the satisfaction of certain conditions. The Credit Facility matures in October 2018. We had outstanding borrowings under our Credit Facility totaling $495.0 million and $200.0 million as of September 30, 2014 and December 31, 2013, respectively. Our issued letters of credit under the Credit Facility totaled $12.0 million and $7.4 million as of September 30, 2014 and December 31, 2013, respectively. We also had $242.5 million in Term Loans outstanding as of September 30, 2014 and December 31, 2013.

 

Our liquidity consisting of cash and cash equivalents and availability under the Credit Facility fluctuates based on a number of factors, including the timing of receipts from our customers and payments to our suppliers as well as commodity prices. Our Credit Facility and our Term Loans contain certain financial covenants with which we are required to comply. Our failure to comply with the financial covenants contained in our Credit Facility and our Term Loans could result in an event of default. An event of default, if not cured or waived, would permit acceleration of any outstanding indebtedness under the Credit Facility and our Term Loans, trigger cross-defaults under other agreements to which we are a party and impair our ability to borrow and issue letters of credit, which would have a

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material adverse effect on our business, financial condition, results of operations and cash flows. As of September 30, 2014, we were in compliance with all financial covenants contained in our Credit Facility and our Term Loans.

 

Other Credit Lines.  Additionally, we have other uncommitted credit lines primarily for the issuance of letters of credit, bank guarantees and bankers’ acceptances. These credit lines are renewable on an annual basis and are subject to fees at market rates. As of September 30, 2014 and December 31, 2013, our outstanding letters of credit and bank guarantees under these credit lines totaled $214.1 million and $150.6 million, respectively. We also have Receivables Purchase Agreements (“RPAs”) that allow for the sale of up to an aggregate of $375.0 million of our accounts receivable. As of September 30, 2014, we had sold accounts receivable of $185.1 million under the RPAs.

 

Short-Term Debt. As of September 30, 2014, our short-term debt of $16.4 million primarily represents the current maturities (within the next twelve months) of certain promissory notes related to acquisitions, capital lease obligations and Term Loan borrowings.

 

We believe that available funds from existing cash and cash equivalents and our Credit Facility, together with cash flows generated by operations, remain sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months. In addition, to further enhance our liquidity profile, we may choose to raise additional funds which may or may not be needed for additional working capital, capital expenditures or other strategic investments. Our opinions concerning liquidity are based on currently available information. To the extent this information proves to be inaccurate, or if circumstances change, future availability of trade credit or other sources of financing may be reduced and our liquidity would be adversely affected. Factors that may affect the availability of trade credit or other forms of financing include our financial performance (as measured by various factors, including cash provided from operating activities), the state of worldwide credit markets, and our levels of outstanding debt. Depending on the severity and direct impact of these factors on us, financing may be limited or unavailable on terms favorable to us.

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

Except for changes in the contractual obligations and off-balance sheet arrangements described below, there were no other material changes from December 31, 2013 to September 30, 2014.  For a discussion of these matters, refer to “Contractual Obligations and Off-Balance Sheet Arrangements” in Item 7 of our 2013 10-K Report.

 

Contractual Obligations

 

Derivative Obligations.  As of September 30, 2014, our net derivative obligations were $23.4 million, principally due within one year.

 

Purchase Commitment Obligations.  As of September 30, 2014, fixed purchase commitments under our derivative programs amounted to  $30.5 million.

 

Off-Balance Sheet Arrangements

 

Letters of Credit and Bank Guarantees. In the normal course of business, we are required to provide letters of credit to certain suppliers. A majority of these letters of credit expire within one year from their issuance, and expired letters of credit are renewed as needed.  As of September 30, 2014, we had issued letters of credit and bank guarantees totaling $226.1 million under our Credit Facility and other uncommitted credit lines. For additional information on our Credit Facility and other credit lines, see the discussion in “Liquidity and Capital Resources” above.

 

Recent Accounting Pronouncements

 

Information regarding recent accounting pronouncements is included in Note 1 - Significant Accounting Policies in the “Notes to the Consolidated Financial Statements” in this 10-Q Report.