Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - WORLD FUEL SERVICES CORP | a2017q1ex321.htm |
| EX-31.2 - EXHIBIT 31.2 - WORLD FUEL SERVICES CORP | a2017q1ex312.htm |
| EX-31.1 - EXHIBIT 31.1 - WORLD FUEL SERVICES CORP | a2017q1ex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017
☐ | 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
WORLD FUEL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Florida (State or other jurisdiction of incorporation or organization) | 59-2459427 (I.R.S. Employer Identification No.) | |
9800 N.W. 41st Street Miami, Florida (Address of Principal Executive Offices) | 33178 (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 ☒ 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 ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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 69,062,486 shares of common stock, par value $0.01 per share, issued and outstanding as of April 20, 2017.
Table of Contents
Part I — Financial Information
Item 1. | Financial Statements |
World Fuel Services Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited - In millions, except per share data)
As of | ||||||||
March 31, | December 31, | |||||||
2017 | 2016 | |||||||
Assets: | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 619.3 | $ | 698.6 | ||||
Accounts receivable, net | 2,209.1 | 2,344.0 | ||||||
Inventories | 460.0 | 458.0 | ||||||
Prepaid expenses | 46.4 | 46.5 | ||||||
Short-term derivative assets, net | 50.0 | 58.9 | ||||||
Other current assets | 204.4 | 230.6 | ||||||
Total current assets | 3,589.2 | 3,836.6 | ||||||
Property and equipment, net | 317.3 | 311.2 | ||||||
Goodwill | 883.4 | 835.8 | ||||||
Identifiable intangible and other non-current assets | 473.6 | 429.1 | ||||||
Total assets | $ | 5,263.6 | $ | 5,412.6 | ||||
Liabilities: | ||||||||
Current liabilities: | ||||||||
Short-term debt | $ | 17.1 | $ | 15.4 | ||||
Accounts payable | 1,729.5 | 1,770.4 | ||||||
Customer deposits | 98.5 | 90.8 | ||||||
Accrued expenses and other current liabilities | 249.6 | 306.0 | ||||||
Total current liabilities | 2,094.7 | 2,182.7 | ||||||
Long-term debt | 1,065.8 | 1,170.8 | ||||||
Non-current income tax liabilities, net | 88.5 | 84.6 | ||||||
Other long-term liabilities | 39.0 | 34.5 | ||||||
Total liabilities | 3,288.0 | 3,472.6 | ||||||
Commitments and contingencies | ||||||||
Equity: | ||||||||
World Fuel shareholders' equity: | ||||||||
Preferred stock, $1.00 par value; 0.1 shares authorized, none issued | — | — | ||||||
Common stock, $0.01 par value; 100.0 shares authorized, 69.6 and 69.9 issued and outstanding as of March 31, 2017 and December 31, 2016, respectively | 0.7 | 0.7 | ||||||
Capital in excess of par value | 391.8 | 399.9 | ||||||
Retained earnings | 1,706.5 | 1,679.3 | ||||||
Accumulated other comprehensive loss | (138.1 | ) | (154.8 | ) | ||||
Total World Fuel shareholders' equity | 1,960.8 | 1,925.0 | ||||||
Noncontrolling interest equity | 14.8 | 15.0 | ||||||
Total equity | 1,975.6 | 1,940.0 | ||||||
Total liabilities and equity | $ | 5,263.6 | $ | 5,412.6 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
1
World Fuel Services Corporation and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
(Unaudited – In millions, except per share data)
For the Three Months Ended | ||||||||
March 31, | ||||||||
2017 | 2016 | |||||||
Revenue | $ | 8,194.3 | $ | 5,190.8 | ||||
Cost of revenue | 7,962.9 | 4,969.3 | ||||||
Gross profit | 231.4 | 221.5 | ||||||
Operating expenses: | ||||||||
Compensation and employee benefits | 104.5 | 95.9 | ||||||
Provision for bad debt | 2.5 | 1.5 | ||||||
General and administrative | 74.1 | 63.1 | ||||||
181.1 | 160.5 | |||||||
Income from operations | 50.3 | 61.0 | ||||||
Non-operating expenses, net: | ||||||||
Interest expense and other financing costs, net | (12.7 | ) | (7.6 | ) | ||||
Other (expense) income, net | (1.6 | ) | 1.3 | |||||
(14.3 | ) | (6.3 | ) | |||||
Income before income taxes | 36.1 | 54.8 | ||||||
Provision for income taxes | 5.0 | 3.1 | ||||||
Net income including noncontrolling interest | 31.1 | 51.6 | ||||||
Net loss attributable to noncontrolling interest | (0.3 | ) | (0.1 | ) | ||||
Net income attributable to World Fuel | $ | 31.3 | $ | 51.8 | ||||
Basic earnings per common share | $ | 0.46 | $ | 0.74 | ||||
Basic weighted average common shares | 68.7 | 69.5 | ||||||
Diluted earnings per common share | $ | 0.45 | $ | 0.74 | ||||
Diluted weighted average common shares | 69.2 | 70.0 | ||||||
Comprehensive income: | ||||||||
Net income including noncontrolling interest | $ | 31.1 | $ | 51.6 | ||||
Other comprehensive income (loss): | ||||||||
Foreign currency translation adjustments | 6.4 | 1.3 | ||||||
Cash Flow hedges, net of income tax benefit of $6.5 for the three months ended March 31, 2017 | 10.5 | (0.2 | ) | |||||
Other comprehensive income | 16.9 | 1.0 | ||||||
Comprehensive income including noncontrolling interest | 48.0 | 52.7 | ||||||
Comprehensive (loss) income attributable to noncontrolling interest | (0.1 | ) | 1.5 | |||||
Comprehensive income attributable to World Fuel | $ | 48.0 | $ | 51.2 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
2
World Fuel Services Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(Unaudited - In millions)
Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Loss | Total World Fuel Shareholders' Equity | Noncontrolling Interest Equity | ||||||||||||||||||||||||||
Shares | Amount | Total Equity | |||||||||||||||||||||||||||||
Balance as of December 31, 2016 | 69.9 | $ | 0.7 | $ | 399.9 | $ | 1,679.3 | $ | (154.8 | ) | $ | 1,925.0 | $ | 15.0 | $ | 1,940.0 | |||||||||||||||
Net income | — | — | — | 31.3 | — | 31.3 | (0.3 | ) | 31.1 | ||||||||||||||||||||||
Cash dividends declared | — | — | — | (4.1 | ) | — | (4.1 | ) | — | (4.1 | ) | ||||||||||||||||||||
Distribution of noncontrolling interest | — | — | — | — | — | — | (0.1 | ) | (0.1 | ) | |||||||||||||||||||||
Amortization of share-based payment awards | — | — | 4.2 | — | — | 4.2 | — | 4.2 | |||||||||||||||||||||||
Purchases of common stock tendered by employees to satisfy the required withholding taxes related to share-based payment awards | — | — | (1.2 | ) | — | — | (1.2 | ) | — | (1.2 | ) | ||||||||||||||||||||
Purchases of common stock | (0.3 | ) | — | (11.1 | ) | — | — | (11.1 | ) | — | (11.1 | ) | |||||||||||||||||||
Other comprehensive income | — | — | — | — | 16.7 | 16.7 | 0.2 | 16.9 | |||||||||||||||||||||||
Balance as of March 31, 2017 | 69.6 | $ | 0.7 | $ | 391.8 | $ | 1,706.5 | $ | (138.1 | ) | $ | 1,960.8 | $ | 14.8 | $ | 1,975.6 | |||||||||||||||
Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Loss | Total World Fuel Shareholders' Equity | Noncontrolling Interest Equity | ||||||||||||||||||||||||||
Shares | Amount | Total Equity | |||||||||||||||||||||||||||||
Balance as of December 31, 2015 | 70.8 | $ | 0.7 | $ | 435.3 | $ | 1,569.4 | $ | (109.5 | ) | $ | 1,895.9 | $ | 10.0 | $ | 1,905.9 | |||||||||||||||
Net income | — | — | — | 51.8 | — | 51.8 | (0.1 | ) | 51.6 | ||||||||||||||||||||||
Cash dividends declared | — | — | — | (4.2 | ) | — | (4.2 | ) | — | (4.2 | ) | ||||||||||||||||||||
Distribution of noncontrolling interest | — | — | — | — | — | — | (0.2 | ) | (0.2 | ) | |||||||||||||||||||||
Amortization of share-based payment awards | — | — | 4.0 | — | — | 4.0 | — | 4.0 | |||||||||||||||||||||||
Issuance of common stock related to share-based payment awards | 0.1 | — | — | — | — | — | — | — | |||||||||||||||||||||||
Purchases of common stock tendered by employees to satisfy the required withholding taxes related to share-based payment awards | — | — | (0.9 | ) | — | — | (0.9 | ) | — | (0.9 | ) | ||||||||||||||||||||
Other comprehensive (loss) income | — | — | — | — | (0.5 | ) | (0.5 | ) | 1.6 | 1.0 | |||||||||||||||||||||
Balance as of March 31, 2016 | 70.9 | $ | 0.7 | $ | 438.4 | $ | 1,616.9 | $ | (110.0 | ) | $ | 1,946.1 | $ | 11.2 | $ | 1,957.2 | |||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
World Fuel Services Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited - In millions)
For the Three Months Ended | ||||||||
March 31, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net income including noncontrolling interest | $ | 31.1 | $ | 51.6 | ||||
Adjustments to reconcile net income including noncontrolling interest to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 22.6 | 18.4 | ||||||
Provision for bad debt | 2.5 | 1.5 | ||||||
Share-based payment award compensation costs | 4.1 | 4.1 | ||||||
Deferred income tax (benefit) provision | (6.3 | ) | 1.8 | |||||
Extinguishment of liabilities, net | (1.0 | ) | (1.8 | ) | ||||
Foreign currency (gains) losses, net | (3.0 | ) | 6.2 | |||||
Other | 0.1 | 1.4 | ||||||
Changes in assets and liabilities, net of acquisitions: | ||||||||
Accounts receivable, net | 129.5 | 142.9 | ||||||
Inventories | 0.7 | 26.1 | ||||||
Prepaid expenses | (0.2 | ) | 11.7 | |||||
Short-term derivative assets, net | 10.1 | 85.1 | ||||||
Other current assets | 21.0 | (12.8 | ) | |||||
Cash collateral with financial counterparties | 15.8 | 54.0 | ||||||
Other non-current assets | 4.1 | 7.1 | ||||||
Accounts payable | (44.7 | ) | (191.2 | ) | ||||
Customer deposits | 7.3 | (23.6 | ) | |||||
Accrued expenses and other current liabilities | (54.6 | ) | (37.3 | ) | ||||
Non-current income tax, net and other long-term liabilities | (2.1 | ) | (6.7 | ) | ||||
Total adjustments | 105.9 | 86.9 | ||||||
Net cash provided by operating activities | 137.0 | 138.6 | ||||||
Cash flows from investing activities: | ||||||||
Acquisition of businesses, net of cash acquired and other investments | (88.1 | ) | (45.3 | ) | ||||
Capital expenditures | (10.0 | ) | (14.1 | ) | ||||
Other investing activities, net | 0.2 | 6.9 | ||||||
Net cash used in investing activities | (97.9 | ) | (52.6 | ) | ||||
Cash flows from financing activities: | ||||||||
Borrowings of debt | 818.8 | 689.6 | ||||||
Repayments of debt | (922.5 | ) | (664.6 | ) | ||||
Dividends paid on common stock | (4.1 | ) | (4.2 | ) | ||||
Purchases of common stock | (11.1 | ) | — | |||||
Purchases of common stock tendered by employees to satisfy the required withholding taxes related to share-based payment awards | (1.2 | ) | (0.9 | ) | ||||
Other financing activities, net | (0.1 | ) | (0.2 | ) | ||||
Net cash (used in) provided by financing activities | (120.2 | ) | 19.6 | |||||
Effect of exchange rate changes on cash and cash equivalents | 1.8 | 1.5 | ||||||
Net (decrease) increase in cash and cash equivalents | (79.3 | ) | 107.2 | |||||
Cash and cash equivalents, as of beginning of period | 698.6 | 582.5 | ||||||
Cash and cash equivalents, as of end of period | $ | 619.3 | $ | 689.7 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
4
Supplemental Schedule of Noncash Investing and Financing Activities:
Cash dividends declared, but not yet paid, were $4.1 million and $4.2 million as of March 31, 2017 and March 31, 2016, respectively.
During the three months ended March 31, 2017, the Company acquired certain assets in exchange for the settlement of $8.1 million of accounts receivable balances owed by the seller to the Company.
In connection with our acquisitions, the following table presents the assets acquired, net of cash and liabilities assumed (in millions):
For the Three Months Ended | For the Three Months Ended | |||||
March 31, 2017 | March 31, 2016 | |||||
Assets acquired, net of cash | $ | 103.4 | $ | 30.6 | ||
Liabilities assumed | $ | 7.7 | $ | 1.0 | ||
In connection with the 2016 acquisitions, we issued promissory notes totaling $0.5 million.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
World Fuel Services Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
We prepared the consolidated financial statements following the requirements of the Unites States (“U.S.”) Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) can be condensed or omitted. Unless the context requires otherwise, references to “World Fuel”, “the Company”, “we”, “us”, or “our” in this Quarterly Report on Form 10-Q (“10-Q Report”) refer to World Fuel Services Corporation and its subsidiaries.
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be representative of those for the full year. In the opinion of management, all adjustments necessary for a fair statement of the financial information, which are of a normal and recurring nature, have been made for the interim periods reported. The information included in this 10-Q Report should be read in conjunction with the consolidated financial statements and accompanying notes included in our 2016 Annual Report on Form 10-K (“2016 10-K Report”). Certain amounts in the consolidated financial statements and associated notes may not add due to rounding. All percentages have been calculated using unrounded amounts.
Significant Accounting Policies
The significant accounting policies we use for quarterly financial reporting are disclosed in Note 1 of the “Notes to the Consolidated Financial Statements” included in our 2016 10‑K Report.
Accounting Standards Issued but Not Yet Adopted
Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. In February 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-05. The amendments in the update clarify a financial asset is within the scope of this guidance if it meets the definition of an in substance nonfinancial asset; this may include nonfinancial assets transferred within a legal entity to a counterparty. This standard is effective at the beginning of our 2018 fiscal year. We are currently evaluating whether the adoption of this new guidance will have a significant impact on our consolidated financial statements and related disclosures.
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. In January 2017, ASU 2017-04 was issued. The update simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendment an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This standard is effective at the beginning of our 2020 fiscal year. We are currently evaluating whether the adoption of this new guidance will have a significant impact on our consolidated financial statements and related disclosures.
Business Combinations (Topic 805): Clarifying the Definition of a Business. In January 2017, ASU 2017-01 was issued. The update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. This standard is effective at the beginning of our 2018 fiscal year. We are currently evaluating whether the adoption of this new guidance will have a significant impact on our consolidated financial statements and related disclosures.
Cash Flows: Statement of Cash Flows (Topic 230) - Restricted Cash. In November 2016, ASU 2016-18 was issued. The update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This standard is effective at the beginning of our 2018 fiscal year. We are currently evaluating whether the adoption of this new guidance will have a significant impact on our consolidated financial statements and related disclosures.
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory. In October 2016, ASU 2016-16 was issued. The update prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This standard is effective at the beginning of our 2018 fiscal year. We are currently evaluating whether the adoption of this new guidance will have a significant impact on our consolidated financial statements and related disclosures.
6
Cash Flows: Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments. In August 2016 ASU 2016-15 was issued. The ASU provides guidance on classification of eight specific cash flows items. This standard is effective at the beginning of our 2018 fiscal year. We are currently evaluating whether the adoption of this new guidance will have a significant impact on our consolidated financial statements and related disclosures.
Leases (Topic 842). In February 2016, ASU 2016-02 was issued. This standard will require all lessees to recognize a right of use asset and a lease liability on the balance sheet, except for leases with durations that are less than twelve months. This standard is effective at the beginning of our 2019 fiscal year. We are currently evaluating whether the adoption of this new guidance will have a significant impact on our consolidated financial statements and related disclosures.
Financial Instruments: Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. In January 2016, ASU 2016-01 was issued to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU supersedes the guidance to classify equity securities with readily determinable fair values into different categories, and requires equity securities (except those that are accounted for under the equity method or those that result in consolidation of the investee) to be measured at fair value with changes in the fair value recognized through net income. It also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period. This update is effective at the beginning of our 2018 fiscal year. We are currently evaluating whether the adoption of this new guidance will have a significant impact on our consolidated financial statements and disclosures.
Revenue Recognition (Topic 606): Revenue from Contracts with Customers. In May 2014, ASU 2014-09 was issued. Under this ASU and subsequently issued amendments, an entity is required to recognize the amount of revenue it expects to be entitled to for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP. This ASU provides alternative methods of transition, a full retrospective and a modified restrospective approach. The modified retrospective approach would result in recognition of the cumulative impact of a retrospective application as of the beginning of the period of initial application, which in our case is the interim period beginning January 1, 2018.
In preparation for adoption of the standard, we developed a cross-functional team and engaged a third-party service provider to assist us throughout our evaluation. In addition, we have factored the adoption into our ongoing ERP platform upgrade, which we previously committed to perform, as our system readiness is a key element towards the determination of the adoption approach we adopt. We continue to perform our assessment, and while those activities are not complete, we expect to identify similar performance obligations under ASC 606 as compared to those previously identified.
Adoption of New Accounting Standards
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. In March 2016, ASU 2016-06 was issued. ASU 2016-06 clarifies the steps required to determine bifurcation of an embedded derivative. This update became effective at the beginning of our 2017 fiscal year. The adoption of this ASU did not have a significant impact on our consolidated financial statements and disclosures.
Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. In March 2016, ASU 2016-05 was issued which clarifies the change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This update became effective at the beginning of our 2017 fiscal year. The adoption of this ASU did not have a significant impact on our consolidated financial statements and disclosures.
Inventory (Topic 330): Simplifying the Measurement of Inventory. In July 2015, the FASB issued ASU 2015-11, which simplifies the subsequent measurement of inventory. The updated guidance requires that inventory measured using any method other than last-in, first-out (LIFO) or the retail inventory method (for example, inventory measured using first-in, first-out (FIFO) or average cost) be measured at the lower of cost and net realizable value. This update became effective at the beginning of our 2017 fiscal year. The adoption of this ASU did not have a significant impact on our consolidated financial statements and disclosures.
7
2. Acquisitions
2017 Acquisitions
In the first quarter of 2016, we signed a definitive agreement to acquire from certain ExxonMobil affiliates their aviation fueling operations at more than 80 airport locations in Canada, the United Kingdom ("U.K."), Germany, Italy, France, Australia and New Zealand. During 2016, we completed the acquisitions of the aviation fueling operations in Canada, the U.K. and France. During the first quarter of 2017, we completed the acquisition of substantially all of the remaining airport locations in Italy, Germany, Australia and New Zealand.
In addition to the above acquisitions, we completed two acquisitions during the first quarter of 2017 which were not significant individually or in the aggregate.
The following table summarizes the aggregate consideration paid for acquisitions in the first quarter of 2017 and the provisional amounts of the assets acquired and liabilities assumed, recognized at the acquisition date. The Company is in the process of finalizing the valuations of certain acquired assets and assumed liabilities; thus, the provisional measurements of these acquired assets and assumed liabilities are subject to change and will be finalized no later than one year from the acquisition date.
Total | ||||
Cash paid for acquisition of businesses | $ | 87.1 | ||
Amounts due to sellers | 0.5 | |||
Non-monetary consideration | 8.1 | |||
Estimated purchase price | $ | 95.7 | ||
Assets acquired: | ||||
Property and equipment | 10.7 | |||
Goodwill and identifiable intangible assets | 85.0 | |||
Other current and long-term assets | 7.6 | |||
Liabilities assumed: | ||||
Long-term liabilities and deferred tax liabilities | (7.7 | ) | ||
Estimated purchase price | $ | 95.7 | ||
The goodwill assigned, of which $25.9 million is anticipated to be deductible for tax purposes, is attributable primarily to the expected synergies and other benefits that we believe will result from combining the operations acquired with the operations of our aviation segment. The identifiable intangible assets consists of $43.0 million of customer relationships with weighted average lives of 6.4 years.
The financial position, results of operations and cash flows of the 2017 acquisitions have been included in our consolidated financial statements since their respective acquisition dates and did not have a significant impact on our revenue and net income for the three months ended March 31, 2017. Pro forma information for the 2017 acquisitions has not been provided as the impact is not significant.
2016 Acquisitions
During the first quarter of 2016, we completed three acquisitions in our land segment which were not significant individually or in the aggregate. The financial position, results of operations and cash flows of the 2016 acquisitions have been included in our consolidated financial statements, since their respective acquisition dates, and did not have a significant impact on our revenue and net income for the three months ended March 31, 2016.
8
3. Derivatives
We enter into financial derivative contracts in order to mitigate the risk of market price fluctuations in aviation, land and marine 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 in 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 sheets 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 derivative contracts we execute to mitigate the risk of price volatility in forecasted transactions.
Fair Value Hedges. Includes derivative contracts we hold to hedge the risk of changes in the price of our inventory.
Non-designated Derivatives. Includes derivatives we primarily transact to mitigate the risk of market price fluctuations in the form of swaps or futures as well as certain forward fixed price purchase and sale contracts and proprietary trading.
The following table presents the gross fair value of our derivative instruments and their locations on the consolidated balance sheets (in millions):
Gross Derivative Assets | Gross Derivative Liabilities | ||||||||||||||||||
As of March 31, 2017 | As of December 31, 2016 | As of March 31, 2017 | As of December 31, 2016 | ||||||||||||||||
Derivative Instruments | Balance Sheet Location | ||||||||||||||||||
Derivatives designated as hedging instruments | |||||||||||||||||||
Commodity contracts | Short-term derivative assets, net | $ | 35.5 | $ | 2.2 | $ | 30.8 | $ | 5.4 | ||||||||||
Accrued expenses and other current liabilities | — | 86.0 | — | 93.5 | |||||||||||||||
Other long-term liabilities | — | 5.1 | — | 10.1 | |||||||||||||||
Total derivatives designated as hedging instruments | $ | 35.5 | $ | 93.3 | $ | 30.8 | $ | 108.9 | |||||||||||
Derivatives not designated as hedging instruments | |||||||||||||||||||
Commodity contracts | Short-term derivative assets, net | $ | 111.5 | $ | 160.3 | $ | 69.8 | $ | 86.7 | ||||||||||
Identifiable intangible and other non-current assets | 14.8 | 17.1 | 7.0 | 6.2 | |||||||||||||||
Accrued expenses and other current liabilities | 10.0 | 52.5 | 30.2 | 112.2 | |||||||||||||||
Other long-term liabilities | 4.4 | 8.1 | 7.3 | 12.1 | |||||||||||||||
$ | 140.8 | $ | 238.0 | $ | 114.2 | $ | 217.2 | ||||||||||||
Foreign currency contracts | Short-term derivative assets, net | $ | 14.6 | $ | 13.5 | $ | 10.8 | $ | 3.4 | ||||||||||
Identifiable intangible and other non-current assets | 0.2 | 0.9 | — | 0.1 | |||||||||||||||
Accrued expenses and other current liabilities | — | 1.6 | — | 2.8 | |||||||||||||||
Total derivatives not designated as hedging instruments | $ | 14.8 | $ | 16.0 | 10.8 | $ | 6.4 | ||||||||||||
Total derivatives | $ | 191.0 | $ | 347.2 | $ | 155.8 | $ | 332.5 | |||||||||||
For information regarding our derivative instruments measured at fair value after netting and collateral see Note 4.
The following table summarizes the gross notional values of our commodity and foreign currency exchange derivative contracts used for risk management purposes that were outstanding as of March 31, 2017 (in millions):
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As of March 31, | |||||
Derivative Instruments | Units | 2017 | |||
Commodity contracts | |||||
Long | BBL | 57.0 | |||
Short | BBL | (60.9 | ) | ||
Foreign currency exchange contracts | |||||
Sell U.S. dollar, buy other currencies | USD | (280.6 | ) | ||
Buy U.S. dollar, sell other currencies | USD | 414.0 | |||
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 millions):
Realized and Unrealized Gain (Loss) | Realized and Unrealized Gain (Loss) | |||||||||||||||||||
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||||||
Derivative Instruments | Location of Gain (Loss) | 2017 | 2016 | Hedged Items | Location of Gain (Loss) | 2017 | 2016 | |||||||||||||
Commodity contracts | Inventories | |||||||||||||||||||
Revenue | $ | — | $ | 86.3 | Revenue | $ | — | $ | — | |||||||||||
Cost of revenue | 5.3 | (82.4 | ) | Cost of revenue | (3.6 | ) | (3.2 | ) | ||||||||||||
Total Gain (Loss) | $ | 5.3 | $ | 3.8 | Total Gain (Loss) | $ | (3.6 | ) | $ | (3.2 | ) | |||||||||
The net gains or losses recognized in income for the three months ended March 31, 2017, and 2016, representing hedge ineffectiveness were $1.7 million, and $0.7 million respectively, there were no gains or losses for the three months ended March 31, 2017, and 2016, 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 in cash flow hedging relationships on our accumulated other comprehensive income and consolidated statements of income and comprehensive income (in millions):
Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Effective Portion) | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion) | |||||||||||||||||
Derivative | Three Months ended March 31, | Location of | Three Months ended March 31, | |||||||||||||||
Instruments | 2017 | 2016 | Gain (Loss) | 2017 | 2016 | |||||||||||||
Commodity contracts | $ | 57.1 | $ | (46.5 | ) | Revenue | $ | (10.1 | ) | $ | 52.7 | |||||||
Commodity contracts | (50.0 | ) | 44.2 | Cost of Revenue | 6.8 | (54.7 | ) | |||||||||||
Total Gain (Loss) | $ | 7.1 | $ | (2.2 | ) | Total Gain (Loss) | $ | (3.4 | ) | $ | (2.0 | ) | ||||||
Amount of Gain (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing) | ||||||||
Three Months ended March 31, | ||||||||
Location of Gain (Loss) | 2017 | 2016 | ||||||
Revenue | $ | 18.2 | $ | (0.1 | ) | |||
Cost of Revenue | (20.2 | ) | 2.9 | |||||
Total Gain (Loss) | $ | (2.0 | ) | $ | 2.8 | |||
The effective portion of the gains or losses on derivative instruments designated as cash flow hedges of forecasted transactions are initially reported as a component of accumulated other comprehensive income and subsequently reclassified into earnings once the future transactions affects earnings.
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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 millions):
Amount of Realized and Unrealized Gain (Loss) | |||||||||
Three Months ended March 31, | |||||||||
Derivative Instruments - Non-designated | Location of Gain (Loss) | 2017 | 2016 | ||||||
Commodity contracts | |||||||||
Revenue | $ | 49.2 | $ | 38.9 | |||||
Cost of revenue | (38.8 | ) | (47.5 | ) | |||||
$ | 10.4 | $ | (8.6 | ) | |||||
Foreign currency contracts | |||||||||
Revenue | $ | (0.5 | ) | $ | 1.9 | ||||
Other (expense), income, net | (1.6 | ) | (5.2 | ) | |||||
$ | (2.0 | ) | $ | (3.3 | ) | ||||
Total Gain (Loss) | $ | 8.3 | $ | (11.9 | ) | ||||
Credit-Risk-Related Contingent Features
We enter into derivative instrument contracts which may require us to periodically post collateral. Certain of these derivative contracts contain credit-risk-related contingent clauses which are triggered by credit events. These credit events may include the requirement to post additional collateral or the immediate settlement of the derivative instruments upon the occurrence of a credit downgrade or if certain defined financial ratios fall below an established threshold. The following table presents the potential collateral requirements for derivative liabilities with credit-risk-contingent features (in millions):
Potential Collateral Requirements for Derivative Liabilities with Credit-Risk-Contingent Features | ||||||||||
As of March 31, 2017 | As of December 31, 2016 | |||||||||
Net derivatives liability positions with credit contingent features | $ | 5.0 | $ | 15.2 | ||||||
Maximum potential collateral requirements | $ | 5.0 | $ | 15.2 | ||||||
At December 31, 2016 and March 31, 2017, there was no collateral held or posted by our counterparties on these derivative contracts with credit-risk-contingent features.
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4. 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. The carrying values of our debt and notes receivables 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 $1.1 billion and $1.2 billion as of March 31, 2017 and December 31, 2016, respectively, and our notes receivable of $19.1 million and $16.9 million as of March 31, 2017 and December 31, 2016, respectively, are categorized in Level 3.
The following table presents information about our gross assets and liabilities that are measured at fair value on a recurring basis (in millions):
Fair Value Measurements as of March 31, 2017 | ||||||||||||||||
Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Fair Value | |||||||||||||
Assets: | ||||||||||||||||
Commodities contracts | $ | 132.0 | $ | 42.7 | $ | 1.5 | $ | 176.3 | ||||||||
Foreign currency contracts | — | 14.8 | — | 14.8 | ||||||||||||
Cash surrender value of life insurance | — | 4.4 | — | 4.4 | ||||||||||||
Total assets at fair value | $ | 132.0 | $ | 61.9 | $ | 1.5 | $ | 195.4 | ||||||||
Liabilities: | ||||||||||||||||
Commodities contracts | $ | 104.4 | $ | 40.3 | $ | 0.3 | $ | 145.0 | ||||||||
Foreign currency contracts | — | 10.8 | — | 10.8 | ||||||||||||
Total liabilities at fair value | $ | 104.4 | $ | 51.2 | $ | 0.3 | $ | 155.8 | ||||||||
Fair Value Measurements as of December 31, 2016 | ||||||||||||||||
Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Fair Value | |||||||||||||
Assets: | ||||||||||||||||
Commodities contracts | $ | 273.6 | $ | 55.3 | $ | 2.3 | $ | 331.2 | ||||||||
Foreign currency contracts | — | 16.0 | — | 16.0 | ||||||||||||
Cash surrender value of life insurance | — | 4.0 | — | 4.0 | ||||||||||||
Total assets at fair value | $ | 273.6 | $ | 75.3 | $ | 2.3 | $ | 351.2 | ||||||||
Liabilities: | ||||||||||||||||
Commodities contracts | $ | 236.6 | $ | 88.8 | $ | 0.7 | $ | 326.1 | ||||||||
Foreign currency contracts | — | 6.4 | — | 6.4 | ||||||||||||
Total liabilities at fair value | $ | 236.6 | $ | 95.2 | $ | 0.7 | $ | 332.5 | ||||||||
There were no transfers between Level 1 and Level 2 during the periods presented. The fair values of our commodity contracts measured using Level 3 inputs were not material at March 31, 2017 and December 31, 2016.
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.
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The following tables summarize those commodity derivative balances subject to the right of setoff as presented on our consolidated balance sheet. We have elected to offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements when a legal right of offset exists.
Fair Value as of March 31, 2017 | ||||||||||||||||||||||||
Gross Amounts | ||||||||||||||||||||||||
Gross Amounts | Gross Amounts | Net Amounts | Cash | without | ||||||||||||||||||||
Recognized | Offset | Presented | Collateral | Right of Offset | Net Amounts | |||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Commodities contracts | $ | 176.3 | $ | 120.8 | $ | 55.4 | $ | 2.8 | $ | — | $ | 52.7 | ||||||||||||
Foreign currency contracts | 14.8 | 10.8 | 3.9 | — | — | 3.9 | ||||||||||||||||||
Total assets at fair value | $ | 191.0 | $ | 131.7 | $ | 59.4 | $ | 2.8 | $ | — | $ | 56.6 | ||||||||||||
Liabilities: | ||||||||||||||||||||||||
Commodities contracts | $ | 145.0 | $ | 120.8 | $ | 24.2 | $ | 0.3 | $ | — | $ | 23.9 | ||||||||||||
Foreign currency contracts | 10.8 | 10.8 | — | — | — | — | ||||||||||||||||||
Total liabilities at fair value | $ | 155.8 | $ | 131.7 | $ | 24.2 | $ | 0.3 | $ | — | $ | 23.9 | ||||||||||||
Fair Value as of December 31, 2016 | ||||||||||||||||||||||||
Gross Amounts | ||||||||||||||||||||||||
Gross Amounts | Gross Amounts | Net Amounts | Cash | without | ||||||||||||||||||||
Recognized | Offset | Presented | Collateral | Right of Offset | Net Amounts | |||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Commodities contracts | $ | 331.2 | $ | 249.7 | $ | 81.5 | $ | 27.1 | $ | — | $ | 54.5 | ||||||||||||
Foreign currency contracts | 16.0 | 5.1 | 10.9 | — | — | 10.9 | ||||||||||||||||||
Total assets at fair value | $ | 347.2 | $ | 254.8 | $ | 92.4 | $ | 27.1 | $ | — | $ | 65.3 | ||||||||||||
Liabilities: | ||||||||||||||||||||||||
Commodities contracts | $ | 326.1 | $ | 249.7 | $ | 76.5 | $ | 2.0 | $ | — | $ | 74.5 | ||||||||||||
Foreign currency contracts | 6.4 | 5.1 | 1.2 | — | — | 1.2 | ||||||||||||||||||
Total liabilities at fair value | $ | 332.5 | $ | 254.8 | $ | 77.7 | $ | 2.0 | $ | — | $ | 75.7 | ||||||||||||
At March 31, 2017 and December 31, 2016, we did not present any amounts gross on our consolidated balance sheet where we had the right of setoff.
5. Interest Income, Expense and Other Finance Costs
The following table provides additional information about our interest income (expense), and other financing costs, net, for the periods presented (in millions):
For the Three Months Ended | ||||||||
March 31, | ||||||||
2017 | 2016 | |||||||
Interest income | $ | 1.0 | $ | 1.3 | ||||
Interest expense and other financing costs | (13.7 | ) | (8.9 | ) | ||||
$ | (12.7 | ) | $ | (7.6 | ) | |||
t
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6. Shareholders’ Equity
Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss
Our other comprehensive loss, consisting of foreign currency translation adjustments related to our subsidiaries that have a functional currency other than the U.S. dollar and derivative instruments, was as follows (in millions):
Foreign Currency Translation Adjustments | Derivative Instruments | Accumulated Other Comprehensive Loss | ||||||||||
Balance as of December 31, 2016 | $ | (147.5 | ) | $ | (7.4 | ) | $ | (154.8 | ) | |||
Other comprehensive income | 6.4 | 10.5 | 16.9 | |||||||||
Less: Net other comprehensive (loss) attributable to noncontrolling interest | (0.2 | ) | — | (0.2 | ) | |||||||
Balance as of March 31, 2017 | $ | (141.2 | ) | $ | 3.1 | $ | (138.1 | ) | ||||
Balance as of December 31, 2015 | $ | (108.7 | ) | $ | (0.8 | ) | $ | (109.5 | ) | |||
Other comprehensive income (loss) | 1.3 | (0.2 | ) | 1.0 | ||||||||
Less: Net other comprehensive income attributable to noncontrolling interest | 1.6 | — | 1.6 | |||||||||
Balance as of March 31, 2016 | $ | (108.9 | ) | $ | (1.1 | ) | $ | (110.0 | ) | |||
The foreign currency translation adjustment gains for the three months ended March 31, 2017 were primarily due to the weakening of the U.S. dollar as compared to the British Pound and the Brazilian Real.
7. Income Taxes
Our income tax provision for the periods presented and the respective effective income tax rates for such periods are as follows (in millions, except for income tax rates):
For the Three Months ended | ||||||||
March 31, | ||||||||
2017 | 2016 | |||||||
Income tax provision | $ | 5.0 | $ | 3.1 | ||||
Effective income tax rate | 13.9 | % | 5.7 | % | ||||
Our provision for income taxes for each of the three-month periods ended March 31, 2017 and 2016 was calculated based on the estimated annual effective income tax rate for the full 2017 and 2016 fiscal years. Our provision for income taxes for the three months ended March 31, 2017 was adjusted for an income tax expense of $1.2 million, net, for discrete items related to changes in estimates in uncertain tax positions and an adjustment for stock based compensation in accordance with ASU 2016-09. Without the $1.2 million expense, the three month period ended March 31, 2017 effective income tax rate would have been 10.6%. Our provision for income taxes for the three months ended March 31, 2016 was adjusted for an income tax benefit of $4.0 million, net, for discrete items related to changes in estimates in uncertain tax positions. Without the $4.0 million adjustment, the three month period ended March 31, 2016 effective income tax rate would have been 15.4%. The actual effective income tax rate for the full 2017 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.
We operate under a special income tax concession in Singapore which began January 1, 2008. Our current five year special income tax concession was effective January 1, 2013. The special income tax concession is conditional upon our meeting of certain employment and investment thresholds which, if not met in accordance with our agreement, may eliminate the benefit beginning with the first year in which the conditions are not satisfied. The income tax concession reduces the income tax rate on qualified sales and the impact of this income tax concession decreased foreign income taxes by $0.8 million and $0.6 million for the three months ended March 31, 2017 and 2016, respectively. The impact of the income tax concession on basic earnings per common share was $0.01 and $0.01 for the three months ended March 31, 2017 and 2016, respectively. On a diluted earnings per common share basis, the impact was $0.01 and $0.01 for the three months ended March 31, 2017 and 2016, respectively.
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Subsequent to the quarter ended March 31, 2017, we signed an agreement with the Internal Revenue Service (IRS) which effectively closed the income tax audit for the tax years 2011 and 2012. The matter had already been provided for within our reserve estimates.
The South Korean branch of one of our subsidiaries received an income tax assessment notice for the year 2011 and an income tax pre-assessment for the years 2012 - 2014 totaling $8.0 million (KRW 9.2 billion). We disagree with the South Korean tax authorities' assessment and are appealing.
8. Goodwill
The following table provides the components of and changes in the carrying amount of goodwill (in millions):
Aviation | Land | Marine | Total | |||||||||||||
Balance as of December 31, 2016 | $ | 266.8 | $ | 496.7 | $ | 72.3 | $ | 835.8 | ||||||||
Additions | 42.1 | — | — | 42.1 | ||||||||||||
Foreign exchange and other adjustments | 3.1 | 2.3 | 0.1 | 5.5 | ||||||||||||
Balance as of March 31, 2017 | $ | 312.0 | $ | 499.0 | $ | 72.4 | $ | 883.4 | ||||||||
9. Earnings per Common Share
The following table sets forth the computation of basic and diluted earnings per common share for the periods presented (in millions, except per share amounts):
For the Three Months Ended | ||||||||
March 31, | ||||||||
2017 | 2016 | |||||||
Numerator: | ||||||||
Net income attributable to World Fuel | $ | 31.3 | $ | 51.8 | ||||
Denominator: | ||||||||
Weighted average common shares for basic earnings per common share | 68.7 | 69.5 | ||||||
Effect of dilutive securities | 0.4 | 0.5 | ||||||
Weighted average common shares for diluted earnings per common share | 69.2 | 70.0 | ||||||
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 | 0.6 | 0.9 | ||||||
Basic earnings per common share | $ | 0.46 | $ | 0.74 | ||||
Diluted earnings per common share | $ | 0.45 | $ | 0.74 | ||||
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10. Commitments and Contingencies
Legal Matters
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 (“District Court”) seeking a court ruling that the loss is not covered under our policy. In May 2016, the District Court entered an order granting summary judgment in our favor holding that the loss is covered under the AGCS policy. On March 27, 2017, we entered into a confidential settlement agreement pursuant to which we collected from AGCS the full amount of the insurance receivable, plus additional reimbursements, and the parties exchanged full and final releases in respect of the matter.
Tax Matters
From time to time, we are under review by various domestic and foreign tax authorities with regards to indirect tax matters and are involved in various challenges and litigation in a number of countries, including, in particular, Brazil and South Korea, where the amounts under controversy may be significant.
During the quarter ended December 31, 2016, the Korean branch (“WFSK”) of one of our subsidiaries received assessments of approximately $10.4 million (KRW 11.9 billion) and a pre-assessment notice for an additional $17.6 million (KRW 20.1 billion) from the regional tax authorities of Seoul, South Korea (“SRTO”). The assessments primarily consist of fines and penalties for allegedly failing to issue Value Added Tax ("VAT") invoices and report certain transactions during the period 2011-2014. These assessments do not involve failure to pay or collect VAT. We believe that these assessments are without merit and are currently appealing the actions. In addition to these assessments, in November 2016, the SRTO referred the case to the Seoul Central District Prosecutors Office (“SCDPO”) for investigation and determination as to whether the alleged invoicing and reporting violations should be subject to criminal action under Korean law. On March 30, 2017, the SCDPO issued a decision not to bring a criminal action against us. This decision is subject to appeal by the SRTO.
We are also involved in a number of tax disputes with federal, state and municipal tax authorities in Brazil, relating primarily to VAT (ICMS) tax matters. These disputes are at various stages of the legal process, including the administrative review phase and the collection action phase, and include assessments of fixed amounts of principal and penalties, plus interest.
When we deem it appropriate and the amounts are reasonably estimable, we establish reserves for potential adjustments to our provision for the accrual of indirect taxes that may result from examinations or other actions by tax authorities. If events occur which indicate payment of these amounts is unnecessary, the reversal of the liabilities would result in the recognition of benefits in the period we determine the liabilities are no longer necessary. If our estimates of any of our federal, state, and foreign indirect tax liabilities are less than the ultimate assessment, it could result in a further charge to expense. Except with respect to the matters described above, we believe that the final outcome of any pending examinations, agreements, administrative or judicial proceedings will not have a material effect on our results of operations or cash flows.
Other Matters
On August 31, 2016, Hanjin Shipping Co., Ltd. (“Hanjin”), one of our customers in our marine segment, filed for bankruptcy protection in South Korea and on September 1, 2016, the Korean Rehabilitation Court accepted Hanjin’s application for rehabilitation. On February 17, 2017, the Korean Rehabilitation Court formally adjudicated the liquidation of Hanjin. As of March 31, 2017, we had outstanding Hanjin receivables of approximately $4.0 million, net of anticipated insurance recoveries of approximately $4.0 million. While we believe we will recover all or substantially all of the outstanding Hanjin and insurance receivables, there can be no assurance that we will be able to recover all of the remaining amounts.
We are also 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, personal injury, billing and fuel quality claims, as well as bankruptcy preference claims 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 March 31, 2017, 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
16
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.
11. Business Segments
We operate in three reportable segments consisting of aviation, land and marine. Corporate expenses are allocated to the segments based on usage, where possible, or on other factors according to the nature of the activity. Within 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 the U.S. and foreign governments as well as intergovernmental organizations. In our land segment, we offer fuel, lubricants, power and natural gas solutions through Kinect, our global energy management services platform, and related products and services to customers including petroleum distributors operating in the land transportation market, retail petroleum operators, and industrial, commercial, residential and government customers. Our marine segment product and service offerings include fuel, lubricants and related products and services to a broad base of customers, including international container and tanker fleets, commercial cruise lines, yachts and time charter operators, offshore rig owners and operators, the U.S. and foreign governments as well as other fuel suppliers. Within each of our segments we may enter into derivative contracts to mitigate the risk of market price fluctuations and also to offer our customers fuel pricing alternatives to meet their needs.
Information concerning our revenue, gross profit and income from operations by segment is as follows (in millions):
For the Three Months Ended | ||||||||
March 31, | ||||||||
Revenue: | 2017 | 2016 | ||||||
Aviation segment | $ | 3,317.4 | $ | 2,219.4 | ||||
Land segment | 2,783.4 | 1,695.0 | ||||||
Marine segment | 2,093.5 | 1,276.5 | ||||||
$ | 8,194.3 | $ | 5,190.8 | |||||
Gross profit: | ||||||||
Aviation segment | $ | 100.0 | $ | 88.7 | ||||
Land segment | 97.8 | 93.6 | ||||||
Marine segment | 33.6 | 39.2 | ||||||
$ | 231.4 | $ | 221.5 | |||||
Income from operations: | ||||||||
Aviation segment | $ | 40.4 | $ | 34.0 | ||||
Land segment | 21.4 | 34.0 | ||||||
Marine segment | 8.3 | 11.4 | ||||||
70.1 | 79.4 | |||||||
Corporate overhead - unallocated | (19.8 | ) | (18.4 | ) | ||||
$ | 50.3 | $ | 61.0 | |||||
17
Information concerning our accounts receivable, net and total assets by segment is as follows (in millions):
As of | ||||||||
March 31, | December 31, | |||||||
2017 | 2016 | |||||||
Accounts receivable, net: | ||||||||
Aviation segment, net of allowance for bad debt of $6.9 and $6.6 as of March 31, 2017 and December 31, 2016, respectively | $ | 695.3 | $ | 776.0 | ||||
Land segment, net of allowance for bad debt of $8.4 and $8.2 as of March 31, 2017 and December 31, 2016, respectively | 758.7 | 737.5 | ||||||
Marine segment, net of allowance for bad debt of $12.1 and $10.2 as of March 31, 2017 and December 31, 2016, respectively | 755.1 | 830.5 | ||||||
$ | 2,209.1 | $ | 2,344.0 | |||||
Total assets: | ||||||||
Aviation segment | $ | 1,907.0 | $ | 2,050.6 | ||||
Land segment | 1,914.1 | 1,928.5 | ||||||
Marine segment | 1,249.8 | 1,287.7 | ||||||
Corporate | 192.7 | 145.8 | ||||||
$ | 5,263.6 | $ | 5,412.6 | |||||
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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 2016 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 are disclosed in “Item 1A — Risk Factors” of our 2016 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 about the conditions in the marine, land and aviation markets in 2017, cost reduction initiatives, the timing, cost and benefits of our multi-year project and upgrade of our Enterprise Resource Planning (“ERP”) platform, as well as expectations regarding military-related activity, our ability to continue growing market share in our land segment and our expectations about the effect of the acquisition on our aviation segment, as well as our business strategy, business prospects, operating results, effectiveness of internal controls to manage risk, working capital, liquidity, capital expenditure requirements and future acquisitions. These forward-looking statements are qualified in their entirety by cautionary statements and risk factor disclosures contained in the Company’s Securities and Exchange Commission filings, including the Company’s Annual Report on Form 10-K filed with the SEC on February 21, 2017. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding our ability to effectively integrate and derive benefits from acquisitions, our ability to capitalize on new market opportunities, the demand for our products, the cost, terms and availability of fuel from suppliers, pricing levels, the timing and cost of capital expenditures, outcome of pending litigation, competitive conditions, general economic conditions and synergies relating to acquisitions, joint ventures and alliances. These assumptions could prove inaccurate. Although we believe that the estimates and projections reflected in the forward-looking statements are reasonable, our expectations may prove to be incorrect.
Important factors that could cause actual results to differ materially from the results and events anticipated or implied by such forward-looking statements include, but are not limited to:
• | customer and counterparty creditworthiness and our ability to collect accounts receivable and settle derivative contracts; |
• | changes in the market price of fuel; |
• | changes in the political, economic or regulatory conditions generally and in the markets in which we operate; |
• | our failure to effectively hedge certain financial risks and the use of derivatives; |
• | non-performance by counterparties or customers to derivative contracts; |
• | changes in credit terms extended to us from our suppliers; |
• | non-performance of suppliers on their sale commitments and customers on their purchase commitments; |
• | loss of, or reduced sales to a significant government customer; |
• | non-performance of third-party service providers; |
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• | adverse conditions in the industries in which our customers operate, including a continuation of the global economic instability and its impact on the airline and shipping industries; |
• | the impact of cyber and other information security-related incidents; |
• | currency exchange fluctuations; |
• | currency and other global market impacts associated with United Kingdom ("U.K.") referendum vote to exit from the European Union; |
• | failure of fuel and other products we sell to meet specifications; |
• | our ability to manage growth; |
• | our ability to effectively integrate and derive benefits from acquired businesses; |
• | material disruptions in the availability or supply of fuel; |
• | environmental and other risks associated with the storage, transportation and delivery of petroleum products; |
• | risks associated with operating in high risk locations; |
• | uninsured losses; |