WORLD KINECT CORP - Annual Report: 2015 (Form 10-K)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

 

COMMISSION FILE NUMBER 1-9533

WORLD FUEL SERVICES CORPORATION

(Exact name of registrant as specified in its charter)

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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 12b-2 of the Exchange Act). Yes ☐ No ☒

As of June 30, 2015, the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the market price at which the common equity was last sold was $3,382,539,000.

As of February 4, 2016, the registrant had approximately 70,800,000 shares of outstanding common stock, par value $0.01 per share.

Documents incorporated by reference:

Part III – Specified Portions of the Registrant’s Definitive Proxy Statement for the 2016 Annual Meeting of Shareholders.

 

TABLE OF CONTENTS

 

 

 

 

PART I

Item 1. Business

Overview

World Fuel Services Corporation (the “Company”) was incorporated in Florida in July 1984 and along with its consolidated subsidiaries is referred to collectively in this Annual Report on Form 10‑K (“2015 10‑K Report”) as “World Fuel,” “we,” “our” and “us.”

We are a global fuel logistics, transaction management and payment processing company, which provides energy management solutions to the aviation, marine and land transportation industries.    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 primarily contract with third parties for the delivery and storage of fuel products, however, we also operate storage facilities and transportation assets.  

We have offices throughout the United States and in various foreign jurisdictions, including: the United Kingdom, Denmark, Norway, Sweden, Switzerland, the Netherlands, Germany, Greece, the United Arab Emirates, Russia, Taiwan, South Korea, Singapore, Japan, Hong Kong, Indonesia, Costa Rica, Brazil, Chile, Argentina, Mexico, Colombia, Canada, South Africa, Gibraltar, India and Australia. See “Item 2 – Properties” for a list of principal offices by business segment and “Exhibit 21.1 – Subsidiaries of the Registrant” included in this 2015 10‑K Report for a list of our subsidiaries.

As of February 4, 2016, we employed approximately 4,700 employees globally. Our principal executive office is located at 9800 Northwest 41st Street, Miami, Florida 33178 and our telephone number at this address is 305‑428‑8000. Our internet address is http://www.wfscorp.com and the investor relations section of our website is located at http://ir.wfscorp.com. We make available free of charge, on or through the investor relations section of our website, our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K, Proxy Statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) with the Securities and Exchange Commission (“SEC”) as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Also posted on our website are our Code of Conduct (“Code of Conduct”), Board of Directors’ committee charters and Corporate Governance Principles. Our internet website and information contained on our internet website are not part of this 2015 10‑K Report and are not incorporated by reference in this 2015 10‑K Report.

Segments

We operate in three reportable segments consisting of aviation, marine and land. 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 United States (“U.S.”) and foreign governments as well as intergovernmental organizations. 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. In our land segment, we offer fuel, crude oil, lubricants, natural gas 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. 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. Financial information with respect to our business segments and the geographic areas of our business is provided below and within Note 11 to the accompanying consolidated financial statements included in this 2015 10-K Report.

 

Aviation Segment

Our aviation‑related service offerings include fuel management, price risk management, ground handling, 24/7 global dispatch services, and international trip planning services, including flight plans, weather reports and overflight permits. In addition, we offer card payment solutions and related processing services. Because fuel is a major component of an aircraft’s operating costs, our customers require cost effective and professional fuel services. We have developed an extensive network of third‑party suppliers and service providers that enables us to provide aviation fuel and related services throughout the world. We believe the breadth of our service offering combined with our global supplier network is a strategic differentiator that allows customers to secure fuel and high‑quality services in locations worldwide on short notice.

We purchase our aviation fuel from suppliers worldwide, which may be delivered into our customers’ aircraft or to a designated storage facility located at one of our suppliers’ locations, pursuant to arrangements with them. Inventory is

purchased at airport locations or shipped via pipelines and held at multiple locations for strategic reasons. We also engage in contract sales, which are sales made pursuant to fuel purchase contracts with customers who commit to purchasing fuel from us over the contract term, and spot sales, which are sales that do not involve continuing contractual obligations by our customers to purchase fuel from us. Our cost of fuel is generally tied to market‑based formulas or is government controlled.

Marine Segment

Through our extensive network, we provide our customers with real‑time global market intelligence and rapid access to quality and competitively priced marine fuel 24 hours a day, every day of the year. Our marine fuel-related services include management services for the procurement of fuel, cost control through the use of price hedging instruments, quality control, claims management, and card payment solutions and related processing services.

We serve primarily as a reseller, and accordingly, in those instances we take delivery for fuel purchased from our supplier at the same place and time as the fuel is sold to our customer. We also sell fuel from our inventory, which we maintain in storage facilities that we own or lease. We also serve as a broker and in those cases we are paid a commission for negotiating the fuel purchase transaction between the supplier and the end user and for expediting delivery of the fuel.  

The majority of our marine segment activity consists of spot sales. Our cost of fuel is generally tied to spot pricing or market‑based formulas or is government controlled. We also contract with third parties to provide various services for our customers, including fueling of vessels in ports and at sea, and transportation and delivery of fuel and fuel-related products.

Land Segment

Our land‑related services include management services for the procurement of fuel and price risk management. We primarily conduct these activities throughout most of the U.S as well as parts of the United Kingdom and Brazil.

In addition, we offer transaction management services, which include card payment solutions, merchant processing services, payment solutions for tolls across Europe, government payment systems for global fuel procurement and commercial payment programs in the land transportation industry.

In connection with our fuel marketing activities, we serve as a reseller, and in those instances we purchase fuel from a supplier and contemporaneously resell it to our customers through spot and contract sales. The fuel is generally delivered to our customers directly or to a designated tanker truck loading terminal commonly referred to as “racks,” which are owned and operated by our suppliers or other third‑parties. We also maintain inventory in certain strategic locations including pipelines and we transport this inventory by railcar. Our cost of fuel is generally tied to market‑based formulas. 

During each of the years presented in the accompanying consolidated financial statements no individual customer accounted for more than 10% of segment or consolidated revenue.

Competitors

We operate globally across industries that are highly fragmented with numerous competitors. Our competitors range in size and complexity from large multinational corporations, principally major oil producers, which have significantly greater capital resources, to relatively small and specialized firms. We compete with major oil producers that market fuel directly to the large commercial airlines, shipping companies and petroleum distributors operating in the land transportation market as well as fuel resellers. We believe that our extensive market knowledge, worldwide footprint, logistics expertise, and the use of derivative contracts to provide fuel pricing alternatives give us the ability to compete within those markets.

Regulation

Our current and past activities are subject to substantial regulation by federal, state and local government agencies, inside and outside the U.S, which enforce laws and regulations governing the transportation, sale, storage and disposal of fuel and the collection, transportation, processing, storage, use and disposal of hazardous substances and wastes, including waste oil and petroleum products. For example, U.S. federal and state environmental laws applicable to us include statutes that: (i) allocate the cost of remedying contamination among specifically identified parties and prevent future contamination; (ii) impose national ambient standards and, in some cases, emission standards, for air pollutants that present a risk to public health or welfare; (iii) govern the management, treatment, storage and disposal of hazardous wastes; and (iv) regulate the discharge of pollutants into waterways. International treaties also prohibit the discharge of petroleum products at sea. The penalties for violations of environmental laws include injunctive relief, recovery of damages for injury to air, water or property, and fines for non‑compliance. See “Item 1A – Risk Factors,” and “Item 3 – Legal Proceedings.”

We may also be affected by new environmental laws and regulations that will apply to us or our customers in the future, some of which could increase the cost or reduce the demand for our products and services. For example, due to concern over the risk of climate change, a number of countries have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emissions. In the U.S., the U.S. Environmental Protection Agency has finalized rules requiring the reporting of greenhouse gas (“GHG”) emissions by petroleum product suppliers and facilities meeting certain

annual emissions thresholds and to regulate emissions from major sources of GHGs under the Clean Air Act. In other countries, proposed regulations include adoption of cap and trade regimes, carbon taxes, restrictive permitting, increased efficiency standards, and incentives or mandates for renewable energy.  Although the ultimate impact of these or other future measures is difficult to accurately predict, they could make our products more expensive or reduce demand for petroleum products, as well as shift demand toward relatively lower-carbon sources. This, in turn, could affect our operations, earnings and competitive position.

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 2015 10-K 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 2015 10-K 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. 

Item 1A. Risk Factors

We extend credit to most of our customers in connection with their purchases of fuel and services from us, and our business, financial condition, results of operations and cash flows will be adversely affected if we are unable to collect accounts receivable.

We extend credit to certain of our customers in connection with their purchases of fuel and services from us. Our success in attracting customers has been due, in part, to our willingness to extend credit on an unsecured basis to customers, which can include other fuel suppliers, that would otherwise be required to prepay or post letters of credit with other suppliers of fuel and other services. While no single customer represents more than 10% of our total consolidated revenue, diversification of credit risk is limited because we transact primarily within the aviation, marine and land transportation industries.

Our exposure to credit losses will depend on the financial condition of our customers and other factors beyond our control, such as deteriorating conditions in the world economy or in the aviation, marine or land transportation industries, changes in oil prices, political instability, terrorist activities, military action or natural disasters in our market areas. The overall volatility in the credit and financial markets over the past several years increases our potential exposure to customer credit risk because it can make it more difficult for our customers to access sufficient capital to meet their liquidity needs. This market

volatility, coupled with a reduction of business activity generally, increases our risks related to our status as an unsecured creditor of many of our customers. Credit losses, if significant, would have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our business is dependent on our ability to obtain financing to meet our capital requirements and fund our future growth, which may be particularly difficult to obtain if there is volatility in the credit or capital markets.

We rely on credit arrangements with banks, suppliers and other parties as a significant source of liquidity for capital requirements not satisfied by operating cash flow. Any inability to obtain credit as and when we need it on commercially reasonable terms or at all, such as in the event there is a substantial tightening of the global credit markets or a significant reduction in supplier trade credit, could have a negative impact on our business, financial condition, and cash flows, as well as our future development and growth.  Furthermore, if we are unable to obtain debt financing and instead raise capital through an equity issuance, existing shareholders would be diluted. Even if we are able to obtain debt financing, the restrictions creditors may place on our operations and our increased interest expense and leverage could limit our ability to grow.

 

Our derivatives transactions with customers, suppliers, merchants and financial institutions expose us to heightened counterparty risk, which could have a material adverse effect on our business.

As part of our price risk management services, we offer certain of our counterparties various pricing structures for future purchases of fuel, including derivatives products designed to hedge exposure to fluctuations in fuel prices.  In the ordinary course of business, we enter into fixed forward pricing contracts (“fixed forward contracts”) with our counterparties under which we agree to sell or purchase, as the case may be, certain volumes of fuel at fixed prices.  In addition, we may act as a counterparty in swap transactions with some of our customers where the customer may be required to pay us in connection with changes in the price of fuel. Furthermore, we may use derivatives to hedge price risks associated with our fuel inventories and purchase and sale commitments.  We typically hedge our financial risk in any of the foregoing types of transactions by entering into derivative instruments with large energy companies, trading houses and financial institutions, on secured and unsecured terms alike.

If we have not required a customer to post collateral in connection with a fixed forward contract or swap transaction, we will have effectively extended unsecured credit to that customer.  Based on the volatility of fuel prices, our counterparties may not be willing or able to fulfill their obligations to us under their fixed forward contracts or their swap transactions.  In such cases, we would be exposed to losses or costs associated with any such default.  For example, in the event the spot market price of fuel at the time of delivery is significantly less than the fixed price, a customer could default on its purchase obligation to us and purchase the fuel at the current spot market rate from another supplier.  Meanwhile, we may have entered into a corresponding commitment with a supplier in order to offer our customer specified pricing or terms.  Similarly, the counterparties with whom we may hedge our price risk exposure may not be willing or able to fulfill their obligations to us under their swap transactions. 

While we generally attempt to structure our agreements such that we are able to recover from the non-performing counterparty any losses or costs we may incur, we may not always be able to recover such amounts and may be exposed to claims for damages, penalties or other costs.   Furthermore, although we have credit standards and perform credit evaluations of our customers and suppliers, our evaluations may be inaccurate, or we may fail to effectively monitor exposure of our counterparties, and we cannot ensure that credit performance will not be materially worse than anticipated.  Accordingly, should any counterparty fail to honor its obligations under our agreements, we could sustain significant losses that would have a material adverse effect on our business, financial condition, results of operations and cash flows.

We are exposed to various risks in connection with our use of derivatives which could have a material adverse effect on our results of operations.

We enter into financial derivative contracts to mitigate the risk of market price fluctuations in fuel products we sell, to offer our customers fuel pricing alternatives to meet their needs and to mitigate the risk of fluctuations in foreign currency exchange rates. However, our efforts to hedge our exposure to fuel price and exchange rate fluctuations could be ineffective in certain instances. For example, we hedge jet fuel prices with derivatives tied to other petroleum products that often bear some historical correlation to aviation jet fuel (e.g. heating oil in the United States or gasoil in Europe or Asia). If the price of aviation jet fuel and the price of any such products experience divergence in correlation, our attempts to mitigate price risk associated with our aviation business may not be effective. For purposes of hedging, neither heating oil nor gasoil is a perfect substitute for aviation jet fuel and significant pricing differences may occur. There may be times where the change in the price of jet fuel increases or decreases based on market supply and demand fundamentals or disruptive events (e.g. hurricanes) while the change in the price of heating oil or gasoil remains relatively constant.

We also enter into proprietary derivative transactions, primarily intended to capitalize on arbitrage opportunities associated with basis, time, quality or geographic spreads related to fuel products we sell. Proprietary derivative transactions, by their nature, often entail exposure to adverse changes in commodity prices in relation to our proprietary positions. Although we have established limits on such exposure, any such adverse changes could result in losses. The risks we face because of our use of financial derivatives can be exacerbated by volatility in the financial and other markets. In addition, we may fail to adequately hedge our risks or could otherwise incur losses if our employees fail to comply with our policies and procedures with respect to hedging or proprietary trading, for example by engaging in unauthorized trading activity, failing to hedge a specific financial risk or failing to observe limits on exposure, which could subject us to financial losses that would have a material adverse effect on our business, financial condition, results of operations and cash flows.

Finally, the majority of our derivatives are not designated as cash flow hedges for accounting purposes, and we therefore recognize changes in the fair market value of these derivatives as a component of revenue or cost of revenue (based on the underlying transaction type) in our consolidated statements of income and comprehensive income. Since the fair value of these derivatives is marked to market at the end of each quarter, changes in the fair value of our derivative instruments as a result of gains or losses may cause our earnings to fluctuate from period to period.

Third parties who fail to provide products or services to us or our customers as agreed could harm our business.

We purchase fuel and other products from suppliers and resell to customers. If the fuel and other products we sell fail to meet the specifications we have agreed to with customers, we could incur significant liabilities if a customer initiates a claim or a lawsuit for which we settle or results in a decision against us.  In addition, our relationship with our customers could be adversely affected and adverse publicity about any allegations of contaminated products may negatively affect us, regardless of whether the allegations are true. Although in most cases we have recourse against our suppliers for products that fail to meet contractual specifications, such recourse cannot be assured and may be costly to enforce. For example, several of our supply agreements are with foreign entities, including foreign governments, and are governed by the laws of foreign jurisdictions. If a supplier breaches such agreement, then we may incur the additional costs of determining our rights and obligations under the agreement, under applicable foreign laws, and enforcing an agreement in a foreign jurisdiction. Any significant liability in excess of any applicable insurance coverage could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We also use third parties to provide various services to our customers, including into plane fueling at airports, fueling of vessels in port and at sea and delivering land based fuel. The failure of these third parties to perform these services in accordance with contractual terms for any reason, such as their inability to supply specified fuel or an interruption of their business because of weather, environmental or labor difficulties or political unrest, could affect our relationships with our customers and subject us to claims and other liabilities that could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Due to our international operations, we are subject to U.S. and international laws, including U.S. economic sanctions, the Foreign Corrupt Practices Act (“FCPA”) and similar anti-bribery laws, which can impose significant compliance costs and subject us to civil or criminal penalties for non-compliance.

Doing business on a worldwide basis requires us to comply with the laws and regulations of the U.S. government and various international jurisdictions. These regulations place restrictions on our operations, trade practices and partners and investment decisions. In particular, our international operations are subject to U.S. and foreign anti-corruption laws and regulations, such as the FCPA and the U.K. Anti Bribery Act, and economic sanction programs administered by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). The FCPA prohibits us from providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business and the U.K. Anti Bribery Act prohibits bribery both in the United Kingdom and internationally, as well as bribery across public and private sectors. As part of our business, we regularly deal with state owned enterprises, the employees of which may be considered foreign officials for purposes of the FCPA. In addition, some of the international jurisdictions in which we operate lack a developed legal system and have higher than normal levels of corruption. Our activities in these countries create the risk of improper payments or offers of payments by one of our employees or other parties acting on our behalf. 

Furthermore, international trade controls, including economic sanctions, export controls and anti-boycott regulations, are complex, restrict our business dealings with certain countries and individuals, and are constantly changing.  Further restrictions may be enacted, amended, enforced or interpreted in a manner that materially impacts our operations. From time to time, certain of our subsidiaries have limited business dealings in countries subject to comprehensive OFAC administered sanctions. These business dealings currently represent an insignificant amount of our consolidated revenue and income and generally consist of the provision of services pursuant to licenses issued by OFAC or as otherwise permitted by applicable sanctions regulations. As a result of the above activities, we are exposed to a heightened risk of violating anti-

corruption laws and trade control regulations. Violations of these regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts and revocations or restrictions of licenses, as well as criminal fines and imprisonment.

We have established policies and procedures designed to assist with our compliance with applicable U.S. and international laws and regulations. However, there can be no assurance that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage, and such a violation could adversely affect our reputation, business, financial condition, results of operations and cash flows. In addition, such a violation could also cause an event of default under our Credit Facility, which if not waived, could result in the acceleration of any outstanding indebtedness, could trigger cross defaults under other agreements to which we are a party (such as certain derivative contracts), and would impair our ability to obtain working capital advances and letters of credit.  Such events could adversely affect our business, financial condition, results of operations and cash flows.  Finally, various state and municipal governments, universities and other investors maintain prohibitions or restrictions on investments in companies that do business with sanctioned countries, which could adversely affect the market for our securities.

In the past, we have received administrative subpoenas from OFAC requesting information regarding our transactions in countries that are the subject of U.S. sanctions. In responding to these subpoenas, we identified a limited number of transactions that may have resulted in violations of U.S. sanctions regulations or our OFAC issued licenses. In each of these responses, we noted that the transactions identified as potential violations resulted in very small amounts of revenue to us. We routinely take actions to further strengthen our compliance-related policies and procedures. Nevertheless, should OFAC determine that any activities constituted violations of U.S. sanctions regulations, civil penalties, including fines, could be assessed against us.  Additionally, in the course of its ongoing reviews, OFAC could request additional information from us, in the form of additional subpoenas or otherwise, and we intend to fully cooperate with any such additional subpoenas or requests. We cannot predict the ultimate outcome of any OFAC review, the total costs to be incurred in response to these reviews, the potential impact on our personnel, the effect of implementing any further measures that may be necessary to ensure full compliance with U.S. sanctions regulations or to what extent, if at all, we could be subject to fines, sanctions or other penalties.

Our fuel storage and transportation operations have inherent risks that could negatively impact our stock price, results of operations and financial condition.

Operating fuel storage and distribution terminals and transporting fuel products involve inherent risks including:

•oil spills and other environmental mishaps;

•fires, collisions and other catastrophic disasters;

•injuries and loss of life;

•severe damage to and destruction of property and equipment; and

•loss of product and business interruption.

Damage arising from such occurrences may result in fines and significant third party claims. We generally maintain insurance to mitigate these types of costs, but there can be no assurance that our insurance would be sufficient to cover the liabilities we might suffer from the occurrence of one or more of the risks described above.

In addition, if we are involved in a spill, leak, fire or other accident involving hazardous substances or if there are releases of fuel or fuel products we own or have custody of, our operations could be disrupted. We could also be subject to material liabilities, such as the cost of investigating and remediating contaminated properties or claims by customers, employees or others who may have been injured, or whose property may have been damaged. These liabilities, to the extent not covered by insurance, could have a material adverse effect on our business, financial condition, results of operations and cash flows. Some environmental laws impose strict liability, which means we could have liability without regard to whether we were negligent or at fault. Any of these occurrences, and any resulting negative media coverage, could have a material adverse effect on our stock price and on our business, financial condition, results of operations and cash flows.

Information technology failures and data security breaches, including as a result of cybersecurity attacks, could negatively impact our results of operations and financial condition, subject us to increased operating costs, and expose us to litigation.

We rely on our computer systems and network infrastructure across our operations. Despite our implementation of security and back-up measures, all of our technology systems are vulnerable to damage, disability or failures due to physical theft, fire, power loss, telecommunications failure, operational error, or other catastrophic events.  Our technology systems are

also subject to cybersecurity attacks including malware, other malicious software, phishing email attacks, attempts to gain unauthorized access to our data, the unauthorized release, corruption or loss of our data, loss or damage to our data delivery systems, and other electronic security breaches.  Due to the large number of transactions that run through our systems each day, significant system down-time or slow-down could have a material impact on our ability to conduct business, process and record transactions, as well as make operational and financial decisions.

In addition to our own vulnerabilities, our reliance on email transmissions over public networks to process certain transactions exposes us to risks associated with the failure of our customers, business partners and other third parties to use appropriate controls to protect sensitive information, as well as to risks of on-line fraud and email scams.  Furthermore, despite our efforts to ensure the integrity of our systems and prevent future cybersecurity attacks, it is possible that our business, financial and other systems could be compromised, especially because such attacks can originate from a wide variety of sources including persons involved in organized crime or associated with external service providers.  Those parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or use electronic means to induce the company to enter into fraudulent transactions.  Past and future occurrences of such attacks could damage our reputation and our ability to conduct our business, impact our credit and risk exposure decisions, cause us to lose customers or revenues, subject us to litigation and require us to incur significant expense to address and remediate or otherwise resolve these issues, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We currently maintain insurance to protect against cybersecurity risks and incidents. However, there can be no assurance that such insurance coverage will be available in the future on commercially reasonable terms or at commercially reasonable rates. In addition, insurance coverage may be insufficient or may not cover certain of these cybersecurity risks and, even if available, the insurance proceeds received for any loss or damage may be insufficient to cover our losses or liabilities without materially adversely affecting our business, financial condition and results of operations.

The personal information that we collect may be vulnerable to breach, theft, loss or misuse that could increase operational costs, result in regulatory penalties and adversely affect our results of operation and financial condition. 

In connection with various businesses we operate, such as our transaction management and payment processing businesses, we have access to sensitive, confidential or personal data or information from our employees, customers (both corporate and individual consumers), suppliers and other third parties, some of which may be subject to privacy and security laws, regulations and customer imposed controls. In the ordinary course of business, we collect, process, transmit and retain sensitive information regarding these parties.  Despite our efforts to protect this information, our facilities and systems and those of our third party service providers may be vulnerable to security breaches, theft, misplaced or lost data and programming and human errors that could potentially lead to such information being compromised.

Failure to adequately protect this information could lead to substantial fines, penalties, third party liability, remediation costs, potential cancellation of existing contracts and inability to compete for future business. Due to legislative and regulatory rules, we may be required to notify the owners of such information of any data breaches, which could harm our business relationships, reputation and financial results, as well as subject us to litigation or actions by regulatory authorities.  Furthermore, there has been heightened legislative and regulatory focus on data security in the U.S. and abroad (particularly in the European Union). Significant changes in applicable regulations may require us to make costly changes to our systems. Although we have taken steps to address these concerns by implementing network security and internal control measures, there can be no assurance that a data security breach will not have a material adverse effect on our business, financial condition, results of operations and cash flows.

Businesses we have acquired or may acquire in the future, as well as strategic investments such as joint venture arrangements, expose us to increased risks.

As part of our growth strategy, we have been acquisitive and intend to continue to explore acquisition opportunities of fuel resellers, logistics and transaction management and payment processing companies, as well as other service and technology businesses. We cannot provide any assurance that we will find attractive acquisition candidates in the future, that we will be able to acquire such candidates on economically acceptable terms or that we will be able to finance acquisitions on economically acceptable terms. If we acquire new businesses in the future, we may incur substantial additional indebtedness and other expenses or we may complete potentially dilutive issuances of equity securities, which may affect the market price of our common stock, inhibit our ability to pay dividends or otherwise restrict our operations. We have also entered into joint venture arrangements and equity investments intended to complement or expand our business, as well as divested of certain of our businesses or assets. These types of transactions can pose substantial risks and liabilities associated with their operations, as well as the risk that our relationships with our partners do not succeed in the manner that we anticipate. These transactions involve significant challenges and risks, including:

•our ability to effectively integrate the operations, financial reporting, and personnel of acquired companies and manage acquired businesses or strategic investments, while maintaining uniform standards and controls;

•our ability to realize our investment and anticipated synergies in the acquired businesses or strategic investments;

•the diversion of management’s time and attention from other business concerns, the potentially negative impact of changes in management on existing business relationships and other disruptions of our business;

•the risks associated with entering into businesses or markets in which we may have no or limited direct prior experience;

•the potential loss of key employees, customers or suppliers of the acquired businesses;

•the ability to integrate the IT systems of acquired businesses into our existing IT infrastructure and manage those systems that cannot be effectively integrated;

•the requirement to write down acquired assets as a result of the acquired business or strategic investment being worth less than we paid or invested in it;

•capital expenditure requirements exceeding our estimates;

•the risk that an acquisition or strategic investment could reduce our future earnings; and

•the assumption of material liabilities, exposure to litigation, regulatory noncompliance or unknown liabilities, and no or limited indemnities from sellers or ongoing indemnity obligations to purchasers.

 

Adverse conditions in the aviation, marine and land transportation industries may have a material adverse effect on our business.

Our business is focused on the marketing of fuel and other related products and services to the aviation, marine and land transportation industries, which are generally affected by economic cycles. Therefore, weak economic conditions can have a negative impact on the business of our customers which may, in turn, have an adverse effect on our business. In addition, any political instability, natural disasters and other weather-related events, terrorist activity or military action that disrupts shipping, flight operations or land transportation will adversely affect our customers and may reduce the demand for our products and services. Our business could also be adversely affected by increased merger activity in the aviation, marine or land transportation industries, which may reduce the number of customers that purchase our products and services, as well as the prices we are able to charge for such products and services.

In addition, the aviation, marine and land transportation industries are subject to continuing changes in laws and regulations, including environmental regulations mandating or incentivizing alternative energy sources or attempting to control or limit emissions and pollution. For example, amendments to the International Convention for the Prevention of Pollution from Ships, or MARPOL, established a phased reduction of the sulfur content in fuel oil and allows for stricter sulfur limits in designated emission control areas. Further changes in laws and regulations applicable to international and national maritime trade are expected over the coming years. Complying with these and other laws and regulations may require capital expenditures by our customers or otherwise increase our customers’ operating costs, which could in turn, reduce the demand for our products and services. Although the ultimate impact of any regulations is difficult to predict accurately, they could have a material adverse effect on our business or on the businesses of our customers.

Our business is subject to seasonal variability, which can cause our revenues and operating results to fluctuate and adversely affect the market price of our shares.

Our operating results are subject to seasonal variability. Our seasonality results from numerous factors, including traditionally higher demand for natural gas and home heating oil during the winter months and aviation and land fuel during the summer months, as well as other seasonal weather patterns.  As such, our results for the fourth and first quarters of the year tend to be the strongest while the second quarter is generally the weakest. There can be no assurance that our historic operating results patterns will continue in future periods as we cannot influence or forecast all of these factors.  Accordingly, results for any one quarter may not necessarily be indicative of the results that may be achieved for any other quarter or for the full fiscal year.  These seasonal fluctuations in our quarterly operating results may therefore adversely affect the market price of our shares.

If we fail to comply with laws or other government regulations applicable to our operations, we could suffer penalties or costs that could have a material adverse effect on our business.

We are required to comply with extensive and complex laws and other regulations in the countries in which we operate, and at the international, federal, state and local government levels relating to, among other things:

 

•the transportation, handling and delivery of fuel and fuel products;

•the operation of fuel storage and distribution facilities;

•workplace safety;

•fuel spillage or seepage;

•environmental protection;

•consumer and data protection;

•payment card industry data security standards;

•government contracting and procurement;

•anti-trust and other applicable competition laws;

•anti-money laundering and statutes and regulations governing the transmission of funds;  

•regulatory reporting and licensing requirements; and

•hazardous waste disposal.

Due to the complex and technical nature of these laws and regulations, inadvertent violations may occur. If we fail to comply with these laws or regulations for any reason, we would be required to correct or implement measures to prevent a recurrence of any violations, which could increase our operating costs. If more serious violations were to occur, we could be subject to substantial fines or penalties or to civil or criminal liability. In addition, compliance with existing and future laws regulating the delivery of fuel by barge, truck or railcar, fuel storage terminals and underground storage tanks that we own or operate may require significant capital expenditures and increased operating and maintenance costs.  For example, rail incidents in the last several years have led and are likely to continue to lead to additional governmental regulation of rail shipments of crude oil and other fuel products in Canada and the United States and to increased safety standards for the railcars that transport these products, including specifications mandating modified railcar designs, configurations, materials, and equipment. These regulations could result in higher operating costs for us, such as if we are required to pay for the modifications to railcars we lease or such railcars become obsolete, which could adversely affect our operating results.

To the extent that we use third parties in our operations, we are also subject to the risk that we would be held accountable for the failure of these third parties to comply with the laws and regulations of the U.S. and various international jurisdictions.  Any significant fines and costs incurred as a result of such regulations could have a material adverse effect on our business and results of operations.

We are subject to unique business risks as a result of selling to government customers and reduced sales to our government customers could adversely affect our profitability.

U.S. and foreign government budget constraints and the withdrawal of armed forces from Afghanistan are expected to continue resulting in a decrease in defense spending, which in turn can cause a significant reduction in sales and related profit in our government services business. Furthermore, due to the nature of these types of conflicts, withdrawals from certain areas may be sudden, subjecting us to losses or higher expenses associated with disposing of unused inventory, removal or abandonment of equipment and relocation of employees.  Furthermore, as government contracts are requirements based, profitability associated with our government services business may fluctuate significantly from time to time as a result of the commencement, extension or completion of existing and new government contracts.  As a result of complex logistics and extended payment terms for our government customers, sales of products and services to such customers generally carry higher margins than sales to other customers. Accordingly, a decrease in government sales could contribute disproportionately to a reduction in our gross margin and profitability and such decrease could be sudden.  The loss of a significant government customer or a material reduction in sales to government customers could adversely affect our business, financial condition, results of operations and cash flows.

In addition, contracting with government agencies is inherently complex.  Government contracts are subject to specific procurement regulations and a variety of other requirements, which affects how we transact business with our customers and can impose additional costs on our business operations.  Government contracts are also generally subject to oversight, including audits and investigations which could identify violations of these agreements or applicable procurement regulations, such as the Federal Acquisition Regulation for contracts with the U.S. federal government. Such violations could result in a range of consequences including, but not limited to, contract price adjustments, civil and criminal penalties, contract termination, forfeiture of profit and/or suspension of payment, and suspension or debarment from future government contracts. The occurrence of any of these actions could harm our reputation and could have a material adverse impact on our business, financial condition, and results of operations.

Changes in the market price of fuel may have a material adverse effect on our business.

Historically, fuel prices have been extremely volatile and will likely continue to be volatile in the future.  Fuel prices are impacted by many factors beyond our control, including:

•global economic conditions;

•changes in global crude oil and natural gas prices;

•expected and actual supply and demand for fuel;

•the ability or willingness of the Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels for oil;

•oil and gas production levels by non-OPEC countries;

•geopolitical conditions;

•laws and regulations related to environmental matters, including those mandating or incentivizing alternative energy sources or otherwise addressing global climate change;

•changes in pricing or production controls by various organizations and oil producing countries;

•technological advances affecting energy consumption or supply;

•energy conservation efforts;

•price and availability of alternative fuels; and

•weather.

If fuel prices increase, our customers may not be able to purchase as much fuel from us because of their credit limits with us and the resulting adverse impact on their business could cause them to be unable to make payments owed to us for fuel purchased on credit. They may also choose to reduce the amount of fuel they consume in their operations to reduce costs or comply with new environmental regulations to obtain associated incentives. For example, in the shipping industry a number of container ships sail at reduced speeds, known as “slow steaming,” to conserve fuel and reduce carbon emissions.  In any such event, there can be no assurance that the volume of orders from our customers will thereafter increase or that we will be able to replace lost volumes with new customers. In addition, if fuel prices increase, our own credit limits could prevent us from purchasing enough fuel from our suppliers to meet our customers’ demands or could require us to prepay for fuel purchases which would impair our liquidity.

Conversely, extended periods of low fuel prices, particularly when coupled with low price volatility, can also have an adverse effect on our results of operations and overall profitability.  This can be due to a number of factors, including decreased demand for our services and price risk management products.    Low fuel prices also facilitate increased competition by reducing financial barriers to entry and enabling existing, lower-capitalized competitors to conduct more business as a result of lower working capital requirements.

Finally, we maintain fuel inventories for competitive or logistical reasons. Because fuel is a commodity, we have no control over the changing market value of our inventory. Our inventory is valued using the average cost methodology and is stated at the lower of average cost or market. A rapid decline in fuel prices could cause our inventory value to be higher than market, resulting in our inventory being marked down to market or the inventory itself sold at lower prices. While we attempt to mitigate these fluctuations such as these through hedging, there can be no assurance that such hedges will be effective.   Accordingly, if the market value of our inventory is less than our average cost and to the extent our hedges are not effective at mitigating fluctuations in prices, we could record a write down of inventory on hand and a non-cash charge, which could adversely impact our earnings.

Economic, political and other risks associated with international sales and operations could adversely affect our business and future operating results.

Because we offer fuel products and services on a worldwide basis, our business is subject to risks associated with doing business internationally. Our business and future operating results could be harmed by a variety of factors, including:

 

•trade protection measures and import, export and other licensing requirements, which could increase our costs or prevent us from doing certain business internationally;

•the costs of hiring and retaining senior management for overseas operations;

•difficulty in staffing and managing widespread operations, which could reduce our productivity;

•unexpected changes in regulatory requirements, which may be costly and require significant time to implement;

•laws restricting us from repatriating profits earned from our activities within foreign countries, including the payment of distributions;

•governmental actions that may result in the deprivation of our contractual rights or the inability to obtain or retain authorizations required to conduct our business;

•political risks specific to foreign jurisdictions; and

•terrorism, war, civil unrest and natural disasters.

 

In particular, we operate in certain international markets which have been plagued by corruption and have uncertain regulatory environments, either of which could have a negative impact on our operations there. Furthermore, many countries in which we operate have historically been, and may continue to be, susceptible to recessions or currency devaluation.

We also operate in certain high risk locations that have been experiencing military action, terrorist activity or continued unrest which could disrupt the supply of fuel or otherwise disrupt our operations in those areas. An act of terror could result in disruptions of fuel supply and oil markets, and our facilities could be direct or indirect targets. Terrorist activity may also hinder our ability to transport fuel if our means of transportation become damaged as a result of an attack.  In these high risk locations, we may also incur substantial operating costs, including maintaining the safety of our personnel. Furthermore, we cannot guarantee the safety of our personnel in these locations and there is a risk of serious injury or loss of life of employees or subcontractors.

Material disruptions in the availability or supply of fuel would adversely affect our business.

The success of a significant portion of our business depends on our ability to purchase, sell and coordinate delivery of fuel and fuel related services to our customers. Our business would be adversely affected to the extent that political instability, natural disasters, terrorist activity, military action or other conditions disrupt the availability or supply of fuel. In addition, we rely on a single or limited number of suppliers for the provision of fuel and related products and services in certain markets. These parties may have significant negotiating leverage over us, and if they are unable or unwilling to supply us on commercially reasonable terms, our business would be adversely affected.

 

We face intense competition and, if we are not able to effectively compete in our markets, our revenues and profits may decrease.

Competitive pressures in our markets could adversely affect our competitive position, leading to a possible loss of market share or a decrease in prices, either of which could result in decreased revenues and profits. Our competitors are numerous, ranging from large multinational corporations, which have significantly greater capital resources than we do, to relatively small and specialized firms. In addition to competing with fuel resellers, we also compete with the major oil producers that market fuel directly to the large commercial airlines, shipping companies and petroleum distributors. Although many major oil companies have been divesting their downstream assets, some continue to compete with us in certain markets while others may decide to reenter the market in the future. Our business could be adversely affected because of increased competition from these oil companies, who may choose to increase their direct marketing in order to compete with us or provide less advantageous price and credit terms to us than to our fuel reseller competitors.

 

If we are unable to retain our senior management and key employees, our business and results of operations could be harmed.

Our ability to maintain our competitive position is largely dependent on the services of our senior management and key personnel. Although we have employment or severance agreements with certain of our key employees, these agreements do not prevent those individuals from ceasing their employment with us at any time. If we are unable to retain existing senior management and key personnel, or to attract other qualified senior management and key personnel on terms satisfactory to us, our business could be adversely affected. While we maintain key man life insurance with respect to certain members of senior management, our coverage levels may not be sufficient to offset any losses we may incur and there is no assurance that we will continue to maintain key man life insurance in the future.

 

Our failure to comply with the requirements of our Credit Facility and Term Loans could adversely affect our operating flexibility.

We have the ability to borrow money pursuant to a Credit Facility and Term Loans that impose certain operating and financial covenants on us, which restrict our ability to (i) pay dividends, (ii) incur additional debt, (iii) create liens, (iv) make restricted payments, (v) sell assets and (vi) engage in mergers or acquisitions. Our failure or inability to comply with the requirements of these facilities, including meeting certain financial ratios or other covenants, could limit the availability under our Credit Facility or result in an event of default. An event of default, if not cured or waived, would permit acceleration of any outstanding indebtedness under these facilities, could trigger cross defaults under other agreements to which we are a party (such as certain derivative contracts), and would impair our ability to obtain working capital advances and letters of credit, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

If we fail to successfully manage the implementation of an upgrade to our global enterprise resource planning (“ERP”) platform, our operations and operating results could be adversely affected.

In 2015, we committed to undertake a multi-year project designed to drive greater improvement in operating efficiencies and optimize scalability, particularly when integrating future acquisitions.  We will accomplish this in part by a global design and deployment of an upgrade to our existing ERP platform. We are currently in the early planning phase and the costs incurred to date have not been significant.  We expect the total cost of the project over the next three years to range between $30.0 million and $40.0 million.  If we fail to successfully implement the upgrade to our existing ERP platform, or should we experience material delays in implementation, our ability to grow our business could be adversely affected. Estimating the expenditures related to an upgrade of an ERP platform is highly complex and subject to variables that can significantly increase costs. Should the actual costs exceed our estimates, our liquidity and results of operations could be adversely affected.

 

Our operations may be adversely affected by legislation and competition from other energy sources and new or advanced technology.

Fuel competes with other sources of energy, some of which are less costly on an equivalent energy basis. There are significant governmental incentives and consumer pressures to increase the use of alternative fuels in the United States and abroad. A number of automotive, industrial and power generation manufacturers are developing more fuel efficient engines, hybrid engines and alternative clean power systems using fuel cells or clean burning gaseous fuels. The more successful these alternatives become as a result of governmental incentives or regulations, technological advances, consumer demand, improved pricing or otherwise, the greater the potential negative impact on pricing and demand for our products and services and accordingly, our profitability.

 

In addition, federal, state, local and/or foreign governments may enact legislation or regulations that attempt to control or limit GHGs such as carbon dioxide. Such laws or regulations could impose costs tied to carbon emissions, operational requirements or restrictions, or additional charges to fund energy efficiency activities. They could also provide a cost advantage to alternative energy sources, result in other costs or requirements, such as costs associated with the adoption of new infrastructure and technology to respond to new mandates, or impose costs or restrictions on end users of fuel. For example, some of our customers in the transportation industry may be required to purchase allowances or offsets or incur other costs to comply with existing or future requirements relating to GHG. Finally, the focus on climate change could also negatively impact the reputation of fuel products or services such as those we offer. The occurrence of any of the foregoing events could put upward pressure on the cost of fuel relative to other energy sources, increase our costs and the prices we charge our customers, reduce the demand for our products, and therefore adversely affect our business, financial condition, results of operations and cash flows.

 

Insurance coverage for some of our operations may be insufficient to cover losses, which may have a material adverse effect on our financial condition and results of operations.

We maintain insurance to cover various risks associated with the operation of our business. Certain risks, however, such as environmental risks, are not fully insurable and our insurance coverage does not cover all potential losses, costs, or liabilities. Accordingly, our insurance policies may not adequately cover or may have exclusions of coverage for certain losses. Therefore, there can be no assurance that our insurance coverage will be available or will be adequate to cover claims that may arise.

 

Furthermore, our ability to obtain and maintain adequate insurance and the cost of such insurance may be affected by significant claims and conditions in the insurance market over which we have no control. If the cost of insurance increases, we may decide to discontinue certain insurance coverage, reduce our level of coverage or increase our deductibles/retentions in order to offset the cost increase. In addition, our existing types and levels of insurance coverage could become difficult or impossible to obtain in the future. The occurrence of an event that is not fully covered by insurance, the loss of insurance coverage or a significant increase in the cost of insurance could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Current and future litigation could have a material adverse effect on our business and results of operations.

We are currently, and may in the future be, involved in legal proceedings that arise in the ordinary course of our business. Lawsuits and other administrative or legal proceedings can involve substantial costs, including the costs associated with investigation, litigation and possible settlement, judgment, penalty or fine. Although we generally maintain insurance to mitigate certain costs, there can be no assurance that costs associated with lawsuits or other legal proceedings will not exceed the limits of insurance policies. Our business, financial condition, results of operations and cash flows could be adversely affected if a judgment, penalty or fine is not fully covered by insurance.

 

 

Changes in U.S. or foreign tax laws could adversely affect our business and future operating results.

We are affected by various U.S. and foreign taxes, including income taxes and taxes imposed on the purchase and sale of aviation, marine and land fuel products, such as sales, excise, value added tax, energy, environmental and other taxes. From time to time, we may also benefit from special tax concessions in certain jurisdictions. Changes in U.S. and foreign tax laws, our failure to comply with such laws or the loss of tax concessions could adversely affect our business, financial condition, results of operations and cash flows.

 

Furthermore, significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by tax authorities and, although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our financial statements in the period or periods for which that determination is made.

 

Finally, we earn a significant amount of our operating income from outside the U.S., and any repatriation of funds currently held in foreign jurisdictions to the U.S. may result in higher effective income tax rates for the Company. Further, recent developments, including proposals to change U.S. income tax laws regarding how U.S. multinational corporations are taxed on foreign earnings, investigations by the European Commission on illegal state aid, the project by the Organisation for Economic Co-operation and Development on Base Erosion and Profit Shifting and other initiatives, could adversely affect our worldwide effective tax rate, if enacted. Although we cannot predict whether or in what form any changes will be made, if enacted they could have a material adverse impact on our income tax expense, financial condition, results of operations and cash flows.

 

Fluctuations in foreign exchange rates could materially affect our financial condition and results of operations.

The majority of our business transactions are denominated in U.S. dollars. In certain markets, however, payments to some of our fuel suppliers and from some of our customers are denominated in local currency. We also have certain liabilities, primarily for local operations, including income and transactional taxes, which are denominated in foreign currencies. This subjects us to foreign currency exchange risk. Although we generally use hedging strategies to manage and minimize the impact of foreign currency exchange risk when available, these hedges may be costly and at any given time, only a portion of this risk may be hedged.  Accordingly, our exposure to this risk may be substantial and fluctuations in foreign exchange rates could adversely affect our profitability.

 

In addition, many of our customers are based outside of the U.S. and may be required to purchase U.S. dollars to pay for our products and services. A rapid depreciation or devaluation in currency that affects our customers could have an adverse effect on their operations and their ability to convert local currency to U.S. dollars in order to make required payments to us. This could, in turn, increase our credit losses and adversely affect our business, financial condition, results of operations and cash flows.

 

Our cash equivalents and investments are subject to risks that may cause illiquidity and losses from declines in value.

Our cash equivalents, principally consisting of overnight investments, bank money market accounts and bank time deposits are subject to credit, liquidity, market and interest rate risk, which can be exacerbated by volatility in the capital markets. Adverse changes in this respect can result in the decline of the fair value of our cash equivalents and therefore our liquidity, which could materially affect our business, financial condition, results of operations and cash flows.

 

Current and proposed derivatives legislation and rulemaking could have a material adverse effect on our business.

The Dodd Frank Wall Street Transparency and Accountability Act of 2010 (the “Act”) provides for federal regulation of the over the counter (“OTC”) derivative markets both for commodities and securities, and gives the U.S. Commodity Futures Trading Commission (“CFTC”) and the SEC broad authority to regulate such markets and their participants. This includes, among others, derivative transactions linked to crude oil, refined products and natural gas prices. The CFTC and the SEC are continuing to consider, finalize and implement rules governing, among other things, where swaps are transacted (on exchange versus off exchange); how they are transacted (cleared versus uncleared; margined versus unmargined); the differing responsibilities of those who participate in OTC derivatives (end users, swap dealers, major swap participants); and the application of cross-border rules in the global derivatives markets. Further, regulations setting limits on the size of a party’s derivative positions in major energy markets were adopted by the CFTC but vacated after a successful challenge in federal court. In November 2013, the CFTC re-proposed new position limits rules, which would limit trading in options, futures, and swaps contracts related to certain agricultural, metal, and energy commodities, including energy commodities in which we currently engage in derivative transactions.  Such rules have not been finalized, and we cannot currently predict whether or when the re-proposed rules will be adopted, in what form the rules will be adopted, or the effect of the final rules,

if any, on our businesses. Furthermore, certain of the other requirements under the Act have taken effect and other regulations that could have a significant impact on us are expected to be finalized in the near future.

 

 

In addition, various foreign jurisdictions have adopted or are in the process of adopting legislation regulating the use of derivatives, including Singapore and Europe, where we currently conduct certain derivatives activities.

As regulations are finalized, adopted and implemented, we continue to evaluate how legislation will impact our ability to conduct our business. In particular, the Act and any new (or newly implemented) regulations and international legislation could significantly increase the cost of our derivative contracts (including through requirements to post collateral, which could adversely affect our cash flows and liquidity, or subject us directly or indirectly to additional reporting requirements), materially alter the terms of our derivative contracts, reduce our ability to offer derivative and other price management products to our customers, reduce the demand for our price risk management services, reduce the availability of derivatives to protect against risks we encounter, increase price volatility in commodities we buy and sell (and derivatives related to those commodities), affect cash flow and liquidity due to margin calls, reduce our ability to monetize or restructure our existing commodity price contracts, and increase our exposure to less creditworthy counterparties. If the increased cost of derivative contracts is significant or we reduce or limit our derivatives activities as a result of any such legislation or rules, our profitability and results of operations could be adversely affected. Any of these consequences could have a material adverse effect on us, our financial condition, and our results of operations and cash flows.

 

 

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The following table sets forth our principal properties, the majority of which are leased, as of February 4, 2016. We consider all of our properties and facilities to be suitable and adequate for our present needs and do not anticipate that we will experience difficulty in renewing or replacing those leases that expire in 2016 in any material respect.

WORLD FUEL SERVICES CORPORATION AND SUBSIDIARIES

PROPERTIES 

 

 

Item 3. Legal Proceedings 

Lac‑Mégantic, Quebec

 

We, on behalf of DPTS Marketing, LLC (“DPM”), a crude oil marketing joint venture in which we previously owned a 50% membership interest, purchased crude oil from various producers in the Bakken region of North Dakota. Dakota Petroleum Transport Solutions, LLC (“DPTS”), a crude oil transloading joint venture in which we also previously owned a 50% membership interest, arranged for the transloading of the crude oil for DPM into tank cars at its facility in New Town, North Dakota. We leased the tank cars used in the transloading from a number of third party lessors and subleased these tank cars to DPM. We, on behalf of DPM, contracted with Canadian Pacific Railway (“CPR”) for the transportation of the tank cars and the crude oil from New Town, North Dakota to a customer in New Brunswick, Canada. CPR subcontracted a portion of that route to Montreal, Maine and Atlantic Railway (“MMA”). On July 6, 2013, the freight train operated by MMA with tank cars carrying approximately 50,000 barrels of crude oil derailed in Lac-Mégantic, Quebec (the “Derailment”). The Derailment resulted in significant loss of life, damage to the environment from spilled crude oil and extensive property damage. 

 

Between 2013 and 2015, we, certain of our subsidiaries, DPM and DPTS, along with a number of third parties, were sued in various actions in both the United States and Canada, by multiple third parties seeking economic, compensatory  and punitive damages allegedly caused by the Derailment.  In addition, in 2013, the Quebec Minister for Sustainable Development, Environment, Wildlife and Parks (the “Minister”) issued an order requiring us to recover the spilled crude oil caused by the incident and to otherwise fully remediate the impact of the incident on the environment.

 

On June 8, 2015, we entered into a settlement agreement (the “Settlement Agreement”) with the Trustee (the “Trustee”) for the U.S. bankruptcy estate of Montreal, Maine & Atlantic Railway, Ltd., Montreal, Maine and Atlantic Canada Co. (“MMAC”), and the monitor (the “Monitor”) in MMAC’s Canadian bankruptcy (collectively, the “MMA Parties”) resolving all claims arising out of the Derailment.  On December 22, 2015,the effective date of the bankruptcy plans filed by the Trustee in the U.S. and by MMAC in Canada (the “U.S. Bankruptcy Plan” and the “CCAA Plan” respectively, each a “Plan” and collectively the “Plans”), the Settlement Agreement became final and effective . 

 

Pursuant to the Settlement Agreement, we contributed US$110 million (the “Settlement Payment”) to a compensation fund established to compensate parties who suffered losses as a result of the Derailment. As part of the settlement, we also assigned to the Trustee and MMAC certain claims we have against third parties arising out of the Derailment.  The Settlement Payment, as well as substantially all of the related costs and expenses have been recovered from insurance.

 

In consideration of the Settlement Payment and the assignment of claims to the Trustee and MMAC, we, as well as our former joint ventures, DPTS Marketing, LLC and Dakota Petroleum Transport Solutions, LLC and each of their affiliates (collectively, the “WFS Parties”), received, and will continue to receive, the benefit of the global releases and injunctions set forth in the Plans. These global releases and injunctions bar all claims which may exist now or in the future against the WFS Parties arising out of the Derailment, other than criminal claims which by law may not be released.   Under the terms of the Plans and the Settlement Agreement, all actions pending against us were required to be dismissed.  Multiple actions have already been dismissed and we expect all actions currently pending against us to be dismissed in due course.

 

 

Other Matters

We are a party to various claims, complaints and proceedings arising in the ordinary course of our business operations including, but not limited to: (i) commercial and governmental contract claims, such as property damage, demurrage, personal injury, billing and fuel quality claims, (ii) environmental claims, (iii) bankruptcy preference claims and (iv) tax and administrative claims. We are not currently a party to any such claim, complaint or proceeding that we expect to have a material adverse effect on our business or financial condition. However, any adverse resolution of one or more such claims, complaints or proceedings during a particular reporting period could have a material adverse effect on our consolidated financial statements or disclosures for that period.

Item 4. Mine Safety Disclosures

Not applicable.

 

PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol INT. As of December 31, 2015, the closing price of our stock on the NYSE was $38.46. The following table sets forth, for each quarter in 2015 and 2014, the high and low closing sales prices of our common stock as reported by the NYSE.

 

As of February 4, 2016, there were 369 shareholders of record of our common stock.

Cash Dividends

The following table sets forth the amount, the declaration date, record date and payment date for each quarterly cash dividend declared in 2015 and 2014.

 

Our Credit Facility and Term Loans restrict the payment of cash dividends to a maximum of the sum of (i) $50.0 million plus (ii) 50% of the cumulative consolidated net income for each fiscal quarter beginning with the fiscal quarter ended March 31, 2010, plus (iii) 100% of the net proceeds of all equity issuances made after October 2013. For additional information regarding our Credit Facility and Term Loans, see Note 6 to the accompanying consolidated financial statements, included herein, and “Liquidity and Capital Resources” in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Stock Performance

This graph compares the total shareholder return on our common stock with the total return on the Russell 2000 Index and the S&P Energy Index for the five‑year period from December 31, 2010 through December 31, 2015. The cumulative return includes reinvestment of dividends.

Fiscal year ending December 31.

 

Copyright© 2016 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

Copyright© 2016 Russell Investment Group. All rights reserved.

 

 

Equity Compensation Plans

The following table summarizes securities authorized for issuance related to outstanding restricted stock units (“RSUs”) and stock‑settled stock appreciation rights (“SSAR Awards”) under our equity compensation plan (which was approved by our shareholders) and available for future issuance under our equity compensation plan as of December 31, 2015 (in millions, except weighted average price data):

 

 

(1) Calculated without taking into account shares of common stock subject to the RSUs reported in column (a) and that will become issuable following vesting of such RSUs without any cash consideration or other payment required.

Issuer Purchases of Equity Securities

The following table presents information with respect to repurchases of common stock made by us during the quarterly period ended December 31, 2015 (in thousands, except average price per share):

 

 

 

For information on repurchases of common stock for the first three quarters of 2015, see the corresponding Quarterly Report on Form 10-Q.

Item 6. Selected Financial Data

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and related notes thereto and Part II, Item 7 of this report appearing under the caption, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial data and “Risk Factors” included elsewhere in this 2015 10‑K Report. The historical results are not necessarily indicative of the operating results to be expected in the future. All financial information presented has been prepared in U.S. dollars and in accordance with accounting principles generally accepted (“GAAP”) in the United States.

WORLD FUEL SERVICES CORPORATION AND SUBSIDIARIES

SELECTED CONSOLIDATED FINANCIAL DATA

(In millions, except earnings and dividends per share data)

 

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with “Item 6 – Selected Financial Data,” and with the accompanying consolidated financial statements and related notes thereto appearing elsewhere in this 2015 10‑K 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” and under “Forward-Looking Statements.”

Overview

We are a global fuel logistics, transaction management and payment processing company, principally engaged in the distribution of fuel and related products and services in the aviation, marine and land transportation industries. 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 primarily contract with third parties for the delivery and storage of fuel products, however, we also operate storage facilities and transportation assets. 

Reportable Segments

We operate in three reportable segments consisting of aviation, marine and land.  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 as well as intergovernmental organizations. 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, offshore rig owners and operators, the U.S. and foreign governments as well as other fuel suppliers. In our land segment, we offer fuel, crude oil, lubricants and related products and services to petroleum distributors operating in the land transportation market, retail petroleum operators, and industrial, commercial, residential and government customers.  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. In addition, we offer transaction management services which consist of card payment solutions and merchant processing services to customers, primarily in the aviation, marine and land transportation industries.

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.

The results of operations include the results of (i) Pester commencing on September 1, 2015, (ii) Watson Petroleum commencing on March 7, 2014 and (iii) Colt commencing on July 29, 2014; their respective acquisition dates.

 

Selected financial information with respect to our business segments is provided in Note 11 to the accompanying consolidated financial statements included in this 2015 10‑K Report.

Results of Operations

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 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. 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 and gas prices. 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 further deterioration in the world economy, declines in the transportation industry, natural disasters and continued conflicts and instability in the Middle East, Asia and Latin America, as well as potential future terrorist activities and possible military retaliation. In addition, because fuel costs represent a significant part of our customers’ operating expenses, volatile and/or high fuel prices can adversely affect our customers’ businesses, and, consequently, the demand for our services and our results of operations. Our hedging activities may not be effective to mitigate volatile fuel prices and may expose us to counterparty risk. See “Item 1A – Risk Factors” of this 2015 10‑K Report.

2015 compared to 2014

Revenue.  Our revenue for 2015 was $30.4 billion, a decrease of $13.0 billion, or 30.0%, as compared to 2014. Our revenue during these periods was attributable to the following segments (in millions):

 

Our aviation segment revenue for 2015 was $11.7 billion, a decrease of $5.5 billion, or 32.0% as compared to 2014. Of the decrease in aviation segment revenue, $7.4 billion was due to a decrease in the average price per gallon sold as a result of lower average jet fuel prices in 2015 as compared to 2014, which was partially offset by $1.9 billion principally due to increased volume attributable to new and existing customers.

Our marine segment revenue for 2015 was $9.4 billion, a decrease of $4.5 billion, or 32.3% as compared to 2014. Of the decrease in marine segment revenue, $8.2 billion was due to a decrease in the average price per metric ton sold as a result of lower average marine fuel prices in 2015 as compared to 2014, which was partially offset by $3.7 billion due to increased volume attributable to new and existing customers.

Our land segment revenue for 2015 was $9.3 billion, a decrease of $3.0 billion, or 24.4%, as compared to 2014. Of the decrease in land segment revenue, $5.0 billion was due to a decrease in the average price per gallon sold as a result of lower average land fuel prices in 2015 as compared to 2014, which was partially offset by $1.6 billion due to increased volume attributable to new and existing customers and $0.4 billion due to revenue from acquired businesses.

Gross Profit.  Our gross profit for 2015 was $860.5 million, an increase of $46.9 million, or 5.8%, as compared to 2014. Our gross profit during these periods was attributable to the following segments (in millions):

 

 

Our aviation segment gross profit for 2015 was $361.4 million, an increase of $39.8 million, or 12.4%, as compared to 2014. Of the increase in aviation segment gross profit, $31.0 million was due to increased volume attributable to new and existing customers and $28.7 million was due to gross profit from acquired businesses. These increases were partially offset by $19.9 million in lower gross profit per gallon sold due to fluctuations in customer mix.

Our marine segment gross profit for 2015 was $189.6 million, a decrease of $16.0 million, or 7.8%, as compared to 2014. Of the decrease in marine segment gross profit, $71.2 million was due to lower gross profit per metric ton sold in 2015 as compared to 2014 due to fluctuations in customer mix, which was partially offset by $55.2 million in increased volume attributable to new and existing customers.

Our land segment gross profit for 2015 was $309.5 million, an increase of $23.1 million, or 8.1%, as compared to 2014. Of the increase in land segment gross profit, $37.5 million was due to increased volume attributable to new and existing customers and $28.2 million was due to gross profit from acquired businesses. These increases were partially offset by $42.6 million in lower gross profit per gallon sold due to fluctuations in customer mix.  

 

Operating Expenses.  Total operating expenses for 2015 were $613.3 million, an increase of $68.8 million, or 12.6%, as compared to 2014. The following table sets forth our expense categories (in millions):

 

 

Of the $46.0 million increase in compensation and employee benefits, $24.4 million was due to the inclusion of expenses from acquired businesses and $21.6 million was principally due to compensation for new hires to support our growing global business. Of the $19.1 million increase in general and administrative expenses, $17.2 million was due to the inclusion of expenses from acquired businesses and $1.9 million was due to increased general and administrative expenses to support our growing global business.

Income from Operations.  Our income from operations for 2015 was $247.2 million, a decrease of $21.9 million, or 8.1%, as compared to 2014. Income from operations during these periods was attributable to the following segments (in millions):

 

 

Our aviation segment income from operations for 2015 was $131.7 million, a decrease of $10.6 million, or 7.4%, as compared to 2014. This decrease resulted from a $50.4 million increase in operating expenses, which was partially offset by $39.8 million in higher gross profit. Of the increase in operating expenses, $28.2 million was related to the inclusion of acquired businesses, $3.8 million was related to the termination of the employment agreement of our former Aviation Segment President and $18.4 million was due to increased operating expenses to support our growing global business.

 

Our marine segment income from operations for 2015 was $73.0 million, a decrease of $17.0 million, or 18.9%, as compared to 2014. This decrease resulted from $16.0 million in lower gross profit and a $1.0 million increase in operating expenses.

 

Our land segment income from operations for 2015 was $103.4 million, an increase of $13.1 million, or 14.5%, as compared

to 2014.  This increase resulted from $23.1 million in higher gross profit, which was partially offset by a $10.0 million increase in operating expenses. The increase in operating expenses was principally due to expenses related to acquired businesses.  

 

Corporate overhead costs not charged to the business segments for 2015 were $60.9 million, an increase of $7.4 million, or 13.8%, as compared to 2014. This increase was principally due to increased expenses to support our growing global business.

 

Non-Operating (Expenses) Income, net.  For 2015, we had non-operating expenses, net of $27.9 million, as compared to non-operating income, net of $0.4 million in 2014. This $28.3 million change was principally due to an $18.1 million gain on the sale of our crude oil joint venture interests in 2014, a $6.7 million reduction of equity earnings in 2015 as compared to 2014 and a $4.7 million increase in interest expense and other financing costs, net, as a result of higher average borrowings in 2015 as compared to 2014.  The decrease in earnings from our equity investments is principally related to the sale of our crude oil transloading joint venture in December 2014.

Income Taxes.    For 2015, our effective income tax rate was 16.6% and our income tax provision was $36.3 million, as compared to an effective income tax rate of 19.0% and an income tax provision of $51.1 million for 2014.  The lower effective income tax rate for 2015, as compared to 2014, resulted principally from differences in the results of our subsidiaries in tax jurisdictions with different income tax rates and a 2014 U.S. gain on the sale of the crude oil joint venture interest.  Without the gain on the sale of the crude oil joint venture interest, the 2014 effective income tax rate would have been 17.7%.

Net Loss Attributable to Noncontrolling Interest.    For 2015, net loss attributable to noncontrolling interest was $3.9 million as compared to net loss attributable to noncontrolling interest of $3.3 million for 2014.

Net Income and Diluted Earnings per Common Share.  Our net income for 2015 was $186.9 million, a decrease of $34.9 million, or 15.7%, as compared to 2014. Diluted earnings per common share for 2015 was $2.64 per common share, a decrease of $0.47 per common share, or 15.1% as compared to 2014.

Non‑GAAP Net Income and Non‑GAAP Diluted Earnings per Common Share.  Our non‑GAAP net income for 2015 was $225.1 million, a decrease of $23.9 million, or 9.6%, as compared to 2014. Non‑GAAP diluted earnings per common share for 2015 was $3.18 per common share, a decrease of $0.31 per common share, or 8.9%, as compared to 2014. The following table sets forth the reconciliation between our net income and non‑GAAP net income for 2015 and 2014 (in millions):

 

 

The following table sets forth the reconciliation between our diluted earnings per common share and our non‑GAAP diluted earnings per common share for 2015 and 2014:

 

 

The non-GAAP financial measures exclude costs associated with share-based compensation, amortization of acquired intangible assets, expenses related to acquisitions, deferred revenue purchase accounting adjustments, the termination of employment agreement, the executive non-renewal charge and the gain on the sale of the crude oil joint venture interests (net of certain related operating expenses) 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 acquisitions, the termination of employment agreement, the executive non-renewal charge and the gain on the sale of the crude oil joint venture interests (net of certain related operating) expenses are useful for purposes of evaluating operating performance of our core operating results and comparing them period over period. In accordance with the fair value provisions applicable to the accounting for business combinations, acquired deferred revenue is often recorded on the opening balance sheet at an amount that is lower than the historical carrying value.  Although this acquisition accounting requirement has no impact on our business or cash flows, it adversely impacts our reported GAAP revenue in the reporting periods following an acquisition. We believe that the exclusion of the deferred revenue purchase accounting adjustment is useful to investors as an additional means to reflect trends of our business and provides investors with financial information that facilitates comparison of both historical and future results.  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.

 

2014 compared to 2013

Revenue.  Our revenue for 2014 was $43.4 billion, an increase of $1.8 billion, or 4.4%, as compared to 2013. Our revenue during these periods was attributable to the following segments (in millions):

 

Our aviation segment revenue for 2014 was $17.3 billion, an increase of $1.2 billion, or 7.3% as compared to 2013. Of the increase in aviation segment revenue, $2.5 billion was due to increased volume attributable to new and existing customers, which was partially offset by $1.3 billion due to a decrease in the average price per gallon sold as a result of lower average jet fuel prices in 2014 as compared to 2013.

Our marine segment revenue for 2014 was $13.8 billion, a decrease of $0.9 billion, or 6.4% as compared to 2013. Of the decrease in marine segment revenue, $0.5 billion was due to decreased volume and $0.4 billion was due to a decrease in the average price per metric ton sold in 2014 as compared to 2013.

Our land segment revenue for 2014 was $12.3 billion, an increase of $1.6 billion, or 14.9%, as compared to 2013. Of the increase in land segment revenue, $2.1 billion was due to revenue from acquired businesses and $0.6 billion was due to increased volume attributable to new and existing customers, which was partially offset by $1.1 billion due to a decrease in the average price per gallon sold as a result of lower average land fuel prices in 2014 as compared to 2013.

 

Gross Profit.  Our gross profit for 2014 was $813.6 million, an increase of $60.8 million, or 8.1%, as compared to 2013. Our gross profit during these periods was attributable to the following segments (in millions):

 

 

Our aviation segment gross profit for 2014 was $321.6 million, a decrease of $5.6 million, or 1.7%, as compared to 2013. Of the decrease in aviation segment gross profit, $67.4 million was due to lower gross profit per gallon sold principally due to changes in customer mix. This decrease was partially offset by an increase of $49.4 million due to increased volume attributable to new and existing customers and $12.4 million due to gross profit from acquired businesses.

Our marine segment gross profit for 2014 was $205.6 million, an increase of $28.5 million, or 16.1%, as compared to 2013. Of the increase in marine segment gross profit, $35.0 million was due to increased gross profit per metric ton sold principally due to certain higher margin business activity, which was partially offset by $6.5 million due to decreased volume.

Our land segment gross profit for 2014 was $286.4 million, an increase of $37.9 million, or 15.3%, as compared to 2013. Of the increase in land segment gross profit, $51.2 million was due to gross profit from acquired businesses and $13.6 million was due to increased volume attributable to new and existing customers.  This increase was partially offset by $17.0 million in lower gross profit per gallon sold principally due to fluctuations in customer mix. Additionally, our crude oil transloading joint venture, which was deconsolidated effective December 31, 2013, generated $9.9 million in gross profit in 2013 and is not included in our land segment gross profit in 2014.

Operating Expenses.    Total operating expenses for 2014 were $544.5 million, an increase of $56.2 million, or 11.5%, as compared to 2013. The following table sets forth our expense categories (in millions):

 

The $31.8 million increase in compensation and employee benefits was principally due to the inclusion of $27.3 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. The $7.9 million decrease in provision for bad debt was primarily due to an overall decrease in accounts receivable balances throughout the second half of the year as a result of declining world oil prices.  The $32.3 million increase in general and administrative expenses was due to the inclusion of $24.6 million in expenses from acquired businesses and acquisition related expenses and $7.7 million principally due to increased professional fees and general insurance expenses.

Income from Operations.    Our income from operations for 2014 was $269.1 million, an increase of $4.6 million, or 1.7%, as compared to 2013. Income from operations during these periods was attributable to the following segments (in millions):

 

 

Our aviation segment income from operations for 2014 was $142.3 million, a decrease of $8.6 million, or 5.7%, as compared to 2013. This decrease resulted from $5.6 million in lower gross profit and a $3.0 million increase in operating expenses.  Of the increase in aviation segment operating expenses, $9.6 million was due to the inclusion of acquired businesses, which was partially offset by a decrease of $6.6 million principally due to compensation and employee benefits.

Our marine segment income from operations for 2014 was $90.0 million, an increase of $16.2 million, or 21.9%, as compared to 2013. This increase resulted from $28.6 million in higher gross profit, which was partially offset by an increase of $12.3 million in operating expenses.  The increase in marine segment operating expenses was principally due to compensation and employee benefits.

Our land segment income from operations for 2014 was $90.3 million, an increase of $5.5 million, or 6.5%, as compared to 2013. This increase resulted from $37.9 million in higher gross profit which was partially offset by an increase of $32.4 million in operating expenses. Of the increase in land segment operating expenses, $40.0 million was due to the inclusion of acquired businesses, which was partially offset by a decrease of $7.6 million principally due to compensation and employee benefits and provision for bad debt. 

Corporate overhead costs not charged to the business segments for 2014 were $53.5 million, an increase of $8.5 million, or 18.8%, as compared to 2013. This increase was primarily attributable to the $4.8 million executive non-renewal charge and $3.8 million in increased professional fees.

Non‑Operating Income (Expenses), net.    For 2014, we had non-operating income, net of $0.4 million, as compared to non-operating expenses, net of $17.7 million in 2013. This $18.1 million change was due to an $18.1 million gain on the sale of our crude oil joint venture interests in December 2014.  Also impacting the change was a $8.0 million increase in interest expense and other financing costs, net, as a result of higher average borrowings in 2014 as compared to 2013, offset by a $5.4 million increase in earnings from our equity investments and a $2.6 million decrease in other non-operating expenses.  The increase in earnings from our equity investments is principally related to the 2013 deconsolidation of our crude oil transloading joint venture effective December 31, 2013, which thereafter was accounted for under the equity method until its sale in December 2014.

Income Taxes.    For 2014, our effective income tax rate was 19.0% and our income tax provision was $51.1 million, as compared to an effective income tax rate of 16.0% and an income tax provision of $39.5 million for 2013.  The higher effective income tax rate for 2014 resulted primarily from differences in the results of our subsidiaries in tax jurisdictions with different income tax rates and a U.S. gain on the sale of the crude oil joint venture interests as compared to 2013.  Without the gain on the sale of the crude oil joint venture interests, for 2014, our effective income tax rate would have been 17.7%.

Net (Loss) Income Attributable to Noncontrolling Interest.    For 2014, net loss attributable to noncontrolling interest was $3.3 million as compared to net income attributable to noncontrolling interest of $4.1 million for 2013.  This $7.4 million change is primarily related to the deconsolidation of our crude oil transloading joint venture effective December 31, 2013.  Prior to the deconsolidation of this joint venture, its results were included in our results of operations and we recorded net income attributable to noncontrolling interest.

Net Income and Diluted Earnings per Common Share.    Our net income for 2014 was $221.7 million, an increase of $18.7 million, or 9.2%, as compared to 2013. Diluted earnings per common share for 2014 was $3.11 per common share, an increase of $0.28 per common share, or 9.9% as compared to 2013.

Non‑GAAP Net Income and Non‑GAAP Diluted Earnings per Common Share.    Our non‑GAAP net income for 2014 was $249.1 million, an increase of $18.6 million, or 8.1%, as compared to 2013. Non‑GAAP diluted earnings per common share for 2014 was $3.49 per common share, an increase of $0.27 per common share, or 8.4%, as compared to 2013. The following table sets forth the reconciliation between our net income and non‑GAAP net income for 2014 and 2013 (in millions):

 

 

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

 

 

The non‑GAAP financial measures exclude costs associated with share based compensation, amortization of acquired intangible assets, expenses related to acquisitions, the executive non-renewal charge and the gain on the sale of the crude oil venture interests (net of certain related operating expenses) 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 acquisitions, the executive non-renewal charge and the gain on the sale of the crude oil venture interests (net of certain related operating expenses) 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.

Liquidity and Capital Resources

Cash Flows

The following table reflects the major categories of cash flows for 2015, 2014 and 2013. For additional details, please see the consolidated statements of cash flows in the consolidated financial statements.

 

2015 compared to 2014

 

Operating Activities.  For 2015, net cash provided by operating activities was $447.5 million as compared to $141.2 million for 2014. The  $306.3 million increase in operating cash flows was primarily due to year-over-year changes in assets and liabilities, net of acquisitions.

Investing Activities.  For 2015, net cash used in investing activities was $144.7 million as compared to $297.1 million for 2014. The $152.4 million decrease in cash used in investing activities was principally due to a decrease in the cash used for the acquisition of businesses in 2015 as compared to 2014.  

Financing Activities.  For 2015, net cash used in financing activities was $17.1 million as compared to $169.5 million provided by financing activities for 2014. The  $186.6 million decrease in cash provided by financing activities was principally due to a $126.6 decrease in net borrowing in 2015 as compared to 2014 and $60.5 million increase of common stock repurchases in 2015 as compared to 2014.

2014 compared to 2013

Operating Activities.  For 2014, net cash provided by operating activities was $141.2 million as compared to $264.3 million for 2013. The $123.1 million decrease in operating cash flows was principally due to unfavorable year‑over‑year changes in assets and liabilities, net of acquisitions.

Investing Activities.  For 2014, net cash used in investing activities was $297.1 million as compared to $174.5 million for 2013. The $122.6 million increase in cash used in investing activities was principally due to an increase in the cash used for the acquisition of businesses in 2014

Financing Activities.  For 2014, net cash provided by financing activities was $169.5 million as compared to $29.5 million for 2013. The $140.0 million increase in cash provided by financing activities was principally due to increased net borrowing under our Credit Facility in 2014 compared to 2013.

Other Liquidity Measures

Cash and Cash Equivalents.  As of December 31, 2015 and 2014, we had cash and cash equivalents of $582.5 million and $302.3 million, respectively. 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.

 

In 2015, we committed to undertake a multi-year project designed to drive greater improvement in operating efficiencies and optimize scalability designed to incorporate acquisitions that we may undertake in the future.  We will accomplish this

in part by a global design and deployment of an upgrade to our existing ERP platform. We are currently in the early planning phase and the cost incurred to date is not considered significant.  We expect the total cost of the project over the next three years to range between $30.0 million and $40.0 million.

 

Credit Facility and Term Loans.    We have a Credit Facility which permits borrowing up to $1.26 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 $416.0 million and $420.0 million as of December 31, 2015 and 2014, respectively. Our issued letters of credit under the Credit Facility totaled $5.5 million and $14.8 million as of December 31, 2015 and 2014, respectively.  We also had $333.2 million and $241.3 million in Term Loans outstanding as of December 31, 2015 and 2014, respectively.  As of December 31, 2015 and 2014, the unused portion of our Credit Facility was $838.5 million and $665.2 million, respectively.

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 and other covenants with which we are required to comply. Our failure to comply with the 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 certain other agreements to which we are a party and impair our ability to obtain working capital advances and issue letters of credit, which would have a material adverse effect on our business, financial condition, results of operations and cash flows. As of December 31, 2015, we were in compliance with all financial and other covenants contained in our Credit Facility and our Term Loans.

Other Credit Lines and Receivables Purchase Agreements.  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 December 31, 2015 and 2014, our outstanding letters of credit and bank guarantees under these credit lines totaled $208.4 million and $211.4 million, respectively. We also have Receivables Purchase Agreements (“RPAs”) that allow for the sale of up to an aggregate of $499.0 million of our accounts receivable. As of December 31, 2015, we had sold accounts receivable of $118.4 million under the RPAs.

Short‑Term Debt.  As of December 31, 2015, our short‑term debt of $25.5 million primarily represents the current maturities (within the next twelve months) of Term Loan borrowing, certain promissory notes related to acquisitions and capital lease obligations.

We believe that our cash and cash equivalents as of December 31, 2015 (of which $137.3 million was available for use by our U.S. subsidiaries without incurring additional costs) and available funds from 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 by 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

Our significant contractual obligations and off‑balance sheet arrangements are set forth below. For additional information on any of the following and other contractual obligations and off‑balance sheet arrangements, see Notes 6 and 7 in the notes to the consolidated financial statements in Item 15 of this 2015 10‑K Report.