WKC 10-Q
World Kinect Corp (WKC)
10-Q
2023-10-27
For: 2023-09-30
View Original
Added on
April 11, 2026
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from __________ to ___________
COMMISSION FILE NUMBER 001-09533
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (Address of Principal Executive Offices) (Zip Code) | (I.R.S. Employer Identification No.) | ||||||||||||||||||||||||
| ( | ) | |||||||||||||||||||||||||
| Registrant’s telephone number, including area code | ||||||||||||||||||||||||||
| Securities registered pursuant to Section 12(b) of the Act | ||||||||||||||||||||||||||
| Title of each class | Trading Symbol (s) | Name of each exchange on which registered | ||||||||||||||||||||||||
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 þ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes þ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
The registrant had a total of 60,201,835 shares of common stock, par value $0.01 per share, issued and outstanding as of October 20, 2023.
TABLE OF CONTENTS
Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 | ||||||||
Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2023 and 2022 | ||||||||
Condensed Consolidated Statements of Shareholders' Equity for the Three and Nine Months Ended September 30, 2023 and 2022 | ||||||||
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 | ||||||||
| SIGNATURES | ||||||||
Part I — Financial Information
Item 1. Financial Statements
WORLD KINECT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - In millions, except per share data)
| September 30, 2023 | December 31, 2022 | |||||||||||||
| Assets: | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
Accounts receivable, net of allowance for credit losses of $ | ||||||||||||||
| Inventories | ||||||||||||||
| Prepaid expenses | ||||||||||||||
| Short-term derivative assets, net | ||||||||||||||
| Other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property and equipment, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Identifiable intangible assets, net | ||||||||||||||
| Other non-current assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Current maturities of long-term debt | $ | $ | ||||||||||||
| Accounts payable | ||||||||||||||
| Short-term derivative liabilities, net | ||||||||||||||
| Accrued expenses and other current liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies | ||||||||||||||
| Equity: | ||||||||||||||
| World Kinect shareholders' equity: | ||||||||||||||
Preferred stock, $ | ||||||||||||||
Common stock, $ | ||||||||||||||
| Capital in excess of par value | ||||||||||||||
| Retained earnings | ||||||||||||||
| Accumulated other comprehensive income (loss) | ( | ( | ||||||||||||
| Total World Kinect shareholders' equity | ||||||||||||||
| Noncontrolling interest | ||||||||||||||
| Total equity | ||||||||||||||
| Total liabilities and equity | $ | $ | ||||||||||||
The accompanying Notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
1
WORLD KINECT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(Unaudited – In millions, except per share data)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost of revenue | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Compensation and employee benefits | ||||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||||
| Asset impairments | ||||||||||||||||||||||||||
| Restructuring charges | ( | ( | ||||||||||||||||||||||||
| Total operating expenses | ||||||||||||||||||||||||||
| Income from operations | ||||||||||||||||||||||||||
| Non-operating income (expenses), net: | ||||||||||||||||||||||||||
| Interest expense and other financing costs, net | ( | ( | ( | ( | ||||||||||||||||||||||
| Other income (expense), net | ( | ( | ( | |||||||||||||||||||||||
| Total non-operating income (expense), net | ( | ( | ( | ( | ||||||||||||||||||||||
| Income (loss) before income taxes | ||||||||||||||||||||||||||
| Provision for income taxes | ||||||||||||||||||||||||||
| Net income (loss) including noncontrolling interest | ||||||||||||||||||||||||||
| Net income (loss) attributable to noncontrolling interest | ||||||||||||||||||||||||||
| Net income (loss) attributable to World Kinect | $ | $ | $ | $ | ||||||||||||||||||||||
| Basic earnings (loss) per common share | $ | $ | $ | $ | ||||||||||||||||||||||
| Basic weighted average common shares | ||||||||||||||||||||||||||
| Diluted earnings (loss) per common share | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted weighted average common shares | ||||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||
| Net income (loss) including noncontrolling interest | $ | $ | $ | $ | ||||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ( | ||||||||||||||||||||||
Cash flow hedges, net of income tax expense (benefit) of ($ | ( | ( | ||||||||||||||||||||||||
| Total other comprehensive income (loss) | ( | ( | ( | ( | ||||||||||||||||||||||
| Comprehensive income (loss) including noncontrolling interest | ||||||||||||||||||||||||||
| Comprehensive income (loss) attributable to noncontrolling interest | ||||||||||||||||||||||||||
| Comprehensive income (loss) attributable to World Kinect | $ | $ | $ | |||||||||||||||||||||||
The accompanying Notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
2
WORLD KINECT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited - In millions)
| Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total World Kinect Shareholders' Equity | Noncontrolling Interest Equity | Total Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Amortization of share-based payment awards | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance (cancellation) of common stock related to share-based payment awards | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Purchases of common stock tendered by employees to satisfy the required withholding taxes related to share-based payment awards | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Amortization of share-based payment awards | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance (cancellation) of common stock related to share-based payment awards | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Purchases of common stock tendered by employees to satisfy the required withholding taxes related to share-based payment awards | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Purchases of common stock | ( | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Convertible note hedge transactions | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Warrant transactions | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Amortization of share-based payment awards | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
The accompanying Notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
3
| Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total World Kinect Shareholders' Equity | Noncontrolling Interest Equity | Total Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Amortization of share-based payment awards | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance (cancellation) of common stock related to share-based payment awards | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for acquisition of a business | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Purchases of common stock tendered by employees to satisfy the required withholding taxes related to share-based payment awards | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Purchases of common stock | ( | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Amortization of share-based payment awards | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance (cancellation) of common stock related to share-based payment awards | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Purchases of common stock tendered by employees to satisfy the required withholding taxes related to share-based payment awards | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Purchases of common stock | ( | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Amortization of share-based payment awards | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
The accompanying Notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
4
WORLD KINECT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - In millions)
| For the Nine Months Ended September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net income (loss) including noncontrolling interest | $ | $ | ||||||||||||
| Adjustments to reconcile net income including noncontrolling interest to net cash provided by operating activities: | ||||||||||||||
| Unrealized (gain) loss on derivatives | ( | |||||||||||||
| Depreciation and amortization | ||||||||||||||
| Noncash operating lease expense | ||||||||||||||
| Provision for credit losses | ||||||||||||||
| Share-based payment award compensation costs | ||||||||||||||
| Deferred income tax expense (benefit) | ( | ( | ||||||||||||
| Unrealized foreign currency (gains) losses, net | ( | |||||||||||||
| Other | ||||||||||||||
| Changes in assets and liabilities, net of acquisitions and divestitures: | ||||||||||||||
| Accounts receivable, net | ( | |||||||||||||
| Inventories | ( | |||||||||||||
| Prepaid expenses | ( | ( | ||||||||||||
| Other current assets | ( | ( | ||||||||||||
| Cash collateral with counterparties | ||||||||||||||
| Other non-current assets | ( | ( | ||||||||||||
| Change in derivative assets and liabilities, net | ( | |||||||||||||
| Accounts payable | ( | |||||||||||||
| Accrued expenses and other current liabilities | ( | |||||||||||||
| Other long-term liabilities | ( | ( | ||||||||||||
| Net cash provided by (used in) operating activities | ||||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Acquisition of business, net of cash acquired | ( | |||||||||||||
| Capital expenditures | ( | ( | ||||||||||||
| Other investing activities, net | ( | ( | ||||||||||||
| Net cash provided by (used in) investing activities | ( | ( | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Borrowings of debt | ||||||||||||||
| Repayments of debt | ( | ( | ||||||||||||
| Issuance of Convertible Notes | ||||||||||||||
| Dividends paid on common stock | ( | ( | ||||||||||||
| Repurchases of common stock | ( | ( | ||||||||||||
| Purchase of convertible note hedges | ( | |||||||||||||
| Sale of warrants | ||||||||||||||
| Payments of deferred consideration for acquisitions | ( | ( | ||||||||||||
| Other financing activities, net | ( | ( | ||||||||||||
| Net cash provided by (used in) financing activities | ( | |||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | ||||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | |||||||||||||
| Cash and cash equivalents, as of the beginning of the period | ||||||||||||||
| Cash and cash equivalents, as of the end of the period | $ | $ | ||||||||||||
The accompanying Notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
5
WORLD KINECT CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation, New Accounting Standards, and Significant Accounting Policies
General
World Kinect Corporation (the "Company") was incorporated in Florida in July 1984 and along with its consolidated subsidiaries is referred to collectively in this Quarterly Report on Form 10-Q ("10-Q Report") as "World Kinect," "we," "our" and "us." On June 15, 2023, the Company's shareholders approved an amendment to the Company's Articles of Incorporation, as amended, changing the Company's name from World Fuel Services Corporation to World Kinect Corporation. This change is intended to better reflect the Company's ongoing transformation into a more resilient, diversified energy and solutions provider.
We are a leading global energy management company, offering a broad suite of solutions across the energy product spectrum. In addition to our core energy and fuel offerings to customers in the transportation sector, we provide advisory services, sustainability and renewable energy solutions, as well as supply fulfillment for natural gas and power. We continue to focus on advancing the energy transition to lower carbon alternatives through expanding our portfolio of energy solutions and providing customers with greater access to sustainably sourced energy.
The Condensed Consolidated Financial Statements and related Notes include our parent company and all subsidiaries where we exercise control, and include the operations of acquired businesses after the completion of their acquisition. The decision of whether or not to consolidate an entity requires consideration of majority voting interests, as well as effective economic or other control over the entity. The Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the Notes included in our 2022 Annual Report on Form 10-K ("2022 10-K Report"). All intercompany transactions among our businesses have been eliminated.
New Accounting Standards
Adoption of New Accounting Standards
Disclosure of Supplier Finance Program Obligations. In September 2022, Accounting Standards Update ("ASU") 2022-04 was issued to require the buyer in a supplier finance program to disclose the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented. The amendments do not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments should be applied retrospectively to each period in which a balance sheet is presented, except for the rollforward, which should be applied prospectively. Early adoption was permitted. The Company adopted ASU 2022-04 in the first quarter of 2023 and has included all relevant disclosures below.
Supplier Finance Programs
Under various supplier finance programs, we agree to pay counterparties engaged as paying agents the stated amount of confirmed invoices from our designated suppliers on the original maturity date of the invoices. Under certain of these arrangements, we may also pay fees for the supplier finance platform and related support.
6
Accounting Standards Issued but Not Yet Adopted
There are no recently issued accounting standards not yet adopted by us that are expected, upon adoption, to have a material impact on the Company’s Consolidated Financial Statements or processes.
Significant Accounting Policies
There have been no significant changes in the Company's accounting policies from those disclosed in our 2022 10-K Report. The significant accounting policies we use for quarterly financial reporting are disclosed in Note 1. Basis of Presentation, New Accounting Standards, and Significant Accounting Policies of the accompanying Notes to the Consolidated Financial Statements included in our 2022 10-K Report.
Accounts Receivable and Allowance for Credit Losses
When we extend credit on an unsecured basis, our exposure to credit losses depends on the financial condition of our customers and macroeconomic factors beyond our control, such as global economic conditions or adverse impacts in the industries we serve, changes in oil prices and political instability.
We actively monitor and manage our credit exposure and work to respond to both changes in our customers' financial conditions and macroeconomic events. Based on the ongoing credit evaluations of our customers, we adjust credit limits based upon payment history and our customers' current creditworthiness. However, because we extend credit on an unsecured basis to most of our customers, there is a possibility that any accounts receivable not collected may ultimately need to be written off.
We had accounts receivable, net, of $2.9 billion and $3.3 billion and an allowance for expected credit losses, primarily related to accounts receivable, of $19.4 million and $17.3 million, as of September 30, 2023 and December 31, 2022, respectively. Changes to the expected credit loss provision during the nine months ended September 30, 2023 resulted from the Company's assessment of reasonable and supportable forward-looking information, including global economic outlook considerations. Based on an aging analysis as of September 30, 2023, 94 % of our accounts receivable were outstanding less than 60 days.
The following table sets forth activities in our allowance for expected credit losses (in millions):
| For the Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Balance as of January 1, | $ | $ | |||||||||
| Charges to allowance for credit losses | |||||||||||
| Write-off of uncollectible receivables | ( | ( | |||||||||
| Recoveries of credit losses | |||||||||||
| Translation adjustments | |||||||||||
| Balance as of September 30, | $ | $ | |||||||||
Receivable Purchase Agreements
We have receivable purchase agreements ("RPAs") that allow for the sale of our qualifying accounts receivable in exchange for cash consideration equal to the total balance, less a discount margin, depending on the outstanding accounts receivable at any given time. During the second quarter of 2023, we amended one of our RPAs to, among other things, reduce the overall fee structure.
Accounts receivable sold under the RPAs are accounted for as sales and excluded from Accounts receivable, net of allowance for credit losses on the accompanying Condensed Consolidated Balance Sheets. Fees paid under the RPAs are recorded within Interest expense and other financing costs, net on the Condensed Consolidated Statements of Income and Comprehensive Income.
During the nine months ended September 30, 2023 and 2022, we sold receivables under the RPAs with an aggregate face value of $7.7 billion and $9.9 billion, respectively, and recognized fees of $30.7 million and $29.4 million, respectively.
7
3. Acquisitions
2022 Acquisition
During the first quarter of 2022, we completed the acquisition of Flyers Energy Group, LLC ("Flyers"). Flyers' operations include transportation, commercial fleet fueling, lubricants distribution, and the supply of wholesale, branded and renewable fuels. The total purchase price of $795.0 million included deferred payments totaling $100.0 million. In January 2023, $50 million was paid to the seller and the remaining $50 million outstanding as of September 30, 2023 is expected to be settled in January 2024.
4. Derivative Instruments
We are exposed to a variety of risks including but not limited to, changes in the prices of commodities that we buy or sell, changes in foreign currency exchange rates, changes in interest rates, and the creditworthiness of each of our counterparties. While we attempt to mitigate these fluctuations through hedging, such hedges may not be fully effective.
Our risk management program includes the following types of derivative instruments:
Fair Value Hedges. Derivative contracts we hold to hedge the risk of changes in the price of our inventory.
Cash Flow Hedges. Derivative contracts we execute to mitigate the risk of price and interest rate volatility in forecasted transactions.
Non-designated Derivatives. Derivatives we primarily transact to mitigate the risk of market price fluctuations in swaps or futures contracts, as well as certain forward fixed price purchase and sale contracts to hedge the risk of currency rate fluctuations and for portfolio optimization.
The following table summarizes the gross notional values of our derivative contracts used for risk management purposes (in millions):
| Unit | September 30, 2023 | |||||||||||||
| Commodity contracts | ||||||||||||||
| Long | BBL | |||||||||||||
| Short | BBL | ( | ||||||||||||
| Foreign currency exchange contracts | ||||||||||||||
| Sell U.S. dollar, buy other currencies | USD | ( | ||||||||||||
| Buy U.S. dollar, sell other currencies | USD | |||||||||||||
| Interest rate contracts | ||||||||||||||
| Interest rate swap | USD | |||||||||||||
While the majority of our foreign currency exchange contracts and the volume related to our commodities contracts are expected to settle within the next year, our interest rate swap agreement matures in March 2025.
8
Assets and Liabilities
The following table presents the gross fair value of our derivative instruments and their locations on the Condensed Consolidated Balance Sheets (in millions):
| Condensed Consolidated Balance Sheets Location | Gross Derivative Assets | Gross Derivative Liabilities | |||||||||||||||||||||||||||
| Derivative Instruments | September 30, 2023 | December 31, 2022 | September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||||||||||||||
| Commodity contracts | Short-term derivative assets, net | $ | $ | $ | $ | ||||||||||||||||||||||||
| Short-term derivative liabilities, net | |||||||||||||||||||||||||||||
| Interest rate contracts | Short-term derivative assets, net | ||||||||||||||||||||||||||||
| Other non-current assets | |||||||||||||||||||||||||||||
| Total derivatives designated as hedging instruments | |||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||
| Commodity contracts | Short-term derivative assets, net | ||||||||||||||||||||||||||||
| Other non-current assets | |||||||||||||||||||||||||||||
| Short-term derivative liabilities, net | |||||||||||||||||||||||||||||
| Other long-term liabilities | |||||||||||||||||||||||||||||
| Foreign currency contracts | Short-term derivative assets, net | ||||||||||||||||||||||||||||
| Other non-current assets | |||||||||||||||||||||||||||||
| Short-term derivative liabilities, net | |||||||||||||||||||||||||||||
| Other long-term liabilities | |||||||||||||||||||||||||||||
| Total derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||
| Total derivatives | $ | $ | $ | $ | |||||||||||||||||||||||||
For information regarding our derivative instruments measured at fair value after netting and collateral, see Note 5. Fair Value Measurements.
The following amounts were recorded on our Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges (in millions):
| Line item in the Consolidated Balance Sheets in which the hedged item is included | Carrying Amount of Hedged Assets/(Liabilities) | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Asset/(Liabilities) | ||||||||||||||||||||||||
| September 30, 2023 | December 31, 2022 | September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||
| Inventory | $ | $ | $ | $ | ||||||||||||||||||||||
9
Earnings and Other Comprehensive Income (Loss)
Derivatives Designated as Hedging Instruments
The following table presents, on a pre-tax basis, the location and amount of gains (losses) on fair value and cash flow hedges recognized in income in our Condensed Consolidated Statements of Income and Comprehensive Income (in millions):
| For the Three Months Ended | ||||||||||||||||||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||||||||||||||||
| Revenue | Cost of revenue | Interest expense and other financing costs, net | Revenue | Cost of revenue | Interest expense and other financing costs, net | |||||||||||||||||||||||||||||||||
| Total amounts of income and expense line items in which the effects of fair value or cash flow hedged are recorded | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Gains (losses) on fair value hedge relationships: | ||||||||||||||||||||||||||||||||||||||
| Commodity contracts: | ||||||||||||||||||||||||||||||||||||||
| Hedged item | ( | |||||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | ( | |||||||||||||||||||||||||||||||||||||
| Amount excluded from effectiveness testing recognized in earnings based on amortization approach | ||||||||||||||||||||||||||||||||||||||
| Gains (losses) on cash flow hedge relationships: | ||||||||||||||||||||||||||||||||||||||
| Commodity contracts: | ||||||||||||||||||||||||||||||||||||||
| Amount of gain (loss) reclassified from Accumulated other comprehensive income (loss) into net income | ( | |||||||||||||||||||||||||||||||||||||
| Amount excluded from effectiveness testing recognized in earnings based on changes in fair value | ||||||||||||||||||||||||||||||||||||||
| Interest rate contracts: | ||||||||||||||||||||||||||||||||||||||
| Amount of gain (loss) reclassified from Accumulated other comprehensive income (loss) into net income | ( | |||||||||||||||||||||||||||||||||||||
| Amount excluded from effectiveness testing recognized in earnings based on changes in fair value | ||||||||||||||||||||||||||||||||||||||
| Total amount of income and expense line items excluding the impact of hedges | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
10
| For the Nine Months Ended | ||||||||||||||||||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||||||||||||||||
| Revenue | Cost of revenue | Interest expense and other financing costs, net | Revenue | Cost of revenue | Interest expense and other financing costs, net | |||||||||||||||||||||||||||||||||
| Total amounts of income and expense line items in which the effects of fair value or cash flow hedged are recorded | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Gains (losses) on fair value hedge relationships: | ||||||||||||||||||||||||||||||||||||||
| Commodity contracts: | ||||||||||||||||||||||||||||||||||||||
| Hedged item | ||||||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | ( | ( | ||||||||||||||||||||||||||||||||||||
| Amount excluded from effectiveness testing recognized in earnings based on amortization approach | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Gains (losses) on cash flow hedge relationships: | ||||||||||||||||||||||||||||||||||||||
| Commodity contracts: | ||||||||||||||||||||||||||||||||||||||
| Amount of gain (loss) reclassified from Accumulated other comprehensive income (loss) into net income | ( | |||||||||||||||||||||||||||||||||||||
| Amount excluded from effectiveness testing recognized in earnings based on changes in fair value | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Interest rate contracts: | ||||||||||||||||||||||||||||||||||||||
| Amount of gain (loss) reclassified from Accumulated other comprehensive income (loss) into net income | ( | |||||||||||||||||||||||||||||||||||||
| Amount excluded from effectiveness testing recognized in earnings based on changes in fair value | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Total amount of income and expense line items excluding the impact of hedges | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
The following table presents, on a pre-tax basis, the amounts not recorded in Accumulated other comprehensive income (loss) due to intra-period settlement but recognized in Revenue and Cost of revenue in our Condensed Consolidated Statements of Income and Comprehensive Income (in millions):
Gain (Loss) Not Recorded in Accumulated other comprehensive income (loss) Due to Intra-Period Settlement | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||
| Location | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||
| Commodity contracts | Revenue | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||||||
| Commodity contracts | Cost of revenue | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||
For the nine months ended September 30, 2023 and 2022, there were no
As of September 30, 2023, on a pre-tax basis, $0.9 million and $3.3 million is scheduled to be reclassified from Accumulated other comprehensive income (loss) over the next twelve months as a decrease to Revenue and an increase to Cost of revenue, respectively, related to designated commodity cash flow hedges that will mature within the next twelve months.
11
The following tables present the effect and financial statement location of our derivative instruments in cash flow hedging relationships on Accumulated other comprehensive income (loss) and in our Condensed Consolidated Statements of Income and Comprehensive Income (in millions):
| Amount of Gain (Loss) Recognized in Accumulated other comprehensive income (loss), Net of Income Tax (Expense) Benefit | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Commodity contracts (Revenue) | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||
| Commodity contracts (Cost of revenue) | ( | ( | ||||||||||||||||||||||||
| Interest rate contracts (Interest expense and other financing costs, net) | $ | $ | ||||||||||||||||||||||||
| Total gain (loss) | $ | ( | $ | $ | $ | ( | ||||||||||||||||||||
| Amount of Gain (Loss) Reclassified from Accumulated other comprehensive income (loss) into Net income (loss), Net of Income Tax (Expense) Benefit | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||
| Location | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||
| Commodity contracts | Revenue | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||
| Commodity contracts | Cost of revenue | |||||||||||||||||||||||||||||||
| Interest rate contracts | Interest expense and other financing costs, net | ( | ( | |||||||||||||||||||||||||||||
| Total gain (loss) | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||
Derivatives Not Designated as Hedging Instruments
The following table presents the amount and financial statement location in our Condensed Consolidated Statements of Income and Comprehensive Income of realized and unrealized gains (losses) recognized on derivative instruments not designated as hedging instruments (in millions):
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| Derivative Instruments - Non-designated | Location | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||
| Commodity contracts | Revenue | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||
| Cost of revenue | ( | ( | ( | |||||||||||||||||||||||||||||
| ( | ( | |||||||||||||||||||||||||||||||
| Foreign currency contracts | Revenue | ( | ( | |||||||||||||||||||||||||||||
| Other (expense), net | ( | ( | ||||||||||||||||||||||||||||||
| ( | ( | |||||||||||||||||||||||||||||||
| Total gain (loss) | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||
Credit-Risk-Related Contingent Features
We enter into derivative contracts which may require us to post collateral periodically. Certain of these derivative contracts contain credit-risk-related contingent clauses which are triggered by credit events, such as a credit downgrade or if certain defined financial ratios fall below an established threshold. The occurrence of these credit events may require us to post additional collateral or immediately settle the derivative instrument.
12
The following table presents the potential collateral requirements for derivative liabilities with credit-risk-contingent features (in millions):
| September 30, 2023 | December 31, 2022 | |||||||||||||
| Net derivative liability positions with credit contingent features | $ | $ | ||||||||||||
| Collateral posted and held by our counterparties | ( | |||||||||||||
| Maximum additional potential collateral requirements | $ | $ | ||||||||||||
5. Fair Value Measurements
The carrying amounts of cash and cash equivalents, net accounts receivable, accounts payable and accrued expenses and other current liabilities approximate fair value based on their short-term maturities. With the exception of the Convertible Notes issued in June 2023, as discussed in Note 6. Debt, Interest Income, Expense, and Other Finance Costs, the carrying values of our debt and notes receivable approximate fair value as these instruments bear interest either at variable rates or fixed rates, which are not significantly different from market rates. The fair value measurements for our debt and notes receivable are considered to be Level 2 measurements based on the fair value hierarchy.
Recurring Fair Value Measurements
The following tables present information about our gross assets and liabilities that are measured at fair value on a recurring basis (in millions):
| Fair Value Measurements as of September 30, 2023 | |||||||||||||||||||||||
| Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Commodities contracts | $ | $ | $ | $ | |||||||||||||||||||
| Interest rate contract | |||||||||||||||||||||||
| Foreign currency contracts | |||||||||||||||||||||||
| Cash surrender value of life insurance | |||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Commodities contracts | $ | $ | $ | $ | |||||||||||||||||||
| Foreign currency contracts | |||||||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | |||||||||||||||||||
| Fair Value Measurements as of December 31, 2022 | |||||||||||||||||||||||
| Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Commodities contracts | $ | $ | $ | $ | |||||||||||||||||||
| Interest rate contract | |||||||||||||||||||||||
| Foreign currency contracts | |||||||||||||||||||||||
| Cash surrender value of life insurance | |||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Commodities contracts | $ | $ | $ | $ | |||||||||||||||||||
| Foreign currency contracts | |||||||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | |||||||||||||||||||
13
For our derivative contracts, we may enter into master netting, collateral and offset agreements with counterparties. These agreements provide us the ability to offset a counterparty's rights and obligations, request additional collateral when necessary, or liquidate the collateral in the event of counterparty default. We net the fair value of cash collateral paid or received against fair value amounts recognized for net derivative positions executed with the same counterparty under the same master netting or offset agreement.
We have elected to offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements when a legal right of offset exists. The following tables summarize those derivative balances subject to the right of offset as presented on our Condensed Consolidated Balance Sheets (in millions):
| Fair Value as of September 30, 2023 | ||||||||||||||||||||||||||||||||||||||
| Gross Amounts Recognized | Gross Amounts Offset | Net Amounts Presented | Collateral | Gross Amounts without Right of Offset | Net Amounts | |||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||
| Commodities contracts | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Interest rate contract | ||||||||||||||||||||||||||||||||||||||
| Foreign currency contracts | ||||||||||||||||||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||||||||
| Commodities contracts | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Foreign currency contracts | ||||||||||||||||||||||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Fair Value as of December 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Gross Amounts Recognized | Gross Amounts Offset | Net Amounts Presented | Collateral | Gross Amounts without Right of Offset | Net Amounts | |||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||
| Commodities contracts | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Interest rate contract | ||||||||||||||||||||||||||||||||||||||
| Foreign currency contracts | ||||||||||||||||||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||||||||
| Commodities contracts | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Foreign currency contracts | ||||||||||||||||||||||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
At September 30, 2023 and December 31, 2022, we did not present any amounts gross on our Condensed Consolidated Balance Sheets where we had the right of offset.
Concentration of Credit Risk
Our individual over-the-counter ("OTC") counterparty exposure is managed within predetermined credit limits and includes the use of cash-call margins when appropriate, thereby reducing the risk of significant nonperformance. At September 30, 2023, one of our counterparties with a total exposure of $80.3 million represented over 10 % of our credit exposure to OTC derivative counterparties, for which we held cash collateral of $21.1 million.
14
Nonrecurring Fair Value Measurements
The fair values of nonrecurring assets or liabilities measured using Level 3 inputs were not material as of September 30, 2023 and December 31, 2022, respectively.
6. Debt, Interest Income, Expense, and Other Finance Costs
Issuance of Convertible Debt
On June 26, 2023, we issued $350.0 million aggregate principal amount of 3.250 % Convertible Senior Notes due 2028 (the "Convertible Notes"), which reflects the exercise in full of an option to purchase up to an additional $50.0 million in principal amount of the Convertible Notes.
The Convertible Notes mature on July 1, 2028, unless earlier converted, redeemed or repurchased. We may not redeem the Convertible Notes prior to July 6, 2026. Thereafter and until the 61st scheduled trading day immediately preceding the maturity date, we may redeem for cash, if the last reported sale price of our common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide the related Notice of Redemption. Prior to March 1, 2028, the Convertible Notes will be convertible at the option of the holders only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2023 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which, for each trading day of that period, the Trading Price (as defined in the Indenture), as determined following a request by a holder of Convertible Notes in accordance with the procedures described in the Indenture, per $1,000 principal amount of Convertible Notes for such trading day was less than 98 % of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if we call such Convertible Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the Convertible Notes called (or deemed called) for redemption; or (4) upon the occurrence of specified corporate events described in the Indenture. Thereafter and until the second scheduled trading day immediately preceding the maturity date of the Convertible Notes, holders may convert regardless of the foregoing conditions.
The Convertible Notes are senior, unsecured obligations that bear interest at a rate of 3.250 % per year, payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2024. The initial conversion rate was 35.1710 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $28.43 per share. The conversion rate will be subject to adjustment upon the occurrence of certain events but will not be adjusted for accrued and unpaid interest.
Upon conversion, the Convertible Notes will be settled in cash up to the aggregate principal amount of the Convertible Notes to be converted, and in cash, shares of common stock or any combination thereof, at our option, in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount.
In connection with the pricing of the Convertible Notes, we entered into convertible note hedge transactions and warrant transactions. The cost of the convertible note hedge transactions was approximately $70.5 million. The convertible note hedge transactions cover, subject to customary anti-dilution adjustments, the number of shares of common stock that initially underlie the Convertible Notes, and have an initial strike price equal to the initial conversion price of the Convertible Notes. Separately, we received $40.0 million of proceeds from the sale of warrants to acquire, subject to anti-dilution adjustments, the same amount of shares at an initial strike price of $40.14 per share. The net cost of $30.5 million was recorded as a reduction to additional paid-in capital in the Condensed Consolidated Statement of Shareholders’ Equity.
During the three and nine months ended September 30, 2023, we recognized interest expense of $3.5 2.9 3.250 % coupon rate and $0.6
Credit Agreement
The Fourth Amended and Restated Credit Agreement matures in April 2027 and provides for a term loan as well as a revolving credit facility of up to $1.5 billion (the "Credit Facility").
15
Long-Term Debt
Our outstanding debt consists of the following (in millions):
| September 30, 2023 | December 31, 2022 | |||||||||||||
| Credit Facility | $ | $ | ||||||||||||
| Term loan | ||||||||||||||
Notes (1) | ||||||||||||||
| Finance leases | ||||||||||||||
Other (2) | ||||||||||||||
| Total debt | ||||||||||||||
Less: Current maturities of long-term debt and finance leases (2) | ||||||||||||||
| Long-term debt | $ | $ | ||||||||||||
(1)The conversion feature discussed above did not require separate accounting. As a result a liability was recognized for the aggregate principal net of issuance costs. As of September 30, 2023 the net carrying amount of the Convertible Notes includes the aggregate principal amount of $350.0 million, net of unamortized debt issuance costs of $12.1 million. As of September 30, 2023, the fair value of the Convertible Notes is estimated to be approximately $346.0 million using the Level 2 observable input of quoted market prices in an inactive market on the last business day of the period.
(2)Includes secured borrowings of $39.1 million (EUR 37.0 million) as of September 30, 2023 for the transfer of tax receivables.
Interest Expense
The following table provides additional information about our Interest income (expense), and other financing costs, net (in millions):
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Interest income | $ | $ | $ | $ | ||||||||||||||||||||||
| Interest expense and other financing costs | ( | ( | ( | ( | ||||||||||||||||||||||
| Interest expense and other financing costs, net | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
16
7. Revenue from Contracts with Customers
Disaggregated revenue
The following table presents our revenues from contracts with customers disaggregated by major geographic areas in which we conduct business (in millions):
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Aviation | $ | $ | $ | $ | ||||||||||||||||||||||
| Land | ||||||||||||||||||||||||||
| Marine | ||||||||||||||||||||||||||
| Asia Pacific | ||||||||||||||||||||||||||
| Aviation | ||||||||||||||||||||||||||
| Land | ||||||||||||||||||||||||||
| Marine | ||||||||||||||||||||||||||
| EMEA | ||||||||||||||||||||||||||
| Aviation | ||||||||||||||||||||||||||
| Land | ||||||||||||||||||||||||||
| Marine | ||||||||||||||||||||||||||
| LATAM | ||||||||||||||||||||||||||
| Aviation | ||||||||||||||||||||||||||
| Land | ||||||||||||||||||||||||||
| Marine | ||||||||||||||||||||||||||
| North America | ||||||||||||||||||||||||||
Other revenues (excluded from ASC 606) (1) | ( | ( | ||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||||||||||||
(1) Includes revenue from derivatives, leases, and other transactions that we account for under separate guidance.
Accounts receivable, contract assets and contract liabilities
The nature of the receivables related to revenue from contracts with customers and other revenues (excluded from ASC 606) are substantially similar, as they are both generated from transactions with the same type of counterparties (e.g., separate fuel sales and storage lease with the same counterparty) and are entered into utilizing the same credit approval and monitoring procedures for all customers. As such, we believe the risk associated with the cash flows from the different types of receivables is not meaningful to separately disaggregate the accounts receivable balance presented on our Condensed Consolidated Balance Sheets. As of September 30, 2023 and December 31, 2022, the contract assets and contract liabilities recognized by the Company were not material.
8. Income Taxes
Our income tax provision and the respective effective income tax rates are as follows (in millions, except for income tax rates):
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Provision for income taxes | $ | $ | $ | $ | ||||||||||||||||||||||
| Effective income tax rate | % | % | % | % | ||||||||||||||||||||||
17
Our provision for income taxes for the three months ended September 30, 2023 includes a net discrete income tax benefit of $2.7 million, of which $3.2 million relates to the reversal of a valuation allowance previously recorded against the deferred tax assets of certain foreign subsidiaries and states, partially offset by a net tax expense of $0.5 million related to other worldwide adjustments. For the three months ended September 30, 2022, the provision included a net discrete income tax benefit of $1.5 million, of which $3.1 million related to the reversal of a valuation allowance previously recorded against the deferred tax assets of one of our foreign subsidiaries, reduced by a net tax expense of $1.5 million related to other worldwide adjustments.
Our provision for income taxes for the nine months ended September 30, 2023 includes a net discrete income tax benefit of $8.2 million, which includes a benefit of $8.2 million related to the reversal of valuation allowances previously recorded against deferred tax assets of certain foreign subsidiaries and states, as well as other offsetting worldwide adjustments. For the nine months ended September 30, 2022, the provision included a net discrete income tax benefit of $13.3 million, of which a benefit of $9.4 million related to the reversal of valuation allowances previously recorded against the deferred tax assets of two of our foreign subsidiaries and $7.3 million related to the remeasurement of an uncertain tax position and expiration of statute of limitation periods for one of our foreign subsidiaries, reduced by a net tax expense of $3.4 million related to other worldwide tax adjustments.
Our income tax provisions for the three months ended September 30, 2023 and 2022 were calculated based on the estimated annual effective income tax rates for the 2023 and 2022 years, respectively. The actual effective income tax rate for the 2023 year may be materially different for several reasons including differences between estimated versus actual results and the geographic tax jurisdictions in which the results are earned.
We have tax returns under examination in various U.S. state and foreign jurisdictions. The most material of these is in Denmark for the 2013 to 2019 tax years, where one of our subsidiaries has been under audit since 2018. Through September 30, 2023, we have received final tax assessments for the 2013 and 2014 tax years that were immaterial, a proposed tax assessment for the 2015 tax year of approximately $13.6 million (DKK 96.1 million), and proposed tax assessments for the 2016 and 2017 tax years of approximately $19.0 million (DKK 133.8 million) and $22.0 million (DKK 155.5 million), respectively. We believe these assessments are without merit and are vigorously defending against the actions. We have not yet received any proposed assessments related to the 2018 or 2019 tax years, which could be materially larger than the previous assessments if a similar methodology is applied.
In April 2023, we received notification that the U.S. examinations of our 2017 and 2018 tax years are closed as expected.
An unfavorable resolution of one or more of the above matters could have a material adverse effect on our operating results or cash flows in the quarter or year in which the adjustments are recorded, or the tax is due or paid. As examinations are still in process or have not yet reached the final stages of the appeals process, the timing of the ultimate resolution or payments that may be required cannot be determined at this time.
9. Commitments and Contingencies
In December 2021, judgments were entered against one of our subsidiaries in the Singapore High Court in companion actions filed by a financing bank of two of our subsidiary’s suppliers. Each of the claims arose out of a financing arrangement between our subsidiary's supplier and the bank. The resulting judgments, including principal and interest, aggregated to approximately $33 million, which we paid to the bank pending the appeals of the Singapore court judgments. In January 2023, we entered into a settlement agreement with the bank pursuant to which the parties settled for approximately $13 million. As a result, we recognized a loss of $6.5 million during the year ended December 31, 2022. Pursuant to the settlement, in the first quarter of 2023 we recovered approximately $20 million in funds we had previously paid to the bank. In connection with the settlement, we have withdrawn our appeals and the parties have exchanged full and final releases in respect of the matters.
We are also a party to various claims, complaints and proceedings arising in the ordinary course of our business including, but not limited to, environmental claims, commercial and governmental contract claims, such as property damage, demurrage, personal injury, billing and fuel quality claims, as well as bankruptcy preference claims and tax and administrative claims.
From time to time, we are also under review by various domestic and foreign tax authorities regarding indirect tax matters and are involved in various challenges and litigation in a number of countries, including, in particular, South Korea and Brazil, where the amounts in controversy may be material. During 2016 and 2017, the South Korean branch of one of our subsidiaries received assessments totaling approximately $25.4 34.3
18
2011-2014. These assessments do not involve failure to pay or collect VAT. We believe that these assessments are without merit and are currently appealing the actions.
We are also involved in several tax disputes with federal, state and municipal tax authorities in Brazil, relating primarily to a VAT tax known as ICMS. These disputes are at various stages of the legal process, including the administrative review phase and the collection action phase, and include assessments of fixed amounts of principal and penalties, plus interest. One of our Brazilian subsidiaries is currently contesting an assessment of approximately $13.3 million (BRL 66.7 million) from the Brazilian tax authorities relating to the ICMS rate used for certain transactions. The assessment primarily consists of interest and penalties. We believe that the assessment is without merit and are pursuing our remedies in the judicial court system.
We have established loss provisions for claims and other matters in which losses are probable and can be reasonably estimated. As of September 30, 2023, these reserves were not material. For those matters where a reserve has not been established and for which we believe a loss is reasonably possible, we believe that such losses will not have a material adverse effect on our Condensed Consolidated Financial Statements. However, any adverse resolution of one or more such claims, complaints or proceedings during a particular period could have a material adverse effect on our Condensed Consolidated Financial Statements or disclosures for that period.
Our estimates regarding potential losses and materiality are based on our judgment and assessment of the claims utilizing currently available information. Although we will continue to reassess our reserves and estimates based on future developments, our objective assessment of the legal merits of such claims may not always be predictive of the outcome and actual results may vary from our current estimates.
10. Shareholders' Equity
Cash Dividends
During the nine months ended September 30, 2023, the Company's Board of Directors (the "Board") declared quarterly cash dividends of $0.14 8.6 8.4 8.4 0.12 0.12 0.14 7.6 7.4 8.6
Accumulated Other Comprehensive Income (Loss)
Our Accumulated other comprehensive income (loss) consists of foreign currency translation adjustments related to our subsidiaries that have a functional currency other than the U.S. dollar and unrealized gains (losses) from derivative instruments designated as cash flow hedges. The after-tax changes in Accumulated other comprehensive income (loss) by component were as follows (in millions):
| Foreign Currency Translation Adjustments | Cash Flow Hedges | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||
| Balance as of January 1, 2023 | $ | ( | $ | $ | ( | ||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | ( | ( | |||||||||||||||
| Balance as of September 30, 2023 | $ | ( | $ | $ | ( | ||||||||||||
| Balance as of January 1, 2022 | $ | ( | $ | ( | $ | ( | |||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ( | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | |||||||||||||||||
| Balance as of September 30, 2022 | $ | ( | $ | $ | ( | ||||||||||||
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11. Business Segments
We operate in three reportable segments consisting of aviation, land and marine. Our operating segments are determined based on the different markets in which we provide products and services, which are defined primarily by the customers (businesses and governmental) and the products and services provided to those customers. We use Income from operations as our primary measure of profit as we believe it is the most meaningful measure to allocate resources and assess the performance of our segments. Corporate expenses are allocated to the segments based on usage, where possible, or on other factors according to the nature of the activity.
Information concerning our Revenue and Income from operations by reportable segment is as follows (in millions):
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| Revenue: | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Aviation segment | $ | $ | $ | $ | ||||||||||||||||||||||
| Land segment | ||||||||||||||||||||||||||
| Marine segment | ||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Income from operations: | ||||||||||||||||||||||||||
| Aviation segment | $ | $ | $ | $ | ||||||||||||||||||||||
| Land segment | ||||||||||||||||||||||||||
| Marine segment | ||||||||||||||||||||||||||
| Corporate overhead - unallocated | ( | ( | ( | ( | ||||||||||||||||||||||
| Total income from operations | $ | $ | $ | $ | ||||||||||||||||||||||
Information concerning our Accounts receivable, net of allowance for credit losses and Total assets by reportable segment is as follows (in millions):
| September 30, 2023 | December 31, 2022 | |||||||||||||
| Accounts receivable, net: | ||||||||||||||
Aviation segment, net of allowance for credit losses of $ | $ | $ | ||||||||||||
Land segment, net of allowance for credit losses of $ | ||||||||||||||
Marine segment, net of allowance for credit losses of $ | ||||||||||||||
| Total accounts receivable, net | $ | $ | ||||||||||||
| Total assets: | ||||||||||||||
| Aviation segment | $ | $ | ||||||||||||
| Land segment | ||||||||||||||
| Marine segment | ||||||||||||||
| Corporate | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
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12. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share for the periods presented (in millions, except per share amounts):
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Net income attributable to World Kinect | $ | $ | $ | $ | ||||||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||||
| Weighted average common shares for basic earnings per common share | ||||||||||||||||||||||||||
Effect of dilutive securities (1) | ||||||||||||||||||||||||||
| Weighted average common shares for diluted earnings per common share | ||||||||||||||||||||||||||
| Basic earnings (loss) per common share | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted earnings (loss) per common share | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted average securities which are not included in the calculation of diluted earnings per common share because their impact is anti-dilutive or their performance conditions have not been met | ||||||||||||||||||||||||||
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our 2022 10-K Report and the unaudited Condensed Consolidated Financial Statements and related Notes in Item 1 – Financial Statements of this 10-Q Report. A reference to a "Note" herein refers to the accompanying Notes to the Condensed Consolidated Financial Statements contained in Item 1 – Financial Statements. The following discussion may contain forward-looking statements, and our actual results may differ materially from the results suggested by these forward-looking statements. Some factors that may cause our results to differ are disclosed in Item 1A – Risk Factors of our 2022 10-K Report.
Forward-Looking Statements
This 10-Q Report and the information incorporated by reference in it, or made by us in other reports, filings with the U.S. Securities and Exchange Commission (the "SEC"), press releases, teleconferences, industry conferences or otherwise, contain "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," "plan," or words or phrases of similar meaning. Specifically, this 10-Q Report includes forward-looking statements regarding (i) the conditions in the aviation, land, and marine markets and their impact on our business, (ii) our growth strategies, including the position of our land segment to gain market share, (iii) the impact of fuel prices and our working capital, liquidity, and capital expenditure requirements, (iv) our expectations and estimates regarding tax, legal and accounting matters, including the impact on our financial statements, (v) our hedging strategy, (vi) estimates regarding the financial impact of our derivative contracts, (vii) expectations regarding inflation and its impact on us, and (viii) our role in the transition to lower carbon alternatives and the impact of our services on such transition. These forward-looking statements are qualified in their entirety by cautionary statements and risk factor disclosures contained in our SEC filings.
These 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. Although we believe the estimates and projections reflected in the forward-looking statements are reasonable, our expectations may prove to be incorrect. Our actual results may differ materially from the future results, performance or achievements expressed or implied by the forward-looking statements.
Important factors that could cause actual results to differ materially from the results and events anticipated or implied by such forward-looking statements include, but are not limited to:
•customer and counterparty creditworthiness and our ability to collect accounts receivable and settle derivative contracts;
•sudden changes in the market price of fuel or extremely high or low fuel prices that continue for an extended period of time;
•adverse conditions in the industries in which our customers operate;
•our inability to effectively mitigate certain financial risks and other risks associated with derivatives and our physical fuel products;
•relationships with our employees and potential labor disputes associated with employees covered by collective bargaining agreements;
•our failure to comply with restrictions and covenants governing our outstanding indebtedness;
•the impact of cyber and other information security related incidents;
•changes in the political, economic or regulatory environment generally and in the markets in which we operate, such as the current conflicts in Eastern Europe and the Middle East;
•greenhouse gas reduction programs and other environmental and climate change legislation adopted by governments around the world, including cap and trade regimes, carbon taxes, increased efficiency standards and mandates for renewable energy, each of which could increase our operating and compliance costs as well as adversely impact our sales of fuel products;
•changes in credit terms extended to us from our suppliers;
•non-performance of suppliers on their sale commitments and customers on their purchase commitments;
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•non-performance of third-party service providers;
•our ability to effectively integrate and derive benefits from acquired businesses;
•our ability to meet financial forecasts associated with our operating plan;
•lower than expected cash flows and revenues, which could impair our ability to realize the value of recorded intangible assets and goodwill;
•the availability of cash and sufficient liquidity to fund our working capital and strategic investment needs;
•currency exchange fluctuations;
•inflationary pressures and their impact on our customers or the global economy, including sudden or significant increases in interest rates or a global recession;
•our ability to effectively leverage technology and operating systems and realize the anticipated benefits;
•failure to meet fuel and other product specifications agreed with our customers;
•environmental and other risks associated with the storage, transportation and delivery of petroleum products;
•reputational harm from adverse publicity arising out of spills, environmental contamination or public perception about the impacts on climate change by us or other companies in our industry;
•risks associated with operating in high-risk locations, including supply disruptions, border closures and other logistical difficulties that arise when working in these areas;
•uninsured or underinsured losses;
•seasonal variability that adversely affects our revenues and operating results, as well as the impact of natural disasters, such as earthquakes, hurricanes and wildfires;
•declines in the value and liquidity of cash equivalents and investments;
•our ability to retain and attract senior management and other key employees;
•changes in U.S. or foreign tax laws, interpretations of such laws, changes in the mix of taxable income among different tax jurisdictions, or adverse results of tax audits, assessments, or disputes;
•our failure to generate sufficient future taxable income in jurisdictions with material deferred tax assets and net operating loss carryforwards;
•the impact of the U.K.'s exit from the European Union, known as Brexit, on our business, operations and financial condition;
•our ability to comply with U.S. and international laws and regulations, including those related to anti-corruption, economic sanction programs and environmental matters;
•the outcome of litigation and other proceedings, including the costs associated with defending any actions; and
•other risks, including those described in this 10-Q report and in Item 1A – Risk Factors in our 2022 10-K Report, together with those described from time to time in our other filings with the SEC.
We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all of those risks, nor can we assess the impact of all of those risks on our business or the extent to which any factor may cause actual results to differ materially from those contained in any forward-looking statement. 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. Any public statements or disclosures by us following this report that modify or impact any of the forward-looking statements contained in or accompanying this 10-Q Report will be deemed to modify or supersede such forward-looking statements.
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, as amended (the "Exchange Act").
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Business Overview
On June 15, 2023, the Company's shareholders approved an amendment to the Company's Articles of Incorporation, as amended, changing the Company's name from World Fuel Services Corporation to World Kinect Corporation. This change is intended to better reflect the Company's ongoing transformation into a more resilient, diversified energy and solutions provider. Effective at the open of market trading on June 16, 2023, the Company’s common stock began trading on the New York Stock Exchange under its new name as well as the Company’s new ticker symbol, "WKC."
We are a leading global energy management company, offering a broad suite of solutions across the energy product spectrum. In addition to our core energy and fuel offerings to customers in the transportation sector, we provide advisory services, sustainability and renewable energy solutions, as well as supply fulfillment for natural gas and power. We continue to focus on advancing the energy transition to lower carbon alternatives through expanding our portfolio of energy solutions and providing customers with greater access to sustainably sourced energy.
Reportable Segments
We operate in three reportable segments consisting of aviation, land, and marine. For additional discussion on our reportable segments, see "Reportable Segments" under Part I, Item 1 – Business in our 2022 10-K Report. Selected financial information with respect to our business segments is provided in Note 11. Business Segments.
Aviation Segment
Our aviation segment has benefited from growth in our fuel and related service offerings, as well as our enhanced logistics capabilities and the geographic expansion of our aviation fueling operations into additional international airport locations. As part of our business strategy, we hold inventory in order to meet the needs of our customers. While we generally enter into financial derivative contracts to mitigate price risk exposure associated with our inventory, market pricing dynamics may still negatively impact our results. In the first half of 2022, oil futures forward prices traded at significantly lower levels than then-current market prices, resulting in elevated price volatility and a severely backwardated market that negatively impacted our results. The oil futures forward pricing structure has since returned closer to historical trading and volatility levels.
Land Segment
We believe our land segment is well-positioned to continue growing market share, both organically and through leveraging the capabilities of our acquisitions, including Flyers, which we acquired in January 2022, serving to further enhance our business to deliver value-added solutions to our land fuel customers.
We provide energy advisory services, sustainability solutions, as well as supply fulfillment for natural gas and power. We continue to focus on supporting the energy transition through various initiatives and expanding our sustainability offerings, including renewable fuel products, and carbon management and renewable energy solutions. We are continuing to invest in talent in this area, which we believe will help accelerate growth in these activities.
Marine Segment
Due to the generally spot nature of sales in our marine business, we have traditionally benefited from elevated fuel prices and volatility, supply uncertainty, and a constrained credit environment. We have spent a considerable amount of time reorganizing our business to drive internal efficiencies so that we can generate relatively moderate levels of earnings in stable markets and yet remain poised to provide additional value in volatile and credit constrained markets. In 2022, our marine segment delivered exceptional results due to the market conditions arising from the dramatic increase in global oil prices and higher interest rates, as well as the disruption of traditional supply patterns and related price volatility. The lower global oil prices and reduced market volatility experienced in 2023 have impacted our marine segment's performance and we expect the full year 2023 to be materially lower than the extraordinary results produced in 2022.
Macroeconomic Environment
After being relatively moderate in recent years, inflation in the United States and other jurisdictions in which we do business increased significantly beginning in late 2021, primarily driven by supply chain disruptions, labor shortages and increased commodity prices, which has generally resulted in higher costs in 2022 and 2023.
However, to the extent that a rising cost environment impacts our results, there are typically offsetting benefits either inherent in certain parts of our business or that may result from proactive measures we take to reduce the impact of inflation on our net operating results. These benefits can include higher commodity prices that typically result in a constrained credit environment, often creating favorable market conditions that increase demand for our services, as well as our ability to renegotiate prices due to many of our sales contracts being 12 months or less in duration.
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Additionally, we take measures to mitigate the impact of increases in fuel prices through comprehensive hedging programs and the use of financial derivative contracts.
For these reasons, the increased cost environment, caused in part by inflation, has not had a material impact on our historical results of operations for the periods presented in this report. However, a significant or prolonged period of high inflation, particularly when combined with rising interest rates due to actions taken by governments to attempt to control inflation, could adversely impact our results if costs, including employee compensation driven by competitive job market conditions, were to increase at a rate greater than the increase in the revenues we generate. Higher interest rates also typically increase the interest expense associated with our credit arrangements with banks and other parties that serve as important sources of liquidity for us, which can therefore negatively impact our results of operations for a particular period.
See “We extend credit to most of our customers in connection with their purchase of fuel and services from us, and our financial condition, results of operations and cash flows will be adversely affected if we are unable to collect accounts receivable,” “Changes in the market price of fuel may have a material adverse effect on our business,” “Our business depends on our ability to adequately finance our capital requirements and fund our investments, which, if not available to us, would impact our ability to conduct our operations,” "Significant inflation and higher interest rates may adversely affect our business and financial condition," and “Our derivative transactions with customers, suppliers, merchants and financial institutions expose us to price and credit risks, which could have a material adverse effect on our business” in Item 1A – Risk Factors in our 2022 10-K Report for additional discussion of these risks.
Results of Operations
Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022
Consolidated Results of Operations
The following provides a summary of our consolidated results of operations for the periods indicated (in millions, except per share amounts):
| For the Three Months Ended September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Revenue | $ | 12,245.3 | $ | 15,661.3 | ||||||||||
| Cost of revenue | 11,963.9 | 15,339.0 | ||||||||||||
| Gross profit | 281.4 | 322.3 | ||||||||||||
| Operating expenses: | ||||||||||||||
| Compensation and employee benefits | 132.0 | 141.1 | ||||||||||||
| General and administrative | 76.1 | 81.7 | ||||||||||||
| Asset impairments | — | — | ||||||||||||
| Restructuring charges | — | (0.8) | ||||||||||||
| Total operating expenses | 208.2 | 222.0 | ||||||||||||
| Income (loss) from operations | 73.3 | 100.3 | ||||||||||||
| Non-operating income (expenses), net: | ||||||||||||||
| Interest expense and other financing costs, net | (28.6) | (34.0) | ||||||||||||
| Other income (expense), net | 1.6 | (3.5) | ||||||||||||
| Total non-operating income (expense), net | (26.9) | (37.5) | ||||||||||||
| Income (loss) before income taxes | 46.3 | 62.8 | ||||||||||||
| Provision for income taxes | 10.8 | 18.9 | ||||||||||||
| Net income (loss) including noncontrolling interest | 35.5 | 43.9 | ||||||||||||
| Net income (loss) attributable to noncontrolling interest | 0.6 | 1.4 | ||||||||||||
| Net income (loss) attributable to World Kinect | $ | 34.9 | $ | 42.5 | ||||||||||
| Basic earnings (loss) per common share | $ | 0.58 | $ | 0.69 | ||||||||||
| Diluted earnings (loss) per common share | $ | 0.58 | $ | 0.68 | ||||||||||
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Revenue. Our consolidated revenue for the three months ended September 30, 2023 was $12.2 billion, a decrease of $3.4 billion, or 22%, compared to the three months ended September 30, 2022, primarily driven by lower fuel prices across all segments as well as lower volumes in our marine segment, as discussed further below.
Gross Profit. Our gross profit for the three months ended September 30, 2023 was $281.4 million, a decrease of $40.9 million, or 13%, compared to the three months ended September 30, 2022, attributable to decreased gross profit of $40.2 million and $4.0 million in our marine and aviation segments, respectively, partially offset by increased gross profit of $3.3 million in our land segment, as discussed further below.
Operating Expenses. Total operating expenses for the three months ended September 30, 2023 were $208.2 million, a decrease of $13.9 million, or 6%, compared to the three months ended September 30, 2022. The decrease in operating expenses was primarily driven by lower compensation costs and a decrease in general and administrative costs, as discussed further below.
Non-Operating Income (Expense), net. For the three months ended September 30, 2023, we had net non-operating expense of $26.9 million compared to net non-operating expense of $37.5 million for the three months ended September 30, 2022. The decrease of $10.6 million during the three months ended September 30, 2023 was primarily attributable to a $5.4 million decrease in interest expense as well as lower foreign currency losses during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The decrease in interest expense was primarily driven by lower utilization and fees associated with sales of accounts receivable under our RPAs.
Income Taxes. For the three months ended September 30, 2023, we recognized an income tax expense of $10.8 million, compared to income tax expense of $18.9 million for the three months ended September 30, 2022. The decrease of $8.0 million was primarily attributable to a decrease in pre-tax earnings and changes in the jurisdictional mix of those earnings, as well as differences in net discrete tax items. See Note 8. Income Taxes for additional information.
Aviation Segment Results of Operations
The following provides a summary of the aviation segment results of operations for the periods indicated (in millions, except price per gallon):
| For the Three Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| Revenue | $ | 5,983.5 | $ | 7,262.0 | $ | (1,278.4) | ||||||||||||||
| Gross profit | $ | 125.6 | $ | 129.6 | $ | (4.0) | ||||||||||||||
Operating expenses | 67.0 | 71.7 | (4.7) | |||||||||||||||||
Income (loss) from operations | $ | 58.6 | $ | 57.9 | $ | 0.7 | ||||||||||||||
| Operational metrics: | ||||||||||||||||||||
| Aviation segment volumes (gallons) | 1,920.4 | 1,839.6 | 80.8 | |||||||||||||||||
| Aviation segment average price per gallon | $ | 2.91 | $ | 3.75 | $ | (0.84) | ||||||||||||||
Revenues in our aviation segment were $6.0 billion for the three months ended September 30, 2023, a decrease of $1.3 billion, or 18%, compared to the three months ended September 30, 2022. The decrease in revenue was driven by lower average prices, with average jet fuel price per gallon sold decreasing by 22% in the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Total aviation volumes increased by 80.8 million gallons, or 4%, to 1.9 billion gallons driven primarily by growth in passenger airline demand.
Aviation segment gross profit for the three months ended September 30, 2023 was $125.6 million, a decrease of $4.0 million, or 3%, compared to the three months ended September 30, 2022. The decrease in gross profit during the three months ended September 30, 2023 as compared to the prior period was primarily attributable to lower physical inventory-related profitability when compared with the three months ended September 30, 2022 as well as a rationalization of lower-return business activity. These decreases were partially offset by higher margins driven by our focus on improving returns in a higher interest rate environment.
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Income from operations in our aviation segment for the three months ended September 30, 2023 was $58.6 million, an increase of $0.7 million, or 1%, compared to the three months ended September 30, 2022. The lower gross profit discussed above was offset by a $4.7 million decrease in operating expenses primarily attributable to lower incentive compensation costs which was offset by an increase in our provision for credit losses, which returned to a more normalized level.
Land Segment Results of Operations
The following provides a summary of the land segment results of operations for the periods indicated (in millions, except price per gallon):
| For the Three Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| Revenue | $ | 3,983.5 | $ | 5,013.9 | $ | (1,030.4) | ||||||||||||||
| Gross profit | $ | 121.2 | $ | 117.9 | $ | 3.3 | ||||||||||||||
Operating expenses | 89.4 | 95.7 | (6.3) | |||||||||||||||||
Income (loss) from operations | $ | 31.8 | $ | 22.2 | $ | 9.6 | ||||||||||||||
| Operational metrics: | ||||||||||||||||||||
Land segment volumes (gallons) (1) | 1,546.0 | 1,515.1 | 30.9 | |||||||||||||||||
Land segment average price per gallon | $ | 2.58 | $ | 3.31 | $ | (0.73) | ||||||||||||||
(1)Includes gallons and gallon equivalents of British Thermal Units (BTU) for our natural gas sales and Kilowatt Hours (kWh) for our power business.
Revenues in our land segment were $4.0 billion for the three months ended September 30, 2023, a decrease of $1.0 billion, or 21%, compared to the three months ended September 30, 2022. The decrease in revenue was principally driven by lower average fuel prices, with average fuel prices decreasing by 22% for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Total volumes increased by 30.9 million, or 2%, to 1.5 billion gallons or gallon equivalents in the three months ended September 30, 2023 compared to the three months ended September 30, 2022 driven by increased activity in our natural gas and power business, partially offset by lower activity in our core fuel business in North America.
Our land segment gross profit for the three months ended September 30, 2023 was $121.2 million, an increase of $3.3 million, or 3%, compared to the three months ended September 30, 2022. The increase in gross profit was primarily driven by continued growth in our sustainability-related offerings, partially offset by our core fuel business in North America, which benefited from significant price volatility in the first half of 2022.
In our land segment, income from operations for the three months ended September 30, 2023 was $31.8 million, an increase of $9.6 million, or 43%, compared to the three months ended September 30, 2022. In addition to the increase in gross profit discussed above, income from operations benefited from a decrease in operating expenses principally related to lower general and administrative costs.
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Marine Segment Results of Operations
The following provides a summary of the marine segment results of operations for the periods indicated (in millions, except price per metric ton):
| For the Three Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| Revenue | $ | 2,278.2 | $ | 3,385.4 | $ | (1,107.2) | ||||||||||||||
| Gross profit | $ | 34.6 | $ | 74.8 | $ | (40.2) | ||||||||||||||
Operating expenses | 22.2 | 26.7 | (4.5) | |||||||||||||||||
Income (loss) from operations | $ | 12.4 | $ | 48.1 | $ | (35.7) | ||||||||||||||
| Operational metrics: | ||||||||||||||||||||
Marine segment volumes (metric tons) | 4.1 | 4.8 | (0.8) | |||||||||||||||||
Marine segment average price per metric ton | $ | 562.18 | $ | 701.14 | $ | (138.96) | ||||||||||||||
Revenues in our marine segment were $2.3 billion for the three months ended September 30, 2023, a decrease of $1.1 billion, or 33%, compared to the three months ended September 30, 2022. The decrease in revenue was principally driven by a 20% decrease in the average price per metric ton of bunker fuel sold in the three months ended September 30, 2023 compared to the three months ended September 30, 2022. In addition, total volume decreased by 0.8 million metric tons, or 16%, to 4.1 million metric tons for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 primarily due to reduced demand in our resale businesses.
Marine segment gross profit for the three months ended September 30, 2023 was $34.6 million, a decrease of $40.2 million, or 54%, compared to the three months ended September 30, 2022 principally due to record bunker fuel prices and significant market volatility during the three months ended September 30, 2022 as well as increased competition, together with softening demand driven by changes in the global macroeconomic environment during the three months ended September 30, 2023.
Our marine segment income from operations for the three months ended September 30, 2023 was $12.4 million, a decrease of $35.7 million, or 74%, compared to the three months ended September 30, 2022, primarily due to the decrease in gross profit partially offset by a $4.5 million decrease in operating expenses, largely driven by lower incentive compensation costs compared to the three months ended September 30, 2022.
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Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
Consolidated Results of Operations
The following provides a summary of our consolidated results of operations for the periods indicated (in millions, except per share amounts):
| For the Nine Months Ended September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Revenue | $ | 35,707.6 | $ | 45,165.4 | ||||||||||
| Cost of revenue | 34,881.8 | 44,358.7 | ||||||||||||
| Gross profit | 825.8 | 806.7 | ||||||||||||
| Operating expenses: | ||||||||||||||
| Compensation and employee benefits | 376.3 | 374.3 | ||||||||||||
| General and administrative | 235.9 | 238.8 | ||||||||||||
| Asset impairments | 0.3 | — | ||||||||||||
| Restructuring charges | — | (0.8) | ||||||||||||
| Total operating expenses | 612.5 | 612.3 | ||||||||||||
Income (loss) from operations | 213.3 | 194.4 | ||||||||||||
| Non-operating income (expenses), net: | ||||||||||||||
| Interest expense and other financing costs, net | (95.4) | (74.8) | ||||||||||||
| Other income (expense), net | (4.7) | (1.9) | ||||||||||||
| Total non-operating income (expense), net | (100.0) | (76.7) | ||||||||||||
| Income (loss) before income taxes | 113.3 | 117.7 | ||||||||||||
| Provision for income taxes | 24.8 | 22.7 | ||||||||||||
| Net income (loss) including noncontrolling interest | 88.5 | 95.0 | ||||||||||||
| Net income (loss) attributable to noncontrolling interest | 0.9 | 1.8 | ||||||||||||
| Net income (loss) attributable to World Kinect | $ | 87.7 | $ | 93.2 | ||||||||||
| Basic earnings (loss) per common share | $ | 1.42 | $ | 1.49 | ||||||||||
| Diluted earnings (loss) per common share | $ | 1.41 | $ | 1.48 | ||||||||||
Revenue. Our consolidated revenue for the nine months ended September 30, 2023 was $35.7 billion, a decrease of $9.5 billion, or 21%, compared to the nine months ended September 30, 2022, primarily driven by lower fuel prices across all segments as well as lower volumes in our marine segment, as discussed further below.
Gross Profit. Our gross profit for the nine months ended September 30, 2023 was $825.8 million, an increase of $19.1 million, or 2%, compared to the nine months ended September 30, 2022, attributable to increased gross profit of $107.8 million in our aviation segment, partially offset by decreased gross profit of $71.4 million and $17.3 million in our marine and land segments, respectively, as discussed further below.
Operating Expenses. Total operating expenses for the nine months ended September 30, 2023 were $612.5 million, an increase of $0.2 million compared to the nine months ended September 30, 2022. Higher compensation costs during the nine months ended September 30, 2023 were offset by a decrease in general and administrative costs, as discussed further below.
Non-Operating Income (Expense), net. For the nine months ended September 30, 2023, we had net non-operating expense of $100.0 million compared to net non-operating expense of $76.7 million the nine months ended September 30, 2022. The increase of $23.3 million was primarily attributable to an increase in interest expense driven by higher interest rates.
Income Taxes. For the nine months ended September 30, 2023, we recognized income tax expense of $24.8 million, compared to $22.7 million for the nine months ended September 30, 2022. The increase of $2.1 million was primarily attributable to differences in net discrete tax items, as well as changes in the jurisdictional mix of our pre-tax earnings. See Note 8. Income Taxes for additional information.
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Aviation Segment Results of Operations
The following provides a summary of the aviation segment results of operations for the periods indicated (in millions, except price per gallon):
| For the Nine Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| Revenue | $ | 17,400.8 | $ | 20,116.0 | $ | (2,715.2) | ||||||||||||||
| Gross profit | $ | 354.4 | $ | 246.6 | $ | 107.8 | ||||||||||||||
Operating expenses | 203.7 | 188.1 | 15.6 | |||||||||||||||||
Income (loss) from operations | $ | 150.7 | $ | 58.5 | $ | 92.2 | ||||||||||||||
| Operational metrics: | ||||||||||||||||||||
| Aviation segment volumes (gallons) | 5,544.1 | 5,326.2 | 217.9 | |||||||||||||||||
| Aviation segment average price per gallon | $ | 2.93 | $ | 3.65 | $ | (0.71) | ||||||||||||||
Revenues in our aviation segment were $17.4 billion for the nine months ended September 30, 2023, a decrease of $2.7 billion, or 13%, compared to the nine months ended September 30, 2022. The decrease in revenue was driven by lower average prices, partially offset by increased volume. Average jet fuel price per gallon sold decreased by 19% in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Total aviation volumes increased by 217.9 million gallons, or 4%, to 5.5 billion gallons, driven largely by growth in passenger airline demand.
Our aviation segment gross profit for the nine months ended September 30, 2023 was $354.4 million, an increase of $107.8 million, or 44%, compared to the nine months ended September 30, 2022. The increase in gross profit during the nine months ended September 30, 2023 compared to the prior period was primarily attributable to the impact of significant inventory losses arising from the extreme backwardation and price volatility experienced during the nine months ended September 30, 2022.
Income from operations in our aviation segment for the nine months ended September 30, 2023 was $150.7 million, an increase of $92.2 million compared to the nine months ended September 30, 2022. The increase in gross profit discussed above was partially offset by a $15.6 million increase in operating expenses primarily driven by higher headcount-related compensation costs and general and administrative expenses to support the increased level of operating activity.
Land Segment Results of Operations
The following provides a summary of the land segment results of operations for the periods indicated (in millions, except price per gallon):
| For the Nine Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| Revenue | $ | 11,517.1 | $ | 14,826.6 | $ | (3,309.5) | ||||||||||||||
| Gross profit | $ | 342.8 | $ | 360.1 | $ | (17.3) | ||||||||||||||
Operating expenses | 260.2 | 271.6 | (11.4) | |||||||||||||||||
Income (loss) from operations | $ | 82.6 | $ | 88.5 | $ | (5.9) | ||||||||||||||
| Operational metrics: | ||||||||||||||||||||
Land segment volumes (gallons) (1) | 4,618.3 | 4,629.4 | (11.2) | |||||||||||||||||
Land segment average price per gallon | $ | 2.49 | $ | 3.20 | $ | (0.71) | ||||||||||||||
(1)Includes gallons and gallon equivalents of British Thermal Units (BTU) for our natural gas sales and Kilowatt Hours (kWh) for our power business.
Revenues in our land segment were $11.5 billion for the nine months ended September 30, 2023, a decrease of $3.3 billion, or 22%, compared to the nine months ended September 30, 2022. The decrease in revenue was principally driven by lower average fuel prices, with average fuel prices decreasing by 22% for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.
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Our land segment gross profit for the nine months ended September 30, 2023 was $342.8 million, a decrease of $17.3 million, or 5%, compared to the nine months ended September 30, 2022. The decrease in gross profit was primarily attributable to extreme weather conditions experienced in our core fuel business in North America in early 2023, as well as lower profitability from our U.K. business, which benefited from significant price volatility in the first half of 2022. These decreases were partially offset by improved performance in our natural gas, power, and sustainability-related offerings.
In our land segment, income from operations for the nine months ended September 30, 2023 was $82.6 million, a decrease of $5.9 million, or 7%, compared to the nine months ended September 30, 2022. The decrease in gross profit discussed above was partially offset by a decrease in operating expenses principally related to lower general and administrative costs.
Marine Segment Results of Operations
The following provides a summary of the marine segment results of operations for the periods indicated (in millions, except price per metric ton):
| For the Nine Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| Revenue | $ | 6,789.8 | $ | 10,222.9 | $ | (3,433.1) | ||||||||||||||
| Gross profit | $ | 128.6 | $ | 200.0 | $ | (71.4) | ||||||||||||||
Operating expenses | 65.7 | 76.0 | (10.3) | |||||||||||||||||
Income (loss) from operations | $ | 63.0 | $ | 124.0 | $ | (61.0) | ||||||||||||||
| Operational metrics: | ||||||||||||||||||||
Marine segment volumes (metric tons) | 12.5 | 14.4 | (1.9) | |||||||||||||||||
Marine segment average price per metric ton | $ | 541.38 | $ | 709.99 | $ | (168.62) | ||||||||||||||
Revenues in our marine segment were $6.8 billion for the nine months ended September 30, 2023, a decrease of $3.4 billion, or 34%, compared to the nine months ended September 30, 2022. The decrease in revenue was principally driven by a decrease of 24% in the average price per metric ton of bunker fuel sold in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. In addition, total volume decreased by 1.9 million metric tons, or 13%, to 12.5 million metric tons in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to reduced demand in our resale businesses.
Our marine segment gross profit for the nine months ended September 30, 2023 was $128.6 million, a decrease of $71.4 million, or 36%, compared to the nine months ended September 30, 2022 principally driven by increased competition resulting from lower bunker fuel prices, together with softening demand driven by changes in the global macroeconomic environment.
Our marine segment income from operations for the nine months ended September 30, 2023 was $63.0 million, a decrease of $61.0 million, or 49%, compared to the nine months ended September 30, 2022, primarily due to the decrease in gross profit, partially offset by a $10.3 million decrease in operating expenses, largely driven by lower incentive compensation costs compared to the three months ended September 30, 2022.
Liquidity and Capital Resources
Liquidity to fund working capital, as well as make strategic investments to further our growth strategy, is a significant priority for us. Our views concerning liquidity are based on currently available information and if circumstances change significantly, the future availability of trade credit or other sources of financing may be reduced, and our liquidity would be adversely affected accordingly.
Sources of Liquidity and Factors Impacting Our Liquidity
Our liquidity, consisting principally of cash and availability under our Credit Facility, fluctuates based on a number of factors, including the timing of receipts from our customers and payments to our suppliers, changes in fuel prices, as well as our financial performance.
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Based on the information currently available, we believe that our cash and cash equivalents as of September 30, 2023 and available funds from our Credit Facility, as described below, together with cash flows generated by operations, are sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months.
Convertible Notes. On June 26, 2023, we issued $350.0 million aggregate principal amount of 3.250% Convertible Senior Notes due 2028 (the "Convertible Notes"), which reflects the exercise in full of an option to purchase up to an additional $50.0 million in principal amount of the Convertible Notes. The Convertible Notes mature on July 1, 2028, unless earlier converted, redeemed or repurchased. The Convertible Notes are senior, unsecured obligations that bear interest at a rate of 3.250% per year, payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2024. The initial conversion rate was 35.1710 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $28.43 per share. The conversion rate will be subject to adjustment upon the occurrence of certain events but will not be adjusted for accrued and unpaid interest. Upon conversion, the Convertible Notes will be settled in cash up to the aggregate principal amount of the Convertible Notes to be converted, and in cash, shares of common stock or any combination thereof, at our option, in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount.
In connection with the pricing of the Convertible Notes, we entered into convertible note hedge transactions and warrant transactions. The cost of the convertible note hedge transactions was approximately $70.5 million. The convertible note hedge transactions cover, subject to customary anti-dilution adjustments, the number of shares of common stock that initially underlie the Convertible Notes, and have an initial strike price equal to the initial conversion price of the Convertible Notes. Separately, we received $40.0 million of proceeds from the sale of warrants to acquire, subject to anti-dilution adjustments, the same amount of shares at an initial strike price of $40.14 per share. As a result, dilution upon conversion of the Convertible Notes will be mitigated as the bond hedge and warrant transactions increase the effective conversion price of the Convertible Notes to $40.14 per share.
The net proceeds from the sale of the Convertible Notes was approximately $337.5 million after deducting the initial purchasers’ discounts and estimated offering expenses payable by us. We used the net proceeds from the sale of the Convertible Notes (i) to pay the cost of the convertible note hedge transactions net of the proceeds from the sale of the warrants), (ii) to repurchase approximately 2.24 million shares of common stock from purchasers of the Convertible Notes for an aggregate purchase price of approximately $50.0 million and (iii) to repay the amounts outstanding under our revolving credit facility.
See Note 6. Debt, Interest Income, Expense, and Other Finance Costs for additional information.
Credit Agreement. The Fourth Amended and Restated Credit Agreement (as amended, the "Credit Agreement"), matures in April 2027 and provides for a term loan as well as a revolving credit facility of $1.5 billion (the "Credit Facility"). Our availability under the Credit Facility is limited by, among other things, our consolidated total leverage ratio, which is defined in the Credit Agreement and is based, in part, on our consolidated earnings before interest, taxes, depreciation and amortization, and share-based compensation, with such adjustments as specified therein, for the four immediately preceding fiscal quarters. The Credit Agreement generally limits the total amount of indebtedness we may incur to a consolidated total leverage ratio of not more than 4.75 to 1.
As a result of the foregoing, as well as other covenants and restrictions contained in our Credit Agreement, our availability under the Credit Facility may fluctuate from period to period. In addition, our failure to comply with the covenants contained in our Credit Agreement 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 loan, 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. See Note 6. Debt, Interest Income, Expense, and Other Finance Costs for additional information.
Receivables Purchase Agreements. We also have accounts receivable programs under RPAs that allow us to sell a specified amount of qualifying accounts receivable and receive cash consideration equal to the total balance, less an associated fee, which varies based on the outstanding accounts receivable at any given time. The RPAs provide the constituent banks with the ability to add or remove customers from these programs in their discretion based on, among other things, the level of risk exposure the bank is willing to accept with respect to any particular customer. The fees the banks charge us to purchase the receivables from these customers can also be impacted for these reasons. During the second quarter of 2023, we amended one of our RPAs to, among other things, reduce the overall fee structure. See Note 2. Accounts Receivable for additional information.
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Future Uses of Liquidity
Cash is primarily used to fund working capital to support our operations as well as for strategic acquisitions and investments. There were no material changes in our expected future uses of liquidity from December 31, 2022 to September 30, 2023. For a discussion of these matters, refer to "Liquidity and Capital Resources" under Part II, Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2022 10-K Report.
Cash Flows
The following table reflects the major categories of cash flows for the nine months ended September 30, 2023 and 2022 (in millions). For additional details, please see the unaudited Condensed Consolidated Statements of Cash Flows in this Quarterly Report on Form 10-Q.
| For the Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net cash provided by (used in) operating activities | $ | 266.8 | $ | 229.3 | |||||||
| Net cash provided by (used in) investing activities | (77.4) | (699.2) | |||||||||
| Net cash provided by (used in) financing activities | (140.4) | 115.0 | |||||||||
Operating Activities. For the nine months ended September 30, 2023, net cash provided by operating activities was $266.8 million, compared to $229.3 million net cash provided during the nine months ended September 30, 2022. The $37.5 million increase in operating cash flows was principally due to lower average fuel prices compared to the prior year, which reduced our cost of inventory; the decrease of our accounts receivable and accounts payable (net of activity under our RPA programs, as discussed under "Sources of Liquidity and Factors Impacting Our Liquidity" above) largely driven by the rationalization of lower-return business within our aviation segment and the reduction of average fuel prices; and cash provided by our derivative activities. These increases were offset by a decrease in our net income (see "Results of Operations" for further details of the drivers impacting our net income) adjusted for noncash items, as well as a decrease in customer prepayments.
Investing Activities. For the nine months ended September 30, 2023, net cash used in investing activities was $77.4 million, compared to net cash used of $699.2 million during the nine months ended September 30, 2022. The net cash used in investing activities for the nine months ended September 30, 2023 was primarily driven by capital expenditures of $67.9 million. Net cash used in investing activities for the nine months ended September 30, 2022 was principally driven by $641.7 million net cash paid for the acquisition of Flyers, as discussed in Note 3. Acquisitions, and $56.2 million for capital expenditures.
Financing Activities. For the nine months ended September 30, 2023, net cash used in financing activities was $140.4 million compared to net cash provided of $115.0 million for the nine months ended September 30, 2022. The net cash used in financing activities for the nine months ended September 30, 2023 was primarily attributable to net borrowings of $38.7 million, driven by $350.0 million proceeds from the issuance of the Convertible Notes and $40.3 million proceeds from secured borrowings associated with the transfer of transaction taxes, as discussed in Note 6. Debt, Interest Income, Expense, and Other Finance Costs, partially offset by $345.3 million of net repayments under our Credit Facility. In connection with the issuance of the Convertible Notes, we paid $70.5 million for the purchase of the convertible note hedges and $11.9 million for debt issuance costs, and received $40.0 million from the sale of warrants. In addition, net cash used in financing activities includes payments of deferred consideration related to prior acquisitions of $62.9 million, repurchases of common stock of $50.0 million, and dividend payments of $25.7 million. Net cash provided by financing activities for the nine months ended September 30, 2022 was primarily attributable to net borrowings under our Credit Facility of $199.4 million, primarily driven by incremental borrowings related to the acquisition of Flyers and increased working capital requirements, partially offset by $48.7 million in purchases of our common stock, dividend payments of $22.4 million, and payments for deferred consideration related to prior acquisitions of $10.0 million.
Critical Accounting Estimates
The unaudited Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America. The significant accounting policies used are disclosed in Item 15 – Financial Statement Schedules, Note 1. Basis of Presentation, New Accounting Standards and Significant Accounting Policies to the Consolidated Financial Statements in our 2022 10-K report.
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We make estimates and assumptions that affect the reported amounts on our unaudited Condensed Consolidated Financial Statements and accompanying Notes as of the date of the unaudited Condensed Consolidated Financial Statements. With the exception of additional considerations in relation to the Convertible Notes discussed below, there have been no material changes to the Critical Accounting Estimates disclosed in our 2022 10-K report.
Impairment Assessments of Goodwill, Long-Lived Assets, and Equity Investments
We assess accounting estimates that require consideration of forecasted financial information. Significant judgment is involved in performing these estimates as they are developed based on forecasted assumptions. As of September 30, 2023, the assumptions used in these assessments, particularly the expected growth rates, the profitability embedded in the projected cash flows provided by our legacy and newly acquired businesses, the discount rate and the market-based multiples, were defined based on available information considering current market volatility and geopolitical risks. Management also considered the volatility in the Company's market capitalization and evaluated the potential impact that this volatility may have on the estimated fair value of our reporting units.
Based on the assessments performed, and supported by the available information as of September 30, 2023, we concluded that the carrying value of our long-lived assets and equity investments were recoverable and that the fair value of our land and aviation reporting units were not less than their respective carrying values. If our results differ significantly from our assumptions, such impact could potentially result in impairments.
Derivatives
We assess convertible notes and other related contracts to determine if those contracts or embedded components of those contracts meet the definition of a derivative that require separate accounting. Significant judgment is involved in assessing if the contracts are indexed to our own stock and if the contracts shall be classified as equity in our statement of financial position. If those contracts are derivatives or contain embedded derivatives, they would be classified as a liability and remeasured to fair value through net income impacting future earnings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our exposures to commodity price, interest rate, or foreign currency risk since December 31, 2022. Please refer to our 2022 10-K Report for a complete discussion of our exposure to these risks.
For information about our derivative instruments at their respective fair value positions as of September 30, 2023, see Note 4. Derivative Instruments.
Item 4. Controls and Procedures
Management's Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required financial disclosure.
As of the end of the period covered by this 10-Q Report, we evaluated, under the supervision and with the participation of our CEO and CFO, the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon this evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the three months ended September 30, 2023.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
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Part II — Other Information
Item 1. Legal Proceedings
From time to time, we are under review by the IRS and various other domestic and foreign tax authorities with regards to income tax and indirect tax matters and are involved in various inquiries, audits, challenges and litigation in a number of countries, and the amounts under controversy may be material. See Note 8. Income Taxes and Note 9. Commitments and Contingencies within this 10-Q Report as well as Notes 10. Income Taxes and 11. Commitments and Contingencies within Part IV. Item 15 – Notes to the Consolidated Financial Statements in our 2022 10-K Report for additional details regarding certain tax matters.
We are also a party to various claims, complaints and proceedings arising in the ordinary course of our business including, but not limited to, environmental claims, commercial and governmental contract claims, such as property damage, demurrage, personal injury, billing and fuel quality claims, as well as bankruptcy preference claims and administrative claims.
In addition, Item 103 of Regulation S-K promulgated by the SEC requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and such proceedings involve potential monetary sanctions, unless we reasonably believe that the matter will result in no monetary sanctions, or in monetary sanctions, exclusive of interest and costs, of less than a specified threshold. We have elected to use a threshold of $1 million for purposes of determining whether the disclosure of any such environmental proceeding is required.
We are not currently a party to any 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. See Note 9. Commitments and Contingencies for additional information.
Item 1A. Risk Factors
The risk factor set forth below supplements the risk factors previously disclosed under Part I, Item 1A – Risk Factors of our 2022 10-K Report.
We are subject to counterparty risk with respect to the bond hedge transactions which serve to mitigate the dilutive impact of our Convertible Notes.
In connection with our offering of Convertible Notes in June 2023, we entered into bond hedge transactions with multiple financial institutions, which increased the effective conversion price of the Convertible Notes to approximately $40.14 (from the nominal conversion price of $28.43). Consequently, the bond hedge transaction is expected to reduce the potential dilution upon conversion of the Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of the Convertible Notes upon their conversion. We also entered into warrant transactions with the bond hedge counterparties, which could have a dilutive effect on our common stock to the extent that the market price per share of our common stock exceeds the strike price of the warrants.
Our exposure to the credit risk of the bond hedge counterparties is not secured by any collateral. Global economic conditions have, from time-to-time, resulted in the actual or perceived failure or financial difficulties of several financial institutions. If any bond hedge counterparty becomes subject to insolvency proceedings, we would become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the bond hedge transaction. If any of these counterparties were to fail to comply with their contractual obligations under bond hedge transactions, we would (i) be exposed to greater dilution with respect to their respective portion of the hedge, to the extent that our stock price exceeded the nominal conversion price upon conversion, (ii) may suffer adverse tax consequences, or (iii) incur additional costs associated with entering into a replacement bond hedge transaction with a different bond hedge counterparty.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
In March 2020, the Company's Board of Directors approved a stock repurchase program authorizing $200.0 million in common stock repurchases (the "2020 Repurchase Program"). Our repurchase program does not require a minimum number of shares of common stock to be purchased, has no expiration date, and repurchases may be suspended or discontinued at any time. As of September 30, 2023, approximately $147.1 million remains available for purchase under the 2020 Repurchase Program. The timing and amount of shares of common stock to be repurchased under the 2020 Repurchase Program will depend on market conditions, share price, securities law and other legal requirements and factors. We did not repurchase any shares during the third quarter of 2023.
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the three months ended September 30, 2023, none of our officers (as defined in Rule 16a-1(f) of the Exchange Act) or directors adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K.
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Item 6. Exhibits
The exhibits set forth in the following index of exhibits are filed as part of this 10-Q Report:
| Exhibit No. | Description | |||||||
| Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d — 14(a) | ||||||||
| Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d — 14(a) | ||||||||
| Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | ||||||||
| 101 | The following materials from World Kinect Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in XBRL (Extensible Business Reporting Language); (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income and Comprehensive Income, (iii) Condensed Consolidated Statements of Shareholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements. | |||||||
| 104 | Cover page interactive file (formatted in Inline XBRL and contained in Exhibit 101) | |||||||
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: October 27, 2023 | World Kinect Corporation | ||||
| /s/ Michael J. Kasbar | |||||
| Michael J. Kasbar | |||||
| Chairman, President and Chief Executive Officer | |||||
| /s/ Ira M. Birns | |||||
| Ira M. Birns | |||||
| Executive Vice President and Chief Financial Officer | |||||
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