World Kinect(WKC) - 2021 Q4 - Annual Report

Part I Item 1. Business World Fuel Services is a global fuel and energy management company serving aviation, land, and marine sectors, subject to competition and regulation - The company's core business is the distribution of fuel and related products and services across the aviation, land, and marine transportation sectors[10] - A key strategic goal is to transition into a leading global energy management company, expanding offerings to include energy advisory, management services, technology solutions, and sustainability products like renewable fuels[10] - The company operates through three reportable segments: Aviation, Land, and Marine[14] - The business is highly competitive, fragmented, and subject to seasonal variability, with higher demand for aviation/land fuel in summer and heating oil/natural gas in winter[29][30] - Operations are subject to substantial environmental and climate change regulations globally, which could impose significant costs and affect demand for hydrocarbon products[31][34][36] Aviation Segment - Provides global aviation fuel supply and comprehensive services to a wide range of customers including commercial airlines, cargo carriers, corporate fleets, and government/military clients[17][18] - Service offerings include fuel management, price risk management, ground handling, dispatch services, and trip planning[17] - The company is actively working to increase the availability of Sustainable Aviation Fuel (SAF) to support the energy transition[20] Land Segment - Offers fuel, heating oil, propane, natural gas, and lubricants to fuel distributors, retail operators, and industrial, commercial, and government customers, primarily in the U.S., U.K., and Brazil[21] - Expanded offerings include renewable diesel, biodiesel, and renewable natural gas, alongside energy advisory and sustainability solutions through its World Kinect brand[21] - On January 3, 2022, the company acquired Flyers Energy Group, significantly expanding its transportation, commercial fueling, and lubricants distribution operations[24] Marine Segment - Markets fuel, lubricants, and related services to marine customers such as container fleets, cruise lines, and governments[25] - Services include fuel procurement management, price risk management, quality control, and claims management[25] - The segment is actively working to develop a sustainable marine fuel supply chain and identify lower carbon alternatives[26] Human Capital Resources - The company emphasizes employee investment through diversity and inclusion initiatives, professional development, and a focus on health, safety, and well-being[39] - In response to COVID-19, the company implemented business continuity plans, maximized remote work, and expanded employee assistance programs[42] - Diversity initiatives aim to increase representation of minorities, military veterans, and women in senior management, supported by training and diverse interview panels[43] Item 1A. Risk Factors Significant risks include customer credit, fuel price volatility, operational, cybersecurity, and climate change regulations - The company is exposed to significant customer credit risk, as it extends unsecured credit to customers in the aviation, land, and marine industries, which are vulnerable to global events like the COVID-19 pandemic[54][55] - Fuel price volatility is a major risk, impacting working capital requirements, customer credit limits, inventory valuation, and competitive dynamics[56][58][59] - Cybersecurity attacks on IT systems or critical infrastructure (like pipelines) could disrupt operations, compromise data, and result in significant financial and reputational damage[74][75] - Climate change regulations, such as GHG emission limits and mandates for renewable energy, could increase operating costs and reduce demand for traditional fuel products[89][92] - The COVID-19 pandemic has had, and is expected to continue to have, adverse effects on the business through reduced fuel demand, supply chain disruptions, and customer liquidity issues[109][110][111] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[123] Item 2. Properties Principal properties are leased administrative offices and storage facilities, including headquarters in Miami, London, and Singapore - The company's main properties are leased administrative offices and inventory storage facilities, with none being individually material[124] - Corporate headquarters are leased in Miami, Florida, with other strategic offices in London and Singapore[124] Item 3. Legal Proceedings The company is involved in tax inquiries and ordinary litigation, with material controversies in Brazil, Denmark, and South Korea - The company is under review by tax authorities in multiple countries, with material controversies in Brazil, Denmark, and South Korea[126] - The company is also a party to various ordinary course claims, including environmental, commercial, and governmental contract claims, which are not currently expected to be materially adverse[127] Item 4. Mine Safety Disclosures Not applicable - Not applicable[128] Part II Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Common stock trades on NYSE; 923,403 shares repurchased for $26.1 million in Q4 2021, with $195.8 million remaining for repurchase | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under Repurchase Programs | | :--- | :--- | :--- | :--- | :--- | | 10/1/2021 - 10/31/2021 | 250,000 | $32.28 | 250,000 | $213,786,194 | | 11/1/2021 - 11/30/2021 | 408,803 | $27.00 | 408,803 | $202,749,436 | | 12/1/2021 - 12/31/2021 | 264,600 | $26.39 | 264,600 | $195,766,982 | | Total | 923,403 | $28.25 | 923,403 | $195,766,982 | - As of December 31, 2021, approximately $195.8 million remains available for purchase under the 2020 Repurchase Program[134] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations FY2021 revenue increased to $31.3 billion, but gross profit and net income declined, with sufficient liquidity maintained Consolidated Results of Operations | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $31,337.0 M | $20,358.3 M | 54% | | Gross Profit | $788.2 M | $851.8 M | -7% | | Income from Operations | $142.6 M | $137.9 M | 3% | | Net Income | $73.7 M | $109.6 M | -33% | | Diluted EPS | $1.16 | $1.71 | -32% | - The 54% increase in revenue was driven by higher average fuel prices across all segments[147] - The 7% decrease in gross profit was due to declines of $51.1 million in the marine segment and $46.5 million in the land segment, partially offset by a $34.0 million increase in the aviation segment[148] - Operating expenses decreased by 10% primarily due to a lower provision for credit losses and the absence of a 2020 impairment charge, partially offset by higher incentive compensation[149] - The significant decrease in net non-operating income was primarily attributable to the gain on the sale of MSTS recognized in 2020[150] Aviation Segment Results | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $12,824.3 M | $8,179.6 M | 57% | | Gross Profit | $386.9 M | $352.9 M | 10% | | Income from Operations | $163.4 M | $84.5 M | 93% | | Volume (gallons) | 5,857.5 M | 4,694.1 M | 25% | | Avg. Price per Gallon | $2.08 | $1.46 | 43% | - Revenue growth was driven by a 43% increase in average jet fuel prices and a 25% increase in volumes as travel restrictions eased[152] - Gross profit increased due to the recovery in passenger air travel, partially offset by reduced government activity in Afghanistan and the sale of MSTS[153] - The 93% surge in income from operations was due to higher gross profit combined with a $46.4 million reduction in the provision for credit losses[154] Land Segment Results | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $10,426.8 M | $6,663.1 M | 56% | | Gross Profit | $301.1 M | $347.6 M | -13% | | Income from Operations | $44.6 M | $72.6 M | -38% | | Volume (gallons) | 5,254.1 M | 5,062.8 M | 4% | | Avg. Price per Gallon | $1.98 | $1.30 | 52% | - Revenue increased primarily due to a 52% rise in average fuel prices[156] - The decline in gross profit was mainly attributable to the sale of MSTS, reduced government activity in Afghanistan, and lower demand in the U.K[157] Marine Segment Results | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $8,085.8 M | $5,515.7 M | 47% | | Gross Profit | $100.3 M | $151.4 M | -34% | | Income from Operations | $20.7 M | $58.5 M | -65% | | Volume (metric tons) | 18.4 M | 17.5 M | 6% | | Avg. Price per Metric Ton | $438.31 | $315.74 | 39% | - Revenue growth was driven by a 39% increase in the average price per metric ton of bunker fuel[159] - Gross profit decreased significantly due to highly competitive market conditions in 2021, compared to strong results in H1 2020 which benefited from the implementation of IMO 2020 regulations[160] Liquidity and Capital Resources - The company believes cash on hand ($652.2 million as of Dec 31, 2021), available funds from its Credit Facility, and operating cash flows are sufficient to fund working capital and capital expenditures for at least the next twelve months[167][250] | Cash Flow Activity (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from operating activities | $173.2 | $604.1 | | Net cash from investing activities | ($58.3) | $72.8 | | Net cash from financing activities | ($113.6) | ($213.0) | - The decrease in operating cash flow was principally due to a $451.3 million increase in net working capital resulting from business recovery and higher fuel prices compared to 2020[182] - On January 3, 2022, the company closed the acquisition of Flyers for total consideration of $792.7 million, funded by cash on hand and incremental borrowings[176] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company manages commodity price, foreign currency, and interest rate risks using derivative contracts and hedging strategies - The company uses derivative instruments (futures, forwards, swaps, options) to manage commodity price risk inherent in the purchase and sale of fuel[207] - Foreign currency exchange risk from international operations is economically hedged using forward and swap contracts; a hypothetical 10% change in exchange rates is not expected to have a material impact on income from operations[209] - The company has interest rate risk from its floating-rate Credit Facility and Term Loans; a 1% fluctuation in interest rates would result in a $4.8 million change in annual interest expense[211] - A $300 million interest rate swap agreement is in place to effectively lock in the variable interest rate on a portion of its Eurodollar rate loans at 0.55%, maturing in March 2025[212] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants on accounting and financial disclosure - None[215] Item 9A. Controls and Procedures Management confirmed effective disclosure controls and internal control over financial reporting as of December 31, 2021, with no material changes - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[217] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021, based on the COSO framework[220] - There were no material changes in internal control over financial reporting during the quarter ended December 31, 2021[222] Part III Items 10, 11, 12, 13, and 14 Information for Items 10-14 (directors, executive compensation, security ownership) is incorporated by reference from the 2022 Proxy Statement - Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, related transactions, and principal accounting fees is incorporated by reference from the 2022 Proxy Statement[228][229][230] Part IV Item 15. Exhibits, Financial Statement Schedules This section presents the company's consolidated financial statements for FY2021, including balance sheets, income, equity, and cash flow statements Consolidated Financial Statements | (In millions) | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Total Current Assets | $4,019.7 | $2,639.3 | | Total Assets | $5,942.4 | $4,500.3 | | Liabilities & Equity | | | | Total Current Liabilities | $3,096.7 | $1,684.0 | | Total Liabilities | $4,025.6 | $2,587.4 | | Total Equity | $1,916.8 | $1,912.9 | | Total Liabilities & Equity | $5,942.4 | $4,500.3 | | (In millions, except per share data) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Revenue | $31,337.0 | $20,358.3 | $36,819.0 | | Gross Profit | $788.2 | $851.8 | $1,112.0 | | Income from Operations | $142.6 | $137.9 | $299.7 | | Net Income | $73.7 | $109.6 | $178.9 | | Diluted EPS | $1.16 | $1.71 | $2.69 | Note 2. Accounts Receivable | Allowance for Expected Credit Losses (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Balance as of January 1 | $57.3 | $46.6 | | Charges to allowance | $6.3 | $63.7 | | Write-offs | ($35.3) | ($53.7) | | Recoveries | $1.4 | $1.0 | | Balance as of December 31 | $29.8 | $57.3 | - The company sold $9.2 billion of receivables under its RPA programs in 2021, compared to $4.3 billion in 2020[313] Note 3. Acquisitions and Divestitures - On January 3, 2022, the company acquired Flyers Energy Group for total consideration of $792.7 million, consisting of $642.7 million in cash, $50.0 million in common stock, and a $100.0 million holdback[315] - In 2020, the company completed the sale of its Multi Service payment solutions business (MSTS) for gross cash proceeds of $303.5 million, resulting in a pre-tax gain of $80.0 million[318] Note 5. Restructuring - In 2020, the company initiated a restructuring program focused on streamlining operations, particularly in the land business; the program was completed in Q4 2021[335] - The company incurred incremental restructuring charges of $6.6 million in 2021, primarily for consulting fees and severance costs[336] - In 2020, a global office rationalization initiative resulted in an $18.6 million impairment charge related to abandoned office leases[338] Note 8. Debt, Interest Income, Expense and Other Finance Costs | Debt Component (in millions) | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Credit Facility | $0.0 | $0.0 | | Term Loans | $484.1 | $503.2 | | Finance leases | $21.2 | $18.2 | | Other | $3.3 | $3.3 | | Total Debt | $508.7 | $524.7 | - As of December 31, 2021, the company had no outstanding borrowings under its $1.3 billion Credit Facility and had $1.2 billion of unused capacity[347][348] Note 11. Income Taxes | Reconciliation of U.S. Statutory Rate to Effective Rate | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | U.S. federal statutory tax rate | 21.0% | 21.0% | 21.0% | | Foreign earnings, net of foreign taxes | (10.3%) | (13.3%) | (13.8%) | | State income taxes, net | 3.2% | 1.3% | 2.2% | | Tax Reform - GILTI | 8.8% | 0.5% | 6.0% | | Uncertain tax positions | 5.3% | 6.8% | 8.2% | | Valuation allowance | (8.0%) | 10.6% | 1.2% | | Other, net | 5.8% | 5.3% | (1.1%) | | Effective income tax rate | 25.8% | 32.2% | 23.7% | - The company has material tax examinations in progress in Denmark (2013-2019), South Korea (2011-2014), and the U.S. (2017-2019)[393] - As of December 31, 2021, the company had gross Unrecognized Tax Liabilities of $98.2 million, including penalties and interest[389] Note 13. Business Segments, Geographic Information and Major Customers | Income from Operations by Segment (in millions) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Aviation segment | $163.4 | $84.5 | $283.9 | | Land segment | $44.6 | $72.6 | $55.0 | | Marine segment | $20.7 | $58.5 | $67.1 | | Corporate overhead - unallocated | ($86.1) | ($77.8) | ($106.4) | | Total income from operations | $142.6 | $137.9 | $299.7 | - Sales to government customers, particularly NATO in Afghanistan, accounted for a material portion of profitability in recent years, but this activity materially declined and concluded in Q3 2021 with the withdrawal of troops[414]