The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto appearing within Part IV. Item 15. Notes to the Consolidated Financial Statements in this 2021 10K Report. 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 materially from the results and events anticipated or implied by such forward-looking statements are described in Item 1A - Risk Factors and under Forward-Looking Statements. We have elected to omit in this 2021 10K Report, discussion on the earliest of the three years covered by the Consolidated Financial Statements presented. Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations located in our Form 10-K for the fiscal year endedDecember 31, 2020 (herein incorporated by reference), filed with theSEC onMarch 1, 2021 , for management's discussion of the fiscal year endedDecember 31, 2019 . Business Overview We are principally engaged in the distribution of fuel and related products and services in the aviation, land and marine transportation industries. Our intention is to become a leading global energy management company offering a full suite of energy advisory, management and fulfillment services, technology solutions, payment management solutions, as well as sustainability products and services across the renewable energy market. For additional discussion on our businesses, climate change and the associated risks, see Part I, Item 1. - Business and Item 1A - Risk Factors within this 2021 10-K Report.
COVID-19[female[feminine
Throughout 2020 and 2021, the COVID-19 pandemic had a significant impact on the
global economy as a whole, and the transportation industries in particular. Many
of our customers in these industries, especially commercial airlines,
experienced a substantial decline in business activity arising from the various
measures enacted by governments around the world to contain the spread of the
virus. While travel and economic activity has begun to improve in certain
regions, activity in many parts of the world continues to be negatively impacted
by travel restrictions and lockdowns. For additional discussion on the risks
relating to the pandemic, see Item 1A. - Risk Factors within this 2021 10-K
Report.
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Reportable Segments We operate in three reportable segments consisting of aviation, land, and marine, where we offer fuel and related products and services to customers in these transportation industries.
See Part I, Article 1. – Activity and Note 13. Business sectors, geographic information and main customers for additional information on our business sectors.
Aviation Segment Our aviation segment has benefited from growth in our fuel and related services offerings, as well as our improving logistics capability and the geographic expansion of our aviation fueling operations into additional international airport locations. However, the global travel restrictions and sharp decrease in demand for air travel resulting from the COVID-19 pandemic significantly impacted the overall aviation market, and accordingly, our results of operations throughout 2020 and 2021. We have experienced improvements in demand and related volume increases in certain regions, principallyNorth America , and are experiencing an accelerating recovery inWestern Europe . The continued recovery in demand will be highly contingent on the timing and extent of governmental actions or restrictions globally in response to any increases in infection rates and the overall recovery of the global economy and passenger travel generally. In addition, our aviation segment has historically benefited from significant sales to government customers, particularly theNorth Atlantic Treaty Organization ("NATO") inAfghanistan , which accounted for a material portion of our aviation segment's profitability in recent years. The level of troop deployments and military-related activities can cause our government customer sales to vary significantly and materially impact our operating results. Specifically, in 2020 theU.S. government andNATO began to significantly reduce the level of troops inAfghanistan and we experienced a corresponding material decline in demand as a result. The final withdrawal of troops in the area was completed during the third quarter of 2021. 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, serving to further enhance our commercial and industrial platforms to deliver value-added solutions to customers across theU.S. In addition, to participate in accelerating the energy transition, we continue to focus on the expansion of our sustainability offerings, which include consulting, renewable fuel products, and carbon management and renewable energy solutions through World Kinect, our global energy management brand. Our land segment can be impacted by market and weather conditions. In periods where we experience historically extreme or unseasonable weather conditions, demand for our products may be affected. In addition, our land segment also similarly benefited from sales toNATO inAfghanistan in recent years, however, such activity materially declined and ultimately concluded in 2021 in connection with theU.S. andNATO troop withdrawal. In connection with our efforts to sharpen our portfolio of businesses and accelerate growth in our core business activities, we have divested of certain businesses and focused on investing in businesses that we believe will drive enhanced operating efficiencies and generate long-term shareholder value. For example, in the third quarter of 2020, we completed the sale of MSTS and inJanuary 2022 , we closed the acquisition of Flyers. We believe that the addition of Flyers' operations, which include transportation, commercial fleet fueling, lubricants distribution, and the supply of wholesale, branded and renewable fuels, will enable us to create an expanded national platform to deliver value-added solutions to commercial and industrial customers acrossthe United States . See Note 3. Acquisitions and Divestitures for additional information. In addition to our acquisition and divestiture activities, we also heightened our focus in 2021 on restructuring our existing land business inNorth America , including reorganizing and relocating certain business activities, as well as implementing changes to the operational and management structure of the business to allow for greater scalability and quicker integration of new businesses to capture synergies. During the fourth quarter of 2021, we were able to complete all necessary activities and close the restructuring and expect the ultimate financial benefit to be realized as new businesses are acquired and integrated into our land segment. See Note 5. Restructuring for additional information. Marine Segment Through much of 2019 and into early 2020, we experienced improved profitability in our marine segment due to higher average fuel prices, combined with our heightened focus on cost management and the continued reshaping of our business portfolio. In particular, the IMO 2020 regulations resulted in certain supply imbalances and price volatility which positively impacted our operating results in those periods. However, beginning in the latter part of the first quarter of 2020 and continuing through 2021, we experienced a material decline in volume and related profitability primarily due to the impact of the COVID-19 pandemic on the marine transportation industry. While we 23
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have experienced some improvements in demand, we expect our marine segment's
operating performance to continue to be impacted by, among other things,
uncertain demand from cruise lines and other sectors of the shipping industry,
as well as competitive market conditions.
Consolidated Results of Operations
The following provides a summary of our consolidated results of operations for
the periods indicated:
Year Ended December
31,
2021 2020
Revenue $ 31,337.0 $ 20,358.3
Cost of revenue 30,548.8 19,506.5
Gross profit 788.2 851.8
Operating expenses:
Compensation and employee benefits 386.7 366.9
General and administrative 247.6 311.1
Asset impairments 4.7 25.6
Restructuring charges 6.6 10.3
Total operating expenses 645.6 714.0
Income from operations 142.6 137.9
Non-operating income (expenses), net:
Interest expense and other financing costs, net (40.2) (44.9)
Other income (expense), net (2.3) 68.8
Total non-operating income (expense), net (42.5) 23.9
Income (loss) before income taxes 100.0 161.7
Provision for income taxes 25.8 52.1
Net income (loss) including noncontrolling interest 74.2 109.6
Net income (loss) attributable to noncontrolling interest 0.5 0.1
Net income (loss) attributable to World Fuel
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
Revenue. Our consolidated revenue for the year endedDecember 31, 2021 was$31.3 billion , an increase of$11.0 billion , or 54%, compared to the year endedDecember 31, 2020 , driven by increased revenue of$4.6 billion ,$3.8 billion , and$2.6 billion in the aviation, land, and marine segments, respectively, as discussed further below. Gross profit. Our consolidated gross profit for the year endedDecember 31, 2021 was$788.2 million , a decrease of$63.6 million , or 7%, compared to the year endedDecember 31, 2020 , driven by decreased gross profit of$51.1 million and$46.5 million in the marine and land segments, respectively, partially offset by increased gross profit of$34.0 million in the aviation segment, as discussed further below. Operating Expenses. Consolidated total operating expenses for the year endedDecember 31, 2021 were$645.6 million , a decrease of$68.3 million , or 10%, compared to the year endedDecember 31, 2020 . The decrease in operating expenses was driven by a reduction in the provision for credit losses due to a stabilization of customer credit risk, the sale of MSTS, and the impairment charge recognized in 2020 as part of the global office footprint rationalization (the "2020 impairment"). These decreases were partially offset by an increase in employee compensation and benefit costs primarily related to increased incentive compensation to reward and retain key employees in a competitive job market. Non-Operating Income (Expenses), net. For the year endedDecember 31, 2021 , we had net non-operating expense of$42.5 million , compared to net non-operating income of$23.9 million for the year endedDecember 31, 2020 . The decrease of$66.4 million was primarily attributable to the gain on the sale of MSTS in 2020, partially offset by a decrease in foreign currency losses and an increase in interest income in 2021. 24
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Income Taxes. For the year endedDecember 31, 2021 , our income tax provision was$25.8 million and our effective income tax rate was 26%, as compared to an income tax provision of$52.1 million and an effective income tax rate of 32% for the year endedDecember 31, 2020 . The decrease of$26.2 million was primarily attributable to the tax on the gain on the sale of MSTS in 2020, as well as a$3.2 million net discrete tax benefit for 2021 as compared to a$4.5 million net discrete tax expense for 2020. See Note 11. Income Taxes for additional information. Aviation Segment Results of Operations The following provides a summary of the aviation segment results of operations for the periods indicated: Year Ended December 31, 2021 2020 Change Revenue$ 12,824.3 $ 8,179.6 $ 4,644.8 Gross profit$ 386.9 $ 352.9 $ 34.0 Operating expenses 223.5 268.4 (44.9) Income from operations$ 163.4 $ 84.5 $ 78.9 Operational metrics: Aviation segment volumes (gallons) 5,857.5 4,694.1 1,163.3 Aviation segment average price per gallon $
2.08
Revenues in our aviation segment were$12.8 billion for the year endedDecember 31, 2021 , an increase of$4.6 billion , or 57%, compared to the year endedDecember 31, 2020 . The increase in revenue was driven by higher average prices and increased volumes. Average jet fuel price per gallon sold increased by 43% in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 as a result of the rise in global oil prices. Total aviation volumes increased by 1.2 billion, or 25%, to 5.9 billion gallons in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 as travel restrictions eased, primarily in the North American market, and demand for passenger air travel continued to recover. Our aviation segment gross profit for the year endedDecember 31, 2021 was$386.9 million , an increase of$34.0 million , or 10%, compared to the year endedDecember 31, 2020 . The increase in gross profit was primarily due to the recovery in demand for passenger air travel, partially offset by a reduction in our government-related activity inAfghanistan and the sale of MSTS. Our aviation segment income from operations for the year endedDecember 31, 2021 was$163.4 million , an increase of$78.9 million , or 93%, compared to the year endedDecember 31, 2020 due to a reduction in operating expenses combined with the increase in gross profit. Operating expenses for the year endedDecember 31, 2021 decreased$44.9 million primarily due to a$46.4 million reduction in the provision for credit losses driven by the stabilization of customer credit risk as the global aviation industry continues to recover and the 2020 impairment, partially offset by an increase in compensation and employee benefit costs as discussed above. Land Segment Results of Operations The following provides a summary of the land segment results of operations for the periods indicated: Year Ended December 31, 2021 2020 Change Revenue$ 10,426.8 $ 6,663.1 $ 3,763.8 Gross profit 301.1 347.6 (46.5) Operating expenses 256.4 275.0 (18.6) Income from operations$ 44.6 $ 72.6 $ (27.9) Operational metrics: Land segment volumes (gallons) 5,254.1 5,062.8 191.3 Land segment average price per gallon$ 1.98 $ 1.30 $ 0.68 25
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Revenues in our land segment were$10.4 billion for the year endedDecember 31, 2021 , an increase of$3.8 billion , or 56%, compared to the year endedDecember 31, 2020 . The increase in revenue was primarily driven by a 52% increase in the average fuel price per gallon or gallon equivalent sold in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 as a result of the rise in global oil prices. Total land volumes increased by 0.2 billion, or 4%, to 5.3 billion gallon or gallon equivalents in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Our land segment gross profit for the year endedDecember 31, 2021 was$301.1 million , a decrease of$46.5 million , or 13%, compared to the year endedDecember 31, 2020 . The decrease in gross profit was primarily attributable to the sale of MSTS, the reduction in our government-related activity inAfghanistan , and a decrease in demand in theU.K. , partially offset by improved performance in our natural gas business inNorth America driven by extreme weather conditions in the first quarter of 2021. Our land segment income from operations for the year endedDecember 31, 2021 was$44.6 million , a decrease of$27.9 million , or 38%, compared to the year endedDecember 31, 2020 . In 2021, the decrease in gross profit was partially offset by the overall reduction in operating expenses, driven by the sale of MSTS in 2020, partially offset by increased compensation and employee benefit costs and restructuring expenses. Marine Segment Results of Operations The following provides a summary of the marine segment results of operations for the periods indicated: Year Ended December 31, 2021 2020 Change Revenue$ 8,085.8 $ 5,515.7 $ 2,570.1 Gross profit 100.3 151.4 (51.1) Operating expenses 79.6 92.8 (13.2) Income from operations$ 20.7 $ 58.5 $ (37.9) Operational metrics: Marine segment volumes (metric tons) 18.4 17.5 1.0 Marine segment average price per metric ton $
438.31
Revenues in our marine segment were$8.1 billion for the year endedDecember 31, 2021 , an increase of$2.6 billion , or 47%, compared to the year endedDecember 31, 2020 . The increase in revenue was primarily driven by a 39% increase in the average price per metric ton of bunker fuel sold as a result of the rise in global oil prices. Total volumes increased by 1.0 million metric tons, or 6%, to 18.4 million metric tons in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Our marine segment gross profit for the year endedDecember 31, 2021 was$100.3 million , a decrease of$51.1 million , or 34%, compared to the year endedDecember 31, 2020 . The decrease in gross profit was primarily attributable to highly competitive market conditions in 2021, combined with a decline relative to the strong results in the first half of 2020, which benefited from the implementation of IMO 2020. Our marine segment income from operations for the year endedDecember 31, 2021 was$20.7 million , a decrease of$37.9 million , or 65%, compared to the year endedDecember 31, 2020 . The decrease in income from operations was primarily due to the$51.1 million decrease in gross profit, partially offset by a$13.2 million reduction in operating expenses. The decrease in operating expenses was driven by a lower provision for credit losses, together with the 2020 impairment and costs associated with the restructuring program recognized in 2020, partially offset by increased compensation and employee benefit costs. 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, whether as a result of the COVID-19 pandemic or otherwise, the future availability of trade credit or other sources of financing may be reduced, and our liquidity would be adversely affected accordingly. 26
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Sources of Liquidity and Factors Affecting Our Liquidity Our liquidity, consisting primarily 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, and our financial performance.
We rely on credit arrangements with banks, suppliers and other parties as an important source of liquidity for capital requirements not satisfied by our operating cash flow. Future market volatility, generally, and any persistent weakness in global energy markets may adversely affect our ability to access capital and credit markets or to obtain funds at reasonable interest rates or on other advantageous terms. In addition, since our business is impacted by the availability of trade credit to fund fuel purchases, an actual or perceived decline in our liquidity or business generally could cause our suppliers to reduce our credit lines, seek credit support in the form of additional collateral or otherwise materially modify our payment terms. During times of high fuel prices, our customers may not be able to purchase as much fuel from us because of their credit limits with us and the resulting adverse impact on their business could cause them to be unable to make payments owed to us for fuel purchased on credit. Furthermore, when fuel prices increase our working capital requirements increase and our own credit limits could prevent us from purchasing enough fuel from our suppliers to meet our customers' demands, or we could be required to prepay for fuel purchases, any of which would adversely impact our liquidity. Conversely, extended periods of low fuel prices, particularly when coupled with low price volatility, can also have an adverse effect on our results of operations and overall profitability. This can occur due to many factors, such as reduced demand for our price risk management products and decreased sales to our customers involved in the oil exploration sector. Low fuel prices also facilitate increased competition by reducing financial barriers to entry and enabling existing, lower-capitalized competitors to conduct more business as a result of lower working capital requirements. Based on the information currently available, we believe that our cash and cash equivalents as ofDecember 31, 2021 and available funds from our Credit Facility, 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. Credit Facility and Term Loans. Our availability under our 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 adjusted consolidated earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") for the four immediately preceding fiscal quarters. The Credit Agreement generally limits the total amount of indebtedness we may incur to not more than 3.75 to 1. In connection with the acquisition of Flyers inJanuary 2022 , the applicable leverage ratio is 4.5 to 1 until the end of 2022 pursuant to the terms of the Credit Facility. As a result of the foregoing, as well as other covenants and restrictions contained in our Credit Facility, 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 Facility and our Term Loans could result in an event of default. An event of default, if not cured or waived, would permit acceleration of any outstanding indebtedness under the Credit Facility and our Term Loans, trigger cross-defaults under certain other agreements to which we are a party and impair our ability to obtain working capital advances and issue letters of credit, which would have a material adverse effect on our business, financial condition, results of operations and cash flows. See Note 8. Debt, Interest Income, Expense and Other Finance Costs for additional information. Other Credit Lines. Additionally, we have other uncommitted credit lines primarily for the issuance of letters of credit, bank guarantees and bankers' acceptances. These credit lines are renewable on an annual basis and are subject to fees at market rates. As ofDecember 31, 2021 and 2020, our outstanding letters of credit and bank guarantees under these credit lines totaled$404.0 million and$328.4 million , respectively. Receivables Purchase Agreements. We also have accounts receivable programs under receivables purchase agreements ("RPAs") that allow us to sell a specified amount of qualifying accounts receivable and receive cash consideration equal to the total balance, less a discount margin, which varies based on the outstanding accounts receivable at any given time. The RPA agreements provide the constituent banks with the ability to add or remove customers from these programs in their discretion based on, among other things, the level of risk exposure the bank is willing to accept with respect to any particular customer. The fees the banks charge us to purchase the receivables from these customers can also be impacted for these reasons. See Note 2. Accounts Receivable for additional information.
See Section 1A. – Risk Factors in Part 1 of this 10-K 2021 Report for additional information.
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Future Uses of Liquidity Cash is primarily used to fund working capital to support our operations as well as for strategic acquisitions and investments, such as the acquisition of Flyers discussed below.
From
Year 1 Years 2-3 Years 4-5 > 5 Years Total
Debts and interest obligations (1)
7.1$ 3.0 $ 536.6 Operating lease obligations (2) 38.0 59.7 40.9 59.2 197.9 Finance lease obligations (2) 5.3 7.9 6.6 3.6 23.5 Derivatives obligations (3) 168.4 66.6 - - 235.0 Purchase commitment obligations (4) 52.0 17.5 15.4 8.1 93.0 Other obligations 1.7 2.6 2.6 1.2 8.1 Total$ 305.8 $ 640.6 $ 72.6 $ 75.1 $ 1,094.0 (1)Debt and interest obligations include principal and interest payments on fixed-rate and variable-rate, fixed-term debt based on their maturity dates. See Note 8. Debt, Interest Income, Expense and Other Finance Costs for additional information.
(2) We enter into rental agreements for the use of offices, operational facilities, vehicles, vessels, storage tanks and other assets for our operations worldwide. See Note 15. Leases for more information.
(3)As part of our risk management program, we enter into derivative instruments intended to mitigate risks associated with changes in commodity prices, foreign currency exchange rate, and interest rates. Our obligations associated with these derivative instruments fluctuate based on changes in the fair value of the derivatives. See Note 4. Derivative Instruments and Note 12. Fair Value Measurements for additional information. (4)We have fixed purchase commitments associated with our risk management program, as well as a purchase contract, that runs through 2026, under which we agreed to purchase annually between 1.9 million barrels and 2.0 million barrels of aviation fuel at future market prices. See Note 9. Commitments and Contingencies for additional information.
Significant future cash requirements and off-balance sheet arrangements, in addition to the contractual obligations shown in the table above, include the following:
Acquisition of Flyers. OnJanuary 3, 2022 , we closed the acquisition of Flyers for total consideration of$792.7 million , subject to customary adjustments relating to net working capital, indebtedness and transaction expenses. At closing,$642.7 million was paid in cash,$50.0 million was satisfied through the delivery of the Company's common stock, and the remaining$100.0 million remains payable to the seller, with one-half to be released on each of the first and second anniversary of the closing of the acquisition. The consideration at closing was funded through approximately$326 million of cash on hand and incremental borrowings under our Credit Facility subsequent toDecember 31, 2021 . See Note 3. Acquisitions and Divestitures for additional information.
Capital expenditure. During the year ended
Unrecognized Income Tax Liabilities. As ofDecember 31, 2021 , we have recorded gross liabilities for unrecognized income tax benefits ("Unrecognized Tax Liabilities"), including penalties and interest, of$98.2 million . The timing of any settlement of our Unrecognized Tax Liabilities with the respective taxing authority cannot be reasonably estimated. Letters of Credit and Bank Guarantees. In the normal course of business, we are required to provide letters of credit to certain suppliers. A majority of these letters of credit expire within one year from their issuance and expired letters of credit are renewed as needed. As ofDecember 31, 2021 , we had issued letters of credit and bank guarantees totaling$450.7 million under our Credit Facility and other uncommitted credit lines. Surety Bonds. In the normal course of business, we are required to post bid, performance and other surety-related bonds. The majority of the surety bonds posted relate to our aviation and land segments. We had outstanding bonds that were executed in order to satisfy various security requirements of$54.9 million as ofDecember 31, 2021 . 28
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Cash Flows The following table reflects the major categories of cash flows for the years endedDecember 31, 2021 , 2020 and 2019 (in millions). For additional details, please see the Consolidated Statements of Cash Flows. 2021 2020
2019
Net cash provided by (used in) operating activities
$ 228.8 Net cash provided by (used in) investing activities (58.3) 72.8
(50.5)
Net cash provided by (used in) financing activities (113.6) (213.0)
(204.9)
Operating Activities. For the year endedDecember 31, 2021 , net cash provided by operating activities was$173.2 million compared to net cash provided of$604.1 million for the year endedDecember 31, 2020 . The$430.9 million decrease in operating cash flows was principally due to an increase in net working capital of$451.3 million due to a recovery in activity as compared to the pandemic-related impacts in 2020, as well as higher average fuel prices in 2021, partially offset by increased operating results of$19.5 million . Investing Activities. For the year endedDecember 31, 2021 , net cash used in investing activities was$58.3 million , compared to net cash provided of$72.8 million for the year endedDecember 31, 2020 . The net cash used in investing activities for the year endedDecember 31, 2021 was primarily driven by$39.2 million in capital expenditures and$37.1 million for the acquisition of a business in the land segment in the fourth quarter of 2021, partially offset by net cash proceeds of$25.0 million from the collection of a note receivable related to the sale of MSTS. Net cash provided by investing activities for the year endedDecember 31, 2020 was primarily driven by net cash proceeds of$259.6 million received from the sale of MSTS, partially offset by cash paid for the acquisition of the UVair fuel business of$128.6 million , as discussed in Note 3. Acquisitions and Divestitures, and capital expenditures of$51.3 million . Financing Activities. For the year endedDecember 31, 2021 , net cash used in financing activities was$113.6 million , compared to net cash used of$213.0 million for the year endedDecember 31, 2020 . Net cash used in financing activities for the year endedDecember 31, 2021 was primarily driven by repurchases of our common stock in the aggregate amount of$50.5 million , dividend payments on our common stock of$28.7 million , and net repayments of debt under our Credit Facility of$23.9 million . Net cash used in financing activities of$213.0 million for the year endedDecember 31, 2020 was primarily driven by net repayments of debt under our Credit Facility of$112.0 million , repurchases of our common stock in the aggregate amount of$68.3 million , and dividend payments on our common stock of$25.6 million . Critical Accounting Estimates Management's discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements included elsewhere in this 2021 10K Report, which has been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to unbilled revenue and associated costs of sales, allowance for credit losses, goodwill and identifiable intangible assets, certain accrued liabilities, and income taxes. We base our estimates on historical experience and on other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified the areas described below as critical to our business operations and the understanding of our results of operations given the uncertainties associated with the assumptions underlying each estimate. For a detailed discussion on the application of these and other significant accounting policies, see Note 1. Basis of Presentation, New Accounting Standards and Significant Accounting Policies. 29
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Effect if Actual Results Differ
Description Judgments and Uncertainties from Assumptions
Impairment Assessments
These assessments require us to make Based on the assessments impairment at least annually, and accounting estimates that require performed, and supported by the whenever events or changes in consideration of forecasted available information as of circumstances indicate it is more financial information. Significant December 31, 2021, we concluded likely than not that the fair judgment is involved in performing that the carrying value of our value of a reporting unit is less these estimates as they are long-lived assets and equity than its carrying amount. We developed based on forecasted investments were recoverable and periodically evaluate whether the assumptions. As of December 31, that the fair value of our land carrying value of long-lived 2021, the assumptions used, and aviation reporting units were assets (property and equipment, particularly the expected growth not less than their respective identifiable intangible assets, rates, the profitability embedded in carrying values. However, at this and leases) and equity investments our projected cash flow, the time, we are unable to predict have been impaired when discount rate and the market-based with specificity the ultimate circumstances indicate the multiples, were defined in the impact of the pandemic, as it carrying value of those assets may context of current and future will depend on the magnitude, not be recoverable. potential impacts of COVID-19 on
our severity and duration, as well as
business and other business
The factors. at what speed and to what extent,
Management also considered the normal economic and operating
volatility in the company's market conditions resume on a
capitalization since the beginning sustainable basis globally.
of the pandemic and evaluated the Accordingly, if the impact of the
potential impact that this pandemic, and its associated
volatility may have had on the reduction in business are more
estimated fair value of our severe or longer in duration than
reporting units. we have assumed, such impact
could potentially result in
impairments.
Accounts receivable and allowance for credit losses We maintain an allowance for
We consider historical payment As a result of the challenges
estimated credit losses based upon trends of our customers together inherent in estimating which
our historical experience with our with internal and external customers are less likely to
customers, any specific customer information about the economic remit amounts owed to us, our
collection issues that we have outlook, geopolitical risks and provision for estimated credit
identified from current financial macroeconomic events, which may not losses may not always be
information and business fully capture the current or future sufficient. Any write-off of
prospects, as well as creditworthiness of our customers, accounts receivable in excess of
forward-looking information from particularly in difficult economic our provision for credit losses
market sources. periods. could adversely affect our
results of operations and cash
flow.
Business Combinations
A business combination occurs when Significant judgment is involved in If estimates or assumptions used
an entity obtains control of a the determination of fair values in to estimate fair values are
"business." To conclude if the the context of acquisitions as fair materially incorrect, future
definition of a business is met, values are generally developed based earnings through depreciation and
we need to conclude whether on forecasted assumptions. Other amortization expense could be
substantially all of the fair factors affecting the concluded fair impacted. In addition, if
value of the gross assets acquired value are assumptions and estimates forecasts supporting the
is concentrated in a single regarding the industry and economic valuation of the long-lived
identifiable asset or a group of factors as well as expected growth, assets, intangibles, or goodwill
similar identifiable assets which profitability and risks embedded in are not achieved, impairments
requires significant judgment to the new acquired activities. could arise.
determine the fair value. The
determination of whether the
acquired activities and assets
constitute a business is critical
because the accounting for a
business combination differs
significantly from that of an
asset acquisition. Business
combinations are accounted for
using a fair value model. In
contrast, asset acquisitions are
accounted for using a cost
accumulation and allocation model.
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Effect if Actual Results Differ
Description Judgments and Uncertainties from Assumptions
Revenue Recognition
The majority of our consolidated In drawing this conclusion, we
Our determination as to whether revenue is generated taking into account various factors, including revenue recognition on a gross or net sale of fuel and fuel-related products
inventory risk management, latitude basis can materially impact the products. We generally recognize in establishing the sales price, amount of revenue we report. fuel sales on a gross basis as we discretion in the supplier selection have control of the products and that we are normally the
primary
before they are delivered to our obligor in our sales arrangements. customers. Income Taxes We estimate total income tax Changes in tax laws and rates, such Due to the complexity of some of expense based on statutory tax as The Tax Cuts and Jobs Act (the these uncertainties, the ultimate rates and tax planning "Tax Act") enacted on December 22, resolution of our tax related opportunities available to us in 2017, could affect recorded deferred balances or valuation allowances various jurisdictions in which we tax assets and liabilities in the may result in a payment that is operate. Deferred income taxes are future. Changes in projected future materially different from the recognized for the future tax earnings could affect the recorded current estimate of the tax effects of temporary differences valuation allowances in the future. liabilities. To the extent we between financial and income tax Our calculations related to income prevail in matters for which reporting using tax rates in taxes contain uncertainties due to unrecognized tax benefit effect for the years in which the judgment used to calculate tax liabilities have been established, differences are expected to liabilities in the application of or are required to pay amounts in reverse. Valuation allowances are complex tax regulations across the excess of our recorded unrecognized recorded when it is likely a tax tax jurisdictions where we operate. tax benefit liabilities, our benefit will not be realized for a Our analysis of unrecognized tax effective tax rate in a given deferred tax asset. We record benefits contains uncertainties financial statement period could be unrecognized tax benefit based on judgment used to apply the materially affected. liabilities for known or more likely than not recognition
and
anticipated tax issues based on measurement thresholds. our analysis of whether, and the extent to which, additional taxes will be due.
Derivatives
We enter into financial derivative When available, quoted market prices While we currently believe that our contracts to mitigate our risk of or prices obtained through external derivative contracts will be fuel market price fluctuations in sources are used to determine a effective in mitigating the aviation, land and marine fuel as contract's fair value. For contracts associated price risks, it is well as changes in interest and for which quoted market prices are possible that our derivative foreign currency exchange rates not available, fair value is instruments will be ineffective at and also to offer our customers determined based on pricing models
mitigate significant changes in fuel pricing alternatives to cater primarily to historical prices, which could adversely affect their needs. These instruments can provide information and expectations
impact on our financial position
be designated as cash flow or fair relationship with quoted market and results of operations. If our
value hedges, or accounted for as prices. Measurement of the fair estimates of fair value are
non-designated derivatives. All value of our derivatives also inaccurate, we may be exposed to
derivative instruments are requires the assessment of certain losses or gains that could be
measured and recorded at fair risks related to non-performance, material. See Item 7A. -
value. which requires a significant amount Quantitative and Qualitative
of judgment. Disclosures About Market Risks for
additional information.
Item 7A. Quantitative and qualitative information on market risk
Derivative and Financial Instruments Market Risk
We use commodity-based derivative contracts and financial instruments, when we
deem it appropriate, to manage the risks associated with changes in the prices
of fuel and fuel-related products, fluctuations in foreign currency exchange
rates and interest rates, or to capture market opportunities. We utilize hedge
accounting and formally designate certain of our derivative instruments as
either cash flow or fair value hedges. Derivative instruments that are not
designated are considered non-designated hedges and are designed to achieve an
economic offset of the underlying price risk exposure. Financial instruments and
positions affecting our financial statements are described below and are held
primarily for hedging purposes. As a result, any changes in income associated
with our derivatives contracts are substantially offset by corresponding changes
in the value of the underlying risk being mitigated.
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Commodity Price Risk
Our commercial business segments use derivative instruments, primarily futures,
forward, swap, and options contracts, in various markets to manage price risk
inherent in the purchase and sale of fuel. Certain of these derivative
instruments are utilized to mitigate the risk of price volatility in forecasted
transactions in a cash flow hedge relationship and to mitigate the risk of
changes in the price of our inventory in a fair value hedge relationship. In
addition, we use derivatives as economic hedges or to optimize the value of our
fuel inventory to capitalize on anticipated market opportunities.
The notional and fair market values of our commodity-based derivative instrument
positions were as follows (in millions, except weighted average contract price):
As of December 31,
Commodity Contracts (In millions of BBL) 2021 2020
Notional Weighted Notional Weighted
Net Average Fair Net Average Fair
Settlement Long/ Contract Value Long/ Contract Value
Hedge Strategy Derivative Instrument Period (Short) Price Amount (Short) Price Amount
Commodity contracts
Designated hedge hedging inventory 2021 - $ - $ - (3.3) $ 53.291 $ 2.9
2022 (2.8) 92.257 (8.2) (0.1) 54.256 (0.4)
(8.2) 2.5
Non-designated hedge Commodity contracts 2021 - - - 13.9 1.052 24.3
2022 4.6 4.633 10.1 1.0 1.067 7.8
2023 0.1 14.199 7.8 - 9.333 4.3
2024 0.1 12.274 6.5 0.1 10.118 4.4
2025 - 12.354 2.0 - - -
Thereafter (0.2) 12.497 1.4 - 10.745 1.7
27.8 42.5
Total commodity derivative contracts $ 19.6 $ 45.0
Foreign Currency Exchange Risk
We hedge our exposure to currency exchange rate changes, such as
foreign-currency-denominated trade receivables, payables, or local currency tax
payments. The foreign currency exchange rate risk results primarily from our
international operations and is economically hedged using forward and swap
contracts. The changes in the fair value of these foreign currency exchange
derivatives are recorded in earnings. Since the gains or losses on the forward
and swap contracts are substantially offset by the gains or losses from
remeasuring the hedged foreign-currency-denominated exposure, we do not believe
that a hypothetical 10% change in exchange rates at December 31, 2021 would have
a material impact on our income from operations.
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As ofDecember 31, 2021 , the foreign currency denominated notional amounts and fair value inU.S. dollars of our exposures from our foreign currency exchange derivatives, were primarily related to the following (in millions, except weighted average contract price): Notional Weighted Average Settlement Period Unit Net Long/(Short) Contract Price Fair Value Amount 2022 CAD (22.3) 1.257 $ (0.1) 2022 CLP 15,459.0 838.368 0.1 2022 COP (37,217.2) 3,828.634 0.4 2022 DKK 266.6 6.152 (0.8) 2022 EUR (37.6) 1.154 0.5 2022 GBP 4.8 1.358 (0.1) 2022 KRW (10,769.6) 1,196.713 (0.1) 2022 MXN (1,107.2) 21.151 (0.7) 2022 NOK (773.1) 8.481 1.7 2022 SEK 138.1 8.201 (0.3) 2022 ZAR 158.0 15.705 (0.2) Total foreign currency exchange derivative contracts $ 0.4 The total fair value our foreign currency exchange derivative contracts was an asset of$0.4 million and a liability of$12.3 million as ofDecember 31, 2021 and 2020, respectively. The majority of foreign currency exchange derivatives are settled within one year. See Note 4. Derivative Instruments for additional information. Interest Rate Risk Borrowings under our Credit Facility and Term Loans related to base rate loans or Eurodollar rate loans bear floating interest rates plus applicable margins. As ofDecember 31, 2021 , the applicable margins for base rate loans and Eurodollar rate loans were 0.75% and 1.75%, respectively. As ofDecember 31, 2021 , we had no outstanding borrowings under our Credit Facility and$484.1 million in Term Loans. As ofDecember 31, 2021 , the aggregate outstanding balance of our finance lease obligations was$21.2 million , which bear interest at annual rates ranging from 1.0% to 5.9%. Our other remaining outstanding debt of$3.3 million , as ofDecember 31, 2021 , primarily relates to loans payable in varying amounts which bear interest at annual rates ranging from zero to 3.5%. The weighted average interest rate on our short-term debt was 2.0% as ofDecember 31, 2021 . A 1% fluctuation in the interest rate on our outstanding debt would result in a$4.8 million change in interest expense during the next twelve months. InMarch 2020 , we entered into a$300 million , one-month LIBOR, floating-for-fixed interest rate non-amortizing swap with a maturity date inMarch 2025 (the "Swap"). The Swap agreement effectively locks in the variable interest cash flows we will pay for a portion of our Eurodollar rate loans at 0.55%. The fair value of the interest rate swap contract was an asset of$5.1 million and a liability of$3.7 million as ofDecember 31, 2021 and 2020, respectively. The following table presents the contractual weighted average interest rates and expected cash flows by maturity dates (in millions, except weighted average interest rates): Expected Maturities as of December 31, 2021 Interest Rate Swap 2022 2023 2024 2025 Fair Value Notional Value:$300 $ 5.1 Variable to Fixed(1)$ (0.3) $ 2.0 $ 2.7 $ 0.7 Average pay rate 0.55 % 0.55 % 0.55 % 0.55 % Average receive rate 0.45 % 1.21 % 1.46 % 1.52 %
(1) Represents net receipts or (payments) discounted from cash flows.
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