Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our 2015 10-K Report and the consolidated financial statements and related notes in “Item 1 — Financial Statements” appearing elsewhere in this 10-Q Report. The following discussion may contain forward-looking statements, and our actual results may differ significantly from the results suggested by these forward-looking statements. Some factors that may cause our results to differ are disclosed in “Item 1A — Risk Factors” of our 2015 10-K Report, as updated in this 10-Q Report.
Forward-Looking Statements
Certain statements made in this report and the information incorporated by reference in it, or made by us in other reports, filings with the Securities and Exchange Commission (“SEC”), press releases, teleconferences, industry conferences or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “could,” “would,” “will,” “will be,” “will continue,” “will likely result,” “plan,” or words or phrases of similar meaning.
Forward-looking statements are estimates and projections reflecting our best judgment and involve risks, uncertainties or other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. The Company’s actual results may differ materially from the future results, performance or achievements expressed or implied by the forward-looking statements. These statements are based on our management’s expectations, beliefs and assumptions concerning future events affecting us, which in turn are based on currently available information.
Examples of forward-looking statements in this 10-Q Report include, but are not limited to, our expectations about the conditions in the marine and aviation markets, cost reduction initiatives, the timing, cost and benefits of our multi-year project and upgrade of our Enterprise Resource Planning (“ERP”) platform, the timing for closing the acquisition of assets from ExxonMobil affiliates and funding of the purchase price, as well as expectations regarding our government business, our business strategy, business prospects, operating results, effectiveness of internal controls to manage risk, working capital, liquidity, capital expenditure requirements and future acquisitions. These forward-looking statements are qualified in their entirety by cautionary statements and risk factor disclosures contained in the company’s Securities and Exchange Commission filings, including the company’s Annual Report on Form 10-K filed with the SEC on February 16, 2016. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding our ability to obtain required consents and satisfy closing conditions in acquisitions, our ability to capitalize on new market opportunities, the demand for our products, the cost, terms and availability of fuel from suppliers, pricing levels, the timing and cost of capital expenditures, outcome of pending litigation, competitive conditions, general economic conditions and synergies relating to acquisitions, joint ventures and alliances. These assumptions could prove inaccurate. Although we believe that the estimates and projections reflected in the forward-looking statements are reasonable, our expectations may prove to be incorrect.
Important factors that could cause actual results to differ materially from the results and events anticipated or implied by such forward-looking statements include, but are not limited to:
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·
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customer and counterparty creditworthiness and our ability to collect accounts receivable and settle derivative contracts;
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·
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changes in the market price of fuel;
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·
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changes in the political, economic or regulatory conditions generally and in the markets in which we operate;
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·
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our failure to effectively hedge certain financial risks and the use of derivatives;
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non-performance by counterparties or customers to derivative contracts;
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·
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changes in credit terms extended to us from our suppliers;
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non-performance of suppliers on their sale commitments and customers on their purchase commitments;
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·
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loss of, or reduced sales to a significant government customer;
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non-performance of third-party service providers;
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·
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adverse conditions in the industries in which our customers operate, including a continuation of the global economic instability and its impact on the airline and shipping industries;
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the impact of cyber and other information security-related incidents;
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·
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currency exchange fluctuations;
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currency and other global market impacts associated with United Kingdom referendum vote to exit from the European Union;
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·
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failure of fuel and other products we sell to meet specifications;
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·
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our ability to manage growth;
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·
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our ability to effectively integrate and derive benefits from acquired businesses;
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·
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material disruptions in the availability or supply of fuel;
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·
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environmental and other risks associated with the storage, transportation and delivery of petroleum products;
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·
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risks associated with operating in high risk locations;
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the impact of natural disasters, such as hurricanes;
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our failure to comply with restrictions and covenants in our senior revolving credit facility (“Credit Facility”) and our senior term loans (“Term Loans”);
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declines in the value and liquidity of cash equivalents and investments;
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our ability to retain and attract senior management and other key employees;
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changes in U.S. or foreign tax laws or changes in the mix of taxable income among different tax jurisdictions;
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·
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our ability to comply with U.S. and international laws and regulations including those related to anti-corruption, economic sanction programs and environmental matters;
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increased levels of competition;
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the outcome of litigation and other proceedings, including the costs associated in defending any actions;
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the liquidity and solvency of banks within our Credit Facility and Term Loans;
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increases in interest rates; and
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other risks, including those described in “Item 1A - Risk Factors” in our 2015 10-K Report and those described from time to time in our other filings with the SEC.
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We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all of those risks, nor can we assess the impact of all of those risks on our business or the extent to which any factor may cause actual results to differ materially from those contained in any forward-looking statement. The forward-looking statements in this 10-Q Report are based on assumptions management believes are reasonable. However, due to the uncertainties associated with forward-
looking statements, you should not place undue reliance on any forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and unless required by law, we expressly disclaim any obligation or undertaking to publicly update any of them in light of new information, future events, or otherwise.
Any public statements or disclosures by the Company 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.
Recent Developments
Acquisitions
On July 1, 2016, we completed the acquisitions of PAPCO, Inc. (“PAPCO”) and Associated Petroleum Products, Inc. (“APP”). PAPCO services retail, commercial and industrial customers with fuel, price-risk management products, and fleet card solutions throughout the Mid-Atlantic region of the United States. APP provides fuel and related services to agricultural, automotive, construction, and commercial and industrial customers in the Pacific Northwest.
United Kingdom Referendum Vote
On June 23, 2016, the United Kingdom (“U.K.”) held a referendum in which voters approved an exit from the European Union (“E.U.”), commonly referred to as "Brexit". As a result, global markets were adversely impacted, including currencies, and resulted in a decline in the value of the British pound, as compared to the U.S. dollar and other currencies. The announcement of Brexit and the withdrawal of the U.K. from the E.U. may also create global economic uncertainty, unknown social and geopolitical impacts, which may adversely affect our business, results of operations and financial condition.
Business Outlook
Declines in commodity and global energy prices, together with slowing economic growth in emerging markets, continue to adversely impact the global shipping and offshore oil exploration markets, affecting our marine segment. These macroeconomic trends present both opportunities and risks for our business. Sustained low fuel prices as compared to previous years, and limited volatility result in decreased per unit margins, demand for our price risk management products, and lower sales to the offshore specialty market due to the significant reduction in offshore exploration activity. We expect that adverse conditions in the shipping markets will continue over the second half of 2016. Further, we have identified certain cost reduction activities that are designed to further right-size and drive efficiencies across the Company.
Conversely, the low fuel price environment continues to benefit the commercial aviation industry allowing commercial airlines to improve profitability and strengthen their balance sheets. We believe our aviation segment is well positioned to capitalize on the expected increase in passenger growth and route expansion, due in part to our expanded supply capabilities in key airports both in the U.S. and internationally. Lower fuel prices have also reduced the working capital cost required to support our aviation segment, thereby improving returns and making such capital available for investment in other areas of our business. A portion of our aviation business consists of providing fuel and related products and services to military fleets and to the U.S. and foreign governments. While we still expect military-related activity to decline over time, the related contribution to aviation profitability in 2016 may be similar or slightly better than the levels we experienced in 2015. Demand for these products and services is driven by global events and can thus vary significantly from period to period.
We may also experience decreases in future sales volumes and margins as a result of further deterioration in the world economy, declines in the transportation industry, natural disasters and continued conflicts and instability in the Middle East, Asia and Latin America, as well as potential future terrorist activities and possible military retaliation. In addition, because fuel costs represent a significant part of our customers’ operating expenses, volatile and/or high fuel prices can adversely affect our customers’ businesses, and, consequently, the demand for our services and our results of operations. The announcement of Brexit and the withdrawal of the U.K. from the E.U. may also create global economic uncertainty and may cause our customers to closely monitor their costs and reduce their spending budget on our products and services, which in turn, may adversely affect our business. Finally, our hedging activities may not be effective to mitigate volatile fuel prices and may expose us to counterparty risk. See “Item 1A – Risk Factors” of our 2015 10
‑K Report,
as updated in this 10-Q Report
.
Reportable Segments
We operate in three reportable segments consisting of aviation, land and marine. In our aviation segment, we offer fuel and related products and services to major commercial airlines, second and third tier airlines, cargo carriers, regional and low cost carriers, airports, fixed based operators, corporate fleets, fractional operators, private aircraft, military fleets and the United States (“U.S.”) and foreign governments as well as intergovernmental organizations. In our land segment, we offer fuel, crude oil, lubricants, power solutions through our global energy management service offerings, natural gas and related products and services to customers including petroleum distributors operating in the land transportation market, retail petroleum operators, and industrial, commercial, residential and government customers. Our marine segment product and service offerings include fuel, lubricants and related products and services to a broad base of customers, including international container and tanker fleets, commercial cruise lines, yachts and time charter operators, offshore rig owners and operators, the U.S. and foreign governments as well as other fuel suppliers. Within each of our segments we may enter into derivative contracts to mitigate the risk of market price fluctuations and also to offer our customers fuel pricing alternatives to meet their needs.
In our aviation and land segments, we primarily purchase and resell fuel and other products, and we do not act as brokers. Profit from our aviation and land segments is primarily determined by the volume and the gross profit achieved on fuel sales and a percentage of card payment and processing revenue. In our marine segment, we primarily purchase and resell fuel and also act as brokers for others. Profit from our marine segment is determined primarily by the volume and gross profit achieved on fuel resales and by the volume and commission rate of the brokering business. Profitability in our segments also depends on our operating expenses, which may be significantly affected to the extent that we are required to provide for potential bad debt.
Our revenue and cost of revenue are significantly impacted by fuel prices. Our operating results are subject to seasonal variability. Seasonality results from numerous factors, including traditionally higher demand for natural gas and home heating oil during the winter months and aviation and land fuel during the summer months, as well as other seasonal weather patterns. Additionally, significant movements in fuel prices during any given financial period can have a significant impact on our gross profit, either positively or negatively depending on the direction, volatility and timing of such price movements.
Selected financial information with respect to our business segments is provided in Note 12 to the accompanying consolidated financial statements included in this 10
‑Q Report.
Results of Operations
Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015
Revenue.
Our revenue for the second quarter of 2016 was $6.6 billion, a decrease of $1.9 billion, or 21.9%, as compared to the second quarter of 2015. Our revenue during these periods was attributable to the following segments (in millions):
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For the Three Months ended
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June 30,
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2016
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2015
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$ Change
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Aviation segment
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$
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2,621.6
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$
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3,185.3
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$
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(563.7)
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Land segment
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2,171.0
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2,505.7
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|
(334.7)
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Marine segment
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1,840.4
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2,805.4
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|
(965.0)
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|
|
$
|
6,633.0
|
|
$
|
8,496.4
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|
$
|
(1,863.4)
|
Revenues in our aviation segment were $2.6 billion for the second quarter of 2016, a decrease of $0.6 billion, or 17.7%, as compared to the second quarter of 2015. The decline in aviation revenues was driven by lower average jet fuel prices per gallon sold in the second quarter of 2016, where the average price per gallon sold was $1.52, as compared to $2.03 in the second quarter of 2015. The overall decline attributable to jet fuel prices was partially offset by $0.3 billion, related to an increase in volume to existing customers, where volumes for the second quarter of 2016 were 1.7 billion gallons, an increase of 9.6%, as compared to the comparable prior year period.
Revenues in our land segment were $2.2 billion for the second quarter of 2016, a decrease of $0.3 billion, or 13.4%, as compared to the second quarter of 2015. The decline in land revenues primarily resulted from a lower average fuel price per gallon sold in the second quarter of 2016, as compared to the second quarter of 2015, as volumes in our land segment increased by 6.0% to 1.2 billion gallons for the second quarters of 2016, as compared to the 2015 period.
Revenues in our marine segment were $1.8 billion for the second quarter of 2016, a decrease of $1.0 billion, or 34.4%, as compared to the second quarter of 2015. The decrease was driven primarily by a 33% decline in the average price per metric ton sold, to $224.1 in the second quarter of 2016 as compared to $334.2 in the second quarter of 2015. Volumes in our marine segment declined 2.2% to 8.2 million metric tons for the second quarter of 2016, as compared to the 2015 period.
Gross Profit.
Our gross profit for the second quarter of 2016 was $218.5 million, an increase of $28.1 million, or 14.8%, as compared to the second quarter of 2015. Our gross profit during these periods was attributable to the following segments (in millions):
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For the Three Months ended
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June 30,
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|
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2016
|
|
2015
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$ Change
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Aviation segment
|
|
$
|
98.6
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|
$
|
85.0
|
|
$
|
13.6
|
Land segment
|
|
|
80.2
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|
|
63.6
|
|
|
16.6
|
Marine segment
|
|
|
39.7
|
|
|
41.8
|
|
|
(2.1)
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|
|
$
|
218.5
|
|
$
|
190.4
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|
$
|
28.1
|
Our aviation segment gross profit for the second quarter of 2016 was $98.6 million, an increase of $13.6 million, or 16.0%, as compared to the second quarter of 2015. The increase in aviation gross profit was primarily due to increases in both the core resale business in North America and Europe, and our U.S. and foreign military-related activity.
Our land segment gross profit for the second quarter of 2016 was $80.2 million, an increase of $16.6 million, or 26.1%, as compared to the second quarter of 2015. While average fuel prices per gallon sold decreased, our land segment generated an increase in gross profit that was driven by recently acquired businesses, including our global energy management services business, that were not included in our prior year results. The land segment was also impacted by increased profits from the North America retail, wholesale and commercial and industrial businesses. Increases in our land segment were partially offset by lower demand in the agricultural sector, due in large part to the extreme wet weather in the United Kingdom, as well as weakness with construction-related customers.
Our marine segment gross profit for the second quarter of 2016 was $39.7 million, a decrease of $2.1 million, or 5.0%, as compared to the second quarter of 2015. The decline in marine segment gross profits was impacted by continued market contraction, which has resulted in a considerably lower fuel price environment, a weakened offshore market and lower price volatility—leading to decreased demand for price risk management offerings, which has collectively resulted in lower overall unit margins. We expect gross profit in the marine segment to benefit from seasonal activity during the quarter ending September 30, 2016, which may result in improved results for the segment, as compared to the current period.
Operating Expenses.
Total operating expenses for the second quarter of 2016 were $173.0 million, an increase of $24.2 million, or 16.3%, as compared to the second quarter of 2015. The total increase in operating expenses was primarily associated with acquired businesses primarily within our Land segment, related professional fees and other growth-related initiatives. The following table sets forth our expense categories (in millions):
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For the Three Months ended
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June 30,
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2016
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2015
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$ Change
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Compensation and employee benefits
|
|
$
|
103.7
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|
$
|
87.5
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|
$
|
16.2
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Provision for bad debt
|
|
|
2.5
|
|
|
2.3
|
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|
0.2
|
General and administrative
|
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|
66.8
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|
59.0
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7.8
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|
$
|
173.0
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|
$
|
148.8
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|
$
|
24.2
|
Income from Operations
. Income from operations during these periods was attributable to the following segments (in millions):
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For the Three Months ended
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June 30,
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2016
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2015
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$ Change
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Aviation segment
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$
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37.2
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|
$
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26.0
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|
$
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11.2
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Land segment
|
|
|
16.2
|
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|
16.5
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|
(0.3)
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Marine segment
|
|
|
11.0
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|
13.6
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|
(2.6)
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|
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|
64.4
|
|
|
56.1
|
|
|
8.3
|
Corporate overhead - unallocated
|
|
|
18.8
|
|
|
14.5
|
|
|
4.3
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|
$
|
45.6
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|
$
|
41.6
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|
$
|
4.0
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Our income from operations for the second quarter of 2016 was $45.6 million, an increase of $4.0 million, or 9.6%, as compared to the second quarter of 2015. The increase was attributable to our aviation segment, which benefited from increased volume in the core resale business in North America and Europe, and our U.S. and foreign military-related activity. The aviation segment increase was partially offset by lower gross profit per metric ton sold in our marine segment.
Corporate overhead costs not charged to the business segments for the second quarter of 2016 were $18.8 million, an increase of $4.3 million, or 29.7%, as compared to the second quarter of 2015. This increase was principally driven by additional costs related to acquired businesses.
Non-Operating Expenses, net.
For the second quarter of 2016, we had non-operating expenses, net of $8.7 million, a slight increase of $0.7 million as compared to the second quarter of 2015.
Income Taxes
. For the second quarter of 2016, our effective income tax rate was 19.4% and our income tax provision was $7.1 million, as compared to an effective income tax rate of 13.7% and an income tax provision of $4.6 million for the second quarter of 2015.
Our provision for income taxes for the second quarter of 2016 was adjusted for an income tax expense of $2.4 million net for discrete items related to changes in estimates in uncertain tax positions. Without the $2.4 million adjustment, the three month period ended June 30, 2016 effective tax rate would have been 12.8%.
Net Loss Attributable to Noncontrolling Interest
. For the second quarter of 2016, net loss attributable to noncontrolling interest was $0.2 million, a decrease of $1.3 million as compared to the second quarter 2015.
Net Income and Diluted Earnings per Common Share
. Our net income for the second quarter of 2016 was $30.0 million, a decrease of $0.5 million, or 1.6%, as compared to the second quarter of 2015. Diluted earnings per common share was $0.43 per common share for the second quarter of 2016 and 2015, respectively.
Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015
Revenue.
Our revenue for the first six months of 2016 was $11.8 billion, a decrease of $4.0 billion, or 25.3%, as compared to the first six months of 2015. Our revenue during these periods was attributable to the following segments (in millions):
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|
For the Six Months ended
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June 30,
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|
2016
|
|
2015
|
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$ Change
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|
|
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|
Aviation segment
|
|
$
|
4,841.0
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|
$
|
6,082.3
|
|
$
|
(1,241.3)
|
Land segment
|
|
|
3,866.0
|
|
|
4,628.7
|
|
|
(762.7)
|
Marine Segment
|
|
|
3,116.9
|
|
|
5,126.1
|
|
|
(2,009.2)
|
|
|
$
|
11,823.9
|
|
$
|
15,837.1
|
|
$
|
(4,013.2)
|
Revenues in our aviation segment were $4.8 billion for the first six months of 2016, a decrease of $1.2 billion, or 20.4%, as compared to the first six months of 2015. The decline in aviation revenues was driven by lower average jet fuel prices per gallon sold in the first six months of 2016, where the average price per gallon sold was $1.45, as compared to $ 2.01 in 2015. The overall decline attributable to jet
fuel prices was partially offset by $0.7 billion, related to an increased volume to existing customers, where volumes for the first six months of 2016 were 3.4 billion gallons, an increase of 10.8%, as compared to the comparable prior year period.
Revenues in our land segment were $3.9 billion for the first six months of 2016, a decrease of $0.8 billion, or 16.5%, as compared to the first six months of 2015. The decline in land revenues primarily resulted from a lower average fuel price per gallon sold during the first six months of 2016, as compared to the first six months of 2015. The overall decline was partially offset by an increase in volumes from new and existing customers, where volumes for the first six months of 2016 was 2.5 billion gallons, an increase of 7.2%, as compared to the first six months of 2015.
Revenues in our marine segment were $3.1 billion for the first six months of 2016, a decrease of $2.0 billion, or 39.2%, as compared to the first six months of 2015. The decrease was driven primarily by a 39% decline in the average price per metric ton sold, to $196.3 in the first six months of 2016 as compared to $319.3 in the first six months of 2015. Volumes in our marine segment for the first six months of 2016 were 15.9 million metric tons and decreased slightly by 1.1%, as compared to the first six months of 2015.
Gross Profit.
Our gross profit for the first six months of 2016 was $440.0 million, an increase of $36.0 million, or 8.9%, as compared to the first six months of 2015. Our gross profit during these periods was attributable to the following segments (in millions):
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|
For the Six Months ended
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|
June 30,
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|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
|
|
|
|
|
|
|
|
|
Aviation segment
|
|
$
|
187.3
|
|
$
|
166.1
|
|
$
|
21.2
|
Land segment
|
|
|
173.9
|
|
|
142.2
|
|
|
31.7
|
Marine Segment
|
|
|
78.8
|
|
|
95.7
|
|
|
(16.9)
|
|
|
$
|
440.0
|
|
$
|
404.0
|
|
$
|
36.0
|
Our aviation segment gross profit for the first six months of 2016 was $187.3 million, an increase of $21.2 million, or 12.8%, as compared to the first six months of 2015. The increase in aviation gross profit was due to increased volume attributable to both the core resale business in North America and Europe, and our U.S. and foreign military-related activity.
Our land segment gross profit for the first six months of 2016 was $173.9 million, an increase of $31.7 million, or 22.3%, as compared to the first six months of 2015. While average fuel prices per gallon sold decreased, our land segment generated an increase in gross profit that was driven by recently acquired businesses, including our global energy management services business, that were not included in our prior year results. The land segment was also impacted by
increased profits from the North American retail, wholesale and commercial and industrial businesses, offset in part by the
impact of weather conditions on our reselling activities in the United Kingdom.
Our marine segment gross profit for the first six months of 2016 was $78.8 million, a decrease of $16.9 million, or 17.7%, as compared to the first six months of 2015. The decrease in marine segment gross profit continued to be impacted by the low fuel price environment, a weakened offshore market and lower price volatility, which resulted in decreased demand for the price risk management products we offer, leading to lower overall unit margins.
Operating Expenses.
Total operating expenses for the second quarter of 2016 were $333.4 million, an increase of $38.6 million, or 13.1%, as compared to the second quarter of 2015. The total increase in operating expenses was primarily associated with acquired businesses, related professional fees and other growth-related initiatives. The following table sets forth our expense categories (in millions):
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|
|
|
|
|
|
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|
For the Six Months ended
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|
June 30,
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|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
$
|
199.6
|
|
|
176.2
|
|
$
|
23.4
|
Provision for bad debt
|
|
|
3.9
|
|
|
3.6
|
|
|
0.3
|
General and administrative
|
|
|
129.9
|
|
|
115.0
|
|
|
14.9
|
|
|
$
|
333.4
|
|
$
|
294.8
|
|
$
|
38.6
|
Of the $23.4 million increase in compensation and employee benefits, $12.2 million was due to compensation for new hires to support our growing global business and $11.2 million was due to expenses related to acquired businesses. Of the $14.9 million increase
in general and administrative expenses, $8.6 million was due to expenses related to acquired businesses and $6.3 million was due to increased general and administrative expenses to support our growing global business.
Income from Operations
. Our income from operations, excluding unallocated corporate overhead, for the first six months of 2016 was $143.8 million, an increase of $5.8 million, or 4.2%, as compared to the first six months of 2015. Income from operations during these periods was attributable to the following segments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months ended
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
|
|
|
|
|
|
|
|
|
Aviation segment
|
|
$
|
71.2
|
|
$
|
52.0
|
|
$
|
19.2
|
Land segment
|
|
|
50.1
|
|
|
46.2
|
|
|
3.9
|
Marine Segment
|
|
|
22.5
|
|
|
39.8
|
|
|
(17.3)
|
|
|
|
143.8
|
|
|
138.0
|
|
|
5.8
|
Corporate overhead - unallocated
|
|
|
37.2
|
|
|
28.8
|
|
|
8.4
|
|
|
$
|
106.6
|
|
$
|
109.2
|
|
$
|
(2.6)
|
Our income from operations, including allocated corporate overhead, for the first six months of 2016 was $106.6 million, a decrease of $2.6 million, or 2.4%, as compared to the second quarter of 2015. The decline was primarily experienced in our marine segment, where income from operations for the first six months of 2016 was $22.5 million, a decrease of $17.3 million, or 43.5%, as compared to the first six months of 2015. The decrease in the marine segment was impacted by the low fuel price environment, a weakened offshore market and lower price volatility, which resulted in decreased demand for the price risk management products we offer, leading to lower overall unit margins in the first six months of 2016 as compared to the first six months of 2015. The decline in our marine segment was offset by increases in our aviation segment and, to a lesser extent our land segment. Our aviation segment benefited from increased volume attributable to both the core resale business and our U.S. and foreign military-related activity.
Corporate overhead costs not charged to the business segments for the first six months of 2016 were $37.2 million, an increase of $8.4 million, or 29.2%, as compared to the first six months of 2015 principally due to increased compensation expenses to support our growing global business.
Non-Operating Expenses, net.
We had non-operating expenses, net of $15.0 million, for the first six months of 2016 and 2015, respectively.
Income Taxes
. For the first six months of 2016, our effective income tax rate was 11.2% and our income tax provision was $10.3 million, as compared to an effective income tax rate of 16.9% and an income tax provision of $15.9 million for the first six months of 2015. Our provision for income taxes for the six months ended June 30, 2016 was adjusted for an income tax benefit of $1.6 million, net for discrete items related to changes in estimates in uncertain tax positions. Without the $1.6 million adjustment, the six month period ended June 30, 2016 effective income tax rate would have been 13.0%. The lower effective income tax rate for the first six months of 2016 resulted principally from differences in the results of our subsidiaries in tax jurisdictions with different income tax rates as compared to the first six months of 2015.
Net Loss Attributable to Noncontrolling Interest
. For the first six months of 2016, net loss attributable to noncontrolling interest was $0.3 million, a decrease of $2.3 million as compared to the first six months of 2015.
Net Income and Diluted Earnings per Common Share
. Our net income for the first six months of 2016 was $81.6 million, an increase of $0.7 million, or 1.0%, as compared to the first six months of 2015. Diluted earnings per common share for the first six months of 2016 was $1.17 per common share, an increase of $0.05 per common share, or 4.4%, as compared to the first six months of 2015.
Liquidity and Capital Resources
Cash Flows
The following table reflects the major categories of cash flows for the six months ended June 30, 2016 and 2015 (in millions). For additional details, please see the consolidated statements of cash flows.
|
|
|
|
|
|
|
|
|
For the Six Months ended
|
|
|
June 30,
|
|
|
2016
|
|
2015
|
Net cash provided by operating activities
|
|
$
|
201.0
|
|
$
|
177.8
|
Net cash (used in) investing activities
|
|
|
(36.8)
|
|
|
(24.0)
|
Net cash (used in) provided by financing activities
|
|
|
(10.6)
|
|
|
34.7
|
Operating Activities.
For the six months ended June 30, 2016, net cash provided by operating activities was $201.0 million as compared to $177.8 million for the first six months of 2015. The $23.2 million increase in operating cash flows was primarily due to year-over-year changes in assets and liabilities, net of acquisitions. For the first six months of 2016 changes in accounts payable balance provided cash of $190.0 million for the first six months of 2016, as compared to $50.8 million for the first six months of 2015, driven principally by increased sales volumes and the impact of rising average fuel prices during the first six months of 2016. Additionally, changes in inventories and short-term derivative assets were impacted by the low price fuel environment, coupled with limited volatility, resulting in combined net cash provided of $16.1 million. Offsetting these increase were changes in our accounts receivables balances which had a cash use of $230.1 million, as compared to $50.1 million in the first six months of 2015, principally due to increased sales volumes and the impact of rising average fuel prices during the first six months of 2016.
Investing Activities.
For the six months ended June 30, 2016, net cash used in investing activities was $36.8 million as compared to $24.0 million for the first six months of 2015. Of the $12.8 million increase in cash used in investing activities, $43.2 million was principally due to increased acquisition-related activity, whereas in the first three months of 2016 we completed three acquisitions in our land segment, which was partially offset by proceeds of $29.3 million from the sale of the Pester retail business.
Financing Activities.
For the six months ended June 30, 2016, net cash used in financing activities was $10.6 million as compared to $34.7 million of cash provided by financing activities for the first six months of 2015. The $45.3 million change was principally due to $60.3 million in lower net borrowings under our credit facility in the first six months of 2016 as compared to the first six months of 2015 partially offset by an $11.6 million decrease in cash used for common stock repurchases in the first six months of 2016 as compared to the first six months of 2015.
Other Liquidity Measures
Cash and Cash Equivalents.
As of June 30, 2016 and December 31, 2015, we had cash and cash equivalents of $737.2 million and $582.5 million, respectively.
Our primary use of cash and cash equivalents are to fund strategic investments, primarily acquisitions and purchase inventory. We are usually extended unsecured trade credit from our suppliers for our fuel purchases; however, certain suppliers require us to either prepay or provide a letter of credit. Increases in oil prices can negatively affect liquidity by increasing the amount of cash needed to fund fuel purchases as well as reducing the amount of fuel which we can purchase on an unsecured basis from our suppliers.
We previously committed to undertake a multi-year project designed to drive greater improvement in operating efficiencies and optimize scalability designed to incorporate acquisitions that we may undertake in the future. We will accomplish this in part by a global design and deployment of an upgrade to our existing ERP platform. We are currently in the early planning phase and the cost incurred during the first six months of 2016 was not considered significant. We expect the total cost of the project over the next three years to range between $30.0 million and $40.0 million.
Credit Facility and Term Loans.
We have a Credit Facility which permits borrowing up to $1.26 billion with a sublimit of $400.0 million for the issuance of letters of credit and bankers’ acceptances. Under the Credit Facility, we have the right to request increases in available borrowings up to an additional $150.0 million, subject to the satisfaction of certain conditions. The Credit Facility matures in October 2018. We had outstanding borrowings under our Credit Facility totaling $444.5 million and $416.0 million as of June 30, 2016 and December 31, 2015, respectively. Our issued letters of credit under the Credit Facility totaled $5.1 million and $5.5 million as of
June 30, 2016 and December 31, 2015, respectively. We also had $326.4 million and $333.2 million in Term Loans outstanding as of June 30, 2016 and December 31, 2015, respectively. As of June 30, 2016 and December 31, 2015, the unused portion of our Credit Facility was $809.1 million and $838.5 million, respectively.
Our liquidity, consisting of cash and cash equivalents and availability under the Credit Facility fluctuates based on a number of factors, including the timing of receipts from our customers and payments to our suppliers as well as commodity prices. Our Credit Facility and our Term Loans contain certain financial and other covenants with which we are required to comply. Our failure to comply with the covenants contained in our Credit Facility and our Term Loans could result in an event of default. An event of default, if not cured or waived, would permit acceleration of any outstanding indebtedness under the Credit Facility and our Term Loans, trigger cross
‑defaults under certain other agreements to which we are a party and impair our ability to obtain working capital advances and issue letters of credit, which would have a material adverse effect on our business, financial condition, results of operations and cash flows. As of June 30, 2016, we were in compliance with all financial covenants contained in our Credit Facility and our Term Loans.
Other Credit Lines and Receivables Purchase Agreements
. Additionally, we have other uncommitted credit lines primarily for the issuance of letters of credit, bank guarantees and bankers’ acceptances. These credit lines are renewable on an annual basis and are subject to fees at market rates. As of June 30, 2016 and December 31, 2015, our outstanding letters of credit and bank guarantees under these credit lines totaled $160.8 million and $208.4 million, respectively. We also have Receivables Purchase Agreements (“RPAs”) that allow for the sale of up to an aggregate of $499.0 million of our accounts receivable. As of June 30, 2016, we had sold accounts receivable of $170.3 million under the RPAs.
Short-Term Debt
. As of June 30, 2016, our short-term debt of $28.8 million primarily represents the current maturities (within the next twelve months) of Term Loan borrowings, certain promissory notes related to acquisitions and capital lease obligations.
We believe that our cash and cash equivalents as of June 30, 2016 (of which $111.4 million was available for use by our U.S. subsidiaries without incurring additional costs) and available funds from our Credit Facility, together with cash flows generated by operations, remain sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months. In addition, to further enhance our liquidity profile, we may choose to raise additional funds which may or may not be needed for additional working capital, capital expenditures or other strategic investments. Our opinions concerning liquidity are based on currently available information. To the extent this information proves to be inaccurate, or if circumstances change, future availability of trade credit or other sources of financing may be reduced and our liquidity would be adversely affected. Factors that may affect the availability of trade credit or other forms of financing include our financial performance (as measured by various factors, including cash provided by operating activities), the state of worldwide credit markets, and our levels of outstanding debt. Depending on the severity and direct impact of these factors on us, financing may be limited or unavailable on terms favorable to us.
Acquisitions.
In July 2016, we
completed the acquisitions of PAPCO, Inc. (“PAPCO”), which services retail, commercial and industrial customers with fuel, price-risk management products, and fleet card solutions throughout the Mid-Atlantic region of the United States and Associated Petroleum Products, Inc. (“APP”), which provides fuel and related services to agricultural, automotive, construction, and commercial and industrial customers in the Pacific Northwest. I
n the first quarter of 2016, we signed a definitive agreement to acquire from certain ExxonMobil affiliates their aviation fueling operations at 83 airports in Canada, the United Kingdom, Germany, Italy, France, Australia and New Zealand. The total purchase price is approximately $260.0 million and is expected to be fully funded with cash on hand. The transaction will close in phases, with the majority of locations expected to close during the second half of 2016. The transaction is subject to customary regulatory consents and closing conditions, including securing third party consents and therefore there can be no assurance that we will be successful in closing the acquisition.
Contractual Obligations and Off-Balance Sheet Arrangements
Except for changes in the contractual obligations and off-balance sheet arrangements described below, there were no other material changes from December 31, 2015 to June 30, 2016. For a discussion of these matters, refer to “Contractual Obligations and Off-Balance Sheet Arrangements” in Item 7 of our 2015 10-K Report.
Contractual Obligations
`Derivative Obligations.
As of June 30, 2016, our net derivative obligations were $43.5 million, principally due within one year.
Purchase Commitment Obligations.
As of June 30, 2016, fixed purchase commitments under our derivative programs amounted to $92.1 million, principally due within one year.
Off-Balance Sheet Arrangements
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 of June 30, 2016, we had issued letters of credit and bank guarantees totaling $165.9 million under our Credit Facility and other uncommitted credit lines. For additional information on our Credit Facility and other credit lines, see the discussion in “Liquidity and Capital Resources” above.
Recent Accounting Pronouncements
Information regarding recently adopted accounting pronouncements is included in Note 1 - Significant Accounting Policies in the “Notes to the Consolidated Financial Statements” in this 10-Q Report.
Recently Issued Accounting Standards
Revenue Recognition.
In May 2014, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. Under this
ASU and subsequently issued amendments, an entity is required to recognize the amount of revenue it expects to be entitled to for the transfer of promised goods or services to customers. The standard is effective for interim and annual reporting periods beginning after December 15, 2017.
The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method
. Early adoption of the standard is permitted, but not before December 15, 2016.
We have not yet selected a transition method and we are currently evaluating how the adoption of the standard will impact our consolidated financial statements and related disclosures
.
Derivatives and Hedging:
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships and ASU 2016-06, Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments. ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-06 clarifies the steps required to determine bifurcation of an embedded derivative. These standards are effective at the beginning of our 2017 fiscal year. We are currently evaluating whether the adoption of these standards will have a significant impact on our consolidated financial statements and related disclosures.
Inventory: Simplifying the Measurement of Inventory.
In July 2015, the FASB issued ASU 2015-11, which simplifies the subsequent measurement of inventory by requiring inventory within the scope of this update to be measured at the lower of cost or net realizable value rather than the lower of cost or market. This standard is effective at the beginning of our 2017 fiscal year. We are currently evaluating whether the adoption of this new guidance will have a significant impact on our consolidated financial statements and related disclosures.
Leases
.
In February 2016, the FASB issued an ASU 2016-02, Leases. This standard will require all lessees to recognize a right of use asset and a lease liability on the balance sheet, except for leases with durations that are less than twelve months. The standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. We are currently evaluating whether the adoption of this new guidance will have a significant impact on our consolidated financial statements and disclosures.
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting.
In March 2016, the FASB issued ASU 2016-09. This ASU is intended to improve the accounting for employee share-based payments.
Several aspects of the accounting for share-based payment award transactions are simplified, including:
(a)
income tax consequences;
(b)
classification of awards as either equity or liabilities; and
(c)
classification on the statement of cash flows
.
This update is effective at the beginning of our 2017 fiscal year with an election to early adopt at the beginning of 2016. We are currently evaluating whether the adoption of this new guidance will impact our consolidated financial statements and related disclosures.