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Acquisitions and Significant Accounting Policies | 9 Months Ended
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Sep. 30, 2011
Acquisitions and Significant Accounting Policies |
Acquisitions and Significant Accounting Policies |
1. Acquisitions and Significant Accounting Policies Acquisitions 2011 Acquisitions During the three months ended September 30, 2011, we completed four acquisitions, which were not material. We acquired certain assets of three companies in our aviation segment and one company in our land segment. The financial position, results of operations and cash flows of these acquisitions have been included in our consolidated financial statements since their respective acquisition dates. During the three months ended June 30, 2011, we completed two acquisitions. We acquired all of the outstanding stock of Ascent Aviation Group, Inc. (“Ascent”) based in Parish, New York on April 1, 2011. Ascent supplies branded aviation fuel and de-icing fluid to more than 450 airports and fixed base operators throughout North America. The other acquisition was in our marine segment and was not material. The financial position, results of operations and cash flows of these acquisitions have been included in our consolidated financial statements since their respective acquisition dates. In connection with the Ascent acquisition, we paid certain assumed employee benefits which have been classified as a financing activity in the consolidated statement of cash flows due to the fact that the liability was paid on behalf of the seller subsequent to closing. On March 1, 2011, we completed the acquisition of all of the outstanding stock of Nordic Camp Supply ApS and certain affiliates (“NCS”) based in Aalborg, Denmark. NCS is a full-service supplier of aviation fuel and related logistics solutions supporting NATO, US and other European armed forces operations in Iraq and Afghanistan. The financial position, results of operations and cash flows of NCS have been included in our consolidated financial statements since its acquisition date. The estimated aggregate purchase price for the 2011 acquisitions was $153.2 million, and is subject to change based on the final value of the net assets acquired. The following reconciles the estimated aggregate purchase price for the 2011 acquisitions to the cash paid for the acquisitions, net of cash acquired (in thousands):
Estimated purchase price |  | $ | 153,213 |
Less: Promissory notes issued |  | 8,278 |
Less: Common stock issued |  | 27,491 |
Estimated cash consideration |  | 117,444 |
Less: Amounts due to sellers, net |  | 6,007 |
Cash consideration paid |  | 111,437 |
Less: Cash acquired |  | 2,638 |
Cash paid for acquisition of businesses, net of cash acquired |  | $ | 108,799 |
The fair value of the common stock issued as part of the consideration paid for our acquisitions was determined on the basis of the closing market price of the common shares on the acquisition date. The estimated purchase price for each of the 2011 acquisitions was allocated to the assets acquired and liabilities assumed based on their estimated fair value at the acquisition date. Since the valuations of the assets acquired and liabilities assumed in connection with the 2011 acquisitions have not been finalized, the allocation of the purchase price of these acquisitions may change. On an aggregate basis, the estimated purchase price allocation for the 2011 acquisitions is as follows (in thousands):
Assets acquired: |  |  |
Cash and cash equivalents |  | $ | 2,638 |
Accounts receivable |  | 60,923 |
Inventories |  | 38,045 |
Other current and long-term assets |  | 15,713 |
Property and equipment |  | 22,559 |
Identifiable intangible assets |  | 18,780 |
Goodwill |  | 42,850 |
Liabilities assumed: |  |  |
Accounts payable |  | (36,434 | )
Assumed employee benefits |  | (5,421 | )
Accrued expenses and other current liabilities |  | (3,031 | )
Other long-term liabilities |  | (3,409 | )
Estimated purchase price |  | $ | 153,213 |
In connection with the 2011 acquisitions, we recorded goodwill of $39.5 million in our aviation segment, $2.8 million in our marine segment and $0.6 million in our land segment, of which $25.9 million is anticipated to be deductible for tax purposes. The revenues and net income of the 2011 acquisitions were $163.6 million and $4.7 million, respectively, for the three months ended September 30, 2011 and $349.6 million and $9.2 million, respectively, for the nine months ended September 30, 2011. Pro Forma Information The following presents the unaudited pro forma results for the nine months ended September 30, 2011 and the three and nine months ended September 30, 2010 as if the 2011 acquisitions had been completed on January 1, 2010 (in thousands, except per share data):
|  | For the Three Months Ended |  | For the Nine Months Ended |
|  | September 30, |  | September 30, |
|  | 2011 |  | 2010 |  | 2011 |  | 2010 |
|  | (pro forma) |  | (pro forma) |  | (pro forma) |  | (pro forma) |
Revenue |  | $ | 9,510,792 |  | $ | 5,100,149 |  | $ | 25,486,686 |  | $ | 13,592,036 |
Net income attributable to World Fuel |  | $ | 52,655 |  | $ | 38,123 |  | $ | 151,582 |  | $ | 109,700 |
Earnings per common share: |  |  |  |  |  |  |  |  |
Basic |  | $ | 0.74 |  | $ | 0.62 |  | $ | 2.14 |  | $ | 1.81 |
Diluted |  | $ | 0.74 |  | $ | 0.61 |  | $ | 2.12 |  | $ | 1.78 |
The acquisitions completed during the three months ended September 30, 2011 are not included in the pro forma information for the three months ended September 30, 2011 as their impact on the pro forma amounts is not significant. 2010 Acquisitions Based on our ongoing fair value assessment of certain of our 2010 acquisitions, we recorded an increase in acquired net assets of $3.9 million with a related increase in the aggregate estimated purchase price of these acquisitions during the nine months ended September 30, 2011. The increase in acquired net assets was mainly attributable to 1) an increase in goodwill of $11.6 million and $2.8 million in our land and marine segments, respectively, 2) a reduction of goodwill of $0.4 million in our aviation segment, 3) a reduction in identifiable intangible assets of $9.3 million, 4) a reduction in fixed assets of $0.5 million and 5) an increase in long-term liabilities of $0.5 million. Since the valuations of the assets acquired and liabilities assumed in connection with the acquisitions completed in the last three months of 2010 have not been finalized, the allocation of the purchase price of these acquisitions may change. There were no significant adjustments in total acquired net assets during the three months ended September 30, 2011. 2009 Acquisitions In April 2009, we acquired all of the outstanding stock of Henty Oil Limited, Tank and Marine Engineering Limited and Henty Shipping Services Limited (collectively, “Henty”), a provider of marine and land based fuels in the United Kingdom. The Henty purchase agreement includes an Earn-out based on Henty meeting certain operating targets over the three-year period ending April 30, 2012. The maximum Earn-out that may be paid is £6.0 million ($9.3 million as of September 30, 2011) if all operating targets are achieved with a minimum Earn-out of £2.7 million ($4.2 million as of September 30, 2011). We estimate the fair value of the Earn-out at each reporting period based on our assessment of the probability of Henty achieving such operating targets over the three-year period. As of September 30, 2011, we have recorded an Earn-out liability of £3.2 million ($5.0 million). The impact of Henty’s revenues and net income did not have a significant impact on our results for the three and nine months ended September 30, 2011. Significant Accounting Policies Except as updated below, the significant accounting policies we use for quarterly financial reporting are the same as those disclosed in Note 1 of the “Notes to the Consolidated Financial Statements” included in our 2010 10-K Report. Basis of Presentation The accompanying consolidated financial statements and related notes to the consolidated financial statements include our accounts and those of our majority-owned or controlled subsidiaries, after elimination of all significant intercompany accounts, transactions, and profits. Certain amounts in prior periods have been reclassified to conform to the current period’s presentation. Accounts Receivable Purchase Agreement We have a Receivables Purchase Agreement (“RPA”) to sell up to $100.0 million of certain of our accounts receivable. The sale price is an amount equal to either 90% or 100%, depending on the customer, of the sold accounts receivable balance less a discount margin equivalent to a floating market rate plus 2% and certain other fees, as applicable. Under the terms of the RPA, we retain a beneficial interest in certain of the sold accounts receivable of 10%, which is included in accounts receivable, net in the accompanying consolidated balance sheet. As of September 30, 2011, we had sold accounts receivable of $41.8 million and recorded a retained beneficial interest of $4.1 million. During the three and nine months ended September 30, 2011, the fees and interest paid under the RPA were not significant. Goodwill Goodwill represents the future earnings and cash flow potential of the acquired business in excess of the fair values that are assigned to all other identifiable assets and liabilities. Goodwill arises because the purchase price paid reflects numerous factors, including the strategic fit and expected synergies these targets bring to existing operations and the prevailing market value for comparable companies. Of the increase in goodwill from December 31, 2010, $56.9 million was related to acquisitions (see Acquisitions above), which was partially offset by a reduction in goodwill of $0.8 million as a result of foreign currency translation adjustments of our Brazilian subsidiary in our marine segment. Extinguishment of Liability In the normal course of business, we accrue liabilities for fuel and services received for which invoices have not yet been received. These liabilities are derecognized, or extinguished, if either 1) payment is made to relieve our obligation for the liability or 2) we are legally released from our obligation for the liability, such as when our legal obligations with respect to such liabilities lapse or otherwise no longer exist. During the three and nine months ended September 30, 2011, we derecognized vendor liability accruals due to the legal release of our obligations in the amount of $2.7 million and $5.9 million, as compared to $3.3 million and $7.9 million during the three and nine months ended September 30, 2010, which is reflected as a reduction of cost of revenue in the accompanying consolidated statements of income. Recent Accounting Pronouncements Testing Goodwill for Impairment. In September 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update (“ASU”) intended to simplify how entities test goodwill for impairment. This update permits an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. This ASU becomes effective on a prospective basis at the beginning of our 2012 fiscal year. We do not believe that the adoption of this ASU will have a material impact on our consolidated financial statements and disclosures. Disclosure Relating to Comprehensive Income. In June 2011, the FASB issued an ASU aimed at increasing the prominence of items reported in other comprehensive income in the financial statements. This update requires companies to present comprehensive income in a single statement below net income or in a separate statement of comprehensive income immediately following the income statement. This ASU becomes effective on a prospective basis at the beginning of our 2012 fiscal year. We do not believe that the adoption of this ASU will have a material impact on our consolidated financial statements and disclosures. Fair Value Measurements. In May 2011, the FASB issued an ASU to provide a consistent definition of fair value and common requirements for measurement and disclosure of fair value between International Financial Reporting Standards and U.S. Generally Accepted Accounting Principals. This ASU changes some fair value measurement principles and enhances disclosure requirements related to activities in Level 3 of the fair value hierarchy. The guidance becomes effective on a prospective basis at the beginning our 2012 fiscal year. We do not believe that the adoption of this ASU will have a material impact on our consolidated financial statements and disclosures. Transfers and Servicing: Reconsideration of Effective Control for Repurchase Agreements. In April 2011, the FASB issued an ASU that affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. This ASU removes from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee, and also eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all of the cost purchasing replacement financial assets. This ASU is effective at the beginning of our 2012 fiscal year and is required to be applied prospectively to transactions or modifications of existing transactions that occur on or after January 1, 2012. We are currently evaluating whether the adoption of this ASU will have a material impact on our consolidated financial statements and disclosures. Disclosure of Supplementary Pro Forma Information for Business Combinations. In January 2011, we adopted an ASU which clarifies the acquisition date that should be used for reporting pro forma financial information when comparative financial statements are presented and also expands the supplemental pro forma disclosures required. The adoption of this ASU did not have a material impact on our consolidated financial statements and disclosures. When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. In January 2011, we adopted an ASU which modifies the requirements of step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The adoption of this ASU did not have a material impact on our consolidated financial statements and disclosures. Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. In July 2010, the FASB issued an ASU relating to improved disclosures about the credit quality of financing receivables and the related allowance for credit losses. In December 2010, we adopted the portion of the guidance which pertains to disclosures as of the end of the reporting period. In January 2011, we adopted the portion of the guidance which pertains to the disclosures for activity that occur during a reporting period. The adoption of this ASU did not have a material impact on our consolidated financial statements and disclosures.

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