World Fuel Services 2007 Annual Report Download - page 38

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64435 TX 30WORLD FUEL SERVICES
ANNUAL REPORT
28-Feb-2008 11:38 EST
CLN PSTAM
RR Donnelley ProFile SER willj0da 8*
PMT 1C
TX8724AC351073
9.9.26
Liquidity and Capital Resources
We had $36.2 million of cash and cash equivalents and $10.0 million of restricted cash as of December 31,
2007, as compared to $176.5 million of cash and cash equivalents as of December 31, 2006. Additionally, at
December 31, 2007, our short-term investments consisted of $8.1 million of commercial paper with a par value
of $10.0 million, which was investment grade when purchased. At the maturity date of the investment during
August 2007, the issuer of the commercial paper defaulted on its repayment obligation. The commercial paper is
no longer highly liquid and therefore a readily determinable fair market value of the investment is not available.
We have estimated the fair market value of the commercial paper based principally on the results of a valuation
performed by a third party. The valuation considered (i) the present value of future principal and interest
payments discounted at rates considered to reflect current market conditions; (ii) individual valuation estimates
of the underlying collateral using multiple indicators of value; and (iii) the probabilities of repayment under
various liquidation scenarios. The results of the valuation yielded a range of estimated fair market values of our
commercial paper investment from approximately $6.9 million to approximately $10.0 million. The estimated
fair market value of our commercial paper of $8.1 million at December 31, 2007 could change significantly
based on future market conditions and the ultimate settlement of our commercial paper could be for amounts
materially different from our current estimate of fair market value. As a result, additional impairment charges
may be required in the future. The commercial paper is classified as a short-term investment as of December 31,
2007 based on information available to us that suggests that it is likely there will be a cash settlement of the
commercial paper available to us within one year. Changes in facts and circumstances in future periods could
lead to changes in the expected settlement date of the commercial paper balances. Accordingly, there may be
changes in our classification of such balances from short term to long term. At December 31, 2006, our short-
term investments consisted of auction rate securities with a par value of $12.5 million, which approximated the
market value. We have not invested in any form of auction rate securities since July 2007.
Our primary use of cash, cash equivalents and short term investments is to fund receivables and the
purchase of inventories. We are usually extended unsecured trade credit from our suppliers for our fuel
purchases; however, certain suppliers require us to provide a letter of credit. Our ability to fund fuel purchases,
obtain trade credit from our suppliers, and provide letters of credit is critical to our business. 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 credit basis from our suppliers. Historically,
we have not required significant capital investment in fixed assets for our businesses as we subcontract fueling
services and maintain inventory at third party storage facilities. However, we are currently in the post-
implementation phase of an enterprise integration project, which consists of a company-wide financial and
commercial information system upgrade. The total expenditures required for this project through the stabilization
period are currently estimated to be $37.7 million. As of December 31, 2007, we had capitalized $24.6 million of
project expenditures, of which $10.5 million was incurred during 2007. Also, as of December 31, 2007, we had
expensed $11.7 million in project expenses, of which approximately $7.7 million was incurred during 2007. The
balance of these expenditures is expected to be incurred during the first quarter of 2008.
Our business is funded through cash generated from operations and borrowings under our Credit Facility.
Outstanding borrowings under our Credit Facility, our cash and cash equivalents and short-term investments
fluctuate primarily based on operating cash flow, most significantly, the timing of receipts from our customers
and payments to our suppliers. Our Credit Facility permits borrowings of up to $475.0 million with a sublimit of
$100.0 million for the issuance of letters of credit and provides us the right to request increases in available
borrowings up to an additional $75.0 million, subject to the satisfaction of certain conditions. As of
December 31, 2007, we had $40.0 million in outstanding borrowings and $55.1 million in issued letters of credit.
Our available borrowings at December 31, 2007 under the Credit Facility were $379.9 million.
Higher interest rates can have a negative effect on our liquidity due to higher costs of borrowing under our
Credit Facility. As of December 31, 2007, we had two interest rate protection arrangements in the form of
interest rate swaps in the amount of $10.0 million each to reduce our exposure to increases in interest rates.
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