World Fuel Services 2012 Annual Report Download - page 75

Download and view the complete annual report

Please find page 75 of the 2012 World Fuel Services annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 115

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115

inputs. Commodity contracts categorized in Level 3 are due to the significance of the unobservable
model inputs to their respective fair values. The unobservable model inputs, such as basis differentials,
are based on the difference between the historical prices of our prior transactions and the underlying
observable data. Fair value of hedged item inventories is derived using spot commodity prices and basis
differentials. Fair value of foreign currency contracts is derived using forward prices that take into
account interest rates, credit risk ratings and currency rates. Factors that could warrant a Level 2 input to
move to a Level 3 input may include lack of observable market data because of a decrease in market
activity, a degradation of a short-term investment which requires us to value the investment based on a
Level 3 input, or a change in significance of a Level 3 input to the fair value measurement in its entirety.
Our policy is to recognize transfers between Level 1, 2 or 3 as of the beginning of the reporting period in
which the event or change in circumstances caused the transfer to occur.
There were no significant changes to our valuation techniques during 2012 and 2011.
Cash and Cash Equivalents
Our cash equivalents consist principally of overnight investments, bank money market accounts, bank
time deposits, money market mutual funds and investment grade commercial paper which have an
original maturity date of less than 90 days. These securities are carried at cost, which approximates
market value.
Accounts Receivable and Allowance for Bad Debt
Credit extension, monitoring and collection are performed for each of our business segments. Each
segment has a credit committee that is responsible for approving credit limits above certain amounts,
setting and maintaining credit standards, and managing the overall quality of the credit portfolio. We
perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history
and the customer’s current creditworthiness, as determined by our review of our customer’s credit
information. We extend credit on an unsecured basis to most of our customers. Accounts receivable are
deemed past due based on contractual terms agreed to with our customers.
We continuously monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience with our customers, current market and
industry conditions of our customers, and any specific customer collection issues that we have
identified. Accounts receivable are reduced by an allowance for bad debt.
Accounts Receivable Purchase Agreement
We have a Receivables Purchase Agreement (‘‘RPA’’) to sell up to $125.0 million of certain of our
accounts receivable. On our sold receivables, we are charged a discount margin equivalent to a floating
market rate plus 2% and certain other fees, as applicable and we retain a beneficial interest in certain of
the sold accounts receivable which is included in accounts receivable, net in the accompanying
consolidated balance sheets.
As of December 31, 2012, we had sold accounts receivable of $60.1 million and recorded a retained
beneficial interest of $3.8 million. During 2012, the fees and interest paid under the RPA were not
significant.
Inventories
Inventories are valued using the average cost methodology and are stated at the lower of average cost or
market. Components of inventory include fuel purchase costs, the related transportation costs and
changes in the estimated fair market values for inventories included in a fair value hedge relationship.
Derivatives
We enter into financial derivative contracts in order to mitigate the risk of market price fluctuations in
aviation, marine and land fuel, to offer our customers fuel pricing alternatives to meet their needs and to
mitigate the risk of fluctuations in foreign currency exchange rates. We also enter into proprietary
derivative transactions, primarily intended to capitalize on arbitrage opportunities related to basis or time
spreads related to fuel products we sell. We have applied the normal purchase and normal sales
exception (‘‘NPNS’’), as provided by accounting guidance for derivative instruments and hedging
activities, to certain of our physical forward sales and purchase contracts. While these contracts are
56