World Kinect Corp: Form 10-Q for the period ended Sep 30, 2023

The following discussion should be read in conjunction with our 2022 10-K Report and the unaudited Condensed Consolidated Financial Statements and related Notes in Item 1 – Financial Statements of this 10-Q Report. A reference to a "Note" herein refers to the accompanying Notes to the Condensed Consolidated Financial Statements contained in Item 1 – Financial Statements. 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 are disclosed in Item 1A – Risk Factors of our 2022 10-K Report.

Forward-Looking Statements

This 10-Q Report and the information incorporated by reference in it, or made by us in other reports, filings with the U.S. Securities and Exchange Commission (the "SEC"), press releases, teleconferences, industry conferences or otherwise, contain "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," "plan," or words or phrases of similar meaning. Specifically, this 10-Q Report includes forward-looking statements regarding (i) the conditions in the aviation, land, and marine markets and their impact on our business, (ii) our growth strategies, including the position of our land segment to gain market share, (iii) the impact of fuel prices and our working capital, liquidity, and capital expenditure requirements, (iv) our expectations and estimates regarding tax, legal and accounting matters, including the impact on our financial statements, (v) our hedging strategy, (vi) estimates regarding the financial impact of our derivative contracts, (vii) expectations regarding inflation and its impact on us, and (viii) our role in the transition to lower carbon alternatives and the impact of our services on such transition. These forward-looking statements are qualified in their entirety by cautionary statements and risk factor disclosures contained in our SEC filings.

These 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. Although we believe the estimates and projections reflected in the forward-looking statements are reasonable, our expectations may prove to be incorrect. Our actual results may differ materially from the future results, performance or achievements expressed or implied by the forward-looking statements.

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:

• customer and counterparty creditworthiness and our ability to collect accounts receivable and settle derivative contracts;
• sudden changes in the market price of fuel or extremely high or low fuel prices that continue for an extended period of time;
• adverse conditions in the industries in which our customers operate;
• our inability to effectively mitigate certain financial risks and other risks associated with derivatives and our physical fuel products;
• relationships with our employees and potential labor disputes associated with employees covered by collective bargaining agreements;
• our failure to comply with restrictions and covenants governing our outstanding indebtedness;
• the impact of cyber and other information security related incidents;
• changes in the political, economic or regulatory environment generally and in the markets in which we operate, such as the current conflicts in Eastern Europe and the Middle East;
• greenhouse gas reduction programs and other environmental and climate change legislation adopted by governments around the world, including cap and trade regimes, carbon taxes, increased efficiency standards and mandates for renewable energy, each of which could increase our operating and compliance costs as well as adversely impact our sales of fuel products;
• changes in credit terms extended to us from our suppliers;
• non-performance of suppliers on their sale commitments and customers on their purchase commitments;
• non-performance of third-party service providers;
• our ability to effectively integrate and derive benefits from acquired businesses;
• our ability to meet financial forecasts associated with our operating plan;
• lower than expected cash flows and revenues, which could impair our ability to realize the value of recorded intangible assets and goodwill;
• the availability of cash and sufficient liquidity to fund our working capital and strategic investment needs;
• currency exchange fluctuations;
• inflationary pressures and their impact on our customers or the global economy, including sudden or significant increases in interest rates or a global recession;
• our ability to effectively leverage technology and operating systems and realize the anticipated benefits;
• failure to meet fuel and other product specifications agreed with our customers;
• environmental and other risks associated with the storage, transportation and delivery of petroleum products;
• reputational harm from adverse publicity arising out of spills, environmental contamination or public perception about the impacts on climate change by us or other companies in our industry;
• risks associated with operating in high-risk locations, including supply disruptions, border closures and other logistical difficulties that arise when working in these areas;
• uninsured or underinsured losses;
• seasonal variability that adversely affects our revenues and operating results, as well as the impact of natural disasters, such as earthquakes, hurricanes and wildfires;
• declines in the value and liquidity of cash equivalents and investments;
• our ability to retain and attract senior management and other key employees;
• changes in U.S. or foreign tax laws, interpretations of such laws, changes in the mix of taxable income among different tax jurisdictions, or adverse results of tax audits, assessments, or disputes;
• our failure to generate sufficient future taxable income in jurisdictions with material deferred tax assets and net operating loss carryforwards;
• the impact of the U.K.'s exit from the European Union, known as Brexit, on our business, operations and financial condition;
• our ability to comply with U.S. and international laws and regulations, including those related to anti-corruption, economic sanction programs and environmental matters;
• the outcome of litigation and other proceedings, including the costs associated with defending any actions; and
• other risks, including those described in this 10-Q report and in Item 1A – Risk Factors in our 2022 10-K Report, together with those described from time to time in our other filings with the SEC.

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. 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 us 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, as amended (the "Exchange Act").

Business Overview

On June 15, 2023, the Company's shareholders approved an amendment to the Company's Articles of Incorporation, as amended, changing the Company's name from World Fuel Services Corporation to World Kinect Corporation. This change is intended to better reflect the Company's ongoing transformation into a more resilient, diversified energy and solutions provider. Effective at the open of market trading on June 16, 2023, the Company’s common stock began trading on the New York Stock Exchange under its new name as well as the Company’s new ticker symbol, "WKC."

We are a leading global energy management company, offering a broad suite of solutions across the energy product spectrum. In addition to our core energy and fuel offerings to customers in the transportation sector, we provide advisory services, sustainability and renewable energy solutions, as well as supply fulfillment for natural gas and power. We continue to focus on advancing the energy transition to lower carbon alternatives through expanding our portfolio of energy solutions and providing customers with greater access to sustainably sourced energy.

Reportable Segments

We operate in three reportable segments consisting of aviation, land, and marine. For additional discussion on our reportable segments, see "Reportable Segments" under Part I, Item 1 – Business in our 2022 10-K Report. Selected financial information with respect to our business segments is provided in Note 11. Business Segments.

Aviation Segment

Our aviation segment has benefited from growth in our fuel and related service offerings, as well as our enhanced logistics capabilities and the geographic expansion of our aviation fueling operations into additional international airport locations. As part of our business strategy, we hold inventory in order to meet the needs of our customers. While we generally enter into financial derivative contracts to mitigate price risk exposure associated with our inventory, market pricing dynamics may still negatively impact our results. In the first half of 2022, oil futures forward prices traded at significantly lower levels than then-current market prices, resulting in elevated price volatility and a severely backwardated market that negatively impacted our results. The oil futures forward pricing structure has since returned closer to historical trading and volatility levels.

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, including Flyers, which we acquired in January 2022, serving to further enhance our business to deliver value-added solutions to our land fuel customers.

We provide energy advisory services, sustainability solutions, as well as supply fulfillment for natural gas and power. We continue to focus on supporting the energy transition through various initiatives and expanding our sustainability offerings, including renewable fuel products, and carbon management and renewable energy solutions. We are continuing to invest in talent in this area, which we believe will help accelerate growth in these activities.

Marine Segment

Due to the generally spot nature of sales in our marine business, we have traditionally benefited from elevated fuel prices and volatility, supply uncertainty, and a constrained credit environment. We have spent a considerable amount of time reorganizing our business to drive internal efficiencies so that we can generate relatively moderate levels of earnings in stable markets and yet remain poised to provide additional value in volatile and credit constrained markets. In 2022, our marine segment delivered exceptional results due to the market conditions arising from the dramatic increase in global oil prices and higher interest rates, as well as the disruption of traditional supply patterns and related price volatility. The lower global oil prices and reduced market volatility experienced in 2023 have impacted our marine segment's performance and we expect the full year 2023 to be materially lower than the extraordinary results produced in 2022.

Macroeconomic Environment

After being relatively moderate in recent years, inflation in the United States and other jurisdictions in which we do business increased significantly beginning in late 2021, primarily driven by supply chain disruptions, labor shortages and increased commodity prices, which has generally resulted in higher costs in 2022 and 2023.

However, to the extent that a rising cost environment impacts our results, there are typically offsetting benefits either inherent in certain parts of our business or that may result from proactive measures we take to reduce the impact of inflation on our net operating results. These benefits can include higher commodity prices that typically result in a constrained credit environment, often creating favorable market conditions that increase demand for our services, as well as our ability to renegotiate prices due to many of our sales contracts being 12 months or less in duration.

Additionally, we take measures to mitigate the impact of increases in fuel prices through comprehensive hedging programs and the use of financial derivative contracts.

For these reasons, the increased cost environment, caused in part by inflation, has not had a material impact on our historical results of operations for the periods presented in this report. However, a significant or prolonged period of high inflation, particularly when combined with rising interest rates due to actions taken by governments to attempt to control inflation, could adversely impact our results if costs, including employee compensation driven by competitive job market conditions, were to increase at a rate greater than the increase in the revenues we generate. Higher interest rates also typically increase the interest expense associated with our credit arrangements with banks and other parties that serve as important sources of liquidity for us, which can therefore negatively impact our results of operations for a particular period.

See “We extend credit to most of our customers in connection with their purchase of fuel and services from us, and our financial condition, results of operations and cash flows will be adversely affected if we are unable to collect accounts receivable,” “Changes in the market price of fuel may have a material adverse effect on our business,” “Our business depends on our ability to adequately finance our capital requirements and fund our investments, which, if not available to us, would impact our ability to conduct our operations,” "Significant inflation and higher interest rates may adversely affect our business and financial condition," and “Our derivative transactions with customers, suppliers, merchants and financial institutions expose us to price and credit risks, which could have a material adverse effect on our business” in Item 1A – Risk Factors in our 2022 10-K Report for additional discussion of these risks.

Results of Operations

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Consolidated Results of Operations

The following provides a summary of our consolidated results of operations for the periods indicated (in millions, except per share amounts):

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Revenue. Our consolidated revenue for the three months ended September 30, 2023 was $12.2 billion, a decrease of $3.4 billion, or 22%, compared to the three months ended September 30, 2022, primarily driven by lower fuel prices across all segments as well as lower volumes in our marine segment, as discussed further below.

Gross Profit. Our gross profit for the three months ended September 30, 2023 was $281.4 million, a decrease of $40.9 million, or 13%, compared to the three months ended September 30, 2022, attributable to decreased gross profit of $40.2 million and $4.0 million in our marine and aviation segments, respectively, partially offset by increased gross profit of $3.3 million in our land segment, as discussed further below.

Operating Expenses. Total operating expenses for the three months ended September 30, 2023 were $208.2 million, a decrease of $13.9 million, or 6%, compared to the three months ended September 30, 2022. The decrease in operating expenses was primarily driven by lower compensation costs and a decrease in general and administrative costs, as discussed further below.

Non-Operating Income (Expense), net. For the three months ended September 30, 2023, we had net non-operating expense of $26.9 million compared to net non-operating expense of $37.5 million for the three months ended September 30, 2022. The decrease of $10.6 million during the three months ended September 30, 2023 was primarily attributable to a $5.4 million decrease in interest expense as well as lower foreign currency losses during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The decrease in interest expense was primarily driven by lower utilization and fees associated with sales of accounts receivable under our RPAs.

Income Taxes. For the three months ended September 30, 2023, we recognized an income tax expense of $10.8 million, compared to income tax expense of $18.9 million for the three months ended September 30, 2022. The decrease of $8.0 million was primarily attributable to a decrease in pre-tax earnings and changes in the jurisdictional mix of those earnings, as well as differences in net discrete tax items. See Note 8. 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 (in millions, except price per gallon):

Revenues in our aviation segment were $6.0 billion for the three months ended September 30, 2023, a decrease of $1.3 billion, or 18%, compared to the three months ended September 30, 2022. The decrease in revenue was driven by lower average prices, with average jet fuel price per gallon sold decreasing by 22% in the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Total aviation volumes increased by 80.8 million gallons, or 4%, to 1.9 billion gallons driven primarily by growth in passenger airline demand.

Aviation segment gross profit for the three months ended September 30, 2023 was $125.6 million, a decrease of $4.0 million, or 3%, compared to the three months ended September 30, 2022. The decrease in gross profit during the three months ended September 30, 2023 as compared to the prior period was primarily attributable to lower physical inventory-related profitability when compared with the three months ended September 30, 2022 as well as a rationalization of lower-return business activity. These decreases were partially offset by higher margins driven by our focus on improving returns in a higher interest rate environment.

Income from operations in our aviation segment for the three months ended September 30, 2023 was $58.6 million, an increase of $0.7 million, or 1%, compared to the three months ended September 30, 2022. The lower gross profit discussed above was offset by a $4.7 million decrease in operating expenses primarily attributable to lower incentive compensation costs which was offset by an increase in our provision for credit losses, which returned to a more normalized level.

Land Segment Results of Operations

The following provides a summary of the land segment results of operations for the periods indicated (in millions, except price per gallon):

(1) Includes gallons and gallon equivalents of British Thermal Units (BTU) for our natural gas sales and Kilowatt Hours (kWh) for our power business.

Revenues in our land segment were $4.0 billion for the three months ended September 30, 2023, a decrease of $1.0 billion, or 21%, compared to the three months ended September 30, 2022. The decrease in revenue was principally driven by lower average fuel prices, with average fuel prices decreasing by 22% for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Total volumes increased by 30.9 million, or 2%, to 1.5 billion gallons or gallon equivalents in the three months ended September 30, 2023 compared to the three months ended September 30, 2022 driven by increased activity in our natural gas and power business, partially offset by lower activity in our core fuel business in North America.

Our land segment gross profit for the three months ended September 30, 2023 was $121.2 million, an increase of $3.3 million, or 3%, compared to the three months ended September 30, 2022. The increase in gross profit was primarily driven by continued growth in our sustainability-related offerings, partially offset by our core fuel business in North America, which benefited from significant price volatility in the first half of 2022.

In our land segment, income from operations for the three months ended September 30, 2023 was $31.8 million, an increase of $9.6 million, or 43%, compared to the three months ended September 30, 2022. In addition to the increase in gross profit discussed above, income from operations benefited from a decrease in operating expenses principally related to lower general and administrative costs.

Marine Segment Results of Operations

The following provides a summary of the marine segment results of operations for the periods indicated (in millions, except price per metric ton):

Revenues in our marine segment were $2.3 billion for the three months ended September 30, 2023, a decrease of $1.1 billion, or 33%, compared to the three months ended September 30, 2022. The decrease in revenue was principally driven by a 20% decrease in the average price per metric ton of bunker fuel sold in the three months ended September 30, 2023 compared to the three months ended September 30, 2022. In addition, total volume decreased by 0.8 million metric tons, or 16%, to 4.1 million metric tons for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 primarily due to reduced demand in our resale businesses.

Marine segment gross profit for the three months ended September 30, 2023 was $34.6 million, a decrease of $40.2 million, or 54%, compared to the three months ended September 30, 2022 principally due to record bunker fuel prices and significant market volatility during the three months ended September 30, 2022 as well as increased competition, together with softening demand driven by changes in the global macroeconomic environment during the three months ended September 30, 2023.

Our marine segment income from operations for the three months ended September 30, 2023 was $12.4 million, a decrease of $35.7 million, or 74%, compared to the three months ended September 30, 2022, primarily due to the decrease in gross profit partially offset by a $4.5 million decrease in operating expenses, largely driven by lower incentive compensation costs compared to the three months ended September 30, 2022.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Consolidated Results of Operations

The following provides a summary of our consolidated results of operations for the periods indicated (in millions, except per share amounts):

Revenue. Our consolidated revenue for the nine months ended September 30, 2023 was $35.7 billion, a decrease of $9.5 billion, or 21%, compared to the nine months ended September 30, 2022, primarily driven by lower fuel prices across all segments as well as lower volumes in our marine segment, as discussed further below.

Gross Profit. Our gross profit for the nine months ended September 30, 2023 was $825.8 million, an increase of $19.1 million, or 2%, compared to the nine months ended September 30, 2022, attributable to increased gross profit of $107.8 million in our aviation segment, partially offset by decreased gross profit of $71.4 million and $17.3 million in our marine and land segments, respectively, as discussed further below.

Operating Expenses. Total operating expenses for the nine months ended September 30, 2023 were $612.5 million, an increase of $0.2 million compared to the nine months ended September 30, 2022. Higher compensation costs during the nine months ended September 30, 2023 were offset by a decrease in general and administrative costs, as discussed further below.

Non-Operating Income (Expense), net. For the nine months ended September 30, 2023, we had net non-operating expense of $100.0 million compared to net non-operating expense of $76.7 million the nine months ended September 30, 2022. The increase of $23.3 million was primarily attributable to an increase in interest expense driven by higher interest rates.

Income Taxes. For the nine months ended September 30, 2023, we recognized income tax expense of $24.8 million, compared to $22.7 million for the nine months ended September 30, 2022. The increase of $2.1 million was primarily attributable to differences in net discrete tax items, as well as changes in the jurisdictional mix of our pre-tax earnings. See Note 8. 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 (in millions, except price per gallon):

Revenues in our aviation segment were $17.4 billion for the nine months ended September 30, 2023, a decrease of $2.7 billion, or 13%, compared to the nine months ended September 30, 2022. The decrease in revenue was driven by lower average prices, partially offset by increased volume. Average jet fuel price per gallon sold decreased by 19% in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Total aviation volumes increased by 217.9 million gallons, or 4%, to 5.5 billion gallons, driven largely by growth in passenger airline demand.

Our aviation segment gross profit for the nine months ended September 30, 2023 was $354.4 million, an increase of $107.8 million, or 44%, compared to the nine months ended September 30, 2022. The increase in gross profit during the nine months ended September 30, 2023 compared to the prior period was primarily attributable to the impact of significant inventory losses arising from the extreme backwardation and price volatility experienced during the nine months ended September 30, 2022.

Income from operations in our aviation segment for the nine months ended September 30, 2023 was $150.7 million, an increase of $92.2 million compared to the nine months ended September 30, 2022. The increase in gross profit discussed above was partially offset by a $15.6 million increase in operating expenses primarily driven by higher headcount-related compensation costs and general and administrative expenses to support the increased level of operating activity.

Land Segment Results of Operations

The following provides a summary of the land segment results of operations for the periods indicated (in millions, except price per gallon):

(1) Includes gallons and gallon equivalents of British Thermal Units (BTU) for our natural gas sales and Kilowatt Hours (kWh) for our power business.

Revenues in our land segment were $11.5 billion for the nine months ended September 30, 2023, a decrease of $3.3 billion, or 22%, compared to the nine months ended September 30, 2022. The decrease in revenue was principally driven by lower average fuel prices, with average fuel prices decreasing by 22% for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Our land segment gross profit for the nine months ended September 30, 2023 was $342.8 million, a decrease of $17.3 million, or 5%, compared to the nine months ended September 30, 2022. The decrease in gross profit was primarily attributable to extreme weather conditions experienced in our core fuel business in North America in early 2023, as well as lower profitability from our U.K. business, which benefited from significant price volatility in the first half of 2022. These decreases were partially offset by improved performance in our natural gas, power, and sustainability-related offerings.

In our land segment, income from operations for the nine months ended September 30, 2023 was $82.6 million, a decrease of $5.9 million, or 7%, compared to the nine months ended September 30, 2022. The decrease in gross profit discussed above was partially offset by a decrease in operating expenses principally related to lower general and administrative costs.

Marine Segment Results of Operations

The following provides a summary of the marine segment results of operations for the periods indicated (in millions, except price per metric ton):

Revenues in our marine segment were $6.8 billion for the nine months ended September 30, 2023, a decrease of $3.4 billion, or 34%, compared to the nine months ended September 30, 2022. The decrease in revenue was principally driven by a decrease of 24% in the average price per metric ton of bunker fuel sold in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. In addition, total volume decreased by 1.9 million metric tons, or 13%, to 12.5 million metric tons in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to reduced demand in our resale businesses.

Our marine segment gross profit for the nine months ended September 30, 2023 was $128.6 million, a decrease of $71.4 million, or 36%, compared to the nine months ended September 30, 2022 principally driven by increased competition resulting from lower bunker fuel prices, together with softening demand driven by changes in the global macroeconomic environment.

Our marine segment income from operations for the nine months ended September 30, 2023 was $63.0 million, a decrease of $61.0 million, or 49%, compared to the nine months ended September 30, 2022, primarily due to the decrease in gross profit, partially offset by a $10.3 million decrease in operating expenses, largely driven by lower incentive compensation costs compared to the three months ended September 30, 2022.

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, the future availability of trade credit or other sources of financing may be reduced, and our liquidity would be adversely affected accordingly.

Sources of Liquidity and Factors Impacting Our Liquidity

Our liquidity, consisting principally 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, as well as our financial performance.

Based on the information currently available, we believe that our cash and cash equivalents as of September 30, 2023 and available funds from our Credit Facility, as described below, 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.

Convertible Notes. On June 26, 2023, we issued $350.0 million aggregate principal amount of 3.250% Convertible Senior Notes due 2028 (the "Convertible Notes"), which reflects the exercise in full of an option to purchase up to an additional $50.0 million in principal amount of the Convertible Notes. The Convertible Notes mature on July 1, 2028, unless earlier converted, redeemed or repurchased. The Convertible Notes are senior, unsecured obligations that bear interest at a rate of 3.250% per year, payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2024. The initial conversion rate was 35.1710 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $28.43 per share. The conversion rate will be subject to adjustment upon the occurrence of certain events but will not be adjusted for accrued and unpaid interest. Upon conversion, the Convertible Notes will be settled in cash up to the aggregate principal amount of the Convertible Notes to be converted, and in cash, shares of common stock or any combination thereof, at our option, in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount.

In connection with the pricing of the Convertible Notes, we entered into convertible note hedge transactions and warrant transactions. The cost of the convertible note hedge transactions was approximately $70.5 million. The convertible note hedge transactions cover, subject to customary anti-dilution adjustments, the number of shares of common stock that initially underlie the Convertible Notes, and have an initial strike price equal to the initial conversion price of the Convertible Notes. Separately, we received $40.0 million of proceeds from the sale of warrants to acquire, subject to anti-dilution adjustments, the same amount of shares at an initial strike price of $40.14 per share. As a result, dilution upon conversion of the Convertible Notes will be mitigated as the bond hedge and warrant transactions increase the effective conversion price of the Convertible Notes to $40.14 per share.

The net proceeds from the sale of the Convertible Notes was approximately $337.5 million after deducting the initial purchasers’ discounts and estimated offering expenses payable by us. We used the net proceeds from the sale of the Convertible Notes (i) to pay the cost of the convertible note hedge transactions net of the proceeds from the sale of the warrants), (ii) to repurchase approximately 2.24 million shares of common stock from purchasers of the Convertible Notes for an aggregate purchase price of approximately $50.0 million and (iii) to repay the amounts outstanding under our revolving credit facility.

See Note 6. Debt, Interest Income, Expense, and Other Finance Costs for additional information.

Credit Agreement. The Fourth Amended and Restated Credit Agreement (as amended, the "Credit Agreement"), matures in April 2027 and provides for a term loan as well as a revolving credit facility of $1.5 billion (the "Credit Facility"). Our availability under the 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 consolidated earnings before interest, taxes, depreciation and amortization, and share-based compensation, with such adjustments as specified therein, for the four immediately preceding fiscal quarters. The Credit Agreement generally limits the total amount of indebtedness we may incur to a consolidated total leverage ratio of not more than 4.75 to 1.

As a result of the foregoing, as well as other covenants and restrictions contained in our Credit Agreement, 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 Agreement 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 loan, 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 6. Debt, Interest Income, Expense, and Other Finance Costs for additional information.

Receivables Purchase Agreements. We also have accounts receivable programs under RPAs that allow us to sell a specified amount of qualifying accounts receivable and receive cash consideration equal to the total balance, less an associated fee, which varies based on the outstanding accounts receivable at any given time. The RPAs 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. During the second quarter of 2023, we amended one of our RPAs to, among other things, reduce the overall fee structure. See Note 2. Accounts Receivable for additional information.

Future Uses of Liquidity

Cash is primarily used to fund working capital to support our operations as well as for strategic acquisitions and investments. There were no material changes in our expected future uses of liquidity from December 31, 2022 to September 30, 2023. For a discussion of these matters, refer to "Liquidity and Capital Resources" under Part II, Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2022 10-K Report.

Cash Flows

The following table reflects the major categories of cash flows for the nine months ended September 30, 2023 and 2022 (in millions). For additional details, please see the unaudited Condensed Consolidated Statements of Cash Flows in this Quarterly Report on Form 10-Q.

Operating Activities. For the nine months ended September 30, 2023, net cash provided by operating activities was $266.8 million, compared to $229.3 million net cash provided during the nine months ended September 30, 2022. The $37.5 million increase in operating cash flows was principally due to lower average fuel prices compared to the prior year, which reduced our cost of inventory; the decrease of our accounts receivable and accounts payable (net of activity under our RPA programs, as discussed under "Sources of Liquidity and Factors Impacting Our Liquidity" above) largely driven by the rationalization of lower-return business within our aviation segment and the reduction of average fuel prices; and cash provided by our derivative activities. These increases were offset by a decrease in our net income (see "Results of Operations" for further details of the drivers impacting our net income) adjusted for noncash items, as well as a decrease in customer prepayments.

Investing Activities. For the nine months ended September 30, 2023, net cash used in investing activities was $77.4 million, compared to net cash used of $699.2 million during the nine months ended September 30, 2022. The net cash used in investing activities for the nine months ended September 30, 2023 was primarily driven by capital expenditures of $67.9 million. Net cash used in investing activities for the nine months ended September 30, 2022 was principally driven by $641.7 million net cash paid for the acquisition of Flyers, as discussed in Note 3. Acquisitions, and $56.2 million for capital expenditures.

Financing Activities. For the nine months ended September 30, 2023, net cash used in financing activities was $140.4 million compared to net cash provided of $115.0 million for the nine months ended September 30, 2022. The net cash used in financing activities for the nine months ended September 30, 2023 was primarily attributable to net borrowings of $38.7 million, driven by $350.0 million proceeds from the issuance of the Convertible Notes and $40.3 million proceeds from secured borrowings associated with the transfer of transaction taxes, as discussed in Note 6. Debt, Interest Income, Expense, and Other Finance Costs, partially offset by $345.3 million of net repayments under our Credit Facility. In connection with the issuance of the Convertible Notes, we paid $70.5 million for the purchase of the convertible note hedges and $11.9 million for debt issuance costs, and received $40.0 million from the sale of warrants. In addition, net cash used in financing activities includes payments of deferred consideration related to prior acquisitions of $62.9 million, repurchases of common stock of $50.0 million, and dividend payments of $25.7 million. Net cash provided by financing activities for the nine months ended September 30, 2022 was primarily attributable to net borrowings under our Credit Facility of $199.4 million, primarily driven by incremental borrowings related to the acquisition of Flyers and increased working capital requirements, partially offset by $48.7 million in purchases of our common stock, dividend payments of $22.4 million, and payments for deferred consideration related to prior acquisitions of $10.0 million.

Critical Accounting Estimates

The unaudited Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America. The significant accounting policies used are disclosed in Item 15 – Financial Statement Schedules, Note 1. Basis of Presentation, New Accounting Standards and Significant Accounting Policies to the Consolidated Financial Statements in our 2022 10-K report.

We make estimates and assumptions that affect the reported amounts on our unaudited Condensed Consolidated Financial Statements and accompanying Notes as of the date of the unaudited Condensed Consolidated Financial Statements. With the exception of additional considerations in relation to the Convertible Notes discussed below, there have been no material changes to the Critical Accounting Estimates disclosed in our 2022 10-K report.

Impairment Assessments of Goodwill, Long-Lived Assets, and Equity Investments

We assess accounting estimates that require consideration of forecasted financial information. Significant judgment is involved in performing these estimates as they are developed based on forecasted assumptions. As of September 30, 2023, the assumptions used in these assessments, particularly the expected growth rates, the profitability embedded in the projected cash flows provided by our legacy and newly acquired businesses, the discount rate and the market-based multiples, were defined based on available information considering current market volatility and geopolitical risks. Management also considered the volatility in the Company's market capitalization and evaluated the potential impact that this volatility may have on the estimated fair value of our reporting units.

Based on the assessments performed, and supported by the available information as of September 30, 2023, we concluded that the carrying value of our long-lived assets and equity investments were recoverable and that the fair value of our land and aviation reporting units were not less than their respective carrying values. If our results differ significantly from our assumptions, such impact could potentially result in impairments.

Derivatives

We assess convertible notes and other related contracts to determine if those contracts or embedded components of those contracts meet the definition of a derivative that require separate accounting. Significant judgment is involved in assessing if the contracts are indexed to our own stock and if the contracts shall be classified as equity in our statement of financial position. If those contracts are derivatives or contain embedded derivatives, they would be classified as a liability and remeasured to fair value through net income impacting future earnings.

There have been no material changes to our exposures to commodity price, interest rate, or foreign currency risk since December 31, 2022. Please refer to our 2022 10-K Report for a complete discussion of our exposure to these risks.

For information about our derivative instruments at their respective fair value positions as of September 30, 2023, see Note 4. Derivative Instruments.

Management's Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required financial disclosure.

As of the end of the period covered by this 10-Q Report, we evaluated, under the supervision and with the participation of our CEO and CFO, the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon this evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2023.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the three months ended September 30, 2023.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.

The risk factor set forth below supplements the risk factors previously disclosed under Part I, Item 1A – Risk Factors of our 2022 10-K Report.

We are subject to counterparty risk with respect to the bond hedge transactions which serve to mitigate the dilutive impact of our Convertible Notes.

In connection with our offering of Convertible Notes in June 2023, we entered into bond hedge transactions with multiple financial institutions, which increased the effective conversion price of the Convertible Notes to approximately $40.14 (from the nominal conversion price of $28.43). Consequently, the bond hedge transaction is expected to reduce the potential dilution upon conversion of the Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of the Convertible Notes upon their conversion. We also entered into warrant transactions with the bond hedge counterparties, which could have a dilutive effect on our common stock to the extent that the market price per share of our common stock exceeds the strike price of the warrants.

Our exposure to the credit risk of the bond hedge counterparties is not secured by any collateral. Global economic conditions have, from time-to-time, resulted in the actual or perceived failure or financial difficulties of several financial institutions. If any bond hedge counterparty becomes subject to insolvency proceedings, we would become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the bond hedge transaction. If any of these counterparties were to fail to comply with their contractual obligations under bond hedge transactions, we would (i) be exposed to greater dilution with respect to their respective portion of the hedge, to the extent that our stock price exceeded the nominal conversion price upon conversion, (ii) may suffer adverse tax consequences, or (iii) incur additional costs associated with entering into a replacement bond hedge transaction with a different bond hedge counterparty.