Murphy USA Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited results. Murphy USA operated 1,336 stations in 24 states and reported one operating segment, Marketing.
Financial performance and liquidity
- Revenue: $2.490 billion, down 14.7% from $2.921 billion. Lower fuel prices drove the decline; reported petroleum sales include excise taxes of $472.6 million, compared with $463.0 million a year earlier.
- Profit: Net income was $85.9 million, or $2.08 per diluted share, versus $22.9 million, or $0.50 per diluted share. The 2016 result included an $89.5 million gain on sale of the CAM pipeline system; the increase in reported earnings therefore substantially reflects an unusual gain.
- Operating performance: Operating income increased to $59.2 million from $42.0 million. Adjusted EBITDA, a non-GAAP measure that excludes the pipeline-sale gain and other specified items, was $83.1 million versus $63.5 million.
- Fuel and merchandise: Retail fuel volume increased 4.6% to 1.01 billion gallons, while gallons per store month declined 0.6% to 252,067. Fuel margin rose to 11.1 cents per gallon from 10.0 cents. Merchandise sales rose 7.2% to $561.7 million; merchandise margin increased to 15.3% from 14.0%, with the company citing benefits from its Core-Mark supply agreement.
- Cash flow: Operating cash flow was $76.9 million, versus $30.1 million in 2015. Property additions were $47.3 million; reported free cash flow was $29.6 million, compared with negative $1.5 million.
- Balance sheet and debt: Cash was $195.7 million and restricted cash was $130.9 million at quarter-end. Long-term debt, including capitalized leases and current maturities, was approximately $688.1 million, up from $490.4 million at year-end, primarily reflecting a new $200 million term loan. The company reported $153 million of available ABL borrowing capacity and no ABL borrowings.
- Capital returns: The company repurchased 2.39 million shares for $150.0 million, at an average $62.83 per share, under its new authorization.
Changes versus Q1 2015
- Revenue fell as retail and wholesale fuel prices declined; the company cited a $0.43 per gallon reduction in retail fuel price. Lower fuel costs reduced cost of sales, while higher retail fuel margins, increased total retail volume, and improved merchandise margins supported operating results.
- Operating expenses rose 2.0% to $116.8 million, mainly because more stores were operating. Depreciation and amortization increased to $23.5 million from $21.1 million.
- Interest expense increased to $9.4 million from $8.3 million, reflecting the new term loan. Diluted weighted-average shares fell to 41.3 million from 46.0 million, partly reflecting repurchases.
- Q1 2015 included a $0.6 million loss from the Hereford ethanol plant, which was sold in 2015 and classified as discontinued operations.
Outlook, commentary, and risks
- Management estimated 2016 capital expenditures of approximately $250 million to $300 million, including new-store development and maintenance; it expected to fund the program primarily with operating cash flow, supplemented by borrowings if needed. The company reported no specific earnings guidance in this filing.
- The board authorized up to $500 million through December 31, 2017, for share repurchases and additional growth opportunities. Management said the company would pursue an independent growth plan apart from Walmart, while also discussing development plans and an existing Walmart land agreement.
- Management estimated an ongoing effective tax rate of approximately 38.5% for the remainder of 2016. It cautioned that first-quarter results are seasonal and are not necessarily indicative of full-year results.
- Fuel margins are volatile and exposed to crude oil and refined-product prices, supply interruptions, competition, and consumer demand. RIN revenue was $38.8 million, versus $37.6 million; management said the business model does not depend on RIN revenue, which is subject to regulatory and market volatility.
- The term-loan agreement includes a maximum secured-debt-to-EBITDA covenant and a conditional minimum fixed-charge coverage covenant. The reported fixed-charge coverage ratio was 0.54, but management said the minimum coverage test did not then affect operations or liquidity because there were no ABL borrowings. Credit availability is subject to a borrowing base and covenant restrictions.
- The filing discusses environmental, tax, insurance, and routine legal contingencies. Management did not expect known environmental or legal matters to have a material adverse effect, but noted that additional environmental costs or tax-audit adjustments remain possible. Outstanding letters of credit totaled $17.8 million; management considered draw risk remote.
Important facts for investors to verify
- How much of the earnings increase is attributable to the $89.5 million pipeline-sale gain, and how recurring operating performance develops after excluding it.
- Whether stronger fuel and merchandise margins persist, given fuel-margin volatility, wholesale margin weakness, and dependence on RIN-market conditions.
- Execution and funding of the $250 million to $300 million capital program and the combined growth and repurchase authorization, including the company’s evolving Walmart strategy.
- Debt-service and covenant headroom, including borrowing-base availability, the term loan’s scheduled amortization beginning July 1, 2016, and any restrictions on capital returns.
- Whether operating cash flow and available liquidity can support planned investment and repurchases while maintaining adequate financial flexibility.