Murphy USA Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; balance-sheet comparisons are to December 31, 2013. Murphy USA operates retail fuel and merchandise locations and wholesale fuel operations, with a remaining ethanol facility in Hereford, Texas. It had 1,239 company stations in 23 states at quarter-end. The 2013 comparative results are combined historical results before the August 2013 spin-off, so they may not be fully comparable to the standalone company.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $4.679 billion | $4.687 billion | $13.601 billion | $13.888 billion |
| Operating income | $108.8 million | $57.1 million | $249.3 million | $206.4 million |
| Income from continuing operations | $62.7 million | $36.0 million | $144.7 million | $126.9 million |
| Net income | $62.7 million | $41.7 million | $145.5 million | $141.4 million |
| Diluted EPS | $1.36 | $0.89 | $3.13 | $3.02 |
| Adjusted EBITDA | $128.7 million | $75.5 million | $309.2 million | $262.0 million |
| Operating cash flow | $77.9 million | $156.0 million | $216.3 million | $333.9 million |
Q3 revenue was essentially flat year over year, while operating income rose about 91% and net income about 50%. Nine-month revenue declined about 2.1%; operating income increased about 21%, while net income rose about 2.9%. Prior-year net income included $14.6 million from discontinued operations, compared with $0.8 million in 2014.
Margins and operations: Retail fuel margin was 17.5 cents per gallon in Q3 versus 14.8 cents; year to date it was 12.7 cents versus 13.9 cents. Retail fuel volumes increased 7.0% in Q3 and 3.8% year to date. Merchandise margin was 13.7% in Q3 versus 13.2%, and 13.8% year to date versus 13.0%. Q3 results also benefited from higher Hereford ethanol earnings and merchandise margins.
Cash, debt, and liquidity
- Cash and cash equivalents were $294.3 million at September 30, nearly unchanged from $294.7 million at year-end 2013. Current assets were $663.1 million and current liabilities $505.1 million.
- Long-term debt was $492.2 million, consisting of 6.00% senior notes due 2023. The remaining $55 million term loan was repaid in May 2014; no current debt maturities remained.
- The company reported a $450 million committed asset-based credit facility, subject to borrowing-base limits; the estimated borrowing base after Q3 was approximately $355 million. The credit agreement was amended to extend maturity to September 2, 2019. The reported fixed-charge coverage ratio was 1.00.
- Nine-month capital expenditures for property additions were $84.7 million. Free cash flow, as defined by the company, was $131.6 million, down from $212.3 million.
Material changes, outlook, and risks
- Q3 fuel margin and volume gains were offset in part by higher station costs, including credit-card fees and maintenance. Q3 SG&A fell substantially, but the 2013 quarter included $14.3 million of spin-related and other one-time costs.
- Nine-month operating cash flow fell to $216.3 million from $333.9 million, primarily because working-capital cash benefits were much smaller than in 2013. The company reported a $17.8 million first-quarter LIFO decrement benefit that it did not expect to restore by year-end.
- Management expected 2014 capital expenditures of approximately $130 million to $150 million, principally for station development and existing-site investment, and expected to fund them primarily from operating cash flow. It estimated an ongoing effective tax rate of approximately 38.2% for the remainder of 2014.
- Management cited volatility in crude oil, refined fuel, corn, and ethanol markets; fuel gross margins can change rapidly. It expected crude oil-price volatility to continue into 2015. RIN sales were $25.2 million in Q3 and $66.1 million year to date; management stated the business model does not depend on RIN revenue.
- The company continued to evaluate strategic alternatives for the Hereford ethanol facility; no final decision had been made. Its station-growth plans depend in part on the Walmart relationship, and some planned development sites had been terminated due to local conditions.
- On October 22, 2014, after quarter-end, the board authorized repurchases of up to $250 million through December 31, 2015. The company completed an earlier approximately $50 million repurchase program during the nine-month period.
- A patent-infringement case concerning an electronic pricing system was set for trial in May 2015. Management considered the probability of loss remote but could not estimate potential damages. The company also disclosed environmental, tax, insurance, and other routine contingencies; it did not expect known environmental matters to have a material adverse effect.
Investor verification priorities
- Check whether Q3 fuel-margin improvement persisted, given the lower nine-month margin and volatile wholesale prices.
- Assess operating cash-flow conversion and working-capital movements, rather than relying on net income or Adjusted EBITDA alone.
- Verify actual borrowing availability under the ABL borrowing base, covenant headroom, and the effects of planned share repurchases.
- Track progress, costs, and returns from the Walmart-related station development program and the stated capital-spending plan.
- Monitor Hereford ethanol performance and any strategic decision, as well as RIN revenue and the patent litigation outcome.