Delek US Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2017. The Delek/Alon merger closed July 1, 2017; Alon’s results are consolidated from that date, while pre-merger periods primarily reflect Old Delek. Accordingly, year-over-year comparisons are substantially affected by the merger and changes in discontinued operations.
The combined company operates refining, logistics and retail businesses. In the third quarter, it committed to sell its California refinery and renewable-fuels operations; these are presented as discontinued operations and held for sale. The filing reports 81.45 million common shares outstanding at September 30.
Financial and operating metrics
Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $2,341.5 | $1,079.9 | $4,754.3 | $3,113.3 |
| Operating income (loss) | $90.8 | $(2.8) | $74.0 | $(5.1) |
| Net income (loss) attributable to Delek | $104.4 | $(161.7) | $77.7 | $(197.9) |
| Basic EPS | $1.30 | $(2.61) | $1.14 | $(3.19) |
| Cash provided by operating activities | Not presented quarterly | Not presented quarterly | $83.3 | $121.5 |
- Consolidated net income, including non-controlling interests, was $114.4 million in Q3 and $97.5 million for the nine months. Delek-attributable income was $104.4 million and $77.7 million, respectively.
- Operating margin, calculated as operating income divided by sales, was approximately 3.9% for Q3 and 1.6% for the nine-month period.
- Cash and cash equivalents were $831.7 million at September 30, versus $689.2 million at December 31, 2016. Total debt carrying value was $1,427.8 million, including $351.0 million classified as current. Unused credit commitments or borrowing-base availability were approximately $898.2 million; letters of credit totaled approximately $146.0 million.
- Nine-month investing cash flow was positive $95.3 million, reflecting $200.5 million cash acquired in the merger, among other items. Capital expenditures were $98.7 million; management’s full-year 2017 capital-spending forecast was $161.6 million.
- Quarterly dividend declared was $0.15 per share; dividends declared totaled $0.45 per share for the first nine months.
- Segment contribution margin, a company-defined measure, was $200.2 million in Q3 and $296.2 million for the first nine months. Refining contributed $180.1 million and $264.9 million, respectively; logistics contributed $30.9 million and $89.2 million; retail contributed $13.5 million in the post-merger quarter.
Material changes versus prior comparable periods
- Reported sales rose 116.8% in Q3 and 52.7% for the nine months, principally because of the Alon merger and higher product prices and volumes. The acquired business contributed only from July 1 in reported results, making comparisons structurally uneven.
- Operating results moved from losses to profits. The 2016 periods included a $245.3 million impairment of Delek’s former equity-method investment in Alon; 2017 includes a $190.1 million non-cash gain from remeasuring that investment at merger close. These unusual items materially affect reported earnings comparisons.
- Q3 refining contribution margin benefited from stronger market crack spreads and acquired refineries, but was reduced by a $33.2 million purchase-accounting inventory fair-value adjustment as acquired inventory was sold. The El Dorado refinery’s 2016 RIN waiver reduced nine-month 2017 RIN expense by approximately $47.5 million.
- Net cash from operations declined to $83.3 million from $121.5 million for the nine months, despite the return to reported profitability. Management cited the non-cash remeasurement gain, working-capital changes and the absence of cash flow from the retail business sold in 2016 among the factors affecting the comparison.
- Debt, assets, goodwill and equity increased substantially following the merger. Preliminary acquisition accounting recorded $784.8 million of goodwill; the purchase-price allocation remained subject to revision.
Outlook, management commentary, risks and contingencies
- Management said available cash, operating cash flow and borrowing capacity should meet anticipated operating and capital requirements for at least the next 12 months. The company believed it was in compliance with debt covenants at September 30.
- No specific earnings guidance was provided. Management said the merger was expected to create operational synergies and that it anticipated the transaction would be accretive to 2018 EPS if certain pre-tax synergies are achieved; this was based on preliminary estimates and was not assured.
- The company expected to complete the California asset sale within 12 months. On November 8, 2017, it separately agreed to acquire the remaining 18.4% of Alon Partnership units in an all-stock transaction, expected to close in Q1 2018.
- Merger-related costs were $18.4 million in Q3 and $22.4 million for the nine months. The elevated 2017 effective tax rates—53.0% for Q3 and 52.3% year to date—were attributed primarily to reversal of a deferred tax asset associated with the former Alon investment.
- Key business risks include volatile refining margins and commodity prices, RIN costs, integration execution and costs, increased leverage and interest-rate exposure, seasonal demand, operational interruptions, and environmental regulation and remediation. A hypothetical 1% interest-rate change was estimated to affect annual interest expense by approximately $8.7 million after swaps.
- Environmental liabilities were approximately $77.1 million at September 30; management estimated about $7.3 million would be spent within 12 months, with most of the balance expected to be spent by 2046. A proposed Big Spring refinery consent decree includes a civil penalty of approximately $456,250 and pollution-control capital spending that could be significant over five years.
- Termination or expiration of J. Aron supply-and-offtake agreements could require repurchase of consigned inventory at prevailing prices and materially affect working capital. The company reported $386.7 million of current obligations under supply-and-offtake agreements.
- Management concluded disclosure controls and procedures were effective. Alon’s internal controls were being integrated and excluded from Delek’s 2017 annual internal-control assessment under the SEC’s business-combination guidance.
Important facts for investors to verify
- Separate merger-driven growth from underlying performance; review pro forma results and segment trends, noting the filing cautions that pro forma results are not predictive.
- Track integration costs, realized synergies and the basis for the anticipated 2018 EPS accretion, as well as the final acquisition accounting and goodwill allocation.
- Assess debt maturities, refinancing needs, covenant headroom, floating-rate exposure and liquidity available to the parent versus cash or assets held in consolidated subsidiaries.
- Monitor the California sale, the planned Alon Partnership unit acquisition, and their effect on share count, cash flows and ownership interests.
- Evaluate environmental spending and liabilities, the Big Spring consent decree, RIN exposure, and the size and potential working-capital effects of supply-and-offtake obligations.