Murphy USA Inc. — Q1 2019 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2019, compared with Q1 2018. Murphy USA operates retail fuel and convenience stores and sells fuel wholesale; it had 1,473 stations in 26 states at quarter-end.
Key financial metrics
Amounts are in millions of dollars except per-share data, percentages and per-gallon metrics.
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $3,116.4 | $3,244.2; down 3.9% |
| Operating income | $18.6 | $60.0 |
| Net income | $5.3 | $39.3 |
| Diluted EPS | $0.16 | $1.16 |
| Adjusted EBITDA (non-GAAP) | $58.8 | $45.0 |
| Operating cash flow | $48.1 | $107.4 |
| Capital expenditures / property additions | $30.5 | $48.7 |
| Cash and cash equivalents, March 31 | $180.4 | $184.5 at Dec. 31, 2018 |
| Total debt, net carrying amount | $859.3 | $863.3 at Dec. 31, 2018 |
| Current assets / current liabilities | $612.9 / $533.3 | $570.1 / $478.1 at Dec. 31, 2018 |
- Fuel contribution, including retail, product supply and wholesale (PS&W), and RINs, was 12.3 cents per gallon versus 11.4 cents. Retail fuel margin was 8.4 cents per gallon in both periods.
- Retail fuel volume rose to 1,041.6 million gallons from 1,002.9 million; same-store gallons per store increased 1.8%.
- Merchandise sales were $606.2 million, up 6.8%; merchandise contribution was $97.5 million, up 6.6%. Merchandise unit margin remained 16.1%.
Material changes versus Q1 2018
- Net income fell $34.0 million. Q1 2018 included $47.0 million of pretax settlement proceeds related to the 2010 Deepwater Horizon oil spill, or $35.3 million after tax; Q1 2019 recorded only $0.1 million of net settlement proceeds.
- Revenue declined mainly because of lower average retail fuel prices and lower PS&W revenues, including RINs. The average retail fuel price was down $0.18 per gallon; higher merchandise sales and fuel volumes partly offset the decline.
- RIN revenue was $9.1 million versus $37.4 million. The company sold 53 million RINs at an average $0.17 each, compared with 64 million at $0.59 in Q1 2018.
- Marketing segment income increased to $16.2 million from $10.7 million, supported by stronger fuel contribution and merchandise results. Corporate and other assets moved to a $10.9 million loss from $28.6 million of income, primarily because of the prior-year settlement.
- Station and other operating expenses increased $5.4 million, and depreciation and amortization increased $7.9 million, partly reflecting a larger store base and increased maintenance activity.
- Operating cash flow declined from $107.4 million. Capital spending was lower, while share repurchases fell to $13.3 million from $71.7 million. The company repurchased 177,074 shares in Q1 2019.
Liquidity, debt and notable accounting items
- Debt comprised $800 million principal amount of senior notes, a $67 million term loan, and lease obligations. The term loan is due in 2020; senior notes mature in 2023 and 2027.
- No amounts were drawn on the $450 million ABL facility; reported remaining availability was $264 million, subject to the borrowing base. A further $150 million incremental facility is uncommitted. The company reported $16.1 million of outstanding letters of credit.
- Quarter-end fixed-charge coverage ratio was 1.25; secured debt-to-EBITDA ratio was 0.16 to 1.0. The company reported that restricted payments were not limited by covenant conditions at quarter-end.
- Adoption of lease accounting on January 1, 2019 added approximately $110.4 million of operating lease right-of-use assets and $110.7 million of lease liabilities, with no material net earnings impact and no cash-flow impact. Total lease liabilities reported at March 31 were $113.4 million, including finance leases.
- The effective tax rate was 10.9%, versus 16.8%; the filing attributes the lower rate principally to employee share-based compensation tax benefits on lower pretax income. Management estimated a 21%–25% effective tax rate for the remainder of 2019.
Outlook, management commentary and risks
- Management expected 2019 capital expenditures of approximately $225 million–$275 million, including about $140 million for retail growth and $30 million for maintenance. Funding was expected primarily from operating cash flow, supplemented by borrowings if needed.
- Management stated that it expected sufficient operating cash flow for ongoing requirements and considered liquidity adequate for planned spending, debt service, repurchases, potential dividends and contingencies. No specific earnings or revenue guidance was provided.
- Management expects fuel volumes and margins to remain subject to commodity-price volatility, local competition, supply interruptions and the timing of passing wholesale fuel cost changes through to pump prices. RIN prices and the Renewable Fuel Standard remain uncertain.
- Results are seasonal; sales volumes and operating income are generally highest in Q2 and Q3 and lowest in winter, so Q1 is not necessarily indicative of full-year results.
- Other disclosed risks include Walmart relationship and growth execution, inventory and supply-chain management, severe weather, cybersecurity and systems failures, tobacco regulation, credit availability and interest rates, debt-covenant compliance, environmental liabilities and tax audits. Management considered routine legal matters and identified environmental exposures not expected to have a material adverse effect based on information then available.
- Disclosure controls were reported effective as of March 31, 2019; no material change in internal control over financial reporting was reported.
Investor verification priorities
- Assess how much Q1 earnings weakness reflects the nonrecurring 2018 settlement versus ongoing fuel, RIN and operating trends; compare GAAP results with the company’s non-GAAP Adjusted EBITDA.
- Track fuel contribution and PS&W margins, including the extent to which Q1’s reported PS&W improvement reflected timing and inventory benefits from rising wholesale prices.
- Verify RIN price and regulatory trends, and their effect on revenues and fuel contribution.
- Monitor execution and funding of the $225 million–$275 million capital program, ABL borrowing-base availability, the 2020 term-loan maturity and covenant headroom.
- Review cash conversion and working-capital movements, as well as the continued level of share repurchases and the newly recognized lease obligations.
- Reassess environmental, legal, tax, supply, weather, cybersecurity and Walmart-related risks against subsequent disclosures.