Murphy USA Inc. — Q2 2016 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2016, compared with the same 2015 periods. Murphy USA marketed fuel and convenience merchandise through 1,344 stations in 24 states and reported one operating segment, Marketing.
Financial performance
- Second quarter: Revenue was $3.006 billion, down 13.3%; net income was $46.3 million versus $26.2 million; diluted EPS was $1.17 versus $0.59. Operating income increased to $84.5 million from $52.0 million.
- First half: Revenue was $5.496 billion, down 14.0%; net income was $132.2 million versus $49.1 million; diluted EPS was $3.26 versus $1.09. Operating income rose to $143.6 million from $94.0 million. Results included an $89.0 million gain on sale of assets, identified in MD&A as the CAM pipeline interest disposition; excluding that gain, the reported increase in earnings would be materially smaller.
- Revenue and margins: Lower fuel prices drove the revenue decline, partly offset by more stores, higher merchandise sales and RIN revenue. Retail fuel margin was 10.8 cents per gallon in Q2, up from 9.0 cents, and 11.0 cents for the first half, up from 9.5 cents. Merchandise margin increased to 15.7% from 14.6% in Q2 and to 15.5% from 14.3% in the first half. Retail fuel volumes rose 2.2% in Q2 and 3.4% in the first half chain-wide, though gallons per store-month declined.
- Cash flow and investment: First-half operating cash flow was $168.6 million versus $65.1 million. Capital additions were $116.6 million; company-defined free cash flow was $52.0 million versus negative $22.8 million. Cash and equivalents were $254.2 million at June 30, up from $102.3 million at year-end; restricted cash was another $53.9 million.
- Debt and liquidity: Long-term debt, including capital leases and current maturities, was approximately $678.6 million, versus $490.4 million at year-end. The balance included $500 million principal of 6% notes due 2023 and a $200 million term loan due 2020. The company reported $183 million of available ABL borrowing capacity and no ABL borrowings. Current assets were $572.0 million and current liabilities $455.7 million.
- Other metrics: The effective tax rate was 37.5% for Q2 and 38.1% for the first half. RIN sales revenue was $43.9 million in Q2 and $82.6 million in the first half. The filing reports no discontinued-operation income in 2016; 2015 included Hereford ethanol plant income of $1.4 million for Q2 and $0.8 million for the first half.
Changes versus prior periods
- Lower retail and wholesale fuel prices reduced reported revenue, while stronger retail fuel margins supported earnings. Management attributed the margin improvement partly to wholesale price volatility; the prior-year quarter had sharply rising wholesale costs.
- Merchandise margins benefited from the Core-Mark supply agreement implemented in February 2016, store-level improvements and promotional effectiveness.
- Store count increased from 1,277 to 1,344 year over year. Newer stores and a higher mix of Midwest locations weighed on gallons per store-month.
- First-half earnings benefited from the $89.0 million CAM pipeline asset-sale gain. Higher interest expense reflected the new term loan; first-half interest expense was $19.6 million versus $16.7 million.
- Share repurchases reduced weighted-average diluted shares to 39.7 million in Q2 from 44.4 million and to 40.5 million in the first half from 45.2 million.
Outlook, commentary and risks
- Management estimated 2016 capital expenditures of $250–$300 million, including $175–$225 million for retail marketing, $5 million for product supply and wholesale, and $30 million for corporate and other assets. The plan also referenced about $40 million of maintenance capital.
- The board authorized a share-repurchase program of up to $500 million through December 31, 2017. The company repurchased 2.63 million shares in the first half for an average $63.50 per share, including brokerage fees, spending $167.1 million. Management said it expected to fund growth mainly from operating cash flow, supplemented as needed by credit facilities.
- Management estimated an ongoing effective tax rate of approximately 38.1% for the remainder of 2016. No earnings or EPS guidance was provided in the filing.
- Key business sensitivities include volatile crude oil and refined-product prices, fuel-margin pressure, supply interruptions, customer demand, competition, RIN price and regulatory changes, and the company’s relationship with Walmart. The company planned continued store development and expected the existing Walmart-site construction program to be completed in 2017, while noting development was not assured.
- The credit agreement includes financial covenants and restrictions on certain payments. The reported fixed-charge coverage ratio was 0.70; management stated it had no current impact because no ABL debt was outstanding. Term-loan amortization began in 2016. Environmental, tax and routine legal contingencies were discussed; management did not expect known matters to materially affect results or liquidity, but outcomes remain uncertain.
Important facts for investors to verify
- Reconcile the $89.0 million asset-sale gain to the CAM pipeline disposition and assess earnings excluding this unusual item.
- Track retail fuel margins, per-store volumes, new-store ramp-up, and the sustainability of merchandise-margin gains and RIN revenue.
- Confirm execution and funding of the $250–$300 million capital plan alongside repurchases, and monitor the remaining authorization and shares bought back.
- Review borrowing-base availability, covenant triggers, term-loan repayments and the impact of higher debt and interest costs on liquidity.
- Monitor Walmart-related development plans, commodity and regulatory exposures, and any changes in environmental, tax or legal contingencies.