Murphy USA Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; unaudited. Comparisons are with the corresponding 2022 periods. Murphy USA operates fuel and convenience stores, wholesale fuel operations and related supply assets. It had 1,724 stores in 27 states at quarter-end.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $5.798bn | $6.195bn | $16.461bn | $18.080bn |
| Operating income | $247.3m | $311.9m | $608.8m | $794.9m |
| Net income | $167.7m | $219.5m | $406.8m | $555.2m |
| Diluted EPS | $7.69 | $9.28 | $18.47 | $22.76 |
| Adjusted EBITDA | $306.0m | $367.0m | $783.3m | $960.6m |
Revenue and margins: Q3 revenue fell 6.4%, primarily due to lower fuel prices and 2.5% lower retail fuel volume; nine-month revenue fell 9.0%, principally reflecting lower fuel prices. Q3 total fuel contribution was $419.0m, or 34.5 cents per gallon, versus $468.1m and 37.6 cents per gallon a year earlier. Retail fuel margin was 28.7 cents per gallon versus 39.3 cents. Merchandise contribution rose to $211.8m in Q3 from $205.7m, with merchandise unit margin of 20.1% versus 20.0%. For nine months, fuel contribution declined to $1.115bn from $1.261bn, while merchandise contribution increased to $605.7m from $578.1m.
Cash flow and liquidity: Operating cash flow for the first nine months was $510.9m, down from $771.5m, reflecting lower net income and a $97.2m working-capital cash use (versus $18.8m provided in 2022). Investing activities used $217.0m, including $224.6m of property additions. Financing activities used $229.6m, including $172.7m of treasury-stock purchases and $24.7m of dividends. Cash and cash equivalents were $124.8m and marketable securities were $15.9m at September 30, 2023.
Debt and capital: Total debt, including capitalized lease obligations and before current maturities, was $1.801bn; the $350m revolving facility was undrawn, with $6.2m of letters of credit outstanding. The term loan balance was approximately $391m and its effective interest rate was 7.22%. The reported total leverage ratio was 1.75x. The company repurchased 584,086 shares during the nine-month period. About $41.0m remained under the existing $1bn authorization; a new $1.5bn authorization is to follow its completion.
Material changes and management commentary
- Lower fuel contribution was the principal earnings headwind. Q3 retail fuel margin dollars fell 28.8%; retail fuel volume declined 2.5%. Management attributed the prior-year comparison partly to a declining commodity-price environment in 2022.
- Higher merchandise contribution partly offset fuel weakness. Q3 same-store merchandise contribution grew 1.2%; nine-month merchandise contribution increased 4.8%.
- Operating costs increased: Q3 store and other operating expenses rose 4.4% and SG&A rose 14.5%; nine-month increases were 4.3% and 18.3%, respectively. Management cited employee costs, maintenance, inventory shrink, incentives, and professional and technology services.
- Interest expense increased to $74.5m for nine months from $61.6m, while the term loan’s effective rate rose from 5.95% at year-end 2022 to 7.22% at September 2023.
Outlook, risks and contingencies
- Management expects 2023 capital expenditures of approximately $325m–$375m, including $235m–$265m for retail growth and $50m–$60m for maintenance. The company expects to fund its program primarily with operating cash flow, with revolver borrowings available if needed.
- Management estimates an ongoing effective tax rate of 24%–26% for the remainder of 2023. The Board declared a $0.41 quarterly dividend on October 26, 2023, payable December 1, 2023.
- Management says liquidity is adequate, but results remain exposed to volatile fuel margins and commodity prices, supply-chain disruption, inflation and cost pressures, weather, competition, regulation (including fuel, tobacco and environmental requirements), cybersecurity, interest rates, credit availability, and debt-covenant compliance. Fuel and merchandise margins can change rapidly; seasonality generally makes the second and third quarters stronger.
- Environmental matters include one EPA Superfund site at which the company considers itself a de minimis responsible party and has recorded no liability. Climate-related lawsuits filed by Charleston, South Carolina, and Delaware seek unspecified damages and abatement; outcomes and potential liability are uncertain. The company states that currently known environmental and legal matters are not expected to have a material adverse effect. It also reports $49.6m of accrued liabilities for routine insurance claims and $10.2m of outstanding letters of credit, for which it considers a draw remote.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track retail fuel margin and volume, including whether fuel contribution recovers from the lower year-over-year level.
- Assess the persistence of merchandise growth against rising store operating and SG&A costs.
- Reconcile operating cash flow and working-capital movements with planned capital spending and shareholder returns.
- Monitor floating-rate debt costs, leverage and covenant headroom, particularly if cash flow weakens.
- Review progress on store growth and capital expenditure plans, and developments in environmental and climate litigation.