Murphy USA Inc. — Q3 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Murphy USA markets fuel and convenience-store merchandise through 1,423 company-operated stations in 26 states, alongside wholesale and product-supply operations. The company reports one operating segment, Marketing.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $3.236 billion | $3.043 billion | $9.447 billion | $8.539 billion |
| Operating income | $117.9 million | $78.9 million | $218.6 million | $311.5 million |
| Net income | $67.9 million | $45.5 million | $120.4 million | $177.7 million |
| Diluted EPS | $1.90 | $1.16 | $3.29 | $4.44 |
| Adjusted EBITDA | $147.4 million | $105.3 million | $306.9 million | $296.9 million |
- Q3 margins and volumes: Retail fuel margin was 15.5 cents per gallon, versus 13.7 cents a year earlier. Fuel gallons per store-month fell 9.5% to 242,810. Merchandise margin was 16.1% of merchandise sales, versus 16.0%. Management said total fuel contribution increased 32.7% to 20.5 cents per gallon, reflecting both retail and product-supply/wholesale results.
- Nine-month operating trends: Retail fuel margin rose to 14.1 cents per gallon from 11.9 cents. Fuel gallons per store-month declined 5.1%; chainwide retail fuel volume declined 0.9%. Merchandise margin increased to 16.0% from 15.7%.
- Cash flow: Nine-month operating cash flow was $166.4 million, down from $209.8 million. Investing activities used $205.4 million, including $201.5 million of property additions. Operating cash flow less property additions was negative $35.2 million, a simple cash-flow comparison, not a company-reported measure. Cash rose to $169.0 million from $153.8 million at year-end 2016.
- Debt and liquidity: Debt carrying value, including current maturities and capitalized leases, was $884.7 million at September 30, versus $670.2 million at December 31, 2016. This includes $500 million principal of 6.00% notes due 2023, $300 million principal of 5.625% notes due 2027, and a $97 million term loan. The company reported no ABL borrowings and approximately $295 million of remaining borrowing capacity; it also stated that availability exceeded $100 million. The secured debt-to-EBITDA ratio was 0.23:1. The fixed-charge coverage ratio was 0.63, below 1.0, but the covenant test was not operative at the reported availability level.
- Margins and liquidity context: Petroleum revenue includes excise taxes collected and remitted to governments—$488.8 million in Q3 and $1.473 billion for nine months in 2017. This gross presentation materially increases reported revenue relative to the underlying sales economics.
Material changes versus comparable periods
- Q3 revenue increased 6.4% and net income increased about 49% year over year. Management attributed the earnings improvement chiefly to higher retail fuel margins, higher merchandise margin, and increased RIN sales volumes.
- Q3 fuel revenue benefited from higher retail prices, while lower fuel volumes per store reflected subdued demand, hurricane impacts, and temporary closures for raze-and-rebuild work. Management said favorable late-quarter wholesale-price movements helped retail margins; product-supply and wholesale results also benefited from timing and inventory effects associated with rising wholesale prices and hurricanes Harvey and Irma.
- Nine-month revenue grew 10.6%, but net income fell 32%. The principal comparison item was the $88.6 million gain on the CAM pipeline disposition recorded in 2016, which did not recur. Nine-month 2017 also had weaker product-supply/wholesale margins excluding RINs: negative $45.6 million versus negative $20.8 million. RIN revenue decreased to $114.4 million from $130.7 million.
- Debt increased following the April 2017 issuance of $300 million of 5.625% notes due 2027. Nine-month interest expense rose to $33.9 million from $29.8 million.
- The company repurchased 2.25 million shares in the first nine months at an average $67.47 per share, spending $152.0 million during the period. About $24.7 million remained under its $500 million authorization at September 30.
Outlook, commentary, risks, and unusual items
- Management forecast full-year 2017 capital expenditures of approximately $250 million to $300 million, including retail, product-supply/wholesale, corporate, and maintenance spending. Nine-month capital spending and investments were $212.5 million. Management expected to fund the program primarily with operating cash flow, supplemented by credit facilities if needed.
- Management estimated an effective tax rate of approximately 38% for the remainder of 2017 and said it believed cash generation and available credit would support operating and planned funding needs. No specific earnings or sales guidance was provided in the filing text.
- Fuel margins are volatile and exposed to crude and refined-product prices, competition, supply interruptions, and the timing of passing wholesale cost changes to customers. The company cited weather and hurricanes, inventory management, supply-chain disruption, RIN regulation and pricing, tobacco regulation, Walmart relationship and execution of its growth plan as risks.
- RIN sales are a meaningful source of other operating revenue, but management stated the business model does not depend on RIN revenue. RIN prices and regulatory requirements can fluctuate.
- Management expected adoption of the revenue-recognition standard in 2018 to result in certain excise and similar taxes being presented net, reducing reported revenue without affecting net income or cash flows; it did not expect the reported-revenue impact to be material. The potential balance-sheet effect of the new lease standard effective in 2019 was still under evaluation.
- Environmental and other legal matters were described as routine or not expected to materially affect results, financial condition, or liquidity. A Mississippi matter concerning alleged underground-storage-tank violations had an anticipated civil penalty of approximately $130,000; the company was negotiating resolution. Outstanding letters of credit were $15.4 million and were not accrued because management considered drawdown remote.
Important facts for investors to verify
- Whether Q3 fuel-margin strength and favorable product-supply/wholesale timing effects are sustainable, especially given lower fuel volumes and negative year-to-date wholesale margins excluding RINs.
- How store rebuilds, hurricanes, demand trends, and the growing store base affect comparable-store volumes, margins, and the $250 million–$300 million 2017 capital plan.
- The drivers of working-capital outflows and the ability of operating cash flow to cover capital spending, share repurchases, and debt service.
- Borrowing-base availability and covenant headroom, particularly because the fixed-charge coverage ratio was below 1.0 even though the related test was not then operative.
- Exposure to RIN pricing and regulation, and the actual revenue-presentation impact when the new revenue standard is adopted.