Murphy USA Inc. — Q2 2017 Form 10-Q
Business context and period. Unaudited quarterly report for the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. Murphy USA markets fuel and convenience merchandise through 1,411 company-operated stations in 26 states, primarily under the Murphy USA and Murphy Express brands. It reports one operating segment, Marketing.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $3.211 billion | $3.006 billion | $6.211 billion | $5.496 billion |
| Operating income | $101.3 million | $84.0 million | $100.7 million | $232.6 million |
| Net income | $55.6 million | $46.3 million | $52.5 million | $132.2 million |
| Diluted EPS | $1.51 | $1.17 | $1.42 | $3.26 |
| Operating cash flow | Not separately stated | Not separately stated | $40.4 million | $168.6 million |
- Q2 revenue increased 6.8% and net income rose about 20% year over year. Management attributed the earnings improvement mainly to higher retail fuel margins and merchandise margins, partly offset by weaker Product Supply and Wholesale (PS&W) contribution and higher interest expense.
- For the first half, revenue grew 13.0%, but net income fell about 60%. The prior-year period included an $89.0 million gain on disposition of the CAM pipeline; management also cited lower total fuel contribution and higher operating costs.
- Q2 retail fuel margin was 16.6 cents per gallon, versus 10.8 cents. However, fuel gallons per store month declined 2.0% to 253,333. For the first half, fuel margin was 13.4 cents per gallon versus 11.0 cents, while gallons per store month fell 2.8%.
- Q2 merchandise margin was 16.1% of merchandise sales versus 15.7%; first-half margin was 15.9% versus 15.5%. RIN sales revenue was $36.6 million in Q2 and $65.6 million in the first half, below the respective 2016 periods.
- Cash and equivalents were $197.1 million at June 30, up from $153.8 million at year-end. First-half capital expenditures were approximately $134.2 million; operating cash flow less property additions was approximately negative $93.7 million.
- Total debt carrying value was $884.0 million, including $14.96 million current maturities; cash-adjusted debt was approximately $687 million. Long-term debt, net of current maturities, was $869.1 million. The company had no ABL borrowings and reported $208 million of remaining ABL borrowing capacity.
- Current assets were $565.7 million and current liabilities $409.3 million at June 30. Stockholders’ equity was $680.6 million.
Material changes and capital allocation
- In April 2017, the company issued $300 million of 5.625% senior notes due 2027. It used debt financing alongside other cash sources and repaid $125.9 million of debt during the first half. Interest expense increased year over year.
- First-half treasury-stock purchases totaled $66.3 million; 994,231 shares were repurchased at an average $66.72 per share. Approximately $110.4 million remained under the $500 million repurchase authorization at June 30, 2017.
- Capital spending was higher, principally reflecting development and raze-and-rebuild activity. The company had temporarily closed high-performing locations for rebuilding, affecting reported per-store fuel volumes.
Outlook, risks and unusual items
- Management expected 2017 capital expenditures of approximately $250 million to $300 million and estimated an effective tax rate of about 38% for the remainder of the year. The filing provides no earnings or revenue guidance.
- Management said it expected operating cash flow to fund ongoing needs, with credit facilities available for additional requirements; it cautioned that future cash generation and access to financing are not assured. Growth plans and the pace of development may change with cash flow and debt availability.
- Fuel margins are volatile and exposed to crude and refined-product prices, competition, demand, weather, and supply disruptions. Management cited record-high gasoline inventories, subdued retail demand, and discounted pipeline-space values as pressures on PS&W results; PS&W margin dollars excluding RINs were negative $20.8 million in Q2 and negative $49.3 million for the first half.
- The credit agreement’s fixed-charge coverage ratio was 0.57, below 1.0, but the test applies only when availability falls below specified thresholds. The company reported more than $100 million of availability, so management stated the ratio did not then restrict operations or liquidity. Secured debt to EBITDA was 0.26 to 1.0.
- Environmental matters, routine legal proceedings, tax audits, and insurance claims remain potential exposures. Management did not expect known environmental or legal matters to materially adversely affect results or liquidity; $16.9 million of letters of credit were outstanding, with no liability accrued because a draw was considered remote.
- The company planned to adopt the new revenue-recognition standard in 2018 and expected certain excise taxes to be presented net, reducing reported revenue without affecting net income or cash flows; it did not expect the revenue effect to be material. The potential impact of the new lease standard, effective in 2019, had not yet been estimated.
Most important facts for investors to verify
- Whether retail fuel margins remain elevated and recover from the decline in per-store volumes, including the effect of subdued demand and store rebuilds.
- Whether PS&W losses, inventory conditions, pipeline-space values, and lower RIN prices improve or persist.
- How first-half working-capital cash use and the planned $250 million to $300 million capital program affect liquidity, borrowing, and repurchases.
- Debt-service capacity and covenant headroom if ABL availability declines, given the reported 0.57 fixed-charge coverage ratio.
- The full-year impact of the CAM pipeline gain comparison, higher interest expense, and the stated tax-rate outlook on earnings.