Murphy USA Inc. — Q3 2016 Form 10-Q
Business and period. Unaudited results for the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. Murphy USA operated 1,364 retail fuel and convenience stores in 25 states and also sold fuel to wholesale customers.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $3,042.7 million | $3,382.5 million | $8,538.8 million | $9,771.3 million |
| Operating income | $79.3 million | $106.4 million | $222.9 million | $200.4 million |
| Net income | $45.5 million | $60.5 million | $177.7 million | $109.7 million |
| Diluted EPS | $1.16 | $1.41 | $4.44 | $2.47 |
| Adjusted EBITDA (non-GAAP) | $105.3 million | $128.5 million | $296.9 million | $265.5 million |
| Operating cash flow | Not separately stated in the cited comparison | Not separately stated in the cited comparison | $209.8 million | $148.8 million |
- Margins and volumes: Retail fuel margin was 13.7 cents per gallon in Q3 versus 18.1 cents a year earlier; nine-month margin was 11.9 cents versus 12.5 cents. Retail fuel volumes increased 1.2% in Q3 and 2.6% year to date, although volume per store month declined in both periods. Merchandise margin was 16.0% in Q3 and 15.7% year to date, up from 14.6% and 14.4%, respectively.
- Cash flow and investment: Nine-month property additions were $198.9 million. Company-defined free cash flow (operating cash flow less property additions) was $10.9 million, compared with negative $13.6 million in 2015. Cash and equivalents were $206.7 million at September 30, 2016, up from $102.3 million at year-end 2015.
- Debt and liquidity: Reported current and long-term debt, including capitalized leases, totaled approximately $679.4 million; cash was $206.7 million. The balance included $493.96 million of 6% notes due 2023 and $190 million outstanding on a term loan due 2020. The company reported $192 million of borrowing capacity under its $450 million asset-based facility, subject to borrowing-base limits; it had no ABL borrowings outstanding.
Material changes versus prior periods
- Q3 revenue fell 10.0%, mainly because lower fuel prices reduced petroleum sales; net income fell from $60.5 million to $45.5 million. Management cited lower fuel margins, higher operating expenses, and additional interest expense from the new term loan as drivers.
- Nine-month revenue declined 12.6%, but net income increased to $177.7 million from $109.7 million. The comparison benefited materially from an $88.6 million pretax gain on the sale of the CAM pipeline interest, as well as higher RIN income, merchandise margins, and retail fuel volumes.
- RIN sales revenue was $48.0 million in Q3 versus $20.0 million, and $130.7 million year to date versus $93.9 million. Management cautions that RIN prices and related market factors can vary.
- In March 2016, the company borrowed $200 million under a new term loan and amended and extended its credit agreement. It repurchased $212.3 million of stock during the first nine months, including 3.24 million shares at an average $65.56 per share.
Outlook, commentary, and risks
- Management expected full-year 2016 capital expenditures of approximately $250 million to $300 million and an ongoing effective tax rate of approximately 37.7% for the remainder of the year. It said operating cash flow was expected to fund ongoing requirements, with credit facilities available as needed. No specific earnings or revenue guidance is provided in the filing.
- The company planned continued store growth and cited a January 2016 decision to pursue an independent growth plan and additional opportunities alongside its existing development program. Management noted that build-out timing and capital plans may change with cash flow and financing availability.
- Fuel margins are exposed to volatile crude and refined-product prices, competitive conditions, supply interruptions, weather, and customer demand. Management attributed Q3 margin pressure partly to rising wholesale prices and the September Colonial pipeline disruption. The business also depends substantially on its Walmart relationship, while RIN-related revenue is subject to regulatory and market changes.
- The credit agreement has financial and restricted-payment covenants. The reported fixed-charge coverage ratio was 0.64, but management stated that the ratio did not then affect operations or liquidity because no ABL debt was outstanding. Covenant triggers and availability remain important to monitor.
- Environmental and other legal proceedings were described as routine or not expected to have a material adverse effect based on information then available. The company reported $16.9 million of outstanding letters of credit, for which it had not accrued a liability because drawdown was considered remote, and $19.0 million of accrued insurance-claim liabilities.
Investor verification points
- Assess underlying earnings excluding the $88.6 million CAM pipeline gain and consider the scale and sustainability of RIN-related income.
- Track retail fuel margins, same-store volumes, per-store performance, and whether merchandise margin gains persist after the Core-Mark supply agreement’s expected early-2017 comparison change.
- Verify actual capital spending, store openings, and funding needs against the $250 million to $300 million 2016 estimate and the announced growth and repurchase capital allocation.
- Review debt amortization, borrowing-base availability, covenant thresholds, and restrictions on repurchases or dividends; reported fixed-charge coverage was below 1.0.
- Monitor the Walmart relationship, commodity and pipeline risks, RIN regulation and pricing, and developments in environmental, tax, and insurance contingencies.