Murphy USA Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report; it also provides unaudited fourth-quarter results. Dollar amounts below are in millions unless otherwise noted.
Business context
Murphy USA operated 1,472 fuel and convenience retail stores in 26 states, primarily near Walmart locations, and also owned fuel supply, terminal and wholesale assets. The company reported one segment, Marketing. Retail fuel volume was 4.23 billion gallons for the year.
Financial and operating performance
| Metric | 2018 | 2017 | Change/comment |
|---|---|---|---|
| Revenue | $14,362.9 | $12,826.6 | Up 12.0%; higher fuel prices and 2.2% growth in total retail fuel volume contributed. |
| Net income | $213.6 | $245.3 | Down $31.7; 2017 included an $88.9 tax benefit from the Tax Cuts and Jobs Act. |
| Diluted EPS | $6.48 | $6.78 | Down year over year. |
| Operating cash flow | $398.7 | $283.6 | Up 40.6%, reflecting tax, working-capital and depreciation changes. |
| Capital expenditures | $193.8 | $273.7 | Lower than prior year. |
| Cash and cash equivalents | $184.5 | $170.0 | At year-end. |
| Long-term debt, net of current maturities | $842.1 | $860.9 | Reported balance; total debt including current maturities and lease obligations was $863.3. |
| Current ratio / working capital | 1.19 / $92.0 | 1.15 / $80.9 | Liquidity measures improved. |
Retail fuel margin, excluding credit-card fees, increased to 14.7 cents per gallon from 14.0 cents. Total fuel contribution was $685.6, versus $677.7, while total fuel contribution per gallon, including product supply, wholesale and RINs, was 16.2 cents versus 16.4 cents. Merchandise sales rose to $2,423.0 and merchandise margin increased to 16.5% from 16.1%; same-store merchandise sales declined 0.2%. Same-store retail fuel volume declined 0.6%.
Fourth-quarter 2018 revenue was $3,501.7, compared with $3,379.5 in Q4 2017. Net income was $77.5, compared with $124.9, and diluted EPS was $2.38 versus $3.58.
Material changes and unusual items
- Revenue growth reflected a 29-cent-per-gallon increase in average retail fuel prices and a larger store base; cost of sales also rose 12.8%.
- Fuel margins benefited from market volatility, but RIN revenue fell to $75.2 from $160.3 as the average selling price declined to $0.33 from $0.72 per RIN.
- 2018 net income included $50.4 of pre-tax Deepwater Horizon settlement proceeds ($39.3 after tax). Higher operating costs, depreciation and interest also weighed on results.
- 2017 net income benefited from the $88.9 tax remeasurement benefit. The effective tax rate was 22.0% in 2018 versus a 2.2% tax benefit in 2017.
- The company adopted ASC 606 in 2018 using the modified retrospective method; no material opening retained-earnings adjustment was recorded. Prior-period revenue is not presented on the same accounting basis. The filing estimates 2018 petroleum sales would have been $196.5 higher under the former presentation of certain taxes.
Outlook, liquidity, risks and contingencies
- Management expected to build 40–50 sites in 2019, including raze-and-rebuild projects. Planned 2019 capital expenditures were approximately $225–$275, including about $140 for retail growth and $30 for maintenance.
- The company had a $450 committed asset-based credit facility, but borrowing availability was limited by a $177 borrowing base at year-end; it also had a $150 uncommitted incremental facility. Cash was $184.5. The filing cites below-investment-grade credit ratings and debt covenant restrictions.
- Debt included $500 principal of 6.00% notes due 2023, $300 principal of 5.625% notes due 2027, and a $72 term loan due 2020. The term loan requires quarterly principal payments. The ABL facility matures in 2021.
- Key business exposures include volatile fuel prices and retail margins, competition, dependence on Walmart-related traffic and agreements, supply interruptions, and reliance on Core-Mark for more than 80% of merchandise purchases. RIN revenue is exposed to price and regulatory changes; litigation seeking to shift Renewable Fuel Standard compliance obligations to blenders was ongoing.
- Environmental contamination and remediation obligations, severe weather, uninsured operational losses, tobacco regulation, cybersecurity and execution of new-store growth are additional risks. The company reported it was a potentially responsible party at one Superfund site but considered its expected share immaterial; it stated known remediation costs were not expected to have a material adverse effect. A $0.1 Mississippi underground-storage-tank penalty was paid in 2018. Other routine legal matters were not expected by management to be material.
- Management expected adoption of the new lease standard in 2019 to add approximately $100–$115 of right-of-use assets and lease liabilities to the balance sheet. No cash dividends were declared in 2017 or 2018; the company repurchased $144.4 of shares in 2018.
Most important facts for investors to verify
- Whether fuel margins and same-store fuel volumes remain resilient amid competition and changing fuel prices.
- How much earnings and cash generation depend on RIN sales, and the potential effect of regulatory or litigation outcomes.
- Progress against the 40–50-site growth plan, projected capital spending and returns on new locations.
- Actual borrowing-base availability, debt maturities, covenant headroom and the effect of leverage on capital allocation.
- The full effect of lease-standard adoption and any emerging environmental, legal or insurance claims.