Murphy USA Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Murphy USA operates retail fuel and convenience stores and sells fuel wholesale; it reported 1,479 stations across 26 states.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $3,657.6 million | $3,788.0 million | $10,574.4 million | $10,861.2 million |
| Operating income | $120.7 million | $70.0 million | $195.0 million | $212.1 million |
| Net income | $69.2 million | $45.0 million | $107.2 million | $136.1 million |
| Diluted EPS | $2.18 | $1.38 | $3.33 | $4.11 |
| Total fuel contribution | $225.6 million; 20.1 cents/gallon | $172.7 million; 16.2 cents/gallon | $521.5 million; 15.8 cents/gallon | $467.5 million; 14.9 cents/gallon |
| Merchandise contribution | $111.2 million | $104.5 million | $314.2 million | $298.3 million |
| Operating cash flow | Not separately stated for the quarter | $251.6 million | $241.4 million |
Fuel contribution combines retail fuel, product supply and wholesale, and RINs. Retail fuel margin was 18.4 cents per gallon in Q3 and 13.5 cents for the nine-month period. Merchandise unit margin was 16.3% in Q3 and 16.1% year to date.
Liquidity, debt and capital
- Cash and cash equivalents were $247.7 million at September 30, 2019, versus $184.5 million at December 31, 2018. Current assets were $664.9 million and current liabilities $516.9 million.
- Total debt carrying value, including current maturities and capitalized leases, was $987.7 million, compared with $863.3 million at year-end 2018. The company had $800 million of senior notes and $200 million outstanding on its term loan; no ABL borrowings were outstanding.
- ABL facility availability was reported as $258 million, subject to the borrowing base; an additional $150 million incremental facility was uncommitted. The amended credit agreement extends the ABL facility to August 2024. Fixed-charge coverage was 1.1 and secured debt-to-EBITDA was 0.43 to 1.0 at quarter-end.
- Operating cash flow of $251.6 million less $153.7 million of property additions implies approximately $97.9 million of cash flow after property additions, before other investing and financing activity.
- Repurchased 1.60 million shares for $139.1 million in the first nine months. The July 2019 authorization permits up to $400 million of repurchases through July 2021.
Changes and notable items
- Q3 revenue fell 3.4%, while net income rose to $69.2 million from $45.0 million, chiefly on stronger retail fuel margins and merchandise contribution. Fuel volume and merchandise sales increased, while lower average fuel prices reduced reported revenue.
- Nine-month revenue declined 2.6% and net income declined to $107.2 million from $136.1 million. The prior-year period included $37.7 million after tax in Deepwater Horizon settlement proceeds; 2019 also included a $14.8 million loss on early debt extinguishment.
- In September, the company redeemed its 6.00% notes due 2023 and issued $500 million of 4.75% notes due 2029, using proceeds in part for the redemption. It also borrowed $200 million under a new term loan and repaid the prior term loan balance. Nine-month interest expense was $42.1 million versus $39.6 million.
- Adoption of the new lease standard added approximately $110.4 million of net lease assets and $110.7 million of lease liabilities at adoption; the filing says it did not materially affect earnings or cash flows.
Outlook, commentary and risks
- Management expects 2019 capital expenditures of approximately $225 million to $275 million, including about $140 million for retail growth and $30 million for maintenance. It expects to fund spending primarily from operating cash flow, with credit facilities available as needed.
- Management estimates an effective tax rate of 21% to 25% for the remainder of 2019. The filing provides no specific earnings or revenue guidance.
- Management says fuel margins are volatile and depend on refined-product prices, supply interruptions, weather, competition and the ability to pass through cost changes. RIN prices and regulatory requirements are additional uncertainties. Q3 average RIN prices were $0.20 per RIN in both years; nine-month average prices were $0.18 in 2019 versus $0.38 in 2018.
- Other stated risks include maintaining the Walmart relationship, executing store growth, controlling costs, supply-chain disruption, cybersecurity, tobacco-related regulation, interest rates, credit availability and debt-covenant compliance.
- Environmental remediation, routine legal matters, insurance claims and tax audits remain contingencies. Management does not expect currently known matters to have a material adverse effect, but outcomes and additional environmental expenditures are uncertain. Outstanding letters of credit totaled $17.0 million and were not accrued because management considered a draw remote.
Key facts for investors to verify
- Whether stronger fuel margins and merchandise contribution persist as commodity prices, competition and RIN economics change.
- How station operating expenses and depreciation develop as the store base expands; the chain had 1,479 stations versus 1,461 a year earlier.
- Cash generation, capital spending and share repurchases relative to the new debt load, available ABL borrowing base and covenant thresholds.
- The realized financing impact of replacing 6.00% 2023 notes with 4.75% 2029 notes, including the one-time extinguishment cost.
- Progress against the $225 million to $275 million capital-spending range and the $400 million repurchase authorization.
- Any material developments in environmental remediation, tax examinations, legal claims or the company’s Walmart relationship.