Murphy USA Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; financial statements are unaudited. Murphy USA operated 1,461 retail fuel stations in 26 states, alongside wholesale fuel operations.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $3,788.0 million | $3,236.3 million | $10,861.2 million | $9,447.0 million |
| Operating income | $70.0 million | $118.0 million | $212.1 million | $218.6 million |
| Net income | $45.0 million | $67.9 million | $136.1 million | $120.4 million |
| Diluted EPS | $1.38 | $1.90 | $4.11 | $3.29 |
| Adjusted EBITDA | $105.2 million | $147.4 million | $262.9 million | $306.8 million |
- Fuel economics: Total fuel contribution, including product supply and wholesale results and RINs, was 16.2 cents per gallon in Q3, down 21% from 20.5 cents. For the nine months, it was 14.9 cents, down 1.4 cents year over year. Retail fuel margin was 14.2 cents per gallon in Q3 versus 15.5 cents, and 11.9 cents year to date versus 14.1 cents.
- Merchandise: Q3 merchandise sales rose 3% to $623.7 million; merchandise gross margin dollars rose 7% to $104.5 million, and unit margin reached 16.8% versus 16.1%. Nine-month merchandise margin dollars increased 5% to $298.3 million; unit margin was 16.5% versus 16.0%.
- Cash flow: Nine-month operating cash flow was $241.4 million, compared with $166.3 million. Property additions used $163.0 million, versus $201.5 million. Cash declined to $75.4 million from $170.0 million at year-end 2017, reflecting investing outflows, share repurchases and debt repayments.
- Debt and liquidity: Debt carrying value was $867.8 million, including $800 million of senior notes and a $77 million term loan; $21.2 million was current. The company had no ABL borrowings and reported $344 million of remaining ABL capacity. It reported more than $100 million of availability, a secured debt-to-EBITDA ratio of 0.19:1, and a fixed-charge coverage ratio of 0.81; management said the latter did not then affect operations or liquidity.
- Balance sheet: Total assets were $2,325.6 million and stockholders’ equity was $728.9 million. Current assets and current liabilities were $541.3 million and $540.8 million, respectively.
Material changes versus comparable periods
- Q3 revenue increased 17%, largely from higher fuel prices, fuel volumes and store count, but net income fell to $45.0 million from $67.9 million. Management attributed the decline mainly to lower fuel contribution and higher payment fees and operating costs; merchandise margin gains and a lower tax rate partly offset the decline.
- Nine-month revenue increased 15%, while net income rose to $136.1 million from $120.4 million. The comparison includes $50.4 million of pretax settlement proceeds related to the 2010 Deepwater Horizon spill ($37.8 million after tax), recorded in the first half of 2018. Excluding this unusual item, reported year-to-date earnings growth would not be comparable on a like-for-like basis.
- RIN sales revenue fell to $11.6 million in Q3 from $48.7 million; the average sale price was $0.20 per RIN versus $0.83. Nine-month RIN revenue was $67.3 million versus $114.4 million.
- The effective tax rate decreased to 21.1% in Q3 from 37.5%, and to 21.5% for the nine months from 36.2%, primarily reflecting federal tax reform and discrete tax benefits.
- Revenue comparisons are affected by the January 2018 adoption of ASC 606: prior periods were not restated, and certain taxes collected and remitted are excluded from 2018 revenue. Under the former presentation, 2018 revenue would have been higher by $51.7 million for Q3 and $143.8 million year to date.
Outlook, risks and unusual items
- Management forecast full-year 2018 capital expenditures of approximately $225–$275 million, depending partly on new-site completion; it expected to fund spending primarily from operating cash flow, with credit facilities available as needed. The forecast included approximately $175 million for retail growth and $40 million for maintenance.
- The company estimated a 20%–23% effective tax rate for Q4 2018. It provided no specific earnings or revenue guidance in this filing.
- Management cited volatile fuel margins, crude and wholesale fuel prices, supply interruptions, severe weather, local competition and uncertainty in the Renewable Fuel Standard/RIN market. Rising wholesale costs may not be passed through immediately to retail customers and can pressure margins and volumes.
- Other disclosed risks include dependence on maintaining a good Walmart relationship, execution and timing of store growth, inventory and supply-chain management, cybersecurity, tobacco regulation, interest rates, credit availability and debt-covenant compliance.
- Environmental and legal proceedings were described as routine or not expected to have a material adverse effect based on information available. The company identified one Superfund site where it considered itself a de minimis party and had recorded no liability. It also reported $19.5 million accrued for routine insurance claims and $16.1 million of outstanding letters of credit, which it said were unlikely to be drawn.
- The company planned to adopt lease accounting standard ASC 842 in Q1 2019 and expected recognition of operating-lease right-of-use assets and liabilities, principally for real estate leases; the impact was still being evaluated.
Key facts for investors to verify
- Whether fuel contribution and retail fuel margins recover, and how changing wholesale prices affect pass-through timing, volumes and profitability.
- How much normalized earnings depend on RIN proceeds and on the nonrecurring Deepwater Horizon settlement; compare operating performance excluding settlement proceeds.
- Whether planned growth capital spending, new-store execution and repurchases remain supportable from operating cash flow and available borrowing capacity.
- How ASC 606 presentation changes affect revenue comparisons, and the expected balance-sheet impact of ASC 842 adoption.
- Whether ABL availability remains above covenant and restricted-payment thresholds, particularly given the reported fixed-charge coverage ratio below 1.0.