Murphy USA Inc. annual report, FY2017

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Murphy USA Inc. — FY 2017 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; it is not a standalone fourth-quarter filing. Murphy USA operates one Marketing reporting segment, comprising retail fuel and convenience stores plus product-supply and wholesale assets. At year-end it operated 1,446 stores in 26 states and sold approximately 4.1 billion gallons of retail fuel during 2017. Most Murphy USA-branded locations are near Walmart stores.

Financial performance and position

  • Revenue: $12.83 billion, up 10.6% from $11.59 billion in 2016. Petroleum product sales were $10.29 billion and merchandise sales were $2.37 billion. Reported revenue includes approximately $1.97 billion of excise taxes collected and remitted.
  • Profit: Net income was $245.3 million, or $6.78 per diluted share, versus $221.5 million, or $5.59 per diluted share, in 2016. Operating income was $283.2 million, down from $388.1 million; the 2016 result included an $88.2 million gain on asset sales. Adjusted EBITDA, a non-GAAP measure, was $405.9 million versus $400.1 million.
  • Margins and operating indicators: Retail fuel margin rose to 14.0 cents per gallon from 11.6 cents. Merchandise margin increased to 16.1% from 15.6%. Total retail fuel volume declined 1.3%, while volume per store per month fell 5.3% to 245,307 gallons. Merchandise sales grew 1.5%, though sales per store per month declined 2.7%.
  • Cash flow and investment: Cash from operating activities was $283.6 million, down 15.9% from $337.4 million. Capital expenditures were $273.7 million; investing activities used $262.1 million. Year-end cash was $170.0 million.
  • Debt and liquidity: Long-term debt, net of current maturities, was $860.9 million, versus $629.6 million in 2016; total debt carrying value including current maturities was $880.8 million. The company issued $300 million of 5.625% notes due 2027 and had $92 million remaining on its term loan. The ABL facility has $450 million of commitments, subject to a $258 million borrowing-base limit at year-end; no borrowings were outstanding under the facility. The current ratio was 1.15, versus 1.00.
  • Capital returns: The company repurchased $206.0 million of shares in 2017 and completed its $500 million repurchase authorization. It declared no cash dividends in 2017 or 2016.

Changes versus 2016

  • Revenue and net income increased, but fuel volume per store declined amid subdued demand and increased competition. Higher fuel prices contributed to revenue growth; fuel-margin improvement supported earnings.
  • Merchandise contribution increased, with improved margins attributed mainly to promotional optimization, tobacco price increases, and product mix.
  • The 2017 income tax benefit of $5.2 million contrasts with tax expense of $130.5 million in 2016. The 2017 result includes an $88.9 million provisional benefit from the Tax Cuts and Jobs Act, primarily from remeasuring deferred tax balances; the company said further analysis could result in adjustments in 2018.
  • Cash from operations declined, while debt increased following the 2027 notes issuance. Interest expense rose to $46.7 million from $39.7 million.
  • RIN revenue declined to $160.3 million from $181.1 million. The filing reports sales of 224 million RINs at an average $0.72 each in 2017, versus 221 million at $0.82 in 2016.

Outlook, risks, contingencies, and unusual items

  • Management expected 2018 capital expenditures of approximately $225 million to $275 million, including about $175 million for retail growth and $40 million for maintenance. The company described a longer-term build pace of 30 to 50 sites annually, including raze-and-rebuild projects; it said 30 new 2018 locations, excluding raze-and-rebuild, were supported by its pipeline.
  • Management expects to fund 2018 capital spending primarily from operating cash flow, supplementing it with credit facilities if needed. It cited fuel-margin volatility, commodity prices, competition, seasonality, and supply interruptions as important uncertainties.
  • Material business exposures include reliance on Walmart’s relationship and retained property rights, dependence on Core-Mark for more than 84% of merchandise supply, volatile fuel margins and RIN prices, environmental remediation and regulation, severe weather, credit-card fees, and cybersecurity or operating disruptions. The company generally does not hedge a significant portion of its commodity exposure.
  • Known contamination and routine legal matters were not expected by management to materially affect future earnings, financial condition, or liquidity. The company is a potentially responsible party at one Superfund site and reported an anticipated approximately $0.1 million Mississippi underground-storage-tank penalty under negotiation. Outstanding letters of credit totaled $15.4 million; no liability was accrued because a draw was considered remote.
  • A $47.0 million net award related to the 2010 Deepwater Horizon oil spill was received in February 2018 and is to be recognized as income in the first quarter of 2018, not in FY 2017.
  • Management and the auditor reported effective internal controls; KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

  • How much of the earnings and EPS increase reflects the one-time tax-law benefit and share repurchases, versus recurring operating improvement?
  • Can stronger per-gallon fuel margins persist as retail volumes per store decline and competition increases?
  • What are the sustainable level and volatility of RIN-related earnings, given 2017 RIN revenue of $160.3 million and regulatory uncertainty?
  • Does cash generation support planned growth and maintenance spending while servicing the higher debt load? Confirm actual ABL availability against the borrowing base, not just the $450 million commitment.
  • How quickly can planned site growth be delivered, and how concentrated are merchandise supply and store traffic risks in Core-Mark and Walmart, respectively?
  • Review the final accounting impact of the Tax Cuts and Jobs Act, environmental exposures, and the timing and accounting for the $47.0 million subsequent-event award.