Murphy USA Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. Financial statements are unaudited. Murphy USA operates 1,491 retail fuel and convenience stores in 26 states and sells fuel to wholesale customers.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $3,184.8 million | $3,116.4 million |
| Operating income | $130.8 million | $18.6 million |
| Net income | $89.3 million | $5.3 million |
| Diluted EPS | $2.92 | $0.16 |
| Operating cash flow | $113.7 million | $48.1 million |
| Property additions | $46.6 million | $30.5 million |
- Revenue increased 2.2%; net income rose substantially as fuel contribution improved. Approximate operating margin was 4.1% versus 0.6%, and net margin was 2.8% versus 0.2%.
- Total fuel contribution was $237.0 million, or 22.5 cents per gallon, versus $128.2 million, or 12.3 cents per gallon. Retail fuel margin rose to 26.9 cents per gallon from 8.4 cents.
- Retail fuel contribution increased to $283.0 million from $87.6 million, while product supply and wholesale contribution was a loss of $61.5 million versus income of $31.4 million, reflecting unfavorable timing and inventory adjustments as product prices fell. RIN revenue was $15.5 million versus $9.2 million.
- Merchandise sales rose 13.4% to $687.5 million; merchandise contribution increased 10.3% to $107.5 million. Merchandise unit margin eased to 15.6% from 16.1% as sales mix shifted toward lower-margin tobacco.
- Cash and cash equivalents were $200.3 million at quarter-end, down from $280.3 million at year-end 2019. Operating cash flow less property additions was approximately $67.1 million. Treasury-stock purchases used $140.6 million, and cash declined $80.0 million overall.
- Total debt, including capitalized lease obligations, was $1,038.6 million; $51.2 million was classified as current and $987.4 million as long-term. Debt included $800 million of senior notes and a $250 million term loan; no ABL borrowings were outstanding.
Material changes and management commentary
- Management attributed the sharp earnings improvement primarily to higher retail fuel margins following the early-2020 crude-price decline, along with higher retail fuel volumes and merchandise contribution. Retail fuel volume rose 1.2% chain-wide, while same-store volume declined 1.0%.
- COVID-19 restrictions began reducing customer counts and fuel volumes in the latter half of March. Management said unusually high retail fuel margins could not be forecast to persist and that it could not predict the pandemic’s effects on seasonal patterns or full-year results.
- SG&A increased 13.3% to $39.2 million, principally due to employee-related expenses and professional fees. Station and other operating expenses increased 1.7% to $135.1 million.
- Repurchased 1,362,400 shares for $140.6 million at an average $103.17 per share. Approximately $134.4 million remained under the $400 million program at March 31, 2020.
- Full-year 2020 capital spending was projected at approximately $225 million to $275 million, including about $140 million for retail growth and $30 million for maintenance. Management expected to fund the program primarily from operating cash flow, supplemented by credit facilities as needed. Estimated ongoing effective tax rate was 21% to 25%.
Liquidity, covenants, risks, and contingencies
- The $325 million asset-based facility had $91.3 million of availability at quarter-end, subject to its borrowing base; a separate $150 million incremental facility is uncommitted. Management considered liquidity adequate but cautioned that future cash generation and access to financing were not assured.
- The fixed-charge coverage ratio was 0.91, below 1.0, and availability was below $100 million. The company said it remained in covenant compliance, but its ability to make certain restricted payments, including dividends, was limited, subject to an unused annual basket of up to $25 million. Secured debt to EBITDA was 0.46 against a 4.5 maximum covenant.
- The term loan matures in August 2023 and requires quarterly principal payments of $12.5 million beginning April 1, 2020. The ABL facility matures in August 2024. A $150 million portion of the term loan was hedged against one-month LIBOR; management said a 10% interest-rate change would have an immaterial financial-statement impact.
- Key risks include COVID-19 effects on demand, staffing, supply chains and store operations; volatile fuel prices and margins; RIN-market and regulatory changes; competition; and compliance with debt covenants. The filing identifies environmental, legal, insurance and tax contingencies, but management did not expect their resolution to have a material adverse effect. Outstanding letters of credit totaled $17.0 million and were not accrued because drawdown was considered remote.
- Management did not expect to seek federal CARES Act aid. The company stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether the exceptional Q1 retail fuel margin and earnings uplift continued or normalized after the quarter, particularly amid COVID-19 restrictions.
- Subsequent trends in customer counts, same-store fuel volumes, merchandise contribution, and wholesale/inventory effects.
- Available ABL borrowing capacity and covenant headroom, including restrictions on dividends or other restricted payments.
- Cash generation, capital spending against the $225 million to $275 million plan, term-loan amortization, and remaining share-repurchase authorization.
- Future environmental, legal, insurance, tax, and pandemic-related exposures and any change in management’s assessment of their materiality.