Murphy USA Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Murphy USA operates retail fuel and merchandise stores, wholesale fuel operations, and an ethanol facility in Hereford, Texas. It had 1,268 company stations across 23 states at quarter-end.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total revenue | $2.963 billion | $4.164 billion; down 28.9% |
| Operating income | $41.1 million | $23.3 million |
| Net income | $22.9 million | $9.6 million |
| Diluted EPS | $0.50 | $0.21 |
| Operating cash flow | $34.4 million | $112.8 million |
| Capital expenditures | $32.2 million | $23.7 million |
| Free cash flow | $2.2 million | $89.1 million |
- Revenue declined primarily because of lower fuel prices; management cited a $1.13-per-gallon reduction in retail fuel price. Retail fuel volume nevertheless increased 5.8% to 962.7 million gallons.
- Retail fuel margin rose to 10.0 cents per gallon from 6.8 cents. Merchandise sales increased 4.3% to $524.1 million; merchandise margin remained 14.0%.
- Operating margin was approximately 1.4% versus 0.6% in Q1 2014; net margin was approximately 0.8% versus 0.2%. These ratios reflect a business with substantial fuel pass-through revenue.
- Cash and equivalents were $287.7 million at March 31, down from $328.1 million at year-end. Operating cash flow was lower mainly because working capital provided substantially less cash than in the prior-year quarter.
- Debt was $488.8 million, principally $500 million of 6% senior notes due 2023, net of discount and issuance costs. Cash exceeded current debt maturities; approximate net debt was $201 million. The current ratio was approximately 1.5.
- The $450 million asset-based revolving facility is subject to a borrowing base; the filing estimates the borrowing base at approximately $239 million based on March 31 balances. A further $200 million incremental facility is uncommitted. The fixed-charge coverage ratio was 1.17; the 1.0 minimum applies when availability falls below specified thresholds.
Material changes and unusual items
- Higher fuel margins and volumes, higher merchandise gross-margin dollars, and RIN sales contributed to improved earnings. RIN revenue was $37.6 million versus $17.6 million; the company reported selling 54 million RINs at an average $0.70 each.
- Product-supply and wholesale margin excluding RINs was a $1.1 million loss versus $29.8 million income in Q1 2014. The prior period included a $17.8 million benefit from a LIFO decrement. Strong refining crack spreads and ample supply challenged current-period margins.
- Hereford operating income declined to a $0.6 million loss from $1.2 million income, primarily due to lower ethanol prices and crush spreads. Murphy USA is evaluating strategic alternatives for the facility; it was not classified as held for sale.
- SG&A increased 12.1% to $31.5 million, attributed primarily to professional-service fees for ongoing projects. Interest expense declined following repayment of the $150 million term loan in May 2014.
- The effective tax rate was 42.7%, versus 38.7%, reflecting discrete items and state taxes. Management estimated an ongoing rate of approximately 38.5% for the remainder of 2015.
- The company repurchased $39.4 million of shares during the quarter. Its $250 million authorization was expected to be completed by December 31, 2015; approximately $209.2 million remained available under the plan at quarter-end.
- The company early adopted ASU 2015-03, retrospectively presenting debt issuance costs as a reduction of debt. This reduced reported March 31, 2015 long-term debt and other assets by $4.0 million.
Outlook, risks, and contingencies
- Management expected 2015 capital expenditures of $230 million to $270 million, primarily for new retail sites and land acquisition; it intended to fund spending mainly with operating cash flow and existing cash.
- The company continued to pursue development opportunities associated with Walmart, including a plan for approximately 200 potential sites. Some sites had been terminated due to local conditions, and replacement sites were uncertain.
- Fuel margins and volumes are exposed to volatile crude and refined-product prices, competition, supply disruptions, and customer demand. Ethanol results are exposed to corn prices, ethanol demand, weather, and regulatory conditions. RIN prices and rules are also variable.
- Freeny patent litigation over an electronic pricing system was scheduled for trial in June 2015. Management assessed loss as remote but could not estimate potential damages. Environmental remediation, tax audits, insurance claims, and $16.2 million of letters of credit were also disclosed; management generally did not expect material effects, while noting outcomes could differ.
- Management said short- and long-term liquidity was adequate. The company noted that cash generation and facility access are not assured. Results are seasonal, with sales and operating income generally highest in the second and third quarters.
Most important facts for investors to verify
- Whether stronger retail fuel margins and increased volumes persist as fuel prices and wholesale conditions change.
- Cash conversion and working-capital trends, particularly given the sharp year-over-year decline in operating cash flow and free cash flow.
- RIN revenue’s contribution to earnings and the deterioration in product-supply and wholesale margins excluding RINs.
- Actual borrowing-base availability, covenant headroom, and funding needs for planned capital expenditures and share repurchases.
- Progress on Walmart site development, the strategic review of Hereford, and the outcome of the scheduled patent litigation.
- The nature and recurrence of the $5.4 million of other nonoperating income; the filing text does not provide a clear explanation for this line item.