Murphy USA Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter ended June 30, 2021; financial statements are unaudited. Comparisons are with Q2 and first half of 2020. QuickChek, acquired January 29, 2021, is included from April 3 through July 2 for Q2 and from its acquisition date through July 2 for the first half.
Business context and results
Murphy USA markets fuel and convenience merchandise through Murphy USA, Murphy Express and QuickChek stores, and sells fuel wholesale. At June 30, it operated 1,662 stores, including 155 QuickChek stores. Marketing is its sole reportable segment.
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $4,456.0 million | $2,379.6 million | $7,993.1 million | $5,564.4 million |
| Operating income | $190.2 million | $235.5 million | $284.8 million | $366.3 million |
| Net income | $128.8 million | $168.9 million | $184.1 million | $258.2 million |
| Diluted EPS | $4.79 | $5.73 | $6.73 | $8.60 |
| Adjusted EBITDA | $244.5 million | $274.2 million | $399.3 million | $444.9 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $330.8 million | $381.9 million |
Margins, cash flow and balance sheet
- Q2 total fuel contribution was $316.6 million, down from $324.6 million; contribution per gallon fell to 28.2 cents from 38.3 cents. Retail fuel margin declined to 21.8 cents per gallon from 31.7 cents, while retail volumes increased 32.6% year over year. First-half fuel contribution was $543.9 million versus $561.5 million.
- Merchandise contribution increased to $184.5 million in Q2 from $118.4 million, and to $332.9 million for the first half from $225.9 million. Merchandise margin rates were 19.2% and 18.5%, respectively, versus 15.4% and 15.5% in the prior periods.
- First-half operating cash flow of $330.8 million was below the prior-year $381.9 million. Investing used $778.3 million, including $641.1 million net cash paid for QuickChek; financing provided $448.9 million. Cash ended at $165.0 million.
- At June 30, total debt and capitalized lease obligations were $1,808.6 million, including $1,794.4 million net of current maturities. This compares with $1,002.4 million and $951.2 million, respectively, at December 31, 2020. The company reported a 2.55-to-1.0 total leverage ratio and an undrawn $350 million revolving facility.
- Share repurchases used $198.3 million in the first half; $176.7 million remained under the $500 million authorization at quarter end. Dividends declared were $0.25 per share in each quarter.
Material changes and management commentary
- Revenue rose 87.3% in Q2 and 43.6% in the first half, reflecting higher fuel prices and volumes, merchandise growth, higher RIN-related revenue and QuickChek. Higher revenue did not translate into higher earnings: net income declined in both comparisons.
- Management attributed lower earnings primarily to weaker retail fuel contribution, higher store and payment-processing costs, higher depreciation and SG&A, and greater interest expense. QuickChek contributed to expense increases; stronger merchandise contribution and higher fuel volumes partly offset them.
- Crude oil averaged approximately $66 per barrel in Q2 2021 versus approximately $28 in Q2 2020. Management said rising wholesale fuel costs can compress retail margins when pump prices cannot adjust quickly. RIN prices averaged $1.60 in Q2 versus $0.38 a year earlier; management noted RIN markets and regulation are unpredictable.
- QuickChek was acquired for $641.9 million cash, before acquired cash. Preliminary purchase accounting recorded $329.1 million of goodwill; allocation remains subject to finalization. The company recorded $9.0 million of acquisition-related costs in the first half.
Outlook, risks and contingencies
- Management estimated 2021 capital expenditures of $325 million to $375 million, including approximately $298 million for retail growth and $25 million for maintenance. It expected primarily to use operating cash flow, supplemented by revolving-credit borrowings if needed.
- The company estimated an ongoing effective tax rate of 23% to 25% for the remainder of 2021. It did not provide specific earnings or revenue guidance.
- Management said seasonal patterns were moving closer to normal as travel restrictions eased, but warned that renewed COVID-19 infections or related intervention could weaken volumes. Fuel margins, crude prices, supply disruptions, competition, RIN prices, QuickChek integration and synergy realization, and interest rates are key uncertainties.
- Credit agreements include leverage and restricted-payment covenants. The filing states that restricted payments were not limited at the reported 2.55 leverage ratio; certain restrictions may apply if pro forma leverage exceeds 3.0-to-1.0. Environmental and other legal matters were not expected by management to have a material adverse effect, though outcomes are uncertain. Outstanding letters of credit totaled $10.5 million and were not accrued because drawdown was considered remote.
Important facts for investors to verify
- Whether fuel margins and total fuel contribution recover or remain pressured as wholesale prices and retail volumes change.
- Whether elevated RIN contribution is sustainable and how future RIN prices or regulatory changes affect results.
- QuickChek’s post-acquisition performance, integration costs, purchase-price allocation and the realization of anticipated synergies.
- Debt, leverage and liquidity trends relative to covenant thresholds, capital spending, dividends and remaining share-repurchase authorization.
- The effects of COVID-19 developments, seasonality, supply interruptions and other risks identified in the filing.