Murphy USA Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Murphy USA operated 1,454 retail fuel stations in 26 states. The interim financial statements are unaudited. Amounts below are in millions of dollars except per-share, per-gallon and store data.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $3,829.0 | $3,211.1 | $7,073.2 | $6,210.7 |
| Operating income | $82.1 | $101.3 | $142.1 | $100.7 |
| Net income | $51.8 | $55.5 | $91.1 | $52.5 |
| Diluted EPS | $1.58 | $1.51 | $2.72 | $1.42 |
| Operating cash flow | Not separately provided | Not separately provided | $166.3 | $40.4 |
| Capital expenditures | Not separately provided | Not separately provided | $102.3 | $134.2 |
- Q2 revenue increased 19.2%, while net income fell 6.7%. Higher fuel prices and store count lifted sales, but higher fuel costs and weaker retail fuel margins weighed on earnings.
- First-half revenue grew 13.9% and net income rose 73.5%; the comparison includes $50.4 million of pretax Deepwater Horizon settlement proceeds in 2018, mostly recognized in Q1. Management reports $37.8 million after tax for the six-month period.
- Q2 total fuel contribution was 16.7 cents per gallon, down 7.7% from 18.1 cents. Retail fuel margin was 13.0 cents per gallon versus 16.6 cents. For the first half, total fuel contribution was 14.2 cents per gallon, unchanged year over year, while retail fuel margin declined to 10.8 cents from 13.4 cents.
- Merchandise gross margin increased 4.6% to $102.3 million in Q2; merchandise unit margin reached 16.6%, compared with 16.1%. First-half merchandise gross margin rose 3.9% to $193.8 million.
Cash, debt and liquidity
- Cash was $71.9 million at June 30, down from $170.0 million at year-end 2017. Operating cash flow of $166.3 million less property additions of $102.3 million implies approximately $64.0 million of cash flow before other investing items.
- Cash used in investing activities was $106.0 million; financing activities used $158.4 million, including $144.4 million of share repurchases. The company repurchased 1,994,632 shares during the first half at an average $72.39 per share.
- Debt carrying value was $871.9 million, including $21.1 million of current maturities, versus $880.8 million at December 31, 2017. The debt includes $500 million principal of 6.00% notes due 2023, $300 million principal of 5.625% notes due 2027, and an $82 million term loan due 2020.
- The company had no ABL borrowings and reported $310 million of remaining ABL availability, subject to the borrowing base; it also has a $150 million uncommitted incremental facility. Management said liquidity was adequate for expected operating and funding requirements.
- The fixed-charge coverage ratio was 0.75, below the 1.0 covenant threshold, but the covenant test is triggered only under specified low-availability conditions. Availability exceeded $100 million, so management stated the ratio did not then restrict operations or liquidity. Secured debt to EBITDA was 0.18.
Material changes, outlook and risks
- Federal tax reform reduced the effective tax rate to 25.0% in Q2 from 38.2% and to 21.7% for the first half from 34.4%. The first-half rate also benefited from a $3.1 million settlement of prior-year state tax positions and $1.0 million of excess stock-compensation tax benefits.
- Revenue recognition Topic 606 was adopted January 1, 2018 with no material opening retained-earnings adjustment. Prior periods were not restated. The new presentation excludes certain taxes collected and remitted; under prior guidance, reported petroleum sales would have been higher by $51.2 million in Q2 and $92.1 million for the first half.
- Management estimated 2018 capital expenditures of $225 million to $275 million, including approximately $175 million for retail growth and $40 million for maintenance. It expected to fund spending primarily through operating cash flow, supplemented by credit facilities if needed. The estimated effective tax rate for the remainder of 2018 was approximately 25%.
- Management cited rising crude and wholesale fuel prices, volatile fuel margins, RIN price uncertainty, local competition, severe weather and supply disruptions as key business risks. First-half same-store fuel gallons declined 2.7%, which management attributed in part to winter storms; Q2 same-store fuel gallons declined 1.5%.
- The company’s business is seasonal, with sales volumes and operating income generally highest in Q2 and Q3. It uses derivatives only to manage commodity risk; activity at quarter-end was immaterial.
- The filing describes routine legal matters and environmental investigations, including one Superfund site where the company considers itself a de minimis party and has recorded no liability. Management did not expect known environmental or legal matters to have a material adverse effect. Outstanding letters of credit were $16.1 million; the company had accrued $19.5 million for routine insurance claims.
Important facts for investors to verify
- Whether fuel margins and volumes recover, given lower Q2 retail fuel margins and declining same-store fuel gallons.
- How much first-half earnings and operating cash flow depended on the final Deepwater Horizon settlement, and the underlying trend excluding it.
- The effects of Topic 606’s tax presentation when comparing reported revenue with prior periods.
- Whether cash levels, continued repurchases and planned capital spending remain consistent with liquidity and covenant headroom.
- Progress toward the $225 million to $275 million capital-spending plan and the expected contribution from new stores.