Murphy USA Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Amounts below are in millions of dollars unless otherwise noted. Murphy USA operated 1,223 stations in 23 states and one ethanol plant in Hereford, Texas. The 2013 comparison is partly a combined presentation of the business before its August 2013 spin-off; 2013 results also include the now-discontinued Hankinson ethanol business.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $4,757.9 | $4,843.5 | $8,922.3 | $9,201.5 |
| Operating income | $117.2 | $114.6 | $140.5 | $149.4 |
| Income from continuing operations | $73.2 | $70.3 | $82.1 | $90.9 |
| Net income | $73.2 | $77.6 | $82.9 | $99.7 |
| Diluted EPS | $1.57 | $1.66 | $1.77 | $2.13 |
| Adjusted EBITDA (non-GAAP) | $137.2 | $133.5 | $180.4 | $186.5 |
Q2 revenue fell 1.8% year over year and net income fell 5.7%; continuing-operations income rose 4.1%. The net-income comparison reflects $7.3 million of discontinued-operations income in Q2 2013, with none in Q2 2014. For the first half, revenue declined 3.0% and net income declined 16.9%. Q2 operating margin was approximately 2.5% versus 2.4%; net margin was approximately 1.5% versus 1.6%.
- Fuel: Retail fuel volumes rose 1.1% in Q2 and 2.2% in the first half, but fuel margin per gallon declined. The segment table reports 13.2 cents per gallon for Q2 2014 versus 15.6 cents in 2013, and 10.1 cents for the first half versus 13.4 cents. Q2 retail gallons per store month fell 2.6% to 271,599.
- Merchandise: Merchandise margin improved to 13.7% in Q2 from 12.8%, and to 13.9% for the first half from 12.9%. Merchandise sales fell 0.9% in Q2 and 1.7% for the first half, principally reflecting lower tobacco sales.
- Cash flow: First-half operating cash flow was $138.6 million versus $184.8 million. Capital expenditures were $53.1 million versus $95.1 million. Free cash flow, as defined by the company, was $85.4 million versus $82.8 million. Q2 operating cash flow was $25.7 million versus $85.2 million; Q2 free cash flow was negative $3.6 million versus positive $57.5 million.
- Liquidity and debt: Cash was $260.2 million at June 30, 2014, down from $294.7 million at year-end. Current assets were $699.9 million and current liabilities $584.1 million (current ratio approximately 1.20). Debt was $492.0 million, consisting of 6% senior notes due 2023; the $150 million term loan was repaid in full in May. Cash exceeded reported debt by approximately $231.8 million. The $450 million ABL facility had a reported borrowing base of approximately $428 million; availability is subject to borrowing-base terms and facility usage.
Material changes and notable items
- Q2 marketing-segment earnings rose to $71.7 million from $66.6 million, helped by stronger merchandise margins, improved product-supply and wholesale margins, and a tax benefit; weaker retail fuel margins were a partial offset. First-half marketing earnings declined to $85.4 million from $89.9 million, primarily due to lower fuel margins.
- Hereford ethanol generated record Q2 net income of $8.8 million, versus $3.7 million, and first-half income of $10.0 million, versus $1.0 million. Management attributed improvement to better crush spreads and yields. Management is considering strategic alternatives for the plant; it was not classified as held for sale.
- In May, the company completed a $50 million share repurchase, acquiring 1,040,636 shares at an average $48.07 per share.
- A $17.8 million first-quarter benefit from a LIFO inventory decrement is included in first-half results and is not expected to be restored by year-end. A $6.8 million discrete tax benefit from a lower estimated state tax rate reduced Q2 tax expense. Q2 interest expense also included $1.9 million of deferred debt-cost write-off associated with the term-loan repayment.
- RIN sales were $23.3 million in Q2 versus $29.7 million, and $40.9 million for the first half versus $43.0 million. Management noted RIN prices had declined or stabilized from early-2013 levels and stated the business model does not depend on RIN revenue.
Outlook, risks and contingencies
- Management estimated 2014 capital expenditures of $150 million to $175 million, including $134 million to $159 million for retail marketing, and expected to fund spending primarily with operating cash flow. The company’s development plan includes potential new stations near Walmart locations; completion of all contemplated sites is not assured.
- Management estimated an ongoing effective tax rate of approximately 38.5% for the remainder of 2014. It expected ethanol margins to remain strong into Q3; no quantified earnings or revenue guidance was provided.
- Management said fuel margins are volatile and depend on commodity prices, supply disruptions and local competition. Other stated exposures include corn and ethanol prices, RIN regulation and pricing, customer demand, and the company’s Walmart relationship. Results are seasonal, generally stronger in Q2 and Q3.
- The ABL agreement requires a minimum 1.0 fixed-charge coverage ratio when availability falls below specified thresholds; the reported ratio was 1.03 at June 30, 2014. Debt agreements also restrict certain activities and payments.
- The company reported $16.2 million of outstanding letters of credit, not accrued because management considered a draw remote. It identified one Superfund site where it believes it is a de minimis responsible party and considered environmental and routine legal matters not expected to have a material adverse effect. Insurance claims accrued were $4.5 million.
- Disclosure controls were assessed as effective at quarter-end. Management had not yet been required to evaluate internal control over financial reporting for this newly public company.
Important facts for investors to verify
- Reconcile the fuel-margin disclosures: the Marketing table reports 13.2 cents per gallon for Q2 2014, while MD&A narrative text says 13.4 cents; the six-month table reports 13.4 cents for 2013, while narrative text says 13.5 cents.
- Assess how much first-half earnings depended on the $17.8 million LIFO benefit and the $6.8 million state-tax benefit, and whether either is repeatable.
- Verify current ABL availability after borrowing-base calculations, letters of credit and other facility usage, and monitor the narrow cushion between the reported 1.03 coverage ratio and the 1.0 covenant threshold when applicable.
- Compare underlying retail fuel margins, volumes per store and merchandise trends with reported results; distinguish ongoing operations from the 2013 discontinued Hankinson business and pre-spin combined results.
- Track Hereford’s performance and the outcome of management’s strategic review, as well as progress and funding needs for the station-development plan.