Murphy USA Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; filed August 6, 2015. Murphy USA operates 1,277 fuel and convenience stores in 23 states, plus wholesale/product-supply operations and an ethanol plant in Hereford, Texas. Financial amounts below are rounded to millions unless otherwise noted.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $3,517 | $4,758 | $6,480 | $8,922 |
| Operating income | $54.2 | $117.2 | $95.3 | $140.5 |
| Net income | $26.2 | $73.2 | $49.1 | $82.9 |
| Diluted EPS | $0.59 | $1.57 | $1.09 | $1.77 |
| Operating cash flow | $43.4 | $25.7 | $77.8 | $138.4 |
| Capital expenditures | $58.8 | $29.3 | $91.0 | $53.1 |
| Free cash flow | $(15.4) | $(3.6) | $(13.2) | $85.4 |
Q2 revenue fell 26.1% year over year, while net income fell 64.2%. For the first half, revenue fell 27.4% and net income fell 40.7%. Lower fuel prices drove much of the revenue decline; reduced fuel margins, weaker wholesale margins and lower Hereford ethanol earnings weighed on profit. Revenue includes excise taxes, which were $483 million in Q2 and $946 million for the first half of 2015.
- Fuel and merchandise: Q2 retail fuel margin was 9.0 cents per gallon versus 13.2 cents a year earlier; first-half margin was 9.5 cents versus 10.1 cents. Q2 gallons sold per store month decreased 2.4%, although chain-wide retail fuel volume increased 1.9% on a higher store count. Merchandise margin improved to 14.6% from 13.7% in Q2.
- Other earnings drivers: Q2 RIN revenue was $36.2 million versus $23.3 million; first-half RIN revenue was $73.8 million versus $40.9 million. Product supply and wholesale margin, excluding RINs, was $14.4 million in Q2 versus $45.4 million, and $13.3 million for the first half versus $75.2 million.
- Margins and expenses: Q2 operating margin (operating income/revenue) was about 1.5%, versus 2.5% in Q2 2014. SG&A increased 12% in both the quarter and half year, largely from professional-service fees related to ongoing projects. The effective tax rate was 36.2% in Q2 and 39.4% for the first half, compared with 31.9% and 32.8%, respectively, in 2014.
- Cash flow: First-half operating cash flow declined to $77.8 million from $138.4 million, primarily reflecting less favorable working-capital movements and lower earnings. Capital spending rose to $91.0 million from $53.1 million, leaving negative first-half free cash flow.
Balance sheet and liquidity
- At June 30, cash was $121.4 million, down from $328.1 million at year-end 2014. Current assets were $529.0 million and current liabilities $472.0 million.
- Debt, including capitalized leases, was $489.4 million: principally $500 million face value of 6% senior notes due 2023, net of discount and issuance costs. No borrowings were outstanding under the ABL facility. The reported borrowing base was approximately $297 million; the facility has $450 million in commitments, subject to borrowing-base availability.
- The credit agreement’s fixed-charge coverage ratio was 0.82 at quarter-end, below the 1.0 minimum that applies when availability falls below specified thresholds. Management said the covenant was not then affecting operations or liquidity because the company had no ABL debt outstanding.
- First-half share repurchases used $189.8 million of cash. Under the $250 million authorization, approximately $58.8 million remained at June 30; the program was expected to be completed by December 31, 2015. Treasury shares rose to 3.92 million from 1.06 million at year-end.
Outlook, commentary and risks
- Management projected full-year 2015 capital expenditures of $230–$270 million, primarily for new stores and land purchases, and expected to fund the program mainly with operating cash and existing balances. It estimated an ongoing effective tax rate of approximately 38.5% for the remainder of 2015.
- The company cited sharp refined-product price increases during Q2 as adverse to retail fuel margins and volumes. Q2 fuel volumes were also affected by the absence of a Walmart fuel-discount promotion that had run during part of Q2 2014. Fuel margins and wholesale results are exposed to volatile commodity prices, local competition and supply disruptions.
- Murphy USA continued evaluating strategic alternatives for the Hereford ethanol facility and a pipeline asset; no final decisions had been made, and neither asset qualified as held for sale. Hereford earnings were lower because of weaker ethanol crush spreads. The company said a pipeline sale gain, if completed, could be material.
- Growth plans include developing sites near Walmart stores, but some planned sites have been terminated due to local conditions. The company identified its Walmart relationship, commodity prices, customer demand, regulation and RIN-market changes among significant risks. RIN sales contributed to results but management said the business model does not depend on them.
- Environmental remediation, tax audits, insurance claims and other legal matters remain potential contingencies. Management did not expect known matters to have a material adverse effect; it had recorded $17.9 million for routine insurance claims and reported $17.8 million of outstanding letters of credit, for which no liability was accrued because a draw was considered remote. The Freeny patent case settled for an immaterial amount.
- A Q2 nonoperating expense of $4.9 million is reported, but the provided filing text does not clearly explain its composition. The company early adopted new debt-issuance-cost presentation guidance retrospectively; this changed balance-sheet presentation, not the underlying debt economics.
Important facts for investors to verify
- Whether retail fuel margins and per-store volumes recover, and how much performance depends on wholesale margins and RIN prices.
- Progress and returns on the planned $230–$270 million capital program, new-store development and the Walmart relationship.
- Cash generation after capital spending and share repurchases, and remaining liquidity under the borrowing-base-limited ABL facility.
- Future results at Hereford and any decision or proceeds related to the ethanol facility or pipeline strategic reviews.
- The nature of the $4.9 million Q2 nonoperating expense and any material developments in environmental, tax, legal or insurance contingencies.