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excise taxes of $569.7 million and $520.9 million for the three months ended September 30, 2022 and 2021, and $1,638.4 million and $1,514.9 million for the six months ended September 30, 2022 and 2021, respectively. 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UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM i10-Q
(Mark one)
i☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Exact name of registrant as specified in its charter)
iDelaware
i46-2279221
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i200 Peach Street
iEl
Dorado,
iArkansas
i71730-5836
(Address
of principal executive offices)
(Zip Code)
(i870) i875-7600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $0.01 Par Value
iMUSA
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑iYes☐ No
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑iYes☐ No
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge accelerated filer☑Accelerated
filer ☐ Non-accelerated filer ☐ Smaller reporting company i☐ Emerging growth company i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes i☑
No
Number of shares of Common Stock, $0.01 par value, outstanding at September 30, 2022 was i22,594,002.
Note1 — iDescription
of Business and Basis of Presentation
Description of business — Murphy USA Inc. and its consolidated subsidiaries (“Murphy USA” or the “Company”) markets refined products through a network of retail gasoline stores and to unbranded wholesale customers. In addition, we operate non-fuel convenience stores in select markets. The Company owns and operates a chain of retail stores under the brand name of Murphy USA® which are almost all located in close proximity to Walmart stores, markets gasoline and other products at standalone stores under the Murphy Express brand, and also has a mix of convenience stores with and without retail gasoline that operate under the name of QuickChek®. At
September 30, 2022, the Company had a total of i1,700 Company stores of which i1,151 were
Murphy USA, i392 were Murphy Express and i157 were QuickChek. The Company also has certain product supply and wholesale assets, including product distribution terminals and pipeline positions.
Basis
of Presentation — Murphy USA was incorporated in March 2013 and, in connection with its incorporation, Murphy USA issued i100 shares of common stock, par value $i0.01
per share, to Murphy Oil Corporation (“Murphy Oil”) for $i1.00. On August 30, 2013, Murphy USA was separated from Murphy Oil through the distribution of i100%
of the common stock of Murphy USA to holders of Murphy Oil stock. On January 29, 2021, the Company acquired i100% of Quick Chek Corporation ("QuickChek"), a privately held convenience store chain. Murphy USA Inc., Murphy Oil USA, Inc. and certain of its subsidiaries operate on a calendar year basis, while the subsidiary
QuickChek uses a weekly retail calendar where each quarter has 13 weeks. For the three month period ended September 30, 2022, the QuickChek results cover the period from July 2, 2022 to September 30, 2022 and year-to-date period began January 1, 2022. For the three month period ended September 30, 2021, the QuickChek results cover the period July 3, 2021 to October 1, 2021 and the year-to-date period covers January 29, 2021 (the date of acquisition) to October 1, 2021. The difference in timing of the period ends is immaterial
to the overall consolidated results.
iIn preparing the financial statements of Murphy USA in conformity with accounting principles generally accepted in the United States, management has made a number of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Actual results may differ from these estimates.
Interim Financial Information — The interim period financial
information presented in these consolidated financial statements is unaudited and includes all known accruals and adjustments, in the opinion of management, necessary for a fair presentation of the consolidated financial position of Murphy USA and its results of operations and cash flows for the periods presented. All such adjustments are of a normal and recurring nature.
These interim consolidated financial statements should be read together with our audited financial statements for the years ended December 31, 2021, 2020 and 2019, included in our Annual Report on Form 10-K (File No. 001-35914), as filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934 on February 17, 2022.
Recently Issued Accounting Standards—
iIn January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope". This standard extends certain of the optional expedients and exceptions in ASC 848 that apply to derivative contracts
impacted by the discounting transition, including derivatives that do not reference LIBOR or other reference rates that are expected to be discontinued. The new standard applies to all entities and is in effect for a limited time, from March 12, 2020 through December 31, 2022. The Company has determined this standard has not had a material impact on the Company's consolidated financial statements.
8
Murphy USA Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In August 2021, the FASB issued ASU 2021-08, "Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts
using the revenue recognition guidance in Topic 606. Under Topic 606, the acquirer applies the revenue model as if it had originated the contracts. This is a departure from the current requirement to measure contract assets and contract liabilities at fair value. This ASU is effective for the Company for the year beginning January 1, 2023, with early adoption permitted. The Company has determined this will not likely have a material impact on the
Company's consolidated financial statements.
Note2 — iRevenues
Revenue Recognition
i
Revenue
is recognized when obligations under the terms of a contract with our customers are satisfied; generally, this occurs with the transfer of control of our petroleum products, convenience merchandise, Renewable Identification Numbers ("RINs") and other assets to our third-party customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Excise and sales tax that we collect where we have determined we are the principal in the transaction have been recorded as revenue on a jurisdiction-by-jurisdiction basis.
The Company enters into buy/sell and similar arrangements when petroleum products are held at one location but are needed at a different location. The
Company often pays or receives funds related to the buy/sell arrangements based on location or quality differences. The Company continues to account for these transactions as non-monetary exchanges under existing accounting guidance and typically reports these on a net basis in the Consolidated Statements of Income.
i
The following tables disaggregate our revenues by major source for the three and nine months ended
September 30, 2022 and 2021, respectively:
1
Includes excise and sales taxes that remain eligible for inclusion under Topic 606
2 Primarily includes collection allowance on excise and sales taxes and other miscellaneous items
Marketing segment
Petroleum product sales (at retail). For our retail store locations, the revenue related to petroleum product sales is recognized as the fuel is pumped to our customers. The transaction price at the pump typically includes some portion of sales or excise taxes as levied in the respective jurisdictions. Those taxes that are collected for remittance to governmental entities on a pass-through basis are not recognized as revenue and they are recorded to a liability account until they are paid. Our
customers typically use a mixture of cash, checks, credit cards and debit cards to pay for our products as they are received. We have accounts receivable from the various credit/debit card providers at any point in time related to product sales made on credit cards and debit cards. These receivables are typically collected in two to iseven days, depending on the terms with the particular credit/debit card providers. Payment fees retained by the credit/debit card providers are recorded as Store and other operating expenses.
Petroleum
product sales (at wholesale). Our sales of petroleum products at wholesale are generally recorded as revenue when the deliveries have occurred and legal ownership of the product has transferred to the customer. Title transfer for bulk refined product sales typically occurs at pipeline custody points and upon trucks loading at product terminals. For bulk pipeline sales, we record receivables from customers that are generally collected within a week from custody transfer date. For our rack product sales, the majority of our customers' accounts are drafted by us within i10
days from product transfer.
Merchandise sales. For our retail store locations, the revenue related to merchandise sales is recognized as the customer completes their purchase at our locations. The transaction price typically includes some portion of sales tax as levied in the respective jurisdictions. Those taxes that are collected for remittance to governmental entities on a pass through basis are not recognized as revenue and they are recorded to a liability account until they are paid. As noted above, a mixture of payment types are used for these revenues and the same terms for credit/debit card receivables are realized.
10
Murphy USA Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The most significant judgment with respect to merchandise sales revenue is determining whether we are the principal or agent for some categories of merchandise such as lottery tickets, lotto, newspapers and other small categories of merchandise. For scratch-off lottery tickets, we have determined we are the principal in the majority of the jurisdictions and therefore we record those sales on a gross basis. We have some categories of merchandise (such as lotto) where we are the agent and the revenues recorded for those transactions are our net commission only.
The Company offers loyalty programs through its Murphy
USA, Murphy Express, and QuickChek branded retail locations. The customers earn rewards based on their spending or other promotional activities. These programs create a performance obligation which requires us to defer a portion of sales revenue to the loyalty program participants until they redeem their rewards. The rewards may be redeemed for free or discounted merchandise or cash discounts at all stores and on fuel purchases at Murphy USA and Murphy Express stores. Earned rewards expire after an account is inactive for a period of i90
days at Murphy USA and Murphy Express, while certain QuickChek rewards require use within the month. We recognize loyalty revenue when a customer redeems an earned reward. Deferred revenue associated with both rewards programs are included in Trade accounts payable and accrued liabilities in our Consolidated Balance Sheet. The deferred revenue balances at September 30, 2022 and December 31, 2021 were immaterial.
RINs sales. For the sale of RINs, we recognize revenue when the RIN is transferred to the counter-party and the sale is completed. Receivables from our counter-parties related to the RIN sales are typically collected within ifive
days of the sale.
Other revenues. Items reported as other operating revenues include collection allowances for excise and sales tax and other miscellaneous items and are recognized as revenue when the transaction is completed.
Accounts receivable
Trade accounts receivable on the balance sheet represents both receivables related to contracts with customers and other trade receivables. At September 30, 2022 and December 31, 2021, we had $i157.1
million and $i111.8 million of receivables, respectively, related to contracts with customers recorded. All of the trade accounts receivable related to contracts with customers outstanding at the end of each period were collected during the succeeding quarter. These receivables were generally related to credit and debit card transactions along with short term bulk and wholesale sales to our
customers, which have a very short settlement window.
Total
petroleum products and store merchandise inventory
i272.6
i284.9
Materials
and supplies
i7.8
i7.4
Total
inventories
$
i280.4
$
i292.3
/
Murphy
USA and Murphy Express branded petroleum products are valued using the last-in, first-out (LIFO) method and certain QuickChek store merchandise for resale is valued using the LIFO method. At September 30, 2022 and December 31, 2021, the replacement cost (market value) of LIFO inventories exceeded the LIFO carrying value for petroleum products by $i303.2 million and $i227.5 million,
respectively and for store merchandise for resale was $ii0.5/ million
for both September 30, 2022 and December 31, 2021.
11
Murphy USA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 4 — iBusiness
Acquisition
On January 29, 2021, Murphy USA completed the previously announced transaction to acquire i100% of QuickChek, a privately-held convenience store chain with a regional brand which consisted of i156
stores located in New Jersey and New York, in an all-cash transaction. The acquisition was made to expand the Company's network into the Northeast by adding stores that had an existing food and beverage model and is consistent with the Company's stated strategic priorities of developing enhanced food and beverage capabilities and accelerating its growth plans.
The excess of the purchase price over the fair value of the net, identifiable assets acquired was recorded as goodwill. The factors contributing to the recognition of goodwill are a mixture of direct and reverse synergies that are expected to be realized by both QuickChek and Murphy USA as a result of this acquisition. The direct synergies include additional margin capture on
the retail fuel side from the tactical pricing decisions and improved benefits from increased scale on the product acquisition side combined with other cost savings in both merchandise and store operations. The reverse synergies reflect management's ability to leverage QuickChek's product pricing and operational capabilities related to food and beverage sales to Murphy branded stores. All fair values were final as of December 31, 2021.
The Company has determined that the trade name has an indefinite life, as there is no economic, contractual, or other factors that limit its useful life and expects to generate value as long as the trade name is utilized, and therefore is not subject to amortization. The fair value of intangible assets was based on widely-accepted valuation
techniques, including discounted cash flows.
i
The following table summarizes the fair value of the consideration transferred at the date of the acquisition, as well as the calculation of goodwill based on the excess of consideration over the fair value of net assets acquired:
(Millions
of dollars)
Cash paid to shareholders
$
i641.9
Less cash and cash equivalents acquired
i0.8
Fair
value of consideration transferred, net of cash acquired
$
i641.1
Assets acquired:
Accounts receivable
$
i8.0
Inventories
i24.3
Prepaid
expenses and other current assets
i5.5
Property and equipment
i447.1
Right
of use assets
i237.6
Other assets
i5.4
Identified
intangible assets
i106.8
Liabilities assumed:
Accounts payable and accrued expenses
(i68.4)
Deferred
income tax liabilities
(i58.5)
Asset retirement obligation
(i1.2)
Current
and long term debt, including finance lease obligations
(i148.5)
Deferred credits and other liabilities
(i7.4)
Operating
lease liabilities
(i237.6)
Net assets acquired
i313.1
Goodwill
i328.0
Fair
value of consideration transferred, net of cash and cash equivalents acquired
$
i641.1
/
12
Murphy
USA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In connection with the acquisition, the Company recognized certain acquisition-related expenses which were expensed as incurred. These expenses, recognized within acquisition related costs in the consolidated statements of income, include amounts related to transaction and integration costs, including fees for advisory and professional services incurred as part of the acquisition and integration costs subsequent to the acquisition in the amount of $i1.4 million
and $i9.7 million for the nine months ended September 30, 2022 and 2021, respectively.
Note5 — iGoodwill
and Intangible Assets
The Company's goodwill is assigned to its Marketing segment and inone of the goodwill is deductible for tax purposes.
We amortize intangible assets subject to amortization on a straight-line basis
based on the period for which the economic benefits of the asset or liability are expected to be realized. The intangible assets subject to amortization was in addition to the Company's existing intangible asset pipeline space, which is being amortized over a i40 year life.
Capitalized
lease obligations, autos and equipment, due through 2026
i2.6
i2.7
Capitalized
lease obligations, buildings, due through 2059
i133.3
i138.9
Less
unamortized debt issuance costs
(i9.7)
(i11.1)
Total
long-term debt
i1,809.2
i1,815.1
Less
current maturities
i15.2
i15.0
Total
long-term debt, net of current
$
i1,794.0
$
i1,800.1
/
Senior
Notes
On April 25, 2017, Murphy Oil USA, Inc., our primary operating subsidiary, issued $i300 million of i5.625%
Senior Notes due 2027 (the "2027 Senior Notes"). The 2027 Senior Notes are fully and unconditionally guaranteed by Murphy USA, and are guaranteed by certain 100% owned subsidiaries that guarantee our Credit Facilities, as defined herein. The indenture governing the 2027 Senior Notes contains restrictive covenants that limit, among other things, the ability of Murphy USA, Murphy Oil USA, Inc. and the restricted subsidiaries to incur additional indebtedness or liens, dispose of assets, make certain restricted payments or investments, enter into transactions with affiliates or merge with or into other entities.
14
Murphy
USA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
On September 13, 2019, Murphy Oil USA, Inc., issued $i500 million of i4.75%
Senior Notes due 2029 (the “2029 Senior Notes”). The net proceeds from the issuance of the 2029 Senior Notes were used to fund, in part, the tender offer and redemption of a prior note issuance. The 2029 Senior Notes are fully and unconditionally guaranteed by Murphy USA, and are guaranteed by certain 100% owned subsidiaries that guarantee our Credit Facilities. The indenture governing the 2029 Senior Notes contains restrictive covenants that are substantially similar to the covenants for the 2027 Senior Notes.
On January 29, 2021, Murphy Oil USA, Inc., issued $i500
million of i3.75% Senior Notes due 2031 (the “2031 Senior Notes” and, together with the 2027 Senior Notes and the 2029 Senior Notes, the "Senior Notes"). The net proceeds from the issuance of the 2031 Senior Notes were used, in part, to fund the acquisition of QuickChek and other obligations related to that transaction. The 2031 Senior Notes are fully and unconditionally guaranteed by the Company and by the
Company's subsidiaries that guarantee our Credit facilities. The indenture governing the 2031 Senior Notes contains restrictive covenants that are substantially similar to the covenants for the 2027 and 2029 Senior Notes.
The Senior Notes and the guarantees rank equally with all of our and the guarantors’ existing and future senior unsecured indebtedness and effectively junior to our and the guarantors’ existing and future secured indebtedness (including indebtedness with respect to the Credit Facilities) to the extent of the value of the assets securing such indebtedness. The Senior Notes are structurally subordinated to all of the existing and future third-party liabilities, including trade payables, of our existing and
future subsidiaries that do not guarantee the Senior Notes.
Revolving Credit Facility and Term Loan
On January 29, 2021, the Company entered into a new credit agreement that consists of both a cash flow revolving credit facility and a senior secured term loan that replaced the Company's prior ABL facility and term loan.
The credit agreement provides for a senior secured term loan in an aggregate principal amount of $i400
million (the "Term Facility") (which was borrowed in full on January 29, 2021) and revolving credit commitments in an aggregate amount equal to $i350 million (the "Revolving Facility", and together with the Term Facility, the "Credit Facilities"). The outstanding balance of the term loan was $i395
million at September 30, 2022 and $i398 million at December 31, 2021. The term loan is due January 2028 and we are required to make quarterly principal payments of $i1 million, which
began on July 1, 2021. As of September 30, 2022, we had ino outstanding borrowings under the Revolving Facility and had $i4.7 million
in outstanding letters of credit (which reduces the amount available to borrow under the Revolving Facility).
Interest payable on the Credit Facilities is based on either:
•the London interbank offered rate, adjusted for statutory reserve requirements (the “Adjusted LIBO Rate”);
or
•the Alternate Base Rate, which is defined as the highest of (a) the rate of interest last quoted by The Wall Street Journal as the "Prime Rate", (b) the greater of the federal funds effective rate and the overnight bank funding rate determined by the Federal Reserve Bank of New York from time to time plus i0.50%
per annum and (c) the one-month Adjusted LIBO Rate plus i1.00% per annum,
plus, (A) in the case of Adjusted LIBO Rate borrowings, (i) with respect to the Revolving Facility, spreads ranging from i1.75%
to i2.25% per annum depending on a total debt to EBITDA ratio or (ii) with respect to the Term Facility, a spread of i1.75% per annum and (B) in the case of Alternate
Base Rate borrowings (i) with respect to the Revolving Facility, spreads ranging from i0.75% to i1.25% per annum depending on a total debt to EBITDA ratio or (ii)
with respect to the Term Facility, a spread of i1.75% per annum.
The Term Facility amortizes in quarterly installments starting with the first amortization payment being due on July 1, 2021 at a rate of i1.00%
per annum. Murphy USA is also required to prepay the Term Facility with a portion of its excess cash flow, a portion of the net cash proceeds of certain asset sales and casualty events (subject to certain reinvestment rights) and the net cash proceeds of issuances of indebtedness not permitted under the Credit Agreement. The credit agreement allows Murphy USA to prepay, in whole or in part, the Term Facility outstanding
15
Murphy USA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
thereunder, together with any accrued and unpaid interest, with prior notice
but without premium or penalty other than breakage and redeployment costs.
The credit agreement contains certain covenants that limit, among other things, the ability of the Company and certain of its subsidiaries to incur additional indebtedness or liens, to make certain investments, to enter into sale-leaseback transactions, to make certain restricted payments, to enter into consolidations, mergers or sales of material assets and other fundamental changes, to transact with affiliates, to enter into agreements restricting the ability of subsidiaries to incur liens or pay dividends, or to make certain accounting changes. The Revolving
Facility credit agreement also impose total leverage ratio and secured net leverage ratio financial maintenance covenants which are tested quarterly. Pursuant to the total leverage ratio financial maintenance covenant, the Company must maintain a total leverage ratio of not more than i5.0 to 1.0 with an ability in certain circumstances to temporarily increase that limit to i5.5
to 1.0 and a maximum secured net leverage ratio of not more than i3.75 to 1.0 with an ability in certain circumstances to temporarily increase that limit to i4.25
to 1.0. The Credit Agreement also contains customary events of default.
Pursuant to the credit agreement's covenant limiting certain restricted payments, certain payments in respect of our equity interests, including dividends, when the total leverage ratio, calculated on a pro forma basis, is greater than i3.0 to 1.0 could be limited. At September 30, 2022, our total leverage ratio was i1.53
to 1.0 which meant our ability at that date to make restricted payments was not limited. If our total leverage ratio, on a pro forma basis, exceeds i3.0 to 1.0, any restricted payments made following that time until the ratio is once again, on a pro forma basis, below i3.0
to 1.0 would be limited by the covenant, which contains certain exceptions, including an ability to make restricted payments in cash in an aggregate amount not to exceed the greater of $i114.5 million or i4.50%
of consolidated net tangible assets over the life of the credit agreement.
All obligations under the credit agreement are guaranteed by Murphy USA and the subsidiary guarantors party thereto, and all obligations under the credit agreement, including the guarantees of those obligations, are secured by certain assets of Murphy USA, Murphy Oil USA, Inc. and the guarantors party to the guarantee and collateral agreement in respect thereof.
Note7 — iAsset
Retirement Obligations (ARO)
The majority of the ARO recognized by the Company at September 30, 2022 and December 31, 2021 is related to the estimated costs to dismantle and abandon certain of its retail gasoline stores. The Company has not recorded an ARO for certain of its marketing assets because sufficient information is presently not available to estimate a range of potential settlement dates for the obligation. These assets are consistently being upgraded and are expected to be operational into the foreseeable future. In these cases, the obligation will be initially recognized in the period in which sufficient information
exists to estimate the obligation.
i
A reconciliation of the beginning and ending aggregate carrying amount of the ARO is shown in the following table.
The
estimation of future ARO is based on a number of assumptions requiring professional judgment. The Company cannot predict the type of revisions to these assumptions that may be required in future periods due to the lack of availability of additional information.
16
Murphy USA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note8 — iIncome Taxes
The effective tax rate is calculated as the amount of income tax expense (benefit) divided by income before income tax expense (benefit). iFor
the three and nine month periods ended September 30, 2022 and 2021, the Company’s approximate effective tax rates were as follows:
2022
2021
Three
months ended September 30,
i24.5%
i24.5%
Nine
months ended September 30,
i24.2%
i24.4%
In
the nine months ended September 30, 2022, the Company recognized approximately $i2.5 million of excess tax benefits related to stock compensation for employees and $i0.4
million in other discrete tax benefits. For the nine months ended September 30, 2021, the Company recognized approximately $i1.2 million in excess tax benefits related to stock compensation, $i1.0 million
for other discrete tax items related to state deferred tax rate adjustments due to the QuickChek acquisition, and $i0.4 million in other discrete tax benefits.
As of September 30, 2022, the earliest years remaining open for federal audit and/or settlement are 2018 and 2017 for state purposes. Although the Company believes
that recorded liabilities for unsettled issues are adequate, additional gains or losses could occur in future periods from resolution of outstanding unsettled matters.
Note9 — iIncentive Plans
2013
Long-Term Incentive Plan
Effective August 30, 2013, certain of our employees participate in the Murphy USA 2013 Long-Term Incentive Plan which was subsequently amended and restated effective as of February 8, 2017 (the “MUSA 2013 Plan”). The MUSA 2013 Plan authorizes the Executive Compensation Committee of our Board of Directors (“the Committee”) to grant non-qualified or incentive stock options, stock appreciation rights, stock awards (including restricted stock and restricted stock unit awards), cash awards, and performance awards to our employees. No more than i5.5
million shares of MUSA common stock may be delivered under the MUSA 2013 Plan and no more than i1 million shares of common stock may be awarded to any one employee, subject to adjustment for changes in capitalization. The maximum cash amount payable pursuant to any “performance-based” award to any participant in any calendar year is $i5.0
million.
Beginning with its initial quarterly dividend in December 2020, the Company issues dividend equivalent units ("DEU") on all outstanding, unvested equity awards (except stock options) in an amount commensurate with regular quarterly dividends paid on common stock. The terms of the DEU mirror the underlying awards and will only vest if the related award vests. DEUs issued are included with grants in each respective table as applicable.
STOCK OPTIONS – The Committee fixes the option price of each option granted at no less than fair market value (FMV) on the date of the grant and fixes the option term at no more than i7
years from such date. In February 2022, the Committee granted nonqualified stock options to certain employees of the Company. The Black-Scholes valuation for these awards was $i51.46 per option.
i
Assumptions
used to value awards:
Dividend yield
i0.64
%
Expected volatility
i32.2
%
Risk-free
interest rate
i1.8
%
Expected life (years)
i4.7
Stock
price at valuation date
$
i181.18
/
17
Murphy USA Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
i
Changes in options outstanding for Company employees during the period from December 31, 2021 to September 30, 2022 are presented in the following table:
Options
Number
of Shares
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term (Years)
Aggregate Intrinsic Value (Millions of Dollars)
Outstanding at 12/31/2021
i366,100
$
i90.44
Granted
i55,150
$
i181.80
Exercised
(i96,250)
$
i69.65
Forfeited
(i9,100)
$
i119.43
Outstanding
at 9/30/2022
i315,900
$
i111.89
i4.3
$
i51.5
Exercisable
at 9/30/2022
i152,400
$
i80.74
i3.1
$
i29.6
/
RESTRICTED
STOCK UNITS (MUSA 2013 Plan) – The Committee has granted time-based restricted stock units (RSUs) as part of the compensation plan for its executives and certain other employees since its inception. The awards granted in the current year were under the MUSA 2013 Plan, are valued at the grant date fair value, and vest over i3 years.
i
Changes
in restricted stock units outstanding for Company employees during the period from December 31, 2021 to September 30, 2022 are presented in the following table:
Employee RSUs
Number of units
Weighted Average Grant Date Fair Value
Total
Fair Value (Millions of Dollars)
Outstanding at 12/31/2021
i175,627
$
i95.93
Granted
i42,086
$
i187.31
Vested
and issued
(i58,996)
$
i79.47
$
i11.2
Forfeited
(i6,559)
$
i115.15
Outstanding
at 9/30/2022
i152,158
$
i126.76
$
i41.8
/
PERFORMANCE-BASED
RESTRICTED STOCK UNITS (MUSA 2013 Plan) – In February 2022, the Committee awarded performance-based restricted stock units (performance units or PSU) to certain employees. Half of the performance units vest based on a i3-year return on average capital employed ("ROACE") calculation and the other half vest based on a i3-year
total shareholder return ("TSR") calculation that compares MUSA to a group of i18 peer companies. The portion of the awards that vest based on TSR qualify as a market condition and must be valued using a Monte Carlo valuation model. For the TSR portion of the awards, the fair value was determined to be $i259.17
per unit. For the ROACE portion of the awards, the valuation will be based on the grant date fair value of $i181.18 per unit and the number of awards will be periodically assessed to determine the probability of vesting.
18
Murphy
USA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Changes in performance-based restricted stock units outstanding for Company employees during the period from December 31, 2021 to September 30, 2022 are presented in the following table:
Employee
PSU's
Number of Units
Weighted Average Grant Date Fair Value
Total Fair Value (Millions of Dollars)
Outstanding at 12/31/2021
i127,638
$
i117.59
Granted
i78,827
$
i218.64
Vested
and issued
(i94,226)
$
i87.62
$
i17.1
Forfeited
(i6,360)
$
i133.98
Outstanding
at 9/30/2022
i105,879
$
i160.21
$
i29.1
2013
Stock Plan for Non-employee Directors
Effective August 8, 2013, Murphy USA adopted the 2013 Murphy USA Stock Plan for Non-employee Directors (the “Directors Plan”). The directors for Murphy USA are compensated with a mixture of cash payments and equity-based awards. Awards under the Directors Plan may be in the form of restricted stock, restricted stock units, stock options, or a combination thereof. An aggregate of i500,000
shares of common stock was reserved for issuance of grants under the Directors Plan.
RESTRICTED STOCK UNITS (Directors Plan) – The Committee has also granted time based RSUs to the non-employee directors of the Company as part of their overall compensation package for being a member of the Board of Directors. These awards typically vest at the end of ithree
years.
Changes in restricted stock units outstanding for Company non-employee directors during the period from December 31, 2021 to September 30, 2022 are presented in the following table:
Director RSU's
Number of Units
Weighted
Average Grant Date Fair Value
Total Fair Value (Millions of Dollars)
Outstanding at 12/31/2021
i30,664
$
i100.23
Granted
i7,963
$
i173.56
Vested
and issued
(i11,735)
$
i75.96
$
i2.1
Outstanding
at 9/30/2022
i26,892
$
i132.54
$
i7.4
For
the nine months ended September 30, 2022 and 2021, share-based compensation was $i11.7 million and $i10.0
million, respectively. There were $i1.1 million and $i0.4
million in income tax benefits realized for the tax deductions from options exercised for the nine months ended September 30, 2022 and 2021, respectively.
19
Murphy USA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 10 — iFinancial
Instruments and Risk Management
iDERIVATIVE INSTRUMENTS — The Company makes limited use of derivative instruments to manage certain risks related to commodity prices and interest rates. The use of derivative instruments for risk management is covered by operating policies and is closely monitored by the Company’s senior management. The
Company does not hold any derivatives for speculative purposes and it does not use derivatives with leveraged or complex features. Derivative instruments are traded primarily with credit worthy major financial institutions or over national exchanges such as the New York Mercantile Exchange (“NYMEX”). For accounting purposes, the Company has not designated commodity derivative contracts as hedges, and therefore, it recognizes all gains and losses on these derivative contracts in its Consolidated Statements of Income. Certain interest rate derivative contracts were accounted for as hedges and gain or
loss associated with recording the fair value of these contracts was deferred in AOCI until the anticipated transactions occur.As of September 30, 2022, all current commodity derivative activity is immaterial.
At September 30, 2022, there was $i0.9
million cash deposit and at December 31, 2021 the cash deposit was $i0.6 million related to commodity derivative contracts reported in Prepaid expenses and other current assets in the Consolidated Balance Sheets. These cash deposits have not been used to increase the reported net assets or reduce the reported net liabilities on the derivative contracts
at September 30, 2022 or December 31, 2021.
Interest Rate Risks
Under hedge accounting rules, the Company deferred the net charge or benefit associated with the interest rate swap entered into to manage the variability in interest payments for the variable-rate debt in association with $i150.0 million
of our outstanding term loan dated August 27, 2019 until the debt was repaid on January 29, 2021. At that time the hedge was de-designated and therefore hedge accounting is no longer applicable and mark-to-market gains and losses are recognized in the period in which the change occurs in the Consolidated Statements of Income in interest expense. The current loan balance subject to the hedge is $i75.0 million. The
Company is reclassifying the accumulated other comprehensive loss on the previous interest rate swap, $i2.4 million as of the de-designation date, into interest expense using a straight-line approach over the remaining life of the originally designated hedging relationship. The amount of pre-tax gains in accumulated other comprehensive loss that was reclassified into interest expense was $i0.2 million
and $i0.7 million for the three and nine months ended September 30, 2022, respectively. The amount of pre-tax gains in accumulated other comprehensive loss that was reclassified into interest expense was $i0.2 million
and $i0.6 million for the three and nine months ended September 30, 2021, respectively. The remaining balance at September 30, 2022 was $i0.9
million. Prior to the de-designation, changes in the fair values of the interest rate swaps were recorded as a component of other comprehensive loss.
Note 11 — iEarnings Per Share
Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average of common shares
outstanding during the period. Diluted earnings per common share adjusts basic earnings per common share for the effects of stock options and restricted stock in the periods where such items are dilutive.
On October 28, 2020, the Board of Directors approved a $i500 million share repurchase program effective through December 2023. The 2020 program was completed in January 2022, and a new authorized
program for up to $i1 billion, approved in December 2021 to be executed by December 31, 2026, is now in effect. For the nine months ended September 30, 2022, the Company repurchased i2,482,804
shares of common stock for an average price of $i228.33 per share including brokerage fees. For the nine months ended September 30, 2021, i1,699,043
shares were repurchased for an average price of $i136.22 per share.
20
Murphy USA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
i
The
following table provides a reconciliation of basic and diluted earnings per share computations for the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30,
Nine
Months Ended September 30,
(Millions of dollars, except share and per share amounts)
2022
2021
2022
2021
Earnings per common share:
Net income per share - basic
Net
income attributable to common stockholders
$
i219.5
$
i104.0
$
i555.2
$
i288.1
Weighted
average common shares outstanding (in thousands)
i23,206
i25,779
i23,963
i26,525
Earnings
per common share
$
i9.46
$
i4.03
$
i23.17
$
i10.86
Earnings
per common share - assuming dilution:
Net income per share - diluted
Net
income attributable to common stockholders
$
i219.5
$
i104.0
$
i555.2
$
i288.1
Weighted
average common shares outstanding (in thousands)
i23,206
i25,779
i23,963
i26,525
Common
equivalent shares:
Dilutive share-based awards
i444
i374
i435
i358
Weighted
average common shares outstanding - assuming dilution (in thousands)
i23,650
i26,153
i24,398
i26,883
Earnings
per common share assuming dilution
$
i9.28
$
i3.98
$
i22.76
$
i10.72
/
i
We
have excluded from the earnings-per-share calculation certain stock options and shares that are considered to be anti-dilutive under the treasury stock method and are reported in the table below.
Three Months Ended September 30,
Nine Months Ended September 30,
Potentially
dilutive shares excluded from the calculation as their inclusion would be anti-dilutive
2022
2021
2022
2021
Stock Options
i—
i82,100
i3,250
i82,100
PSUs
i—
i903
i1,353
i21,357
Total
anti-dilutive shares
i—
i83,003
i4,603
i103,457
/
21
Murphy
USA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 12 — iOther Financial Information
CASH FLOW DISCLOSURES — Cash income taxes paid, net of refunds, was $i141.5
million and $i86.1 million for the nine month periods ended September 30, 2022 and 2021, respectively. Interest paid, net of amounts capitalized, was $i66.2
million and $i57.9 million for the nine month periods ended September 30, 2022 and 2021, respectively.
iCHANGES IN WORKING
CAPITAL:
Nine Months Ended September 30,
(Millions of dollars)
2022
2021
Accounts receivable
$
(i60.3)
$
(i31.5)
Inventories
i11.8
i15.0
Prepaid
expenses and other current assets
(i8.5)
(i8.1)
Accounts
payable and accrued liabilities
i60.5
i137.0
Income
taxes payable
i15.3
(i0.2)
Net
(increase) decrease in noncash operating working capital
$
i18.8
$
i112.2
/
Note
13— iAssets and Liabilities Measured at Fair Value
The Company carries certain assets and liabilities at fair value in its Consolidated Balance Sheets. The fair value hierarchy is based on the quality of inputs used to measure fair value, with Level 1 being the highest quality and Level 3 being the lowest quality. Level 1 inputs are quoted prices in active markets for identical assets
or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1. Level 3 inputs are unobservable inputs which reflect assumptions about pricing by market participants.
At the balance sheet date, the fair value of commodity derivatives contracts was determined using NYMEX quoted values and the value of the Interest rate swap derivative was derived by using level 3 inputs, but the balances for each were immaterial. The carrying value of the Company’s Cash and cash equivalents, Accounts receivable-trade, Trade accounts payable, interest rate swap contracts and accrued liabilities approximates fair value. See
also Note 10 "Financial Instruments and Risk Management" in these consolidated financial statements for the period ended September 30, 2022, for more information.
i
The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at September 30, 2022 and December 31,
2021. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The table excludes Cash and cash equivalents, Accounts receivable-trade, Restricted cash, and Trade accounts payable and accrued liabilities, all of which had fair values approximating carrying amounts. The fair value of Current and Long-term debt was estimated based on rates offered to the Company at that time for debt of the same maturities and these qualify as Level 1 inputs. The Company has off-balance sheet exposures relating to certain financial guarantees and letters of credit. The fair value of these, which represents fees associated with obtaining the instruments, was nominal.
Current and long-term debt, excluding finance leases
$
(i1,673.3)
$
(i1,623.3)
$
(i1,673.5)
$
(i1,709.5)
/
22
Murphy
USA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 14 — iContingencies
The Company’s operations and earnings have been and may be affected by various forms of governmental action. Examples of such
governmental action include, but are by no means limited to: tax increases and retroactive tax claims; import and export controls; price controls; allocation of supplies of crude oil and petroleum products and other goods; laws and regulations intended for the promotion of safety and the protection and/or remediation of the environment; governmental support for other forms of energy; and laws and regulations affecting the Company’s relationships with employees, suppliers, customers, stockholders and others. Because governmental actions are often motivated by political considerations, may be taken without full consideration of their consequences, and may be taken in response to actions of other governments, it is not practical to attempt to predict the likelihood of such actions, the form the actions may take or the effect such actions may have on the
Company.
ENVIRONMENTAL MATTERS AND LEGAL MATTERS — Murphy USA is subject to numerous federal, state and local laws and regulations dealing with the environment. Violation of such environmental laws, regulations and permits can result in the imposition of significant civil and criminal penalties, injunctions and other sanctions. A discharge of hazardous substances into the environment could, to the extent such event is not insured, subject the Company to substantial expense, including both the cost to comply with applicable regulations and claims by neighboring landowners and other third parties for any personal injury, property damage and other losses that might result.
The
Company currently owns or leases, and has in the past owned or leased, properties at which hazardous substances have been or are being handled. Although the Company believes it has used operating and disposal practices that were standard in the industry at the time, hazardous substances may have been disposed of or released on or under the properties owned or leased by the Company or on or under other locations where they have been taken for disposal. In addition, many of these properties have been operated by third parties whose management of hazardous substances was not under the Company’s control. Under existing laws, the
Company could be required to remediate contaminated property (including contaminated groundwater) or to perform remedial actions to prevent future contamination. Certain of these contaminated properties are in various stages of negotiation, investigation, and/or cleanup, and the Company is investigating the extent of any related liability and the availability of applicable defenses. With the sale of the U.S. refineries in 2011, Murphy Oil retained certain liabilities related to environmental matters. Murphy Oil also obtained insurance covering certain levels of environmental exposures. With respect to any remaining potential liabilities, the Company believes costs related to these properties will not have a material adverse effect on Murphy USA’s net income, financial condition or liquidity
in a future period.
Certain environmental expenditures are likely to be recovered by the Company from other sources, primarily environmental funds maintained by certain states. Since no assurance can be given that future recoveries from other sources will occur, the Company has not recorded a benefit for likely recoveries at September 30, 2022, however certain jurisdictions provide reimbursement for these expenses which have been considered in recording the net exposure. The U.S. Environmental Protection Agency (EPA) currently considers the Company a Potentially Responsible Party (PRP) at ione
Superfund site. As to the site, the potential total cost to all parties to perform necessary remedial work at this site may be substantial. However, based on current negotiations and available information, the Company believes that it is a de minimis party as to ultimate responsibility at the Superfund site. Accordingly, the Company has not recorded a liability for remedial costs at the Superfund site at September 30, 2022. The Company could be required to bear a pro rata share of costs attributable to nonparticipating PRPs or could be assigned additional responsibility for remediation at this site or other Superfund sites. The
Company believes that its share of the ultimate costs to clean-up this site will be immaterial and will not have a material adverse effect on its net income, financial condition or liquidity in a future period.
Based on information currently available to the Company, the amount of future remediation costs to be incurred to address known contamination sites is not expected to have a material adverse effect on the Company’s future net income, cash flows or liquidity. However, there is the possibility that additional environmental expenditures could be required to address contamination, including as a result of discovering additional contamination or the imposition of new or revised requirements applicable to known contamination.
23
Murphy
USA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Murphy USA is engaged in a number of other legal proceedings, all of which the Company considers routine and incidental to its business. Currently, the City of Charleston, South Carolina, and the State of Delaware have filed lawsuits against energy companies, including the Company. These lawsuits allege damages as a result of climate change and the plaintiffs are seeking unspecified damages and abatement under various tort theories. At this early stage, the ultimate outcome of these matters remain uncertain, and neither the likelihood
of an unfavorable outcome nor the ultimate liability, if any, can be determined. Based on information currently available to the Company, the ultimate resolution of these other legal matters is not expected to have a material adverse effect on the Company’s net income, financial condition or liquidity in a future period.
INSURANCE — The Company maintains insurance coverage at levels that are customary and consistent with industry standards for companies of similar size. Murphy USA maintains statutory workers compensation insurance with a deductible of $i1.0
million per occurrence, general liability insurance with a self-insured retention of $i3.0 million per occurrence, and auto liability insurance with a deductible of $i0.3
million per occurrence. As of September 30, 2022, there were a number of outstanding claims that are of a routine nature. The estimated incurred but unpaid liabilities relating to these claims are included in Trade account payables and accrued liabilities on the Consolidated Balance Sheets. While the ultimate outcome of these claims cannot presently be determined, management believes that the accrued liability of $i43.4 million will be sufficient to cover the related liability for
all insurance claims and that the ultimate disposition of these claims will have no material effect on the Company’s financial position and results of operations.
The Company has obtained insurance coverage as appropriate for the business in which it is engaged, but may incur losses that are not covered by insurance or reserves, in whole or in part, and such losses could adversely affect our results of operations and financial position.
TAX MATTERS — Murphy USA is subject to extensive tax liabilities imposed by multiple jurisdictions, including income taxes, indirect taxes (excise/duty, sales/use and gross receipts taxes), payroll taxes, franchise taxes, withholding
taxes and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted or proposed that could result in increased expenditures for tax liabilities in the future. Many of these liabilities are subject to periodic audits by the respective taxing authority. Subsequent changes to our tax liabilities because of these audits may subject us to interest and penalties.
OTHER MATTERS — In the normal course of its business, the Company is required under certain contracts with various governmental authorities and others to provide financial guarantees or letters of credit that may be drawn upon if the
Company fails to perform under those contracts. At September 30, 2022, the Company had contingent liabilities of $i9.8 million on outstanding letters of credit. The Company has not accrued a liability in its balance sheet related to these financial
guarantees and letters of credit because it is believed that the likelihood of having these drawn is remote.
Note 15 — iiLease
Accounting/
i
The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded
on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. The Company's leases have remaining lease terms of approximately i1 year to i35 years,
which may include the option to extend the lease when it is reasonably certain the Company will exercise the option. Most leases include ione or more options to renew, with renewal terms that can extend the lease term from i5
to i20 years or more. The exercise of lease renewal options is at the Company's sole discretion. Due to the uncertainties of future markets, economic factors, technology changes, demographic shifts and behavior, environmental regulatory requirements and other information that impacts decisions as to store location, management has determined that it was not reasonably certain to exercise contract options and they are not included in the lease term. Additionally,
short-term leases and leases with variable lease costs are immaterial. The Company reviews all options to extend, terminate, or otherwise modify its lease agreements to determine if changes are required to the right-of-use assets and liabilities.
As the implicit interest rate is not readily determinable in most of the Company's lease agreements, the Company uses its estimated secured incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
/
24
Murphy
USA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Lessor — We have various arrangements for certain spaces for food service and vending equipment as well as subleases under which we are the lessor. These leases meet the criteria for operating lease classification. Lease income associated with these leases is immaterial.
Lessee —We lease land for i433
stores, iiione//
terminal, a hangar and various equipment. Our lease agreements do not contain any material residual value guarantees and approximately i102 stores leased from Walmart contain restrictive covenants, though the restrictions are deemed to have an immaterial impact.
i
Leases
are reflected in the following balance sheet accounts:
Our operations include the sale of retail motor fuel products and convenience merchandise along with the wholesale and bulk sale capabilities of our product supply and wholesale group. As the primary purpose of
the product supply and wholesale group is to support our retail operations and provide fuel for their daily operation, the bulk and wholesale fuel sales are secondary to the group's support functions to our retail operations. As such, they are all treated as ione segment for reporting purposes as they sell the same products and have similar economic characteristics. This Marketing segment contains essentially all of the revenue generating activities of the Company. Results not
included in the reportable segment include Corporate and Other Assets. The reportable segment was determined based on information reviewed by the Chief Operating Decision Maker.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONANDRESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“Management’s Discussion and Analysis” or "MD&A") is the Company’s analysis of its financial performance and of significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes included in this Quarterly Report on Form 10-Q. The MD&A contains forward-looking statements and the Company does not undertake to update, revise
or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the Company’s disclosures under “Forward-Looking Statements” and “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q.
For purposes of this Management’s Discussion and Analysis, references to “Murphy USA”, the “Company”, “we”, “us” and “our” refer to Murphy USA Inc. and its subsidiaries on a consolidated basis.
Management’s Discussion and Analysis is organized as follows:
•Executive
Overview—This section provides an overview of our business and the results of operations and financial condition for the periods presented. It includes information on the basis of presentation with respect to the amounts presented in the Management’s Discussion and Analysis and a discussion of the trends affecting our business.
•Results of Operations—This section provides an analysis of our results of operations, including the results of our operating segment for the three and nine months ended September 30, 2022 and 2021.
•Capital Resources and Liquidity—This section provides a discussion
of our financial condition and cash flows as of and for the three and nine months ended September 30, 2022 and 2021. It also includes a discussion of our capital structure and available sources of liquidity.
•Critical Accounting Policies—This section describes the accounting policies and estimates that we consider most important for our business and that require significant judgment.
Executive Overview
The following MD&A is intended to help the reader understand our results of operations and financial condition. This section is provided to supplement, and should be read in conjunction with,
our consolidated financial statements and the accompanying notes to these financial statements contained elsewhere in this Quarterly Report on Form 10-Q, this MD&A section and the consolidated financial statements in our Annual Report on Form 10-K. Our Form 10-K contains a discussion of matters not included within this document, such as disclosures regarding critical accounting policies and estimates, and contractual obligations.
On January 29, 2021, MUSA acquired 100% of Quick Chek Corporation ("QuickChek"), a privately held convenience store chain with a strong regional brand consisting of 156 stores, at the time of acquisition, located in New Jersey and New York, in an all-cash transaction. The acquisition expanded the MUSA network into the Northeast by adding high-performance stores that had an existing best-in-class food and beverage model
and is consistent with the Company's stated strategic priorities of developing enhanced food and beverage capabilities. For additional information concerning the acquisition, see Note 5 “Business Acquisition” in the audited combined financial statements for the year ended December 31, 2021 included with our Annual Report on Form 10-K, and Note 4, "Business Acquisition" in the accompanying unaudited consolidated financial statements.
Our Business
The Company owns and operates a chain of retail stores under the brand name of Murphy USA® which are almost
all located in close proximity to Walmart stores, principally in the Southeast, Midwest and Southwest areas of the United States. We also market gasoline and other products at standalone stores under the Murphy Express brand and have a mix of convenience stores and retail gasoline stores located in New Jersey and New York that operate under the brand name of QuickChek. At September 30, 2022, we had a total of 1,700 Company stores in 27 states, of which 1,151 were Murphy USA, 392 were Murphy Express and 157 were QuickChek. We also market to unbranded wholesale customers through a mixture of Company owned and third-party terminals.
Basis of Presentation
Murphy USA was incorporated in March 2013, and until the separation from Murphy Oil Corporation was completed on August
30, 2013, it had not commenced operations and had no material assets, liabilities or commitments. The financial information presented in this Management’s Discussion and Analysis is derived from the consolidated financial statements of Murphy USA Inc. and its subsidiaries for all periods presented. QuickChek uses a weekly retail calendar where each quarter has 13 weeks. For Q3 2022, the QuickChek results cover the period from July 2, 2022 to September 30, 2022 and the year-to-date period is from January 1, 2022 to September 30, 2022. For Q3 2021 the QuickChek results cover the period from July 3, 2021 to October 1,
2021 and the 2021 year-to-date period covers January 29, 2021 (the date of acquisition) to October 1, 2021. The difference in the timing of the period ends is immaterial to the overall consolidated results.
Trends Affecting Our Business
Our operations are significantly impacted by the gross margins we receive on our fuel and merchandise sales. While we generally expect our total fuel and merchandise sales volumes to grow over time and the gross margins to remain strong in a normalized environment, these sales and gross margins can change rapidly due to many factors. These factors include, but are not limited to, the price of refined products, geopolitical events that upset global supply and demand and price of crude oil, interruptions in our
fuel and merchandise supply chain caused by severe weather or pandemics such as COVID-19, travel restrictions and stay-at-home orders imposed during a pandemic, severe refinery mechanical failures for an extended period of time, cyber-attacks against the Company or our vendors, and competition in the local markets in which we operate. As concerns around the COVID-19 pandemic continued to lessen due to vaccines being more readily available and generally lower infection rates in 2022, gasoline demand has continued to increase into the third quarter. In addition, the U.S. economy has continued to experience inflationary pressures throughout the year, thus lowering consumer purchasing power. Should the recoveries experienced to-date stall or reverse as a result of a resurgence in COVID-19 infection rates or be impacted by inflationary pressures, it could impact demand and seasonal travel
patterns which could reduce future sales volumes.
The cost of our main sales products, gasoline and diesel, are greatly impacted by the cost of crude oil in the United States. Rising prices for crude oil increase the Company’s cost for wholesale fuel products purchased thus increasing the price of retail fuel sales. Rising prices tend to cause consumers to reduce discretionary fuel consumption but our low-price model serves as a draw to new customers to offset the potential loss of discretionary volumes. In 2022, crude oil prices continued the volatile trend causing prices to range from $76 per barrel to $124 per barrel. The average price in Q3 2022 was approximately $93 per barrel, compared to an average price of $71 per barrel in Q3 2021, with prices during the current quarter trending slightly downward. Total
fuel contribution (retail fuel margin plus product supply and wholesale ("PS&W") results including Renewable Identification Numbers ("RINs")) for Q3 2022 was 37.6 cents per gallon ("cpg"), compared to 26.6 cpg in Q3 2021. Retail fuel margin dollars increased 85.1% in the current quarter and retail fuel volumes improved 13.2% when compared to Q3 of 2021.
Our revenues are impacted by the ability to leverage our diverse supply infrastructure in pursuit of obtaining the lowest cost fuel supply available; for example, activities such as blending bulk fuel with ethanol and bio-diesel to capture and subsequently sell RINs. Under the Energy Policy Act of 2005, the Environmental Protection Agency (“EPA”) is authorized to set annual quotas establishing the percentage of motor fuels consumed in the United States that must be attributable to renewable fuels. Obligated parties
are required to demonstrate that they have met any applicable quotas by submitting a certain amount of RINs to the EPA. RINs in excess of the set quota can be sold in a market for RINs at then-prevailing prices. The market price for RINs fluctuates based on a variety of factors, including but not limited to governmental and regulatory action. There are other market related factors that can impact the net benefit we receive from RINs on a company-wide basis either favorably or unfavorably. The Renewable Fuel Standard ("RFS") program continues to be unpredictable and prices received for ethanol RINs averaged $1.58 in Q3 2022 compared to $1.40 in Q3 2021. Our business model does not depend on our ability to generate revenues from RINs. Revenue from the sales of RINs is included in “Other operating revenues” in the Consolidated Statements of Income.
As of September 30,
2022, we have $1.3 billion of Senior Notes and a $395 million term loan outstanding. We believe that we will generate sufficient cash from operations to fund our ongoing operating requirements and service our debt obligations. At September 30, 2022, we have additional available capacity under the committed $350 million cash flow revolving credit facility, which currently remains undrawn. We expect to use the credit facilities to provide us with available financing to meet any short-term ongoing cash needs in excess of internally generated
cash flows. To the extent necessary, we will borrow under these facilities to fund our ongoing operating requirements. There can be no assurances, however, that we will generate sufficient cash from operations or be able to draw on the credit facilities, or obtain and draw upon other credit facilities. For additional information see Significant
Sources of Capital in the Capital Resources and Liquidity section.
The Company currently anticipates total capital expenditures (including land for future developments) for the full year 2022 to range from approximately $300 million to $350 million depending on how many new stores are completed. We intend to fund the remainder of our capital program in 2022 primarily using operating cash flow but will supplement funding where necessary using borrowings available under cash flow revolving credit facilities.
We believe that our business will continue to grow in the future as we expand the food and beverage capabilities within our network. We maintain a pipeline of desirable future store locations for development. The pace of this growth
is continually monitored by our management, and these plans can be altered based on operating cash flows generated and the availability of debt facilities.
We currently estimate our ongoing effective tax rate to be between 23% and 26% for the remainder of the year.
Seasonality
Our business has inherent seasonality due to the concentration of our retail stores in certain geographic areas, as well as customer activity and behaviors during different seasons. In general, sales volumes and operating incomes are typically highest in the second and third quarters during the summer-activity months and lowest during the winter months. In 2020 and 2021, we saw disruptions to typical seasonal patterns due to the COVID-19 pandemic. In 2022, a more normal seasonal pattern has emerged and fuel
volumes have approached and sometimes exceeded pre-pandemic levels. As a result, operating results for the three and nine months ended September 30, 2022, may not be necessarily indicative of the results that may be expected for the remainder of the year ending December 31, 2022.
Business Segment
The Company has one operating segment which is Marketing. The Marketing segment includes our retail marketing stores and product supply and wholesale assets. For additional operating segment information, see Note 22 “Business Segments” in the audited combined financial statements for the year ended December
31, 2021 included with our Annual Report on Form 10-K and Note 16 “Business Segments” in the accompanying unaudited consolidated financial statements for the three and nine months ended September 30, 2022.
Results of Operations
ConsolidatedResults
For the three months ended September 30, 2022, the Company reported net income of $219.5 million, or $9.28 per diluted share, on revenue of $6.2 billion. Net
income was $104.0 million for the same period in 2021, or $3.98 per diluted share, on $4.6 billion of revenue. The increase in net income was primarily due to higher all-in fuel and merchandise contributions which was partially offset by increases in store operating expenses, payment fees, general and administrative expenses and income tax expense.
For the nine months ended September 30, 2022, the Company reported net income of $555.2 million, or $22.76 per diluted share, on revenue of $18.1 billion. Net income for the same period in 2021 was $288.1 million, or $10.72 per diluted share, on $12.6 billion in revenue. The increase in net income is primarily
due to higher all-in fuel and merchandise contributions and lower acquisition related costs, partially offset by increases in payment fees, store operating expenses, general and administrative expenses, depreciation and amortization expense, and income tax expense.
The consolidated financial results for the year-to-date period include QuickChek from January 1, 2022 to September 30, 2022, and for the prior year year-to-date period covered the period from January 29, 2021 (the date of acquisition) to October 1, 2021. The difference in the timing of the period ends is immaterial to the overall consolidated results.
Revenues for Q3 2022 increased $1.6 billion, or 34.7%, compared to the same quarter in 2021. The increase in revenues was due to 27.0% higher retail fuel sales prices and 13.2% higher fuel sales volumes, combined with an increase in merchandise sales prices and higher RINs sales prices and volumes.
Total cost of sales in Q3 2022 increased $1.4 billion, or 34.0% when compared to Q3 2021. In the current-year quarter, the higher costs were primarily due to higher wholesale fuel prices and fuel
volumes sold combined with higher merchandise costs.
Store and other operating expenses increased $33.4 million, or 15.1%, in Q3 2022 from Q3 2021, due primarily to increased payment fees which represented one-half of the increase and higher employee related costs which included a non-recurring special bonus paid over the 100 days of summer. During the quarter this special incentive program was completed and approximately $4.0 million was paid to our employee base.
SG&A expenses for Q3 2022 increased $5.2 million, or 11.0%, from Q3 2021. The increase in SG&A costs is primarily due to higher employee incentive expenses, professional fees and technology expenses, partially offset by lower salaries and benefits.
The effective income tax rate was approximately 24.5% for Q3 of
2022 and 2021.
Year-to-date revenues for 2022 increased $5.5 billion, or 43.6%, compared to the same period in 2021. The increase in revenues was due to higher retail fuel sales prices, higher retail fuel sales volumes, increased merchandise sales, higher RIN sales, and the inclusion of QuickChek sales results for nine months in 2022 compared to eight months in 2021.
Total cost of sales increased $5.0 billion, or 44.5% when compared to 2021. In the current-year period, the
higher costs were primarily due to higher wholesale fuel prices combined with higher sales volumes, higher merchandise costs, and the inclusion of one additional month of QuickChek results.
Store and other operating expenses increased $122.3 million, or 20.1%, in the first nine months of 2022, primarily due to increased payment fees (44% of the increase), higher employee related costs including the non-recurring special bonus of $7.0 million paid over the 100 days of summer, increased store maintenance expenses and the inclusion of one additional month for QuickChek compared to the prior-year period.
SG&A expenses for the first nine months of 2022 increased $10.8 million, or 7.7%, compared to the first nine months of 2021. The increase in SG&A costs is primarily due to an increase in employee incentive expense, professional fees, technology
services and to the inclusion of QuickChek for one additional month in 2022, partially offset by lower employee benefits.
Depreciation and amortization expense increased $7.0 million, or 4.4% year-to-date from the same period of 2021 primarily due to one additional month of QuickChek depreciation compared to the prior year period, combined with higher depreciation due to the newer larger store formats of Murphy USA stores.
Acquisition and integration related costs were $8.3 million less and interest expense was lower by $0.6 million compared to the same nine-month period in 2021. The period-over-period reduction is primarily related to the costs of the acquisition of QuickChek in January 2021.
The effective income tax rate was approximately 24.2% for the nine months ended September 30,
2022 versus 24.4% for the same period of 2021.
29
SegmentResults
A summary of the Company’s earnings by business segment follows:
Net income for the nine months ended September 30,
2022 increased compared to the same nine-month period in 2021 primarily due to:
•Higher all-in fuel contribution and sales volumes
•Higher merchandise contribution
The items below partially offset the increase in net income in the nine-month period:
•Higher store operating expense
•Higher payment fees
•Higher depreciation and amortization expense
•Higher SG&A expenses
•Higher income tax expense
30
(Millions
of dollars, except revenue per store month (in thousands) and store counts)
Three Months Ended September 30,
Nine Months Ended September 30,
Marketing Segment
2022
2021
2022
2021
Operating
Revenues
Petroleum product sales
$
5,078.6
$
3,573.9
$
14,917.3
$
9,614.2
Merchandise
sales
1,027.2
953.4
2,913.8
2,750.0
Other operating revenues
88.6
73.0
248.3
229.1
Total
operating revenues
6,194.4
4,600.3
18,079.4
12,593.3
Operating expenses
Petroleum products cost of goods sold
4,699.3
3,353.5
13,903.3
9,004.8
Merchandise
cost of goods sold
821.5
766.1
2,335.7
2,229.8
Store and other operating expenses
254.5
221.0
729.4
607.0
Depreciation
and amortization
50.4
49.5
152.9
145.9
Selling, general and administrative
52.4
47.2
150.8
140.0
Accretion
of asset retirement obligations
0.6
0.6
2.0
1.9
Total operating expenses
5,878.7
4,437.9
17,274.1
12,129.4
Gain
(loss) on sale of assets
0.1
0.2
(0.6)
0.2
Income (loss) from operations
315.8
162.6
804.7
464.1
Other
income (expense)
Interest expense
(2.2)
(2.3)
(6.7)
(5.7)
Total
other income (expense)
(2.2)
(2.3)
(6.7)
(5.7)
Income (loss) before income taxes
313.6
160.3
798.0
458.4
Income
tax expense (benefit)
76.8
39.2
193.0
111.3
Net income (loss) from operations
$
236.8
$
121.1
$
605.0
$
347.1
Total
tobacco sales revenue same store sales1,2
$
129.0
$
123.3
$
122.8
$
120.6
Total non-tobacco sales revenue same store sales1,2
75.1
48.7
69.5
49.0
Total
merchandise sales revenue same store sales1,2
$
204.1
$
172.0
$
192.3
$
169.6
12021 amounts not revised for 2022 raze-and-rebuild activity
2Includes
store-level discounts for MDR redemptions and excludes change in value of unredeemed MDR points
Store count at end of period
1,700
1,669
1,700
1,669
Total store months during
the period
5,042
4,944
15,094
14,718
Average Per Store Month (APSM) metric includes all stores open through the date of the calculation, including stores acquired during the period.
Same store sales (SSS) metric includes aggregated individual store results for all stores open throughout both periods presented. For all periods presented, the store must have been open for the entire calendar year
to be included in the comparison. Remodeled stores that remained open or were closed for just a very brief time (less than a month) during the period being compared remain in the same store sales calculation. If a store is replaced either at the same location (raze-and-rebuild) or relocated to a new location, it will be excluded from the calculation during the period it is out of service. Newly constructed stores do not enter the calculation until they are open for each full calendar year for the periods being compared (open by January 1, 2021 for the stores being compared in
31
the 2022 versus 2021 comparison). Acquired stores are not included
in the calculation of same stores for the first 12 months after the acquisition. When prior period same store sales volumes or sales are presented, they have not been revised for current year activity for raze-and-rebuilds, asset acquisitions and asset dispositions.
QuickChek uses a weekly retail calendar where each quarter has 13 weeks. For Q3 2022, the QuickChek results cover the period from July 2, 2022 to September 30, 2022 and the year-to-date period is from January 1, 2022 to September 30, 2022. For Q3 2021 the QuickChek results cover the period from July 3, 2021 to October 1, 2021 and the 2021 year-to-date period covers
January 29, 2021 (the date of acquisition) to October 1, 2021. The difference in the timing of the period ends is immaterial to the overall consolidated results.
Fuel
Three
Months Ended September 30,
Nine Months Ended September 30,
Key Operating Metrics
2022
2021
2022
2021
Total retail fuel contribution ($ Millions)
$
489.5
$
264.4
$
1,063.8
$
666.0
Total
PS&W contribution ($ Millions)
(109.0)
(43.0)
(46.7)
(53.7)
RINs (included in Other operating revenues on Consolidated Statements of Income) ($ Millions)
87.6
71.5
243.6
224.5
Total
fuel contribution ($ Millions)
$
468.1
$
292.9
$
1,260.7
$
836.8
Retail fuel volume - chain (Million gal)
1,245.6
1,100.2
3,545.2
3,232.7
Retail
fuel volume - per store (K gal APSM)1
256.4
231.7
244.0
228.0
Retail fuel volume - per store (K gal SSS)2
251.8
227.6
240.7
224.5
Total
fuel contribution (including retail, PS&W and RINs) (cpg)
37.6
26.6
35.6
25.9
Retail fuel margin (cpg)
39.3
24.0
30.0
20.6
PS&W
including RINs contribution (cpg)
(1.7)
2.6
5.6
5.3
1APSM metric includes all stores open through the date of calculation
22021 amounts not revised
for 2022 raze-and-rebuild activity
The reconciliation of the components of total fuel contribution to the Consolidated Statements of Income is as follows:
Three Months
Ended September 30,
Nine Months Ended September 30,
(Millions of dollars)
2022
2021
2022
2021
Petroleum product sales
$
5,078.6
$
3,573.9
$
14,917.3
$
9,614.2
Less
Petroleum product cost of goods sold
(4,699.3)
(3,353.5)
(13,903.3)
(9,004.8)
Plus RINs and other (included in Other Operating Revenues line)
88.8
72.5
246.7
227.4
Total
fuel contribution
$
468.1
$
292.9
$
1,260.7
$
836.8
32
Merchandise
Three
Months Ended September 30,
Nine Months Ended September 30,
Key Operating Metrics
2022
2021
2022
2021
Total merchandise contribution ($ Millions)
$
205.7
$
187.3
$
578.1
$
520.2
Total
merchandise sales ($ Millions)
$
1,027.2
$
953.4
$
2,913.8
$
2,750.0
Total merchandise sales ($K SSS)1,2
$
204.1
$
172.0
$
192.3
$
169.6
Merchandise
unit margin (%)
20.0
%
19.6
%
19.8
%
18.9
%
Tobacco contribution ($K SSS)1,2
$
18.5
$
17.4
$
17.8
$
16.7
Non-tobacco
contribution ($K SSS)1,2
$
22.7
$
11.1
$
20.1
$
10.7
Total merchandise contribution ($K SSS)1,2
$
41.2
$
28.5
$
37.9
$
27.4
12021
amounts not revised for 2022 raze-and-rebuild activity
2Includes store-level discounts for MDR redemptions and excludes change in value of unredeemed MDR points
Net
income in the Marketing segment for Q3 2022 increased $115.7 million, to $236.8 million compared to the Q3 2021 period, due to higher retail fuel and merchandise contributions which was partially offset by lower contribution from PS&W (including RINs). Additionally, the higher retail margins were partially offset by increases in payment fees and other store operating expenses, selling, general and administrative expenses and income tax expense.
Total revenues for the Marketing segment were approximately $6.2 billion in Q3 2022 compared to $4.6 billion in Q3 2021. The increased revenues were due to a 27.0% increase in retail fuel sales prices, a 13.2% increase in the number of gallons sold, and a 7.7% increase in merchandise sales. Revenues included excise taxes collected and remitted to government authorities of $569.7 million in Q3 2022 and $520.9 million in Q3 2021.
Retail
fuel margin dollars increased 85.1% compared to the prior-year quarter on a higher margin rate of 39.3 cpg for Q3 2022 when compared to 24.0 cpg in the same quarter of 2021, combined with a 13.2% increase in retail fuel volumes. Total fuel sales volumes on a SSS basis increased 9.0% to 251.8 thousand gallons per store in the 2022 period when compared to Q3 2021.
Total PS&W margin dollars, including RINs, decreased by $49.9 million from Q3 2021 results. The quarter-over-quarter decrease is primarily due to timing and price-related impacts in a falling market partially offset by improved spot-to-rack margins and higher RIN sales. The Q3 2022 quarter includes the sale of 55.6 million RINs at an average selling price of $1.58 per RIN while Q3 2021 had sales of 50.9 million RINs at an average price of $1.40 per RIN for a total increase in RINs revenue of $16.1 million.
Total
merchandise sales increased 7.7% to $1.0 billion in Q3 2022 compared to $953.4 million in Q3 2021 due to higher sales across the chain in most categories. Total merchandise contribution in Q3 2022 improved 9.8% compared to Q3 2021 due to higher unit sales volumes and retail prices. Food and beverage contribution, a subset of non-tobacco contribution increased 3.9% in Q3 2022, as sales increased 9.4% when compared to Q3 2021. Total SSS merchandise contribution dollars grew 7.5%, which included an increase of 5.8% in tobacco products and a 8.9% increase in non-tobacco products.
Store and other operating expenses increased $33.5 million in the Q3 2022 compared to Q3 2021, primarily due to higher payment fees, which represented one-half of the increase, employee related expenses, rent and store maintenance costs. On an APSM basis, expenses applicable to store OPEX excluding payment fees and rent increased
6.4%, primarily due to increased employee related expenses and maintenance costs. Employee costs in the Q3 2022 include approximately $4.0 million for a non-recurring special bonus paid to our employee base over the 100 days of summer. This non-recurring special bonus program was completed during the quarter.
Selling, general, and administrative expenses increased $5.2 million in Q3 2022 compared to Q3 2021 due primarily to higher employee incentive expenses and professional fees, partially offset by salaries and benefits.
Net income in the Marketing segment for the nine months ended September 30, 2022 increased $257.9 million compared to the nine months ended September 30, 2021 period, due to improved all-in fuel and merchandise contributions, and the inclusion of QuickChek results for nine months in 2022 versus eight months in 2021. These retail margin improvements were partially offset by higher payment fees, increased store operating expenses, higher general and administrative costs, increased depreciation and amortization expense, and higher interest and income tax expense.
Total revenues for
the Marketing segment were approximately $18.1 billion for the nine-month period ended September 30, 2022 compared to $12.6 billion for the same period ended September 30, 2021. The increased revenues were due to a 41.5% increase in retail fuel sales prices combined with a 9.7% higher number of gallons sold, improved PS&W revenues, including RINs, and a 6.0% increase in merchandise sales. Revenues included excise taxes collected and remitted to government authorities of $1.6 billion in the nine months ended September 30, 2022 and $1.5 billion in the nine months ended September 30, 2021.
Retail fuel margin dollars increased 59.7% in the nine-month period ended September 30,
2022 compared to the prior year nine months on a higher retail margin rate of 30.0 cpg when compared to 20.6 cpg in the same period of 2021. Total fuel sales volumes on a SSS basis increased 5.9% to 240.7 thousand gallons per store in 2022 compare to 2021.
Total PS&W margin dollars, including RINs, generated income of $196.9 million in the 2022 nine-month period compared to income of $170.8 million in the first nine months of 2021. The nine months ended September 30, 2022 includes the sales of 179.1 million RINs at an average selling price of $1.36 per RIN while the prior-year period had sales of 167.7 million RINs at an average price of $1.34 per RIN for a total increase in RIN revenue of $19.1 million.
Total merchandise sales increased 6.0% to $2.9 billion in the nine months ended September 30,
2022 compared to $2.8 billion in the first nine months of 2021 due to higher sales volumes and prices across the chain in most categories and the inclusion of QuickChek results for one additional month in 2022. Year-to-date total merchandise contribution in 2022 increased 11.1% compared to the same period of 2021. Food and beverage contribution increased 15.2% in 2022 compared to 2021 and sales revenues increased 21.1% over the same period mainly due to the inclusion of QuickChek results for one additional month in 2022. Total SSS merchandise contribution dollars grew 5.8%. On a SSS basis there was an increase of 2.2% in tobacco products sales and 2.8% in non-tobacco sales.
Store and other operating expenses increased $122.4 million in the current year compared to the same period of 2021, primarily due to an additional month of QuickChek results in 2022, along with higher payment fees, employee related
expenses, and maintenance expenses. On an APSM basis, expenses applicable to store OPEX excluding payment fees and rent increased 11.1%, primarily due to employee related expenses and maintenance costs. Employee costs in 2022 include a non-recurring special bonus of $7.0 million paid to our employee base over the 100 days of summer. This non-recurring special bonus program is completed.
Selling, general and administrative expenses increased $10.8 million in 2022 compared to 2021 due primarily to the increased professional fees, contract services, and the inclusion of QuickChek for an additional month in 2022.
Depreciation and amortization expense increased $7.0 million, or 4.8%, in the first nine months of 2022 due to the inclusion of QuickChek for an additional
month in 2022, combined with new larger store formats for Murphy USA stores.
34
Same store sales information compared to APSM metrics
After-tax results for Corporate and other assets for Q3 2022 were a loss of $17.3 million compared to a loss of $17.1 million in Q3 2021, the slight increase was primarily due to higher employee incentive expense and professional fees, partially offset by lower wages and benefits.
After-tax results for Corporate and other assets for the nine months ended September 30, 2022 were a loss of $49.8 million compared to a loss of $59.0 million in the same period of 2021. The year-over-year improvement was due primarily to $8.3 million in lower acquisition and integration related costs, combined with a gain on sale of corporate assets, higher interest income, and lower interest expense, partially offset by increased nonoperating expenses in 2022 compared to 2021.
Non-GAAP
Measures
The following table sets forth the Company’s Adjusted EBITDA for the three and nine months ended September 30, 2022 and 2021. EBITDA means net income (loss) plus net interest expense, plus income tax expense, depreciation and amortization, and Adjusted EBITDA adds back (i) other non-cash items (e.g., impairment of properties and accretion of asset retirement obligations) and (ii) other items that management does not consider to be meaningful in assessing our operating performance (e.g., (income) from discontinued operations, net settlement proceeds, (gain) loss on sale of assets, loss on early debt extinguishment, transaction and integration costs related to acquisition, and other non-operating (income) expense).
EBITDA and Adjusted EBITDA are not measures that are prepared in accordance with U.S. generally accepted accounting principles (GAAP).
We use Adjusted EBITDA in our operational and financial decision-making, believing that the measure is useful to eliminate certain items in order to focus on what we deem to be a more reliable indicator of ongoing operating performance and our ability to generate cash flow from operations. Adjusted EBITDA is also used by many of our investors, research analysts, investment bankers, and lenders to assess our operating performance. We believe that the presentation of Adjusted EBITDA provides useful information to investors because it allows understanding of a key measure that we evaluate internally when making operating and strategic decisions, preparing our annual plan, and evaluating our overall performance. However, non-GAAP measures are not a substitute for GAAP
35
disclosures,
and EBITDA and Adjusted EBITDA may be prepared differently by us than by other companies using similarly titled non-GAAP measures.
The reconciliation of net income (loss) to EBITDA and Adjusted EBITDA is as follows:
Three
Months Ended September 30,
Nine Months Ended September 30,
(Millions of dollars)
2022
2021
2022
2021
Net income
$
219.5
$
104.0
$
555.2
$
288.1
Income
tax expense (benefit)
71.2
33.7
177.2
92.9
Interest expense, net of interest income
20.4
20.4
59.8
62.1
Depreciation
and amortization
54.4
53.2
164.5
157.5
EBITDA
365.5
211.3
956.7
600.6
Accretion
of asset retirement obligations
0.6
0.6
2.0
1.9
(Gain) loss on sale of assets
(0.3)
(0.3)
(2.2)
(0.4)
Acquisition
and integration related costs
0.4
0.7
1.4
9.7
Other nonoperating (income) expense
0.8
0.2
2.7
—
Adjusted
EBITDA
$
367.0
$
212.5
$
960.6
$
611.8
Capital
Resources and Liquidity
Significant Sources of Capital
As of September 30, 2022, we had $192.7 million of cash and cash equivalents. We have a committed cash flow revolving credit facility (the "revolving facility”) of $350 million, which was undrawn at September 30, 2022 which can be utilized for working capital and other general corporate purposes, including supporting our operating model as described herein.
We believe our short-term and long-term liquidity is adequate to fund not only our operations, but also our anticipated near-term and long-term funding requirements, including capital spending programs, execution of announced share repurchase programs,
potential dividend payments, repayment of debt maturities and other amounts that may ultimately be paid in connection with contingencies.
Operating Activities
Net cash provided by operating activities was $771.5 million for the nine months ended September 30, 2022, an increase of $184.5 million compared to $587.0 million for the same period in 2021. The increase for the current year is primarily related to the increase in year-over-year net income of $267.1 million partially offset by changes in noncash working capital of $93.4 million compared to the same period in 2021. The year-over-year decrease in non-cash operating working capital changes consisted primarily to a decrease in accounts payable and accrued liabilities of $76.6 million related to timing of payments, increased accounts receivables
of $28.7 million due to the timing of receipts and increased fuel prices, and an increase in inventory of $3.2 million due to price increases partially offset by increases in income taxes payable of $15.6 million due to timing of tax payments.
Investing Activities
For the nine months ended September 30, 2022, cash required by investing activities was $215.2 million compared to $853.7 million in 2021. The decrease in investing cash requirements of 2022 compared to the prior year was primarily due to the cash payments of $641.1 million for the acquisition of QuickChek in 2021. Capital expenditures required $11.5 million more in 2022 versus 2021 and was partially offset by additional benefits from the sale of assets of $7.5 million and lower other investing activities of $1.4 million in 2022 compared
to 2021.
36
Financing Activities
Financing activities in the nine months ended September 30, 2022 required cash of $620.0 million compared to cash provided of $404.4 million in the nine months ended September 30, 2021. The first nine months of 2022 included payments of $566.9 million for the repurchase of common shares, which was an increase of $335.4 million from the repurchases of $231.5 million in the 2021 period and dividend payments of $22.1 million in 2022 versus dividends of $19.9 million in the first
nine months of 2021. Borrowings of debt related to the QuickChek acquisition in 2021 provided $892.8 million compared to no borrowings in the same period of 2022. Repayments of debt required $11.4 million in 2022 compared to repayments of $220.5 million in 2021 that were related to the QuickChek acquisition. Debt issuance costs related to the QuickChek transaction required cash of $9.9 million in 2021 and there were no such costs in 2022. Amounts related to share-based compensation required $13.0 million more in cash during 2022 than in 2021.
Dividends
During the nine months ended September 30, 2022, the Company has paid cash dividend payments of $0.92 per common share, for a total of $22.1 million, compared
to the period ended September 30, 2021, in which dividends of $0.75 per share were paid for a total of cash dividend payments of $19.9 million. As a part of our capital allocation strategy, the Company's intention is to deliver targeted double-digit growth in the per share dividend over time.
On October 20, 2022 the Board of Directors declared a quarterly cash dividend of $0.35 per common share, or $1.40 per share on an annualized basis. The dividend is payable on December 1, 2022, to shareholders of record as of November 8, 2022.
Share
Repurchase Program
During the nine months ended September 30, 2022 a total of 2,482,804 shares were repurchased for $566.9 million. The $500 million share repurchase program approved by the Board of Directors in November 2020 was completed in Q1 2022 and shares are now being repurchased under the $1 billion program authorized in December 2021. At September 30, 2022, the 2021 program had approximately $453.1 million remaining to be executed by December 31, 2026. Share repurchases made during the nine months ended September 30, 2021 were 1,699,043 shares for $231.5 million.
Capitalized
lease obligations, autos and equipment, due through 2026
2.6
2.7
Capitalized lease obligations, buildings, due through 2059
133.3
138.9
Less unamortized debt issuance costs
(9.7)
(11.1)
Total
notes payable, net
1,809.2
1,815.1
Less current maturities
15.2
15.0
Total long-term debt, net of current
$
1,794.0
$
1,800.1
37
Senior
Notes
On April 25, 2017, Murphy Oil USA, Inc., our primary operating subsidiary, issued $300 million of 5.625% Senior Notes due 2027 (the "2027 Senior Notes"). The 2027 Senior Notes are fully and unconditionally guaranteed by Murphy USA, and are guaranteed by certain 100% owned subsidiaries that guarantee our Credit Facilities, as defined herein. The indenture governing the 2027 Senior Notes contains restrictive covenants that limit, among other things, the ability of Murphy USA, Murphy Oil USA, Inc. and the restricted subsidiaries to incur additional indebtedness or liens, dispose
of assets, make certain restricted payments or investments, enter into transactions with affiliates or merge with or into other entities.
On September 13, 2019, Murphy Oil USA, Inc., issued $500 million of 4.75% Senior Notes due 2029 (the “2029 Senior Notes”). The net proceeds from the issuance of the 2029 Senior Notes were used to fund, in part, the tender offer and redemption of a prior note issuance. The 2029 Senior Notes are fully and unconditionally guaranteed by Murphy USA, and are guaranteed by certain 100% owned subsidiaries that guarantee our Credit Facilities. The indenture governing the 2029 Senior Notes contains restrictive covenants that are substantially
similar to the covenants for the 2027 Senior Notes.
On January 29, 2021, Murphy Oil USA, Inc., issued $500 million of 3.75% Senior Notes due 2031 (the “2031 Senior Notes” and, together with the 2027 Senior Notes and the 2029 Senior Notes, the "Senior Notes"). The net proceeds from the issuance of the 2031 Senior Notes were used to fund the acquisition of QuickChek and for other general corporate purposes. The 2031 Senior Notes are fully and unconditionally guaranteed by Murphy USA, and are guaranteed by certain 100% owned subsidiaries that guarantee our Credit Facilities. The indenture governing the 2031 Senior Notes contains restrictive covenants that are substantially
similar to the covenants for the 2027 and 2029 Senior Notes.
The Senior Notes and the guarantees rank equally with all of our and the guarantors’ existing and future senior unsecured indebtedness and effectively junior to our and the guarantors’ existing and future secured indebtedness (including indebtedness with respect to the Credit Facilities) to the extent of the value of the assets securing such indebtedness. The Senior Notes are structurally subordinated to all of the existing and future third-party liabilities, including trade payables, of our existing and future subsidiaries that do not guarantee the Senior Notes.
Revolving Credit Facility and Term Loan
On January
29, 2021, the Company entered into a new credit agreement that consists of both a cash flow revolving credit facility and a senior secured term loan that replaced the Company's prior ABL facility and term loan contained in the credit facility that was last renewed in 2019, respectively.
The credit agreement provides for a senior secured term loan in an aggregate principal amount of $400 million (the "Term Facility") (which was borrowed in full on January 29, 2021) and revolving credit commitments in an aggregate amount equal to $350 million (the "Revolving Facility", and together with the Term Facility, the "Credit Facilities"). The outstanding balance of the term
loan was $395 million at September 30, 2022 and $398 million at December 31, 2021. The term loan is due January 2028 and we are required to make quarterly principal payments of $1 million, which began on July 1, 2021. As of September 30, 2022, we had no outstanding borrowings under the Revolving Facility and had $4.7 million in outstanding letters of credit (which reduces the amount available to borrow under the Revolving Facility).
Interest payable on the Credit Facilities is based on either:
•the London interbank offered rate, adjusted for statutory reserve requirements (the “Adjusted LIBO Rate”);
or
•the Alternate Base Rate, which is defined as the highest of (a) the rate of interest last quoted by The Wall Street Journal as the "Prime Rate", (b) the greater of the federal funds effective rate and the overnight bank funding rate determined by the Federal Reserve Bank of New York from time to time plus 0.50% per annum and (c) the one-month Adjusted LIBO Rate plus 1.00% per annum,
plus, (A) in the case of Adjusted LIBO Rate borrowings, (i) with respect to the Revolving Facility, spreads ranging from 1.75% to 2.25% per annum depending on a total debt to EBITDA ratio or (ii) with respect to the Term Facility, a
38
spread
of 1.75% per annum and (B) in the case of Alternate Base Rate borrowings (i) with respect to the Revolving Facility, spreads ranging from 0.75% to 1.25% per annum depending on a total debt to EBITDA ratio or (ii) with respect to the Term Facility, a spread of 1.75% per annum.
The Term Facility amortizes in quarterly installments starting with the first amortization payment being due on July 1, 2021 at a rate of 1.00% per annum. Murphy USA is also required to prepay the Term Facility with a portion of its excess cash flow, a portion of the net cash proceeds of certain asset sales, casualty events (subject to certain reinvestment rights) and net cash proceeds of issuances of indebtedness not permitted under the credit agreement. The Credit Agreement allows Murphy USA to prepay, in whole or in part, the Term Facility outstanding thereunder, together with any
accrued and unpaid interest, with prior notice but without premium or penalty other than breakage and redeployment costs.
The credit agreement contains certain covenants that limit, among other things, the ability of the Company and certain of its subsidiaries to incur additional indebtedness or liens, to make certain investments, to enter into sale-leaseback transactions, to make certain restricted payments, to enter into consolidations, mergers or sales of material assets and other fundamental changes, to transact with affiliates, to enter into agreements restricting the ability of subsidiaries to incur liens or pay dividends,
or to make certain accounting changes. The Revolving Facility also imposes total leverage ratio and secured net leverage ratio financial maintenance covenants which are tested quarterly. Pursuant to the total leverage ratio financial maintenance covenant, the Company must maintain a total leverage ratio of not more than 5.0 to 1.0 with an ability in certain circumstances to temporarily increase that limit to 5.5 to 1.0 and a maximum secured net leverage ratio of 3.75 to 1.0 with an ability in certain circumstances to temporarily increase that limit to 4.25 to 1.0. The credit agreement also contains customary events of default.
Pursuant to the credit agreement's covenant limiting certain restricted payments, certain payments in respect of our equity interests, including dividends, when the total leverage ratio, calculated
on a pro forma basis, is greater than 3.0 to 1.0 could be limited. At September 30, 2022, our total leverage ratio was 1.53 to 1.0 which meant our ability at that date to make restricted payments was not limited. If our total leverage ratio, on a pro forma basis, exceeds 3.0 to 1.0, any restricted payments made following that time until the ratio is once again, on a pro forma basis, below 3.0 to 1.0 would be limited by the covenant, which contains certain exceptions, including the ability to make restricted payments in cash in an aggregate amount not to exceed the greater of $114.5 million or 4.5% of consolidated net tangible assets over the life of the credit agreement.
All obligations under the credit agreement are guaranteed by Murphy USA and the subsidiary guarantors party thereto, and all obligations under the credit agreement, including the guarantees
of those obligations, are secured by certain assets of Murphy USA, Murphy Oil USA, Inc. and the guarantors party to the guarantee and collateral agreement in respect thereof.
Supplemental Guarantor Financial Information
The following is a description of the guarantees with respect to the Senior Notes and the Credit Facilities, for which MOUSA is primary obligor, and for which the Company and certain 100% owned subsidiaries provide full and unconditional guarantees on a joint and several basis. See "—Debt" above for additional information concerning the Company's
outstanding indebtedness, all of which is guaranteed as described below. See also Note 6 "Long Term Debt" in the accompanying consolidated financial statements.
The Senior Notes and related guarantees rank equally with all of our and the guarantors’ existing and future senior unsecured indebtedness and effectively junior to our and the guarantors’ existing and future secured indebtedness (including indebtedness with respect to the Credit Facilities) to the extent of the value of the assets securing such indebtedness. The Senior Notes and related guarantees are structurally subordinated to all of the existing and future third-party liabilities, including trade payables, of our existing and future subsidiaries that do not guarantee the notes.
All
obligations under the Credit Facilities are guaranteed by the Company and the same subsidiary guarantors that guarantee the Senior Notes. All obligations under the Credit Facilities, including the guarantees of those obligations, are secured by certain assets of the Company, MOUSA, and the other guarantors.
The combined assets, liabilities and results of operations of MOUSA and the guarantors are not materially different from corresponding amounts presented in the consolidated financial statements included herein. MOUSA is our primary operating subsidiary and generated the vast majority of our revenues for the three and nine months ended
39
September 30,
2022, and accounted for the vast majority of our total assets as of September 30, 2022. In the event MOUSA itself were unable to service the Company's consolidated debt obligations, our business and financial condition would be materially adversely impacted.
Capital Spending
Capital spending and investments in our Marketing segment relate primarily to the acquisition of land and the construction of new Company stores. Marketing capital is also deployed to improve our existing stores as needed to ensure reliability and continued performance, which we refer to as sustaining capital. We also invest capital in our Corporate and other assets segment.
The
following table outlines our capital spending and investments by segment for the three and nine month periods ended September 30, 2022 and 2021:
Three
Months Ended September 30,
Nine Months Ended September 30,
(Millions of dollars)
2022
2021
2022
2021
Marketing:
Company
stores
$
67.1
$
64.2
$
188.3
$
175.9
Terminals
—
0.6
—
1.4
Sustaining
capital
10.5
4.3
22.3
12.4
Corporate and other assets
4.1
4.9
18.6
28.9
Total
$
81.7
$
74.0
$
229.2
$
218.6
We
currently expect capital expenditures for the full year 2022 to range from approximately $300 million to $350 million, including $250 million to $275 million for retail growth, and $30 million to $40 million for maintenance capital, with the remaining funds earmarked for other corporate investments and other strategic initiatives. See Note 18 “Commitments” in the audited consolidated financial statements for the year ended December 31, 2021 included in our Annual Report on Form 10-K for more information.
Critical Accounting Policies
There has been no material update to our critical accounting policies since our Annual Report on Form 10-K for the year ended December 31, 2021. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical
Accounting Policies” in the Form 10-K.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain statements or may suggest “forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risk and uncertainties, including, but not limited to M&A activity, anticipated store openings, fuel margins, merchandise margins, sales of RINs, trends in our operations, dividends, and share repurchases. Such statements are based upon the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual future results may differ materially from historical results or current expectations depending upon factors including,
but not limited to: the Company's ability to realize projected synergies from the acquisition of QuickChek and successfully expand our food and beverage offerings; our ability to continue to maintain a good business relationship with Walmart; successful execution of our growth strategy, including our ability to realize the anticipated benefits from such growth initiatives, and the timely completion of construction associated with our newly planned stores which may be impacted by the financial health of third parties; our ability to effectively manage our inventory, disruptions in our supply chain and our ability to control costs; geopolitical events, such as Russia's invasion of Ukraine, that impact the supply and demand and prices of crude oil; the impact of severe weather events, such as hurricanes, floods and earthquakes; the impact of a global health pandemic, such as COVID-19
and the government reaction in response thereof: the impact of any systems failures, cybersecurity and/or security breaches of the company or its vendor partners, including any security breach that results in theft, transfer or unauthorized disclosure of customer, employee or company information or our compliance with information security and privacy laws and regulations in the event of such an incident; successful execution of our information technology strategy; reduced demand for our products due to the implementation of more stringent fuel economy and greenhouse gas reduction requirements, or
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increasingly
widespread adoption of electric vehicle technology; future tobacco or e-cigarette legislation and any other efforts that make purchasing tobacco products more costly or difficult could hurt our revenues and impact gross margins; efficient and proper allocation of our capital resources, including the timing, declaration, amount and payment of any future dividends or levels of the company's share repurchases, or management of operating cash; the market price of the Company's stock prevailing from time to time, the nature of other investment opportunities presented to the Company from time to time, the Company's cash flows from
operations, and general economic conditions; compliance with debt covenants; availability and cost of credit; and changes in interest rates. Our SEC reports, including our most recent Annual Report on our Form 10-K and our Form 10-Q, contain other information on these and other factors that could affect our financial results and cause actual results to differ materially from any forward-looking information we may provide. The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price
Risk
We are exposed to market risks related to the volatility in the price of refined products (primarily gasoline and diesel) used in our operations. These fluctuations can affect our revenues and purchases, as well as the cost of operating, investing and financing activities. We make limited use of derivative instruments to manage certain risks related to commodity prices. The use of derivative instruments for risk management is covered by operating policies and is closely monitored by our middle-office function and the Company’s senior management.
As described in Note 10 “Financial Instruments and Risk Management” in the accompanying unaudited consolidated financial statements, there were short-term commodity derivative contracts in
place at September 30, 2022 to hedge the purchase price of refined products. A 10% increase or decrease in the respective benchmark price of the commodities underlying these derivative contracts would have been immaterial to the Company. Changes in the fair value of these derivative contracts generally offset the changes in the value for an equivalent volume of these products.
Interest Rate Risk
We have exposure to interest rate risks related to volatility of our floating rate term loan of $395 million and to our Revolving Facility which currently is undrawn. Both
of these loans are tied to LIBOR interest rates which can move in either direction and cause fluctuations in our interest expense recognized in any period and in our cash flows related to interest payments made. We make limited use of interest rate swaps to hedge a portion of our exposure to these rate movements. The acquisition of any interest rate derivatives is undertaken by senior management when appropriate with delegated authority from the appropriate Board level committee.
As described in Note 10 “Financial Instruments and Risk Management” in the accompanying unaudited consolidated financial statements, we currently have an interest rate swap that hedges exposure to one-month LIBOR for $90.5 million of our outstanding term loan amount at September 30, 2022. A 10% increase or decrease in the underlying interest rate would have an immaterial impact on the financial
statements of the Company at September 30, 2022.
For additional information about our use of derivative instruments, see Note 14 “Financial Instruments and Risk Management” in our audited combined financial statements for the year ended December 31, 2021 included in the Form 10-K and Note 10 “Financial Instruments and Risk Management” in the accompanying unaudited consolidated financial statements for the nine months ended September 30, 2022.
ITEM 4. CONTROLS
AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
Our management has evaluated, with the participation of our principal executive and financial officers, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and has concluded that our disclosure controls and procedures were effective and appropriately allowed for timely decisions regarding required disclosures as of September 30, 2022.
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Internal
Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II –OTHER INFORMATION
ITEM
1.LEGAL PROCEEDINGS
As of September 30, 2022, the Company was engaged in a number of legal proceedings, all of which the Company considers routine and incidental to its business. See Note 14 ”Contingencies” in the accompanying consolidated financial statements. Based on information currently available to the Company, the ultimate resolution of environmental and legal matters referred to in this Item is not expected to have a material adverse effect on the Company’s
net income, financial condition or liquidity in a future period.
Litigation
The City of Charleston, South Carolina, and the State of Delaware have filed lawsuits against energy companies, including the Company. These lawsuits allege damages as a result of climate change and the plaintiffs are seeking unspecified damages and abatement under various tort theories. See Note 14 ”Contingencies” in the accompanying consolidated financial statements.
ITEM 1A.RISK FACTORS
Our
business, results of operations, cash flows and financial condition involve various risks and uncertainties. These risk factors are discussed under the caption “Risk Factors” in our Annual Report on Form 10-K. We have not identified any additional risk factors not previously disclosed in the Form 10-K and in the quarterly report on Form 10-Q for the period ended September 30, 2022.
ITEM 2.UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Below is detail of the Company’s purchases
of its own equity securities during the period:
1Terms of the repurchase plan authorized by the Murphy USA Inc. Board of Directors and announced on December
1, 2021 include authorization for the Company to acquire up to $1 billion of its common shares by December 31, 2026.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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