MURPHY USA INC.
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.
It contains forward-looking statements including, without limitation, statements
relating to the Company's plans, strategies, objectives, expectations and
intentions. The words "anticipate," "estimate," "believe," "budget," "continue,"
"could," "intend," "may," "plan," "potential," "predict," "seek," "should,"
"will," "would," "expect," "objective," "projection," "forecast," "goal,"
"guidance," "outlook," "effort," "target" and similar expressions identify
forward-looking statements. 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 "
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 six months endedJune 30, 2020 and 2019. •Capital Resources and Liquidity-This section provides a discussion of our financial condition and cash flows as of and for the three and six months endedJune 30, 2020 and 2019. 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.
Our Business
We market refined products through a network of retail gasoline stations and to unbranded wholesale customers. Our owned retail stations are almost all located in close proximity to Walmart stores and use the brand name Murphy USA®. We also market gasoline and other products at standalone stations under the Murphy Express brand. AtJune 30, 2020 , we had a total of 1,485 Company stations in 25 states, principally in the Southeast, Southwest and Midwest United States. During the current quarter, we exitedMinnesota with the sale of our nine stores to a private company. 33
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Basis of Presentation
Murphy USA was incorporated inMarch 2013 , and until the separation from Murphy Oil Corporation was completed onAugust 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 ofMurphy USA Inc. and its subsidiaries for all periods presented.
Trends Affecting Our Business
Our operations are significantly impacted by the gross margins we receive on our fuel sales. These gross margins are commodity-based, change daily and are volatile. While we generally expect our total fuel sales volumes to grow over time and the gross margins we realize on those sales to remain strong in a normalized environment, these gross margins can change rapidly due to many factors. These factors include, but are not limited to, the price of refined products, interruptions in supply caused by severe weather, travel restrictions and stay-at-home orders imposed during a pandemic, such as COVID-19, severe refinery mechanical failures for an extended period of time, and competition in the local markets in which we operate. The cost of our main sales products, gasoline and diesel, is greatly impacted by the cost of crude oil inthe United States . Generally, rising prices for crude oil increase the Company's cost for wholesale fuel products purchased. When wholesale fuel costs rise, the Company is not always able to immediately pass these price increases on to its retail customers at the pump, which in turn reduces the Company's sales margin. Also, rising prices tend to cause our customers to reduce discretionary fuel consumption, which generally reduces our fuel sales volumes. Sharply declining crude oil prices that impacted early 2020 had an inverse positive effect on the business. Crude oil prices dropped dramatically in earlyMarch 2020 asOPEC members increased oil production and the price per barrel of oil settled in negative territory for the first time ever, reaching almost a negative$38 per barrel in April. Prices recovered during the quarter to approximately$40 per barrel by the end of June, which resulted in an average price for the quarter of approximately$28 per barrel compared to an average price of around$60 per barrel a year ago. This wholesale price decline led to an increase in retail fuel contribution of$116.4 million in Q2 2020 compared to Q2 2019. In addition, PS&W margins became positive during the current quarter due to the rising product prices which created favorable timing and inventory adjustments. Total fuel contribution (retail fuel margin plus product supply and wholesale ("PS&W") results including Renewable Identification Numbers ("RINs")) for Q2 2020 was38.3 cents per gallon ("cpg"), a 160.5% increase when compared to the 2019 Q2 total fuel contribution of 14.7 cpg. The COVID-19 pandemic has affected all sectors of the global economy. Beginning in mid-March, we began to see a reduction in customer count, which led to lower retail fuel sales volumes. As stay-at-home orders began lifting during the current quarter, the Company saw an increase in fuel volumes at higher overall margins. If the recoveries experienced in Q2 2020 stall or reverse as a result of any resurgence in COVID-19 infection rates and related government intervention, this could cause volume declines which we believe would be at incrementally higher industry fuel margins, which may help to mitigate any adverse financial impact. 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, theEnvironmental Protection Agency ("EPA ") is authorized to set annual quotas establishing the percentage of motor fuels consumed inthe 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 theEPA . 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. Revenue from the sales of RINs is included in "Other operating revenues" in the Consolidated Statements of Income. The Renewable Fuel Standard ("RFS") program continues to be unpredictable and ethanol RIN prices have ranged from$0.28 to$0.52 , with an average of$0.40 in Q2 2020, which compares to$0.13 to$0.27 in Q2 2019. The average RIN price received in Q2 2020 was$0.38 compared to$0.18 in Q2 2019. As ofJune 30, 2020 , we have$800 million of Senior Notes and$237.5 million of a term loan outstanding. We believe that we will generate sufficient cash from operations to fund our ongoing operating requirements. AtJune 30, 2020 , we have additional available capacity under the committed$325 million credit facilities (subject to the borrowing base), together with capacity under a$150 million incremental uncommitted facility. We expect to use the credit facilities to provide us with available financing intended to meet any ongoing cash needs in excess of 34 -------------------------------------------------------------------------------- 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, obtain commitments for our incremental facility and/or obtain and draw upon other credit facilities. We did not seek government aid from the federal programs established by the CARES Act. 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 2020 to range from approximately$250 million to$275 million depending on how many new sites are completed. We intend to fund the remainder of our capital program in 2020 primarily using operating cash flow but will supplement funding where necessary using borrowings available under credit facilities. We believe that our business will continue to grow in the future as we expect to build additional locations that have the characteristics we look for in a strong site as chosen by our real estate development team. 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 credit facilities.
We currently estimate our ongoing effective tax rate to be between 21% and 25% for the remainder of the year.
Seasonality
Our business has inherent seasonality due to the concentration of our retail sites in certain geographic areas, as well as customer activity 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. Beginning in the latter half ofMarch 2020 , we began to see a disruption to typical seasonal patterns as a result of stay-at-home restrictions due to the COVID-19 pandemic and this continued into the first part of the second quarter, with fuel volumes continuing to be lower than the historical average. At present, we cannot forecast how such measures will affect seasonal patterns for the remainder of fiscal 2020. As a result, operating results for the three and six months endedJune 30, 2020 may not be necessarily indicative of the results that may be expected for the year endingDecember 31, 2020 .
Business Segment
The Company has one operating segment which is Marketing. This segment includes our retail marketing sites and product supply and wholesale assets. For additional operating segment information, see Note 20 "Business Segments" in the audited combined financial statements for the year endedDecember 31, 2019 included with our Annual Report on Form 10-K and Note 14 "Business Segments" in the accompanying unaudited consolidated financial statements for the three and six months endedJune 30, 2020 .
Results of Operations
Consolidated Results
For the three month period endedJune 30, 2020 , the Company reported net income of$168.9 million , or$5.73 per diluted share, on revenue of$2.4 billion . Net income was$32.7 million for the same period in 2019, or$1.01 per diluted share, on$3.8 billion in revenue. The increase in net income is primarily due to higher all-in fuel contribution, a higher merchandise contribution, and lower payment fees, partially offset by lower fuel volumes. Continuing the trend that began in the latter half ofMarch 2020 , the Company experienced reduced retail fuel volumes due to COVID-19 related stay-at-home restrictions which were offset by the higher fuel margins for both retail and PS&W. The Company noted improvements in sales volumes during Q2 2020 as stay-at-home orders were gradually lifted in our areas of operations. For the six month period endedJune 30, 2020 , the Company reported net income of$258.2 million , or$8.60 per diluted share, on revenue of$5.6 billion . Net income was$38.0 million for the same period in 2019, or$1.18 per diluted share, on$6.9 billion in revenue. The increase in net income is primarily due to higher retail fuel contribution and a higher merchandise contribution combined with lower payment fees, and was partially offset by lower fuel volumes caused by the COVID-19 related stay-at-home restrictions and other economic issues. 35
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Three Months Ended
Quarterly revenues for 2020 decreased$1.4 billion , or 37.4%, compared to the same quarter in 2019. The decrease in revenues was due primarily to lower retail fuel sales prices combined with a decrease in retail fuel sales volumes caused by COVID-19 related concerns and travel restrictions and were partially offset by higher merchandise sales, PS&W revenues and RINs sales.
Total cost of sales decreased
Station and other operating expenses decreased
SG&A expenses for Q2 2020 increased$2.0 million , or 5.7%, from Q2 2019. The increase in SG&A costs is primarily due to increased employee-related expenses and professional fees from business improvement initiatives.
The effective income tax rate was approximately 24.3% for Q2 2020 versus 24.5% for the same period of 2019.
Six Months Ended
Year-to-date revenues for 2020 decreased$1.4 billion , or 19.6%, compared to the same period in 2019. The decrease in revenues was due to lower retail fuel sales prices combined with lower sales volumes caused by reduced travel by consumers due to COVID-19 concerns and were partially offset by higher merchandise and RINs sales. Year-to-date cost of sales for 2020 decreased$1.6 billion , or 25.6%, when compared to 2019. In the current-year period, the lower costs were primarily due to lower wholesale fuel prices and lower fuel sales volumes, partially offset by higher merchandise costs. Station and other operating expenses decreased$11.5 million , or 4.1%, in the first six months of 2020, compared to the same period in 2019. This decline was primarily due to lower payment fees, a result of lower sales revenues. SG&A expenses for the first six months of 2020 increased$6.6 million , or 9.5%, compared to the first six months of 2019. The increase in SG&A costs is primarily due to increased employee-related expenses and professional fees from business improvement initiatives. The effective income tax rate was approximately 24.1% for the six months endedJune 30, 2020 versus 22.8% for the same period of 2019. The increase was primarily due to lower excess tax benefits related to share-based payments in 2020. Segment Results
A summary of the Company's earnings by business segment follows:
Three Months Ended Six Months Ended
June 30, June 30,
(Millions of dollars) 2020 2019 2020 2019
Marketing $ 179.6 $ 44.5 $ 280.5 $ 60.7
Corporate and other assets (10.7) (11.8) (22.3) (22.7)
Net Income $ 168.9 $ 32.7 $ 258.2 $ 38.0
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Three Months Ended
Net income for the three months ended
•Significantly higher all-in fuel contribution which includes higher RIN revenues •Higher merchandise contribution •Lower station and other operating expenses
The items below partially offset the increase in earnings in the current period:
•Lower retail fuel volume •Higher SG&A expenses
Six Months Ended
Net income for the six months ended
•Significantly higher retail fuel contribution •Higher merchandise contribution •Higher revenues from RINs •Lower station and other operating expenses
The items below partially offset the increase in earnings in the current period:
•Lower PS&W revenues excluding RIN revenues •Lower retail fuel volume •Higher SG&A expenses (Millions of dollars, except revenue per Three Months Ended Six Months Ended store month (in thousands) and store counts) June 30, June 30, Marketing Segment 2020 2019 2020 2019 Operating Revenues Petroleum product sales$ 1,588.9 $ 3,129.7 $ 4,069.1 $ 5,629.5 Merchandise sales 767.1 658.8 1,454.6 1,265.0 Other operating revenues 23.6 11.9 40.6 22.2 Total operating revenues 2,379.6 3,800.4 5,564.3 6,916.7 Operating expenses Petroleum products cost of goods sold 1,287.8 2,973.7 3,547.6 5,355.2 Merchandise cost of goods sold 648.7 553.3 1,228.7 1,062.0 Station and other operating expenses 131.8 145.6 266.9 278.4 Depreciation and amortization 35.8 33.2 71.7 69.8 Selling, general and administrative 37.1 35.1 76.3 69.7 Accretion of asset retirement obligations 0.5 0.5 1.1 1.0 Total operating expenses 2,141.7 3,741.4 5,192.3 6,836.1 Gain (loss) on sale of assets 1.3 - 1.4 (0.1) Income (loss) from operations 239.2 59.0 373.4 80.5 37
-------------------------------------------------------------------------------- (Millions of dollars, except revenue per Three Months Ended Six Months Ended store month (in thousands) and store counts) June 30, June 30, Marketing Segment 2020 2019 2020 2019 Other income (expense) Interest expense (0.1) (0.1) (0.1) (0.1) Other nonoperating income (expense) - - - - Total other income (expense) (0.1) (0.1) (0.1) (0.1) Income (loss) before income taxes 239.1 58.9 373.3 80.4 Income tax expense (benefit) 59.5 14.4 92.8 19.7 Income (loss) from operations$ 179.6 $ 44.5 $ 280.5 $ 60.7 Total tobacco sales revenue same store sales1,2$ 124.0 $ 107.6 $ 118.3 $ 103.1 Total non-tobacco sales revenue same store sales1,2 48.5 42.7 45.0 40.9 Total merchandise sales revenue same store sales1,2$ 172.5 $ 150.3 $ 163.3 $ 144.0 12019 amounts not revised for 2020 raze-and-rebuild activity 2Includes site-level discounts for MDR redemptions and excludes change in value of unredeemed MDR points Store count at end of period 1,485 1,474 1,485
1,474
Total store months during the period 4,449 4,387 8,910
8,787
Average Per Store Month (APSM) metric includes all stores open through the date of the calculation.
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 sites do not enter the calculation until they are open for each full calendar year for the periods being compared (open byJanuary 1, 2019 for the sites being compared in the 2020 versus 2019 comparison). When prior period same store sales volumes or sales are presented, they have not been revised for current year activity for raze-and-rebuilds and asset dispositions. 38 --------------------------------------------------------------------------------
Fuel
Three Months Ended Six Months Ended
June 30, June 30,
Key Operating Metrics 2020 2019 2020 2019
Total retail fuel contribution ($ Millions)
33.2 4.4 (28.4) 35.9
RINs and other (included in Other operating
revenues on Consolidated Income Statement)
($ Millions) 22.6 10.9 38.1 20.0
Total fuel contribution ($ Millions) $ 324.6 $ 167.7 $ 561.5 $ 295.9
Retail fuel volume - chain (Million gal) 847.2 1,140.4 1,900.9 2,182.0
Retail fuel volume - per site (K gal APSM)1 190.4 259.9 213.3 248.3
Retail fuel volume - per site (K gal SSS)2 187.7 256.0 210.6 244.9
Total fuel contribution (including retail,
PS&W and RINs) (cpg) 38.3 14.7 29.5 13.6
Retail fuel margin (cpg) 31.7 13.4 29.0 11.0
PS&W including RINs contribution (cpg) 6.6 1.3 0.5 2.6
1APSM metric includes all stores open
through the date of calculation
22019 amounts not revised for 2020 raze-and-rebuild activity
The reconciliation of the components of total fuel contribution to the Consolidated Income Statements is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(Millions of dollars) 2020 2019 2020 2019
Petroleum product sales $ 1,588.9 $
3,129.7
(1,287.8) (2,973.7) (3,547.6) (5,355.2)
Plus RINs and other (included in Other
Operating Revenues line) 23.5 11.7 40.0 21.6
Total fuel contribution $ 324.6 $ 167.7 $ 561.5 $ 295.9
Merchandise
Three Months Ended Six Months Ended
June 30, June 30,
Key Operating Metrics 2020 2019 2020 2019
Total merchandise contribution ($ Millions)
$ 767.1 $ 658.8 $ 1,454.6 $ 1,265.0 Total merchandise sales ($K SSS)1,2$ 172.5 $ 150.3 $ 163.3 $ 144.0 Merchandise unit margin (%) 15.4 % 16.0 % 15.5 % 16.0 % Tobacco contribution ($K SSS)1,2$ 17.1 $ 14.5 $ 16.3 $ 13.9 Non-tobacco contribution ($K SSS)1,2$ 10.5 $ 10.1 $ 9.8 $ 9.6 Total merchandise contribution ($K SSS)1,2$ 27.6 $ 24.6 $ 26.1 $ 23.5 12019 amounts not revised for 2020 raze-and-rebuild activity 2Includes site-level discounts for MDR redemptions and excludes change in value of unredeemed MDR points 39
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Three Months Ended
Net income in the Marketing segment for Q2 2020 increased
Total revenues for the Marketing segment were approximately$2.4 billion in Q2 2020 compared to$3.8 billion in Q2 2019. The decreased revenues were due to a 30.9% decrease in retail fuel sales prices combined with a 25.7% lower number of gallons sold partially offset by a 16.4% increase in merchandise sales, and higher PS&W and RINs revenues. Revenues included excise taxes collected and remitted to government authorities of$380.3 million in Q2 2020 and$498.3 million in Q2 2019. Total fuel sales volumes on a SSS basis decreased 27.4% to 187.7 thousand gallons per store in the 2020 period due to travel reductions caused by COVID concerns. Retail fuel margin dollars increased 76.4% compared to the prior year quarter on a margin rate of 31.7 cpg for Q2 2020 which compared to 13.4 cpg in the same quarter of 2019 which was partially offset by lower total volumes. Total PS&W margin dollars, excluding RINs, were$33.2 million in the 2020 period compared to$4.4 million in 2019. The increase in the current period was due to higher trending prices toward the later part of Q2 causing positive timing and inventory adjustments. The 2020 quarter includes the sale of RINs of$22.6 million compared to$10.9 million in Q2 2019, which consisted of sales of 59 million RINs at an average selling price of$0.38 per RIN while the prior-year quarter had sales of 62 million RINs at an average price of$0.18 per RIN.
Total merchandise sales increased 16.4% to
Station and other operating expenses decreased$13.8 million in the current period compared to Q2 2019 levels, primarily due to lower payment fees due to lower sales revenues. On an APSM basis, expenses applicable to station OPEX excluding payment fees and rent decreased 1.8%, primarily due to lower maintenance expense.
Six Months Ended
Net income in the Marketing segment for the six months endedJune 30, 2020 increased$219.8 million compared to the six months endedJune 30, 2019 period. The primary drivers were the 116.9% increase on a cpg basis in total fuel contribution to 29.5 cpg in the first six months of 2020 and higher total merchandise contribution, which increased 11.3% to$225.9 million , combined with lower station operating expenses which were partially offset by lower retail fuel sales volumes. Total revenues for the Marketing segment were approximately$5.6 billion for the six month period endedJune 30, 2020 compared to$6.9 billion for the same period endedJune 30, 2019 . The decreased revenues were due to a 16.1% decrease in the average fuel retail price combined with a 12.9% decrease in the number of gallons sold due to the curtailment of travel caused by COVID-19 concerns and lower PS&W revenues, partially offset by a 15.0% increase in merchandise sales and higher RINs revenues. Revenues included excise taxes collected and remitted to government authorities of$853.7 million in the first six months of 2020 and$953.6 million in the same period of 2019. Total fuel sales volumes on a SSS basis decreased 14.8% to 210.6 thousand gallons per store in the first six months of 2020 compared to the six months endedJune 30, 2019 . Retail fuel margin dollars increased 129.9% compared to the prior year period on a margin rate of 29.0 cpg for the first six months of 2020 which compared to 11.0 cpg for the first six months of 2019. 40 -------------------------------------------------------------------------------- Total PS&W margin dollars, excluding RINs, were a loss of$28.4 million in the six month period endedJune 30, 2020 compared to income of$35.9 million inJune 30, 2019 . The decrease in the first six months of 2020 was due to lower year-over-year prices when compared to 2019. The six months period endedJune 30, 2020 includes the sale of RINs of$38.1 million compared to$20.0 million for the same period in 2019, and consisted of sales of 128.2 million RINs at an average selling price of$0.30 per RIN while the prior-year period had sales of 115.0 million RINs at an average price of$0.17 per RIN. Total merchandise sales increased$189.6 million , or 15.0%, to$1.5 billion in the first six months of 2020 compared to$1.3 billion for the same period endedJune 30, 2019 due to higher sales across the chain. Six month total merchandise contribution in 2020 was 11.3% higher than for the six month period endedJune 30, 2019 . On a SSS basis, total merchandise contribution dollars per store grew 10.9%. Compared to the six months endedJune 30, 2019 , tobacco products sales increased 15.2% and non-tobacco sales increased 8.1% on higher lottery and general merchandise sales. Station and other operating expenses decreased$11.5 million in the current period compared toJune 30, 2019 levels due primarily to lower payment fees as a result of lower sales. On an APSM basis, expenses applicable to station OPEX excluding payment fees and rent decreased 0.7%, primarily due to lower maintenance expense.
Same store sales information compared to APSM metrics
Variance from prior
Variance from prior year year
Three months ended Six months ended
June 30, 2020 June 30, 2020
SSS1 APSM2 SSS1 APSM2
Fuel gallons per month (27.4) % (26.7) % (14.8) % (14.1) %
Merchandise sales 14.4 % 14.8 % 13.2 % 13.4 %
Tobacco sales 15.7 % 15.4 % 15.2 % 14.8 %
Non-tobacco sales 11.3 % 13.3 % 8.1 % 10.1 %
Merchandise margin 11.9 % 10.8 % 10.9 % 9.8 %
Tobacco margin 19.2 % 15.9 % 18.3 % 15.7 %
Non-tobacco margin 1.8 % 3.7 % 0.4 % 2.2 %1Includes site-level discounts for MDR redemptions and excludes change in value of unredeemed MDR points 2Includes all MDR activity
Corporate and Other Assets
Three Months Ended
After-tax results for Corporate and other assets for Q2 2020 were a loss of
Six Months Ended
After-tax results for Corporate and other assets for the six months ended
Non-GAAP Measures The following table sets forth the Company's Adjusted EBITDA for the three and six months endedJune 30, 2020 and 2019. EBITDA means net income (loss) plus net interest expense, plus income tax expense, depreciation and 41 -------------------------------------------------------------------------------- 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 and other non-operating (income) expense). EBITDA and Adjusted EBITDA are not measures that are prepared in accordance withU.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 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 Six Months Ended June 30, June 30, (Millions of dollars) 2020 2019 2020 2019 Net income$ 168.9 $ 32.7 $ 258.2 $ 38.0 Income tax expense (benefit) 54.1 10.6 82.1 11.2 Interest expense, net of interest income 12.8 12.3 25.3 25.2 Depreciation and amortization 39.5 36.5 78.9 76.2 EBITDA 275.3 92.1 444.5 150.6 Net settlement proceeds - - - (0.1) Accretion of asset retirement obligations 0.5 0.5 1.1 1.0 (Gain) loss on sale of assets (1.3) -
(1.4) 0.1
Other nonoperating (income) expense (0.3) 0.1 0.7 (0.1) Adjusted EBITDA$ 274.2 $ 92.7 $ 444.9 $ 151.5
Capital Resources and Liquidity
Significant Sources of Capital
We have a committed$325 million asset based loan facility (the "ABL facility"), which is subject to the remaining borrowing capacity of$168 million atJune 30, 2020 (which can be utilized for working capital and other general corporate purposes, including supporting our operating model as described herein) and a$250 million term loan facility, as well as a$150 million incremental uncommitted facility. As ofJune 30, 2020 , we had$237.5 million outstanding under our term loan and no amounts outstanding under our ABL. See following "Debt - Credit Facilities" for the calculation of our borrowing base. 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. We did not seek government aid from federal programs established by the CARES Act.
Our term loan matures in
42
--------------------------------------------------------------------------------Operating Activities
Net cash provided by operating activities was$381.9 million for the six months endedJune 30, 2020 and was$124.9 million for the comparable period in 2019. The increase for the current year is primarily due to the increase in net income of$220.2 million compared to the corresponding period in 2019, combined with increases in non-cash operating working capital of$23.7 million . Non-cash operating working capital increased due to a$12.4 million decrease in accounts receivable, a$12.4 million decrease in prepaid expenses and other current assets and a$40.8 million increase in income taxes payable, which were partially offset by a$30.3 million increase in inventories and a$12.1 million decrease in accounts payable and accrued liabilities. The changes in accounts receivable and accounts payable were due to timing of invoicing, billing, payments, and receipts. The variance in prepaid expenses and other current assets and income taxes payable were due to increased pretax income in the current year moving the Company from a prepaid position to a payable. The Company also invested in inventory to meet expected demand due to stay-at-home restrictions being eased in our areas of operations.
Investing Activities
For the six months endedJune 30, 2020 , cash required by investing activities was$99.2 million compared to$85.7 million in 2019. The increase in investing cash requirements in the current period was primarily due to the timing of capital expenditures and was partially offset by proceeds from sale of assets in the second quarter of 2020. Other investing activities required$1.1 million in cash during 2020 compared to cash required of$0.5 million in 2019.
Financing Activities
Financing activities in the six months endedJune 30, 2020 required cash of$159.4 million compared to$45.1 million of cash required in the six months endedJune 30, 2019 . The first six months of 2020 included payments of$140.6 million for the repurchase of common shares, which was an increase of$110.5 million from the prior-year period. Net repayments of debt required$13.2 million in 2020 compared to$10.7 million in 2019. Amounts related to share-based compensation required$1.3 million more in cash during 2020 than in 2019. Share Repurchase Program There were no repurchases of common shares during the quarter endedJune 30, 2020 , while during the quarter endedMarch 31, 2020 , a total of 1,362,400 shares were repurchased for$140.6 million under the$400 million share repurchase program approved by the Board of Directors inJuly 2019 , with approximately$134.4 million remaining in the plan.
Debt
Our long-term debt at
June 30, December 31,
(Millions of dollars) 2020 2019
5.625% senior notes due 2027 (net of unamortized discount
of
$
297.4
494.2 493.9
Term loan due 2023 (effective interest rate of 3.35% at
237.5 250.0
Capitalized lease obligations, vehicles, due through 2023 2.4 2.4
Less unamortized debt issuance costs (5.0) (5.5)
Total notes payable, net 1,026.5 1,038.1
Less current maturities 51.2 38.8
Total long-term debt, net of current $ 975.3 $ 999.3
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Senior Notes
OnApril 25, 2017 ,Murphy Oil USA, Inc. , our primary operating subsidiary, issued$300 million of 5.625% Senior Notes due 2027 (the "2027 Senior Notes") under its existing shelf registration statement. The 2027 Senior Notes are fully and unconditionally guaranteed byMurphy USA , and are guaranteed by certain 100% owned subsidiaries that guarantee our credit facilities. The indenture governing the 2027 Senior Notes contains restrictive covenants that limit, among other things, the ability ofMurphy 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. OnSeptember 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 the$500 million aggregate principal amount of its senior notes due 2023. The 2029 Senior Notes are fully and unconditionally guaranteed byMurphy 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 essentially identical to the covenants for the 2027 Senior Notes. The 2027 and 2029 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 2027 and 2029 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 notes.
Credit Facilities and Term Loan
InAugust 2019 , we amended and extended our existing credit agreement. The effective date of the agreement was extended toAugust 2024 . The credit agreement provides for a committed$325 million asset-based loan (ABL) facility (with availability subject to the borrowing base described below) and a$250.0 million term loan facility. It also provides for a$150 million uncommitted incremental facility. OnAugust 27, 2019 ,Murphy Oil USA, Inc. borrowed$200 million under the term loan facility that has a four-year term and prepaid the remaining balance of the prior term loan of$57 million , and onDecember 31, 2019 , we borrowed the additional$50 million term loan. AtJune 30, 2020 andDecember 31, 2019 , the current outstanding principal balance was$237.5 million and$250.0 million respectively. The term loan is dueAugust 2023 and requires quarterly principal payments of$12.5 million which beganApril 1, 2020 . As ofJune 30, 2020 , we have zero outstanding under our ABL facility.
The borrowing base is, at any time of determination, the amount (net of reserves) equal to the sum of:
• 100% of eligible cash at such time, plus • 90% of eligible credit card receivables at such time, plus • 90% of eligible investment grade accounts, plus • 85% of eligible other accounts, plus • 80% of eligible midstream refined products inventory at such time, plus • 75% of eligible retail refined products inventory at such time, plus
the lesser of (i) 70% of the average cost of eligible retail merchandise inventory at such time and (ii) 85% of the net orderly liquidation value of eligible retail merchandise inventory at such time.
The ABL facility includes a
Interest payable on the credit facilities is based on either:
•theLondon 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 prime rate, (b) the greater of the federal funds effective rate and the overnight bank funding rate determined by theFederal 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, 44
-------------------------------------------------------------------------------- plus, (A) in the case of Adjusted LIBO Rate borrowings, (i) with respect to the ABL facility, spreads ranging from 1.50% to 2.00% per annum depending on a total debt to EBITDA ratio under the ABL facility or (ii) with respect to the term loan facility, spreads ranging from 2.50% to 2.75% per annum depending on a total debt to EBITDA ratio and (B) in the case of Alternate Base Rate borrowings, (i) with respect to the ABL facility, spreads ranging from 0.50% to 1.00% per annum depending on a total debt to EBITDA ratio or (ii) with respect to the term loan facility, spreads ranging from 1.50% to 1.75% per annum depending on a total debt to EBITDA ratio.
The interest rate period with respect to the Adjusted LIBO Rate interest rate option can be set at one, two, three, or six months as selected by us in accordance with the terms of the credit agreement.
The credit agreement contains certain covenants that limit, among other things, the ability of us and our 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. In addition, the credit agreement requires us to maintain a minimum fixed charge coverage ratio of a minimum of 1.0 to 1.0 when availability for at least three consecutive business days is less than the greater of (a) 17.5% of the lesser of the aggregate ABL facility commitments and the borrowing base and (b)$70 million (including as of the most recent fiscal quarter end on the first date when availability is less than such amount), as well as a maximum secured total debt to EBITDA ratio of 4.5 to 1.0 at any time when the term loans are outstanding. As ofJune 30, 2020 , our fixed charge coverage ratio was 1.21 and we had$168.3 million of availability under the ABL facility at that time. Our secured debt to EBITDA ratio as ofJune 30, 2020 was 0.33 to 1.0. The credit agreement contains restrictions on certain payments, including dividends, when availability under the credit agreement is less than or equal to the greater of$100 million and 25% of the lesser of the revolving commitments and the borrowing base and our fixed charge coverage ratio is less than 1.0 to 1.0 (unless availability under the credit agreement is greater than$100 million and 40% of the lesser of the revolving commitments and the borrowing base). As ofJune 30, 2020 our ability to make restricted payments was not limited as our fixed charge coverage ratio was greater than 1.0 to 1.0, at 1.21. All obligations under the credit agreement are guaranteed byMurphy USA and the subsidiary guarantors party thereto, and all obligations under the credit agreement, including the guarantees of those obligations, are secured by certain assets ofMurphy USA ,Murphy Oil USA, Inc. and the guarantors party thereto. Capital Spending Capital spending and investments in our Marketing segment relate primarily to the acquisition of land and the construction of new Company stations. Our Marketing capital is also deployed to improve our existing sites, which we refer to as sustaining capital. We also use sustaining capital in this business as needed to ensure reliability and continued performance of our sites. We also invest in our Corporate and other assets segment. The following table outlines our capital spending and investments by segment for the three and six month periods endedJune 30, 2020 and 2019: Three Months Ended Six Months Ended June 30, June 30, (Millions of dollars) 2020 2019 2020 2019 Marketing: Company stores$ 52.9 $ 35.6 $ 80.2 $ 59.6 Terminals 0.2 0.1 0.6 0.5 Sustaining capital 6.8 4.4 11.4 6.8 Corporate and other assets 6.6 18.9 19.7 22.8 Total$ 66.5 $ 59.0 $ 111.9 $ 89.7 45
-------------------------------------------------------------------------------- We currently expect capital expenditures for the full year 2020 to range from approximately$250 million to$275 million , including$140 million for retail growth, approximately$30 million for maintenance capital, with the remaining funds earmarked for other corporate investments, including Europay, MasterCard, andVisa ("EMV") compliance and other strategic initiatives. See Note 16 "Commitments" in the audited consolidated financial statements for the year endedDecember 31, 2019 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 endedDecember 31, 2019 . 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 anticipated store openings, fuel margins, merchandise margins, sales of RINs and trends in our operations. 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: 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; the impact of severe weather events, such as hurricanes, floods and earthquakes; the impact of a global health pandemic, such as COVID-19 including the impact of our fuel volumes if the gradual recoveries experienced in Q2 2020 stall or reverse as a result of any resurgence in COVID-19 infection rates and the responsive measures taken by governmental authorities; the impact of any systems failures, cybersecurity and/or security breaches, 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; 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; compliance with debt covenants; availability and cost of credit; and changes in interest rates. Our public filings, including our most recent Annual Report on our Form 10-K and our Form 10-Q from Q1 2020 contains 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.
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