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.
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 "
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 endedSeptember 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 endedSeptember 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. OnJanuary 29, 2021 , MUSA acquired 100% ofQuick Chek Corporation ("QuickChek"), a privately held convenience store chain with a strong regional brand consisting of 156 stores, at the time of acquisition, located inNew Jersey andNew 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 endedDecember 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 ofthe 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 inNew Jersey andNew York that operate under the brand name ofQuickChek . AtSeptember 30, 2022 , we had a total of 1,700 Company stores in 27 states, of which 1,151 wereMurphy USA , 392 were Murphy Express and 157 wereQuickChek . We also market to unbranded wholesale customers through a mixture of Company owned and third-party terminals. Basis of PresentationMurphy 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.QuickChek uses a weekly retail calendar where each quarter has 13 weeks. For Q3 2022, theQuickChek results cover the period fromJuly 2, 2022 toSeptember 30, 2022 and the year-to-date period is fromJanuary 1, 2022 toSeptember 30, 2022 . For Q3 2021 theQuickChek results cover the period fromJuly 3, 2021 toOctober 1, 2021 and the 2021 year-to-date period coversJanuary 29, 2021 (the date of acquisition) toOctober 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, theU.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 inthe 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 was37.6 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, 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. 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 ofSeptember 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. AtSeptember 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 endedSeptember 30, 2022 , may not be necessarily indicative of the results that may be expected for the remainder of the year endingDecember 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 endedDecember 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 endedSeptember 30, 2022 .
Results of Operations
Consolidated Results
For the three months endedSeptember 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 endedSeptember 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 includeQuickChek fromJanuary 1, 2022 toSeptember 30, 2022 , and for the prior year year-to-date period covered the period fromJanuary 29, 2021 (the date of acquisition) toOctober 1, 2021 . The difference in the timing of the period ends is immaterial to the overall consolidated results. 28 --------------------------------------------------------------------------------
Three Months Ended
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.
Nine Months Ended
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 ofQuickChek 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 ofQuickChek 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 forQuickChek 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 ofQuickChek for one additional month in 2022, partially offset by lower employee benefits.
Depreciation and amortization expense increased
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 ofQuickChek inJanuary 2021 .
The effective income tax rate was approximately 24.2% for the nine months ended
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Segment Results
A summary of the Company's earnings by business segment follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(Millions of dollars) 2022 2021 2022 2021
Marketing $ 236.8 $ 121.1 $ 605.0 $ 347.1
Corporate and other assets (17.3) (17.1) (49.8) (59.0)
Net Income $ 219.5 $ 104.0 $ 555.2 $ 288.1
Marketing
Three Months Ended
Net income for the three months ended
•Higher all-in fuel contribution and sales volumes •Higher merchandise contribution
The items below partially offset the increase in net income in the current period:
•Higher payment fees •Higher store operating expenses •Higher general and administrative expense •Higher income tax expense
Nine Months Ended
Net income for the nine months ended
•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
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-------------------------------------------------------------------------------- (Millions of dollars, except revenue per Three Months Ended Nine Months Ended store month (in thousands) and store counts) September 30, 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
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 byJanuary 1, 2021 for the stores being compared in 31
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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, theQuickChek results cover the period fromJuly 2, 2022 toSeptember 30, 2022 and the year-to-date period is fromJanuary 1, 2022 toSeptember 30, 2022 . For Q3 2021 theQuickChek results cover the period fromJuly 3, 2021 toOctober 1, 2021 and the 2021 year-to-date period coversJanuary 29, 2021 (the date of acquisition) toOctober 1, 2021 . The difference in the timing of the period ends is immaterial to the overall consolidated results.
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