UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934
For the quarterly period ended March 31, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934
For the transition period from _________________to________________
Commission file number: 1-9409
DIAMOND SHAMROCK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2456753
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9830 Colonnade Boulevard, San Antonio, Texas 78230
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code:(210) 641-6800)
______________________________________________________________________
(Former name, former address and former fiscal year, if changed since
last report)
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. (X)YES ( )NO
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. ( )YES ( )NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares of Common Stock outstanding at April 30, 1994: 29,014,667
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
DIAMOND SHAMROCK, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(dollars in millions, except per share data)
Three Months
Ended
March 31,
1994 1993
REVENUES
Sales and operating revenues $ 583.8 $ 620.8
Other revenues, net 4.5 2.1
588.3 622.9
COSTS AND EXPENSES
Cost of products sold and
operating expenses 514.7 567.0
Depreciation 17.0 14.8
Selling and administrative 15.9 14.4
Taxes other than income taxes 9.5 9.8
Interest 10.5 8.6
567.6 614.6
Income Before
Tax Provision and
Cumulative Effect of
Accounting Changes 20.7 8.3
Provision for Income Taxes 8.5 3.3
Income Before
Cumulative Effect of
Accounting Changes 12.2 5.0
Cumulative Effect of
Accounting Changes - (14.2)
Net Income (Loss) 12.2 (9.2)
Dividend Requirement
on Preferred Stock 1.1 -
Earnings (Loss) Applicable to
Common Shares $ 11.1 $ (9.2)
Primary Earnings (Loss) Per Share
Before Accounting Changes $ 0.38 $ 0.17
Cumulative Effect
of Accounting Changes - (0.49)
Total $ 0.38 $ (0.32)
Fully Diluted Earnings (Loss) Per Share
Before Accounting Changes $ 0.38 $ 0.17
Cumulative Effect
of Accounting Changes - (0.49)
Total $ 0.38 $ (0.32)
Cash Dividends Per Share
Common $ 0.13 $ 0.13
Preferred $ 0.625 $ -
Weighted Average Common Shares
Outstanding (thousands of shares)
Primary 29,142 28,803
Fully Diluted 32,399 -
See accompanying Notes to Consolidated Financial Statements.
DIAMOND SHAMROCK, INC.
CONSOLIDATED BALANCE SHEET
(dollars in millions, except per share data)
March 31, December 31,
1994 1993
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 18.9 $ 12.8
Receivables, less doubtful receivables
of $5.1; $5.5 in 1993 147.6 148.8
Inventories
Finished products 96.6 114.0
Raw materials 53.4 47.9
Supplies 29.8 24.1
179.8 186.0
Prepaid expenses 6.0 8.6
Total Current Assets 352.3 356.2
Properties and Equipment, less accumulated
depreciation of $566.9; $550.9 in 1993 956.3 941.1
Deferred Charges and Other Assets 52.3 51.9
$ 1,360.9 $ 1,349.2
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Long-term debt payable within one year $ 3.5 $ 3.5
Accounts payable 95.1 88.5
Accrued taxes 56.7 56.9
Accrued royalties 6.6 7.1
Current portion of Long-term Liability 8.0 8.0
Other accrued liabilities 74.3 56.4
Total Current Liabilities 244.2 220.4
Long-term Debt 460.2 486.2
Deferred Income Taxes 57.0 48.7
Other Liabilities and Deferred Credits 61.8 66.2
Stockholders' Equity
Preferred Stock, $.01 par value
Authorized shares - 25,000,000
Issued and Outstanding shares 1,725,000;
1,725,000 in 1993 0.0 0.0
Common Stock, $.01 par value
Authorized shares - 75,000,000
Issued shares - 29,014,265; 28,927,217
in 1993
Outstanding shares - 29,013,887; 28,903,468
in 1993 0.3 0.3
Paid-in Capital 447.1 444.8
ESOP Stock and Stock Held in Treasury (47.3) (47.9)
Retained Earnings 137.6 130.5
Total Stockholders' Equity 537.7 527.7
$ 1,360.9 $ 1,349.2
See accompanying Notes to Consolidated Financial Statements.
DIAMOND SHAMROCK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(dollars in millions)
Three Months Ended
March 31,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 12.2 $ (9.2)
Adjustments to arrive at net cash provided
by operating activities:
Depreciation 17.0 14.8
Deferred income taxes 8.5 (8.4)
Loss on sale of properties and equipment 0.4 0.7
Cumulative Effect of Accounting Changes - 23.6
Cash flow from futures activity (2.2) 1.9
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1.2 (6.5)
Decrease (increase) in inventories 6.2 (35.3)
Decrease (increase) in prepaid expenses 2.6 1.4
Increase (decrease) in accounts payable 6.6 29.8
Increase (decrease) in taxes payable (0.2) (3.7)
Increase (decrease) in accrued liabilities 17.4 5.3
Other, net 0.7 5.3
NET CASH PROVIDED BY OPERATING ACTIVITIES 70.4 19.7
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of futures contracts (31.7) (46.1)
Settlement of futures contracts 33.9 44.2
Proceeds from sales of facilities 0.7 0.5
Purchase of properties and equipment (33.2) (33.7)
Expenditures for investments (1.6) (0.6)
NET CASH (USED IN) INVESTING ACTIVITIES (31.9) (35.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in commercial paper - (108.6)
Increases in long-term debt 50.2 175.6
Repayments of long-term debt (76.2) (51.6)
Payments of long-term liability (2.6) (1.5)
Issuance of Common Stock 0.9 -
Sale of Common Stock held in treasury 0.1 -
Dividends paid (4.8) (3.7)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (32.4) 10.2
Net increase (decrease) in cash and cash equivalents 6.1 (5.8)
Cash and cash equivalents at beginning of period 12.8 17.5
Cash and cash equivalents at end of period $ 18.9 $ 11.7
See accompanying Notes to Consolidated Financial Statements.
DIAMOND SHAMROCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Financial Statements
The consolidated financial statements as of March 31, 1994 and for the three
months ended March 31, 1994 and 1993 are unaudited, but in the opinion of
Diamond Shamrock, Inc. (the "Company"), all adjustments (consisting only of
normal accruals) necessary for a fair presentation of consolidated results of
operations, consolidated financial position, and consolidated cash flows at the
date and for the periods indicated have been included.
The consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the 1993 Annual Report to Stockholders and incorporated by reference into the
Company's Annual Report on Form 10-K for the year ended December 31, 1993 (the
"1993 Form 10-K").
With respect to the unaudited consolidated financial information of the Company
as of March 31, 1994, and for the three months ended March 31, 1994 and 1993,
Price Waterhouse has made a review (based on procedures adopted by the American
Institute of Certified Public Accountants) and not an audit, as set forth in
their separate report appearing herein. Such a report is not a "report" or
"part of a Registration Statement" within the meaning of Sections 7 and 11 of
the Securities Act of 1933 and the liability provisions of Section 11 of such
Act do not apply.
2. Inventories
Inventories are valued at the lower of cost or market with cost determined
primarily under the Last-in, First-out (LIFO) method. At March 31, 1994,
inventories of crude oil and refined products of the Refining and Wholesale
segment and propylene products in the Allied Businesses segment were valued at
market values (lower than LIFO cost). Motor fuel products of the Retail segment
were recorded at their LIFO costs.
3. Commitments and Contingencies
In connection with the 1987 Spin-off from Maxus Energy Corporation ("Maxus"),
the Company agreed to assume a share of certain liabilities of Maxus' businesses
discontinued or disposed of prior to the Spin-off date (see Note 16 of the 1993
Form 10-K). The Company's total liability for such shared costs is limited to
$85.0 million. Payments with respect to the shared costs are made by Maxus and
the Company is obligated to reimburse Maxus for the Company's share promptly
after receipt of Maxus' invoice accompanied by appropriate supporting data.
Inasmuch as the Company has already reimbursed Maxus for more than $37.5
million, the Company's share of remaining shared costs is one-third of the
amounts paid by Maxus. Although some expenditures are still subject to audit,
the Company has reimbursed Maxus for a total of $55.9 million as of March 31,
1994, including $2.6 million paid during the three months ended March 31, 1994
(see Note 3 of the 1993 Form 10-K for a discussion of the change in the method
of accounting for the liability).
Pursuant to the Distribution Agreement, the Company will also reimburse Maxus
for one-third of all payments for the cost of certain medical and life insurance
benefits for eligible retired employees made by Maxus after the Spin-off date
with respect to persons who retired on or before the Spin-off date (see Note 16
of the 1993 Form 10-K). The actuarial cost of these expected payments under the
Distribution Agreement is included in the Accumulated Postretirement Benefit
Obligation (see Note 3 of the 1993 Form 10-K).
REVIEW BY INDEPENDENT ACCOUNTANTS
With respect to the unaudited consolidated financial information of the Company
as of March 31, 1994 and the three months ended March 31, 1994 and 1993, Price
Waterhouse reported that they have applied limited procedures in accordance with
professional standards for a review of such information. However, their
separate report dated May 12, 1994 appearing below, states that they did not
audit and they do not express an opinion on that unaudited consolidated
financial information. Price Waterhouse has not carried out any significant or
additional audit tests beyond those which would have been necessary if their
report had not been included. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. Price Waterhouse is not subject to the
liability provisions of Section 11 of the Securities Act of 1933 for their
report on the unaudited consolidated financial information because that report
is not a "report" or "part of a Registration Statement" prepared or certified by
Price Waterhouse within the meaning of Sections 7 and 11 of the Act.
REPORT ON REVIEW BY INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Diamond Shamrock, Inc.
We have reviewed the consolidated interim financial information included in the
Report on Form 10-Q of Diamond Shamrock, Inc. and its subsidiaries as of March
31, 1994 and for the quarter then ended. This financial information is the
responsibility of the management of Diamond Shamrock, Inc.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial information for it to be in conformity
with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1993, and the related
consolidated statements of operations and of cash flows for the year then ended
(not presented herein), and in our report dated February 25, 1994, which
included an explanatory paragraph regarding the Company's changes in accounting
for its long-term shared cost liability, income taxes and post-retirement
benefits other than pensions, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet information as of December 31, 1993,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
PRICE WATERHOUSE
San Antonio, Texas
May 12, 1994
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The following are the Company's sales and operating revenues and operating
profit for the three months ended March 31, 1994 and 1993. Business segment
operating profit is sales and operating revenues less applicable segment
operating expense. In determining the operating profit of the three business
segments, neither interest expense nor administrative expenses are included.
Three Months
Ended
March 31,
1994 1993
Sales and Operating Revenues:
Refining and Wholesale $ 304.0 $ 310.9
Retail 212.4 224.3
Allied Businesses 67.4 85.6
Total Sales and Operating Revenues $ 583.8 620.8
Operating Profit:
Refining and Wholesale $ 32.4 $ 13.3
Retail 8.2 11.2
Allied Businesses 4.4 5.3
Total Operating Profit $ 45.0 29.8
Consolidated Results First Quarter 1994 vs 1993
Sales and operating revenues of $583.8 million for the first quarter of 1994
were 6.0% lower than in the same period of 1993, primarily due to a 20.9% and a
19.0% decrease in natural gas liquids sales volumes and prices, respectively,
reflecting the cancellation of the Company's contract to process natural gas for
Maxus during the second quarter of 1993. Also contributing to the decrease in
sales and operating revenues was a 12.9% decrease in retail gasoline sales
prices and a 16.2% decrease in refined product prices.
During the first quarter of 1994, the Company had net income of $12.2 million
compared to net income of $5.0 million (before cumulative effect of accounting
changes) in the 1993 first quarter. The Company's first quarter 1994 results
were positively impacted by higher refinery margins, particularly at the end of
the quarter, reflecting the full benefit of the Three Rivers refinery expansion
project.
Inventories are valued at the lower of cost or market with cost determined
primarily under the Last-in, First-out (LIFO) method. At March 31, 1994,
inventories of crude oil and refined products of the Refining and Wholesale
segment and propylene products in the Allied Businesses segment were valued at
market values (lower than LIFO cost). Motor fuel product inventories of the
Retail segment were recorded at their LIFO costs.
Estimating the financial impact of changes in the valuation of refinery
inventories due to such inventories being valued at market is difficult because
of the number of variables that must be considered. For operating purposes,
management attempts to estimate the impact of changes in valuation of refinery
inventories on net income. The estimated after tax change in inventory values
was a negative $5.0 million and a negative $1.1 million in the first quarters of
1994 and 1993, respectively.
Segment Results First Quarter 1994 vs First Quarter 1993
During the first quarter of 1994 the Refining and Wholesale segment had sales
and operating revenues of $304.0 million compared to $310.9 million during the
first quarter of 1993. The decrease in sales and operating revenues was
primarily due to a 16.2% decrease in refined product sales prices, partial
offset by a 13.5% increase in refined product sales volumes. Operating profit
in the first quarter of 1994 increased $19.1 million over the first quarter of
1993, primarily due to a 49.5% increase in refinery margins over the same period
a year ago. Refinery margins continued to improve from the fourth quarter of
1993, reflecting the full benefit of the Three Rivers refinery expansion
project.
The Retail segment in the first quarter of 1994 reflected a 5.3% decrease in
sales and operating revenues. Such decrease was primarily due to a 12.9%
decrease in retail gasoline prices. Operating profit in the first quarter of
1994 was $8.2 million compared to $11.2 million in the first quarter of 1993.
The decrease was primarily due to a 5.2% decrease in retail gasoline margins,
partially offset by a $0.7 million increase in gross profit from lottery sales.
During the first quarter of 1994, the Allied Businesses segment reflected a
decrease in sales and operating revenues of 21.3%, primarily due to a 20.9% and
a 19.0% decrease in natural gas liquids sales volumes and prices, respectively,
reflecting the cancellation of the Company's contract to process natural gas
from Maxus during the second quarter of 1993. Operating profits were $4.4
million for the first quarter of 1994 compared to $5.3 million in the first
quarter of 1993. Operating profits decreased by 15.7%, primarily due to a
decrease of $1.7 million and $1.0 million in natural gas liquids marketing and
propane/propylene splitter operating profit, respectively.
U.S. demand for gasoline in the first quarter of this year was 3.7% higher than
in the first quarter of 1993. Industry refinery utilization hit a low of 85.9%
during the quarter due to seasonal scheduled refinery maintenance and ended the
quarter at 88%. Increased demand combined with low refinery utilization rates
and low gasoline inventories contributed to strong first quarter refining
margins. Refining margins for the quarter also received the full benefit of the
Three Rivers refinery expansion project. The refining industry is currently
experiencing a utilization rate which is high by historical standards, and
gasoline inventories are lower than at the same time last year as the driving
season approaches. Both of these factors should have a positive impact on
second quarter results.
Longer term, although demand for refined products is expected to grow only
modestly as fuel efficiency improves and alternative fuels are introduced,
industry refining capacity, particularly for the production of gasoline, is
expected to remain constrained as regulatory restrictions negatively impact the
industry's ability to supply products from existing facilities, force some
additional facilities to shut down, and limit the addition of any significant
new capacity. Management continues to believe that the Company is well-
positioned to benefit from these conditions because of its efficient and
strategically located refining and distribution system and its marketing
efforts.
Liquidity and Capital Resources
Cash Flow and Working Capital
For the three months ended March 31, 1994, cash provided by operations was $70.4
million, compared with $19.7 million in the same period of 1993. Decreased
working capital positively impacted cash provided by operations during the first
quarter of 1994.
Working capital at March 31, 1994 was down $27.7 million from December 31, 1993,
and consisted of current assets of $352.3 million and current liabilities of
$244.2 million, or a current ratio of 1.4. At December 31, 1993, current assets
were $356.2 million and current liabilities were $220.4 million, or a current
ratio of 1.6. The decrease in working capital in the first quarter of 1994 was
primarily due to a 31.7% increase in accrued liabilities.
Capital Expenditures
The Company's capital and investment expenditures estimate for 1994 has been
increased to approximately $165.0 million from an earlier estimate of $130.0
million. Such increases are primarily attributable to the recently announced
crude oil storage terminal at Corpus Christi, Texas and a 70-mile pipeline to
connect the terminal to the Company's Three Rivers refinery. Also included in
the increases are a tertiary amyl methol ether (TAME) unit at the McKee Refinery
scheduled for completion in 1995 which will provide additional oxygenates for
producing reformulated gasolines and the acquisition of an increased
participation in an exploration and production joint venture in Bolivia. The
1994 capital expenditures include approximately $88.0 million for the recently
completed refined products pipeline from the McKee refinery to Colorado Springs,
and to complete projects currently underway, namely the Colorado Springs to
Denver products pipeline and a 400-mile pipeline to El Paso from McKee. These
economic projects improve terminal and distribution systems, comply with
environmental regulations, and pursue new ventures in related businesses. The
Company's capital and investment expenditures during 1993 were $131.8 million.
The Company's 1994 capital expenditures were $33.2 million during the first
three months of the year, compared with $33.7 million for the same period of
1993.
The Company anticipates that its capital expenditures, as well as expenditures
for debt service, lease obligations, working capital, and dividend requirements
might at times exceed cash generated by operations. To the extent that the
Company's requirements exceed cash generated by operations, the Company
anticipates that it may access its commercial paper and bank money market
facilities or issue medium to long-term notes. The Company may also consider
other alternatives depending upon various factors, including changes in its
capital requirements, results of operations, and developments in the capital
markets.
The Company continued to enhance its retail marketing business with the opening
of 4 new outlets and the closing of 3 marginal units through March 31, 1994.
The new outlets were leased by the Company under a long-term lease arrangement.
The Company has leased approximately $147.4 million in retail outlets and
related equipment under these arrangements. During March, the Company arranged
to expand the lease by $25.0 million, increasing the remaining availability to
$42.6 million. This expansion became effective on April 23, 1994. This
arrangement permits the Company to continue to expand its development and
acquisition of retail outlets on a competitive basis. The Company presently
anticipates constructing or acquiring approximately 25 to 35 additional outlets
during 1994.
Regulatory Matters
It is expected that rules and regulations implementing the federal, state, and
local laws relating to health and environmental quality will continue to affect
the operations of the Company. The Company cannot predict what health or
environmental legislation, rules or regulations will be enacted in the future or
how existing or future laws, rules or regulations will be administered or
enforced with respect to products or activities of the Company. However,
compliance with more stringent laws or regulations, as well as more expansive
interpretation of existing laws and their more vigorous enforcement by the
regulatory agencies could have an adverse effect on the operations of the
Company and could require substantial additional expenditures by the Company,
such as for the installation and operation of pollution control systems and
equipment.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
15.1 Independent Accountants' Awareness Letter
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company in the first quarter of
1994.
SIGNATURE
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.
DIAMOND SHAMROCK, INC.
By /S/GARY E. JOHNSON
Gary E. Johnson
Vice President and Controller
(Principal Accounting Officer)
May 12, 1994
EXHIBIT 15.1
INDEPENDENT ACCOUNTANTS' AWARENESS LETTER
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sirs:
We are aware that Diamond Shamrock, Inc. has included our report dated May 12,
1994 (issued pursuant to the provisions of Statement on Auditing Standards No.
71) in the Prospectuses constituting part of its Registration Statements on Form
S-3 (Nos. 33-58744, 33-67166, and 33-67556) filed on February 24, 1993, August
9, 1993, and August 18, 1993, respectively, and on Form S-8 (Nos. 33-15268,
33-34306, and 33-50573) filed on June 22, 1987, April 13, 1990 and October 6,
1993, respectively. We are also aware of our responsibilities under the
Securities Act of 1933.
Yours very truly,
PRICE WATERHOUSE
San Antonio, Texas
May 12, 1994