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, 1995
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)
210-641-6800
(Registrant's telephone number, including area code)
_____________________________________________________________________
(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, 1995: 29,020,412
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,
1995 1994
REVENUES
Sales and operating revenues $ 676.7 $ 583.8
Other revenues, net 4.2 4.5
680.9 588.3
COSTS AND EXPENSES
Cost of products sold and
operating expenses 613.1 514.7
Depreciation 18.7 17.0
Selling and administrative 18.3 15.9
Taxes other than income taxes 10.3 9.5
Interest 11.4 10.5
671.8 567.6
Income Before Tax Provision 9.1 20.7
Provision for Income Taxes 3.7 8.5
Net Income 5.4 12.2
Dividend Requirement
on Preferred Stock 1.1 1.1
Earnings Applicable to
Common Shares $ 4.3 $ 11.1
Primary Earnings
Per Share $ 0.15 $ 0.38
Fully Diluted Earnings
Per Share $ 0.15 $ 0.38
Cash Dividends Per Share
Common $ 0.14 $ 0.13
Preferred $ 0.625 $ 0.625
Weighted Average Common Shares
Outstanding (thousands of shares)
Primary 29,024 29,142
Fully Diluted 32,332 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,
1995 1994
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 16.5 $ 27.4
Receivables, less doubtful receivables
of $6.6; $5.8 in 1994 205.1 211.6
Inventories
Finished products 104.8 109.6
Raw materials 64.9 148.3
Supplies 33.8 33.1
203.5 291.0
Prepaid expenses 7.0 10.4
Total Current Assets 432.1 540.4
Properties and Equipment, less accumulated
depreciation of $628.0; $609.3 in 1994 1,070.9 1,026.1
Deferred Charges and Other Assets 55.7 54.3
$1,558.7 $1,620.8
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Long-term debt payable within one year $ 3.9 $ 3.9
Accounts payable 117.2 199.3
Accrued taxes 61.9 65.3
Accrued royalties 6.0 6.7
Current portion of Long-term Liability 8.0 8.0
Other accrued liabilities 76.9 90.9
Total Current Liabilities 273.9 374.1
Long-term Debt 532.1 509.2
Deferred Income Taxes 84.7 81.5
Other Liabilities and Deferred Credits 77.0 67.0
Stockholders' Equity
Preferred Stock, $.01 par value
Authorized shares - 25,000,000
Issued and Outstanding shares - 1,725,000;
1,725,000 in 1994 0.0 0.0
Common Stock, $.01 par value
Authorized shares - 75,000,000
Issued shares - 29,016,101; 29,014,711
in 1994
Outstanding shares - 29,016,101; 28,896,917
in 1994 0.3 0.3
Paid-in Capital 447.3 447.3
ESOP Stock and Stock Held in Treasury (42.2) (45.4)
Retained Earnings 185.6 186.8
Total Stockholders' Equity 591.0 589.0
$1,558.7 $1,620.8
See accompanying Notes to Consolidated Financial Statements.
DIAMOND SHAMROCK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(dollars in millions)
Three Months Ended
March 31,
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5.4 $ 12.2
Adjustments to arrive at net cash provided
by operating activities:
Depreciation 18.7 17.0
Deferred income taxes 3.2 8.5
Loss on sale of properties and equipment 0.0 0.4
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 6.5 1.2
Decrease (increase) in inventories 87.5 6.2
Decrease (increase) in prepaid expenses 3.4 2.6
Increase (decrease) in accounts payable (82.1) 6.6
Increase (decrease) in taxes payable (3.4) (0.2)
Increase (decrease) in accrued liabilities (14.7) 17.4
Other, net 1.5 0.7
NET CASH PROVIDED BY OPERATING ACTIVITIES 26.0 72.6
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of properties and equipment 0.0 0.7
Purchase of properties and equipment (51.5) (33.2)
Expenditures for investments (0.2) (1.6)
NET CASH (USED IN) INVESTING ACTIVITIES (51.7) (34.1)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increases in long-term debt 138.9 50.2
Repayments of long-term debt (116.0) (76.2)
Payments of long-term liability (3.0) (2.6)
Issuance of Common Stock - 0.9
Sale of Common Stock held in treasury - 0.1
Dividends paid (5.1) (4.8)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 14.8 (32.4)
Net increase (decrease) in cash and cash equivalents (10.9) 6.1
Cash and cash equivalents at beginning of period 27.4 12.8
Cash and cash equivalents at end of period $ 16.5 $ 18.9
In January 1995, the Company acquired a portion of a crude oil import and
storage terminal in a non-cash transaction under an installment purchase
arrangement. The purchase price was $12.0 million.
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, 1995 and for the three
months ended March 31, 1995 and 1994 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 1994 Annual Report to Stockholders and incorporated by reference into the
Company's Annual Report on Form 10-K for the year ended December 31, 1994 (the
"1994 Form 10-K").
With respect to the unaudited consolidated financial information of the Company
as of March 31, 1995, and for the three months ended March 31, 1995 and 1994,
Price Waterhouse LLP 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, 1995,
inventories of crude oil and refined products of the Refining and Wholesale
segment were valued at market values (lower than LIFO cost). Motor fuel
products of the Retail segment, and propylene products in the Allied Businesses
segment were recorded at their LIFO costs. Costs of all other inventories are
determined on an average cost method.
3. Long-term Debt
As of March 31, 1995, the Company had outstanding $150.0 million of debt
designated as the 10.75% Senior Notes, $30.0 million of which was payable within
one year. On May 1, 1995, the Company refinanced the $30.0 million repayment
using credit facilities which are classified as long-term debt. Therefore, the
current portion of the 10.75% Senior Notes outstanding as of March 31, 1995 was
classified as long-term debt.
4. 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 1994
Form 10-K). The Company's total liability for such shared costs is limited to
$85.0 million. The Company has reimbursed Maxus for a total of $66.6 million as
of March 31, 1995, including $3.0 million paid during the three months ended
March 31, 1995. See Note 3 of the 1994 Form 10-K for a discussion of the change
in the method of accounting for the liability.
REVIEW BY INDEPENDENT ACCOUNTANTS
With respect to the unaudited consolidated financial information of the Company
as of March 31, 1995 and the three months ended March 31, 1995 and 1994, Price
Waterhouse LLP reported that they have applied limited procedures in accordance
with professional standards for a review of such information. However, their
separate report dated May 11, 1995, appearing below, states that they did not
audit and they do not express an opinion on that unaudited consolidated
financial information. Price Waterhouse LLP 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 LLP 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 LLP 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. (the "Company") and its
subsidiaries as of March 31, 1995 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 of the Company as of December 31, 1994, 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 24, 1995,
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, 1994, is fairly stated in all material respects in relation
to the consolidated balance sheet from which it has been derived.
/S/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
San Antonio, Texas
May 11, 1995
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, 1995 and 1994. 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,
1995 1994
Sales and Operating Revenues:
Refining and Wholesale $ 324.8 $ 304.0
Retail 247.4 212.4
Allied Businesses 104.5 67.4
Total Sales and Operating Revenues $ 676.7 $ 583.8
Operating Profit:
Refining and Wholesale $ 8.4 $ 32.4
Retail 15.1 8.2
Allied Businesses 13.1 4.4
Total Operating Profit $ 36.6 $ 45.0
Consolidated Results First Quarter 1995 vs 1994
Sales and operating revenues of $676.7 million for the first quarter of 1995
were 15.9% higher than in the same period of 1994, due to a 55.0% increase in
Allied Businesses sales, reflecting a $23.5 million increase in polymer grade
propylene sales prices and volumes. Also contributing to the increase in sales
and operating revenues was a 13.1% and a 6.7% increase in retail gasoline sales
prices and volumes, respectively, and a 9.5% increase in refined products sales
prices compared to the first quarter of 1994.
During the first quarter of 1995, the Company had net income of $5.4 million
compared to net income of $12.2 million in the 1994 first quarter. The
Company's first quarter results were negatively impacted by lower refinery
margins. Partially offsetting the decrease in refining margins during the first
quarter of 1995 was an improvement in the demand for polymer grade propylene in
the Company's Allied Businesses segment and an 18.9% increase in retail fuel
margins compared to the first quarter of 1994.
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, 1995,
inventories of crude oil and refined products of the Refining and Wholesale
segment were valued at market values (lower than LIFO cost). Motor fuel
products of the Retail segment, and propylene products in the Allied Businesses
segment were recorded at their LIFO costs. All other inventories are determined
on an average cost method.
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 positive $1.8 million and a negative $5.3 million in the first quarters of
1995 and 1994, respectively.
Segment Results First Quarter 1995 vs First Quarter 1994
During the first quarter of 1995 the Refining and Wholesale segment had sales
and operating revenues of $324.8 million compared to $304.0 million during the
first quarter of 1994. The increase in sales and operating revenues was
primarily due to a 9.5% increase in refined product sales prices. Operating
profit in the first quarter of 1995 decreased $24.0 million from the first
quarter of 1994, primarily due to a 43.5% decrease in refinery margins from the
same period a year ago. Industry refining margins during the first quarter were
the weakest in recent years, reflecting a surplus of heating oil because of the
extremely mild winter and confusion in the new reformulated gasoline ("RFG")
market as several areas opted out, or attempted to opt out, of the RFG
requirements.
The Retail segment in the first quarter of 1995 reflected a 16.5% increase in
sales and operating revenues. Such increase was primarily due to a 13.1% and a
6.7% increase in retail gasoline prices and volumes, respectively. Operating
profit in the first quarter of 1995 was $15.1 million compared to $8.2 million
in the first quarter of 1994. The increase was primarily due to an 18.9% and a
6.3% increase in retail gasoline and merchandise margins, respectively.
During the first quarter of 1995, the Allied Businesses segment reflected an
increase in sales and operating revenues of 55.0%, primarily due to a $23.5
million increase in sales volumes and prices in the Company's propane/propylene
business, reflecting continued strong demand for polymer grade propylene. Also
contributing to the increase in sales and operating revenues was a 28.7%
increase from the Company's natural gas liquids marketing business, reflecting a
16.6% and a 10.4% increase in natural gas liquids sales volumes and prices,
respectively. Operating profits were $13.1 million for the first quarter of
1995 compared to $4.4 million in the first quarter of 1994. Operating profits
increased primarily due to a $6.1 million and a $3.3 million increase in
operating profit from the Company's propane/propylene and Nitromite fertilizer
businesses, respectively.
The outlook for the refining and marketing industry for the rest of 1995 is
positive. Refining margins are already showing significant improvement as
gasoline demand remains strong. Based on the expectation of continued strong
demand for gasoline, spurred by a growing economy and industry-wide low gasoline
inventory levels, refining margins are expected to improve even further as the
summer driving season approaches. Additionally, the Company's recently
completed Corpus Christi crude oil terminal and related pipeline to Three
Rivers, as well as product pipelines and refinery projects planned for
completion in 1995, will continue to improve the Company's refining margins
relative to the industry.
Liquidity and Capital Resources
Cash Flow and Working Capital
For the three months ended March 31, 1995, cash provided by operations was $26.0
million, compared with $72.6 million in the same period of 1994.
Working capital at March 31, 1995 was down $8.1 million from December 31, 1994,
and consisted of current assets of $432.1 million and current liabilities of
$273.9 million, or a current ratio of 1.6. At December 31, 1994, current assets
were $540.4 million and current liabilities were $374.1 million, or a current
ratio of 1.4. The decrease in working capital in the first quarter of 1995 was
primarily due to a 30.1% decrease in inventories. Crude oil inventories were
higher than normal at December 31, 1994, primarily due to the Company's decision
to purchase additional crude oil in December 1994 in order to overcome potential
supply disruptions caused by the implementation of the Oil Pollution Act of
1990. The 41.2% decrease in accounts payable reflected the payment in the first
quarter of 1995 for the additional crude oil purchased in December 1994 and the
return to lower inventory levels.
Capital Expenditures
In recent years capital expenditures have represented a variety of projects
designed to expand and maintain up-to-date refinery facilities, improve terminal
and distribution systems, modernize and expand retail outlets, comply with
environmental regulatory requirements, and pursue new ventures in related
businesses.
The Company's capital expenditures budget for 1995 has been increased to
approximately $250.0 million from an earlier estimate of $225.0 million. Such
increases are primarily attributable to the recently announced plans to
construct a second 730 million pound per year propylene splitter at Mont
Belvieu, scheduled to begin the second quarter of 1995 with completion slated
for the fourth quarter of 1996, and a terminal at El Paso and pipeline from
McKee. Also included in the Company's 1995 capital expense budget are amounts
associated with the Company's decision to own outright rather than lease more of
the retail outlets to be built or acquired in 1995.
The Company announced in February 1995 plans to increase the capacity and
efficiency of its Three Rivers, Texas refinery with an expansion of the crude
unit and construction of a DeMetalized Oil (DMO) hydrotreater, a hydrogen plant,
and a sulfur recovery plant. The expansion will increase the capacity of the
refinery from 72,000 barrels per day to 85,000 barrels per day and allow heavy
oils to be upgraded to more profitable products. The project, which is
scheduled to begin in the spring of 1995 with completion slated for the second
quarter of 1996, will increase the production of gasoline and diesel at the
refinery by about 10 percent. The Company also announced in February that it is
expanding operations at its Mont Belvieu hydrocarbon facility. As part of the
expansion project, the Company recently completed drilling a brine production
well at the facility's East Terminal and purchased four underground storage
wells at the facility's West Terminal from Enron. In addition, the Company is
installing pumping and metering equipment at both terminals.
The Company's capital and investment expenditures during 1994 were $162.1
million. The Company's capital expenditures were $63.5 million during the first
three months of 1995, including a non-cash investment of $12.0 million for the
crude oil terminal acquired under an installment purchase.
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 expand its retail marketing business in the first three
months of 1995 with the acquisition of 21 outlets in New Mexico. In addition,
the Company opened 9 new outlets through March 31, 1995. The newly opened
outlets are leased by the Company under a pre-existing long-term lease
arrangement. The Company has leased approximately $163.9 million in retail
outlets and related equipment under these arrangements. At March 31, 1995,
approximately $26.1 million of the $190.0 million commitment remained available
to construct and/or acquire retail outlets. The Company presently anticipates
leasing approximately 8 to 10 additional outlets during 1995.
On February 13, 1995, the Company issued $75.0 million in non-callable
debentures due June 15, 2015. The proceeds from the issuance of the debentures
were and will continue to be used for general corporate purposes, including
payment of a scheduled $30.0 million principal installment on the Company's
10.75% Senior Notes, and to fund anticipated capital expenditures in 1995.
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
10.1 Second Amendment to Ground Lease Agreement between Brazos River
Leasing L.P. and Diamond Shamrock Refining and Marketing Company
dated as of June 1, 1994.
10.2 Second Amendment to Facilities Lease Agreement between Brazos River
Leasing L.P. and Diamond Shamrock Refining and Marketing Company
dated as of June 1, 1994.
10.3 Fourth Amendment to Ground Lease Agreement between Brazos River
Leasing L.P. and Diamond Shamrock Refining and Marketing Company
dated as of September 16, 1994.
10.4 Fourth Amendment to Facilities Lease Agreement between Brazos River
Leasing L.P. and Diamond Shamrock Refining and Marketing Company
dated as of September 16, 1994.
15.1 Independent Accountants' Awareness Letter
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Reports on Form 8-K were filed by the Company in the first quarter
of 1995, on January 25, 1995 and on February 6, 1995.
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 11, 1995