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 September 30, 1996
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 October 31, 1996: 29,298,218
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 Nine Months
Ended Ended
September 30, September 30,
1996 1995(a) 1996 1995(a)
REVENUES
Sales and operating revenues $1,236.5 $ 941.7 $3,639.1 $2,769.3
Other revenues, net 7.1 4.6 21.6 13.0
1,243.6 946.3 3,660.7 2,782.3
COSTS AND EXPENSES
Cost of products sold 777.8 574.4 2,325.3 1,676.3
Operating expenses 164.4 106.3 460.2 304.7
Depreciation and amortization 26.5 19.4 78.2 57.5
Selling and administrative 23.3 21.9 71.3 61.5
Taxes other than income taxes 209.7 205.3 603.1 587.2
Interest 18.6 11.2 55.0 34.0
1,220.3 938.5 3,593.1 2,721.2
Income Before Tax Provision 23.3 7.8 67.6 61.1
Provision for Income Taxes 9.7 2.1 28.1 21.9
Net Income 13.6 5.7 39.5 39.2
Dividend Requirement
on Preferred Stock 1.1 1.1 3.2 3.2
Earnings Applicable to
Common Shares $ 12.5 $ 4.6 $ 36.3 $ 36.0
Primary Earnings
Per Share $ 0.43 $ 0.16 $ 1.23 $ 1.24
Fully Diluted Earnings
Per Share $ 0.42 $ 0.16 $ 1.21 $ 1.22
Cash Dividends Per Share
Common $ 0.14 $ 0.14 $ 0.42 $ 0.42
Preferred $ 0.625 $ 0.625 $ 1.875 $ 1.875
Weighted Average Common Shares
Outstanding (thousands of shares)
Primary 29,408 29,130 29,390 29,103
Fully Diluted 32,699 32,385 32,692 32,376
(a) Reclassified to conform to 1996 presentation, to include excise
taxes as a component of sales: Excise taxes for the three months ended
September 30, 1996-$197.3 million; 1995-$195.4 million, and for the nine
months ended September 30, 1996-$568.9 million; 1995-$556.6 million.
(See Note 2)
See accompanying Notes to Consolidated Financial Statements.
DIAMOND SHAMROCK, INC.
CONSOLIDATED BALANCE SHEET
(dollars in millions, except per share data)
September 30, December 31,
1996 1995
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 49.5 $ 48.6
Receivables, less doubtful receivables
of $7.2; $7.1 in 1995 222.4 213.0
Inventories
Finished products 196.8 204.1
Raw materials 95.8 137.4
Supplies 33.8 34.5
326.4 376.0
Prepaid expenses and other current assets 12.5 17.3
Total Current Assets 610.8 654.9
Properties and Equipment, less accumulated
depreciation of $748.2; $684.2 in 1995 1,405.8 1,357.1
Excess of Cost over Acquired Net Assets,
less accumulated amortization
of $6.0; $0.3 in 1995 154.1 160.1
Deferred Charges and Other Assets 70.1 73.3
$ 2,240.8 $ 2,245.4
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Long-term debt payable within one year $ 4.5 $ 7.2
Accounts payable 179.9 274.3
Accrued taxes 73.9 71.0
Other accrued liabilities 123.5 137.0
Total Current Liabilities 381.8 489.5
Long-term Debt 1,014.2 957.5
Deferred Income Taxes 67.6 58.6
Other Liabilities and Deferred Credits 118.7 115.1
Stockholders' Equity
Preferred Stock, $.01 par value
Authorized shares - 25,000,000
Issued and Outstanding shares - 1,725,000;
1,725,000 in 1995 0.0 0.0
Common Stock, $.01 par value
Authorized shares - 75,000,000
Issued shares - 29,302,321; 29,035,853
in 1995
Outstanding shares - 29,302,321; 28,994,715
in 1995 0.3 0.3
Paid-in Capital 457.4 447.8
ESOP Stock and Stock Held in Treasury (34.4) (37.4)
Retained Earnings 235.2 214.0
Total Stockholders' Equity 658.5 624.7
$ 2,240.8 $ 2,245.4
See accompanying Notes to Consolidated Financial Statements.
DIAMOND SHAMROCK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(dollars in millions)
Nine Months Ended
September 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 39.5 $ 39.2
Adjustments to arrive at net cash provided
by operating activities:
Depreciation and amortization 78.2 57.5
Deferred income taxes 12.2 4.0
Loss on sale of properties and equipment 0.2 1.0
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (9.4) 29.0
Decrease (increase) in inventories 49.6 29.9
Decrease (increase) in prepaid expenses 4.8 (6.1)
Increase (decrease) in accounts payable (97.1) (56.2)
Increase (decrease) in taxes payable 4.6 (5.6)
Increase (decrease) in accrued liabilities (13.5) (14.7)
Other, net 4.7 14.1
NET CASH PROVIDED BY OPERATING ACTIVITIES 73.8 92.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of properties and equipment 21.0 0.7
Purchase of properties and equipment (135.8) (171.6)
Expenditures for investments (4.3) (2.1)
NET CASH (USED IN) INVESTING ACTIVITIES (119.1) (173.0)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increases in long-term debt 294.0 312.7
Repayments of long-term debt (237.3) (214.5)
Payments of long-term liability (2.1) (8.2)
Funds received from ESOP 2.1 2.8
Sale of Common Stock 6.1 0.2
Sale of Common Stock held in treasury 1.0 0.3
Dividends paid (15.5) (15.4)
Other, net (2.1) -
NET CASH PROVIDED BY FINANCING ACTIVITIES 46.2 77.9
Net increase (decrease) in cash and cash equivalents 0.9 (3.0)
Cash and cash equivalents at beginning of period 48.6 27.4
Cash and cash equivalents at end of period $ 49.5 $ 24.4
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 September 30, 1996 and
for the three months and nine months ended September 30, 1996 and
1995 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 Company's 1995 Annual Report on Form
10-K/A (filed on October 1, 1996, the "1995 Form 10K").
With respect to the unaudited consolidated financial information of
the Company as of September 30, 1996, and for the three months and
nine months ended September 30, 1996 and 1995, 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. Classification of Excise Taxes
Beginning in 1996, the Company includes federal excise taxes and
state motor fuel taxes in Sales and operating revenues and in Costs
and expenses for financial reporting purposes. The results of
operations for the three months and nine months ended September 30,
1995 have been reclassified to conform to the 1996 presentation.
The amount of such taxes for the three months ended September 30,
1996 and 1995, is $197.3 million and $195.4, respectively. The
amount of such taxes for the nine months ended September 30, 1996
and 1995, is $568.9 million and $556.6, respectively. Neither
operating profits nor net income are affected by the
reclassification of such taxes.
3. Acquisition
On December 14, 1995, the Company completed the acquisition of
National Convenience Stores Incorporated ("NCS") (see footnote 4 of
the 1995 Form 10-K). The acquisition was accounted for under the
purchase method. Consequently, the operating results of NCS are
included in the third quarter and first nine months Consolidated
Statement of Income and the Consolidated Statement of Cash Flows
for 1996, but not for 1995. The amount of NCS sales included in
the 1996 third quarter and first nine months Consolidated Statement
of Operations is $253.3 million and $643.3 million, respectively.
4. Inventories
Inventories are valued at the lower of cost or market with cost
determined primarily under the Last-in, First-out (LIFO) method.
At September 30, 1996, current costs exceeded the LIFO cost of
inventories by $12.6 million. At December 31, 1995 current costs
were lower than LIFO cost by $16.0 million. Costs of all other
inventories are determined on an average cost method.
5. Long-term Debt
The Company currently has outstanding $90.0 million of debt
designated as the 10.75% Senior Notes. As of May 1, 1996, $30.0
million of the long-term debt became payable within one year.
Since the Company intends to refinance the $30.0 million repayment
by the use of commercial paper or other credit facilities which
would be classified as long-term, and the Company has the ability
to do so, the current portion of the long-term debt payable on
April 30, 1997 has been classified as long-term debt.
6. 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 17 of the 1995 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 $82.2
million as of September 30, 1996, including $7.3 million paid
during the nine months ended September 30, 1996. See Note 3 of the
1995 Form 10-K for a discussion of the change in the method of
accounting for the liability.
7. Merger
On September 23, 1996, the Company announced that it had entered
into a definitive merger agreement pursuant to which it would merge
with and into Ultramar Corporation. The agreement provides that,
upon closing, the holders of the Company's common stock will
receive 1.02 shares of Ultramar common stock for each share of the
Company's common stock held. The transaction is expected to be
recorded as a "pooling of interests" and the name of the combined
company will be Ultramar Diamond Shamrock Corporation. The merger
is is expected to occur on December 3, 1996.
REVIEW BY INDEPENDENT ACCOUNTANTS
With respect to the unaudited consolidated financial information of
the Company as of September 30, 1996 and the three months and nine
months ended September 30, 1996 and 1995, 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 November 13, 1996, 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 September 30, 1996 and for
the three months and nine months ended September 30, 1996 and 1995.
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, 1995, 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 23, 1996, except as to
the last paragraph of Note 2 (which describes the Company's
reclassification of excise and motor fuel taxes), for which our
report is dated as of September 27, 1996, 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, 1995, 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
November 13, 1996
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
On September 23, 1996, the Company announced that it had entered
into a definitive merger agreement pursuant to which it would merge
with and into Ultramar Corporation. The agreement provides that,
upon closing, the holders of the Company's common stock will
receive 1.02 shares of Ultramar common stock for each share of the
Company's common stock held. The transaction is expected to be
recorded as a "pooling of interests" and the name of the combined
company will be Ultramar Diamond Shamrock Corporation. The merger
is pending and is expected to occur on December 3, 1996.
Results of Operations
The following are the Company's sales and operating revenues and
operating profit for the three months and nine months ended
September 30, 1996 and 1995. 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 Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
Sales and Operating Revenues:
Refining and Wholesale $ 503.6 $ 467.8(1) $ 1,511.9 $1,359.1(1)
Retail 619.9 389.9(1) 1,829.4 1,115.0(1)
Allied Businesses 113.0 84.0 297.8 295.2
Total Sales and
Operating Revenues $1,236.5 $ 941.7 $ 3,639.1 $2,769.3
Operating Profit:
Refining and Wholesale $ 38.4 $ 5.9 $ 109.6 $ 60.5
Retail 16.6 19.8 48.6 46.8
Allied Businesses 7.2 11.2 25.5 39.6
Total Operating Profit $ 62.2 $ 36.9 $ 183.7 $ 146.9
(1) Reclassified to conform to 1996 presentation, including excise taxes
as a component of sales.
Consolidated Results Third Quarter 1996 vs Third Quarter 1995
Sales and operating revenues of $1,236.5 million for the third
quarter of 1996 were 31.3% higher than in the same period of 1995,
primarily due to the acquisition of National Convenience Stores
Incorporated ("NCS") in mid-December 1995 which contributed $253.3
million in sales and operating revenues for the quarter. Excluding
the impact of the NCS acquisition, sales and operating revenues for
the third quarter of 1996 increased 4.4% primarily due to a 17.5%
and an 8.4% increase in refined product sales prices and volumes,
respectively, in the Refining and Wholesale segment. In addition,
sales and operating revenues increased 34.5% in the Allied
Businesses segment, primarily due to a 33.4% and a 13.6% increase
in natural gas liquids prices and volumes, respectively, and an
86.6% increase in polymer grade propylene sales volumes due to
increased demand.
During the third quarter of 1996, the Company had net income of
$13.6 million compared to net income of $5.7 million in the 1995
third quarter. The increase in net income is primarily due to a
25.2% increase in refining margins. An increase in the market
value of refinery inventories due primarily to crude oil price
increases in the third quarter of 1996 also had a positive impact
on net income. Fluctuations in the market value of refinery
inventories had the opposite impact on the third quarter 1995 net
income. Partially offsetting these increases were lower operating
profits in the Company's propane/propylene business.
Inventories are valued at the lower of cost or market with cost
determined primarily under the Last-in, First-out (LIFO) method.
At September 30, 1996, current costs exceeded the LIFO cost of
inventories by $12.6 million. At December 31, 1995 current costs
were lower than LIFO cost by $16.0 million. Costs of 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 $4.0 million and negative $6.8 million in the third
quarters of 1996 and 1995, respectively.
Consolidated Results First Nine Months 1996 vs First Nine Months
1995
Sales and operating revenues of $3,639.1 million for the first nine
months of 1996 were $869.8 million higher than for the same period
of 1995, primarily due to the acquisition of NCS in mid-December
1995 which contributed $643.3 million in sales and operating
revenues for the period. Excluding the impact of the NCS
acquisition, sales and operating revenues for the first nine months
of 1996 increased 8.2%, primarily due to a 13.6% and a 10.6%
increase in wholesale refined product sales prices and volumes,
respectively, in the Refining and Wholesale segment. Also
contributing to the increase in sales and operating revenues was a
4.9% and a 2.0% increase in retail gasoline sales prices and
volumes, respectively, from the Corner Store retail outlets.
During the first nine months of 1996, the Company had net income of
$39.5 million compared to net income of $39.2 million in the first
nine months of 1995. An increase in refinery margins during the
first nine months was offset by a decrease in demand for polymer
grade propylene and ammonia fertilizer in the Company's Allied
Businesses. An increase in the value of refinery inventories due
primarily to crude oil price increases in the first nine months of
1996 also had a positive impact on net income. The estimated after
tax impact of the change in inventory values was a positive $6.0
million and $2.9 million in the first nine months of 1996 and 1995,
respectively.
Segment Results Third Quarter 1996 vs Third Quarter 1995
During the third quarter of 1996, the Refining and Wholesale
segment had sales and operating revenues of $503.6 million compared
to $467.8 million during the third quarter of 1995. Sales and
operating revenues increased primarily due to an increase in
refined product prices and volumes. Operating profit in the third
quarter of 1996 increased $32.5 million from the third quarter of
1995, primarily due to a 25.2% increase in refinery margins from
the same period a year ago. An increase in the value of refinery
inventories due primarily to crude oil price increases in the third
quarter of 1996 also had a positive impact on net income.
The Retail segment in the third quarter of 1996 reflected a 59.0%
increase in sales and operating revenues over the third quarter of
1995, primarily due to the acquisition of NCS and its 661 retail
outlets in mid-December 1995. Excluding the impact of the NCS
acquisition, sales and operating revenues for the third quarter of
1996 increased 2.4%, primarily due to a 6.4% increase in retail
gasoline sales prices. Operating profit in the third quarter of
1996 was $16.6 million compared to $19.8 million in the third
quarter of 1995. The decrease in operating profit was primarily
due to an 10.7% decrease in retail fuel margins, partially offset
by a 2.3% increase in merchandise margins compared to the third
quarter of 1995.
During the third quarter of 1996, the Allied Businesses segment
reflected an increase in sales and operating revenues of 34.5% as
compared to the third quarter of 1995. This increase was primarily
due to a 51.5% increase in sales and operating revenues from the
Company's natural gas liquids marketing business, reflecting a
33.4% and a 13.6% increase in natural gas liquids sales prices and
volumes, respectively. Also contributing to this increase was a
62.0% increase in sales and operating revenues from the Company's
propane/propylene business, reflecting increased demand compared to
the third quarter of 1995. Operating profits were $7.2 million for
the third quarter of 1996 compared to $11.2 million in the third
quarter of 1995. Operating profits decreased primarily due to a
decrease in margins in the Company's propane/propylene business,
and decreased demand for ammonia fertilizer compared to the third
quarter of 1995.
Segment Results First Nine Months 1996 vs First Nine Months 1995
Sales and operating revenues from the Refining and Wholesale
segment were $1,511.9 million in the first nine months of 1996
compared to $1,359.1 million during the first nine months of 1995.
The increase in sales and operating revenues was primarily due to
a 13.6% and a 10.6% increase in wholesale refined product sales
prices and volumes, respectively. Operating profit in the first
nine months of 1996 was $109.6 million compared to $60.5 million in
the first nine months of 1995. The increase in operating profit
was primarily due to a 19.2% increase in refinery margins from the
same period a year ago. Refinery margins increased significantly
late in the first quarter of 1996, decreased somewhat in the second
quarter and increased again late in the third quarter, as volatile
and rising crude oil prices continued to have a significant impact
on refining margins during the first nine months of 1996.
The Retail segment results for the first nine months of 1996
reflected a 64.1% increase in sales and operating revenues,
primarily due to the acquisition of NCS in mid-December 1995 which
has contributed $643.3 million in sales and operating revenues for
the period. Excluding the impact of the NCS acquisition, sales and
operating revenues for the first nine months of 1996 increased
6.4%, primarily due to a 4.9% and a 2.0% increase in retail
gasoline sales prices and volumes, respectively. Also contributing
to the increase in sales and operating revenues was a 4.8% increase
in Corner Store merchandise sales. Operating profit in the first
nine months of 1996 was $48.6 million compared to $46.8 million in
the first nine months of 1995. Operating profit increased
primarily due to increased retail gasoline sales volumes and
prices, and a 139.1% increase in merchandise sales, reflecting the
contributions from the NCS acquisition. Partially offsetting these
increases was an 11.4% decrease in retail fuel margins compared to
the first nine months of 1995 as the retail segment was unable to
completely recoup the rising wholesale fuel costs resulting from
higher crude prices compared to the same period a year ago.
The Allied Businesses segment results reflected an increase in
sales and operating revenues of 0.9% to $297.8 million in the first
nine months of 1996 as compared to the same period in 1995. This
increase was primarily due to a 19.7% increase in sales in the
Company's natural gas liquids business, reflecting a 20.0% increase
in natural gas liquids sales prices. Partially offsetting this
increase in sales and operating revenues was a 10.9% decrease in
sales and operating revenues for the Company's propane/propylene
business, reflecting decreased sales prices attributable to reduced
demand for polymer grade propylene. Operating profits were $25.5
million for the first nine months of 1996 compared to $39.6 million
in 1995. Operating profits decreased primarily due to a $9.3
million and a $3.9 million decrease in operating profit from the
Company's propane/propylene and ammonia fertilizer businesses,
respectively, reflecting decreased demand for polymer grade
propylene and ammonia fertilizer.
Outlook
Although refining margins were under pressure in the third quarter,
industry fundamentals remain strong. U.S. gasoline inventories
continue to trend downward and gasoline demand is expected to rise
with the growing economy.
U.S. distillate demand for 1996 is at historically high levels due
to both the cold winter and the increase in the use of on-highway
diesel. Distillate inventories usually build significantly during
the summer months, but this has not been the case in 1996. In
fact, distillate inventories are at historically low levels,
although recent reports have shown increases in domestic distillate
inventories.
Refinery utilization rates remain high. Conversion capacity is
expected to grow, but at a more moderate rate than the last several
years due to the decline in capital expenditures for the industry.
There is still concern about the volatility of crude prices. The
impact of Iraqi crude entering the market and the effect it will
have on the price of crude remains unclear at this time.
Liquidity and Capital Resources
Cash Flow and Working Capital
For the nine months ended September 30, 1996, cash provided by
operations was $73.8 million, compared with $92.1 million in the
same period of 1995.
Working capital at September 30, 1996 was up $63.6 million from
December 31, 1995, and consisted of current assets of $610.8
million and current liabilities of $381.8 million, or a current
ratio of 1.6. At December 31, 1995, current assets were $654.9
million and current liabilities were $489.5 million, or a current
ratio of 1.3. The increase in working capital was primarily due to
a 34.4% and a 10.4% decrease in accounts payable and accrued
liabilities, respectively. The decrease in current liabilities was
partially offset by a 13.2% decrease in inventories. In addition,
receivables increased during the first nine months of 1996,
primarily due to increased refined product sales prices and
volumes.
Capital Expenditures
In recent years, capital expenditures have related to 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, acquire businesses, and pursue new ventures in
related businesses.
Although the Company intends to continue to pursue acquisitions and
other capital investment opportunities as those opportunities
arise, the Company's near-term objective is to reduce its total
debt to pre-NCS acquisition levels by year end 1997, primarily
through cash flow generated from operations and the sale of non-strategic
assets. In addition, the Company has reduced its capital
expenditure budget compared to recent years so that revised capital
spending plans are approximately $160.0 million in 1996 and $140.0
million in 1997 (1997 budget subject to final approval). Capital
spending plans include the rebranding and integration of the NCS
stores into the Company's systems as well as the construction of
additional retail stores, principally in Arizona. The Company has
completed the rebranding of the NCS gasoline retail outlets. This
rebranding and integration program included signage on the street
and at the pump, and upgraded security, computerization, and store
interiors.
Expansion and upgrading projects begun in 1995 at the Company's
Three Rivers refinery will be completed in 1996, and include the
recently completed heavy gas oil hydrotreater that was put on-stream in the
third quarter of 1996. These projects will increase
the capacity of the refinery from 75,000 to 85,000 barrels per day
and will allow heavy oils to be upgraded to higher value refined
products.
In addition, expenditures continue at Three Rivers on the
previously announced benzene, toluene, and xylene ("BTX")
extraction unit, which will produce high value petrochemical
feedstocks. Once completed in 1997, the BTX unit will give the
Company the flexibility to shift certain components out of the
gasoline pool into more attractively priced petrochemical
feedstocks. Finally, the 1996 capital budget also includes
construction of a second 730 million pound per year propylene
splitter at Mont Belvieu which was completed in August 1996.
The Company's capital and investment expenditures during the first
nine months of 1996 were $139.6 million. The Company's capital
expenditures were $183.6 million during the first nine months of
1995, including a non-cash investment of $12.0 million for the
Corpus Christi crude oil terminal acquired under an installment
purchase arrangement.
The Company anticipates continued consolidation in the industries
in which it operates. The Company expects from time to time to
consider acquisition and other investment opportunities in the
Company's core refining and marketing businesses and in the
downstream petrochemicals area as opportunities may arise.
Although it is presently the Company's goal to reduce debt in 1996,
if its assumptions regarding operating results or capital
requirements change, the Company believes that it has adequate
financial flexibility through its bank credit, bank money market,
commercial paper facilities, and access to the capital markets to
refinance existing debt or otherwise meet its financial
requirements.
In June 1996, the Company issued $100.0 million in 7.65% debentures
due July 1, 2026. The proceeds from the issuance of the debentures
were used to re-pay outstanding short term debt.
In June, July and October 1996, the Company completed the sale of
7, 27, and 43 non-strategic retail outlets, respectively. In
addition, the Company opened 14 retail outlets and closed 17
marginal retail outlets during the first nine months of 1996.
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, while
the Company does not have any major capital programs underway
designed to satisfy these requirements, 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 1. Legal Proceedings
On August 21, 1996, the Texas Natural Resources Conservation
Commission approved an Agreed Order assessing a $995,000 penalty
with a remittance of $596,440 against the Company based on
completion of two Supplemental Environmental Projects by the
Company: one providing funding for the City of Dumas to repair and
upgrade its wastewater treatment plant with the Company
contributing $320,400 to the City for $320,442 in penalty
remittance, and the other replacing underground petroleum piping
with above ground piping at Three Rivers and McKee, with the
Company's pending $1,946,000 for $276,000 in penalty remittance.
Item 2. Changes in Securities
The Rights Agreement between the Company and Ameritrust
Company National Association was amended effective September 22,
1996, to make the Rights outstanding in connection with the
Company's common stock inapplicable to the Agreement and Plan of
Merger, dated as of September 22, 1996 between Ultramar Corporation
and the Company, and inapplicable to the stock option agreement
executed in connection with such merger agreement, pursuant to
which Ultramar Corporation was granted the right to purchase
5,858,500 shares of the Company's common stock, for the price and
under the conditions set out in such option agreement.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Amendment to Rights Agreement between the Company and Ameritrust
Company National Association, as described in the Company's
filing on Form 8-A/A, filed October 23, 1996 and incorporated
herein by reference.
10.1 Agreement and Plan of Merger, dated September 22, 1996, by and
among Ultramar Corporation and the Company, filed as Exhibit
to the Company's Report on Form 8-K filed on September 25,
1996 and incorporated herein by reference.
10.2 Supplemental Executive Retirement Plan, as amended through
July 22, 1996.
10.3 Performance Incentive Plan, as amended through July 22, 1996.
10.4 Form of Disability Benefit Agreement.
10.5 Form of Supplemental Death Benefit Agreement.
10.6 Excess Benefit Plan of the Company, as amended through
July 22, 1996.
10.7 Director s Retirement Plan of the Company, as amended through
July 22, 1996.
10.8 1987 Long Term Incentive Plan of the Company, as amended through
July 22, 1996.
10.9 Diamond Shamrock, Inc. Long-Term Incentive Plan, as amended through
August 15, 1996.
15.1 Independent Accountants Awareness Letter
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on, September 26, 1996
and October 10, 1996.
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)
November 13, 1996
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