FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period _______ to _______.
For Quarter Ended September 30, 1994 Commission File Number: 1-10398
GIANT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0642718
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23733 North Scottsdale Road, Scottsdale, Arizona 85255
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 585-8888
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.
Yes [X] No [ ]
Number of Common Shares outstanding at October 31, 1994: 12,075,870
shares.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1994 (Unaudited) and December 31, 1993
Condensed Consolidated Statements of Earnings (Loss) (Unaudited)
Three and Nine Months Ended September 30, 1994 and 1993
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1994 and 1993
Notes to Condensed Consolidated Financial
Statements (Unaudited)
Computation of Per Share Data (Exhibit 11)
Financial Data Schedule (Exhibit 27)
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURE
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, 1994 December 31, 1993
------------------ -----------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 8,454 $ 19,807
Marketable securities 35,243 36,146
Accounts receivable, net 13,861 15,082
Insurance claim receivable 1,000
Income tax refunds receivable 198 254
Inventories 31,284 23,341
Prepaid expenses and other 1,496 3,571
Deferred income taxes 3,499 3,749
--------- ---------
Total current assets 95,035 101,950
--------- ---------
Property, plant and equipment 311,243 292,519
Less accumulated depreciation,
depletion and amortization (144,273) (130,276)
--------- ---------
166,970 162,243
--------- ---------
Other assets 12,577 15,106
--------- ---------
$ 274,582 $ 279,299
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 4,016 $ 3,035
Accounts payable 14,328 14,883
Accrued expenses 14,804 19,725
--------- ---------
Total current liabilities 33,148 37,643
--------- ---------
Long-term debt, net of current portion 116,325 117,270
Deferred income taxes 14,116 15,850
Other liabilities 3,529 2,622
Common stockholders' equity 107,464 105,914
--------- ---------
$ 274,582 $ 279,299
========= =========
See accompanying notes to condensed consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(Unaudited)
(In thousands except shares and per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1994 1993 1994 1993
------------------------- -------------------------
Net revenues $ 77,461 $ 81,878 $ 215,541 $ 245,160
----------- ----------- ----------- -----------
Cost of products sold 54,215 53,441 143,602 165,003
Reduction of carrying value
of oil and gas properties 3,395 3,395
Operating expenses 20,670 18,283 58,224 53,801
Interest expense, net 2,984 895 7,698 2,806
----------- ----------- ----------- -----------
81,264 72,619 212,919 221,610
----------- ----------- ----------- -----------
Earnings (loss)
before income taxes (3,803) 9,259 2,622 23,550
Provision (benefit)
for income taxes (1,550) 4,254 506 9,015
----------- ----------- ----------- -----------
Net earnings (loss) $ (2,253) $ 5,005 $ 2,116 $ 14,535
=========== =========== =========== ===========
Earnings (loss)
per common share $ (0.19) $ 0.41 $ 0.17 $ 1.19
=========== =========== =========== ===========
Weighted average number
of shares outstanding 12,112,350 12,226,034 12,159,181 12,224,532
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
-------------------
1994 1993
------- -------
Cash flows from operating activities:
Net earnings $ 2,116 $14,535
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Reduction of carrying value of oil and gas properties 3,395
Depreciation, depletion and amortization 11,382 11,689
Deferred income taxes (1,484) 1,529
Restricted stock award compensation 366 366
Loss on sale of property, plant and equipment 143 57
Proceeds from settlement of interest rate swap agreement 1,514
Increase (decrease) in other non-current liabilities 1,035 (1,152)
Changes in operating assets and liabilities:
Decrease in receivables 277 616
(Increase) decrease in inventories (7,943) 4,545
Decrease (increase) in prepaid expenses and other 2,075 (311)
Decrease in accounts payable (555) (3,766)
(Decrease) increase in accrued expenses (5,266) 6,941
------- -------
Net cash provided by operating activities 5,541 36,563
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (14,027) (10,483)
Purchases of other assets (33) (306)
Proceeds from sale of property, plant and equipment 176 405
Purchases of marketable securities (88,124) (31,929)
Proceeds from sales of marketable securities 89,027 10,919
------- -------
Net cash used in investing activities (12,981) (31,394)
------- -------
Cash flows from financing activities:
Payments of long-term debt (2,881) (9,100)
Purchase of treasury stock (935)
Deferred financing costs (100)
Proceeds from exercise of stock options 3 36
------- -------
Net cash used in financing activities (3,913) (9,064)
------- -------
Net decrease in cash and cash equivalents (11,353) (3,895)
Cash and cash equivalents:
Beginning of period 19,807 8,842
------- -------
End of period $ 8,454 $ 4,947
======= =======
Noncash Investing and Financing Activities. In the nine months ended
September 30, 1994, a portion of the acquisition price of nine retail
units was seller financed for $2,917.
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair and comparable
presentation have been included and are of a normal recurring nature.
Operating results for the nine months ended September 30, 1994 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1994. The enclosed financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1993.
NOTE 2 - MARKETABLE SECURITIES:
The Company has implemented Statement of Financial Accounting
Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt
and Equity Securities." Marketable securities are comprised of taxable
corporate bonds, taxable and non-taxable municipal bonds and adjustable
rate preferred stocks and are managed as part of the Company's
short-term cash management program and are classified as
available-for-sale securities. Such classification requires these
securities to be reported at fair market value, with unrealized gains
and losses excluded from earnings and reported in a separate component
of stockholders' equity. At September 30, 1994, the amortized cost of
these securities approximated fair market value.
NOTE 3 - INVENTORIES:
September 30, 1994 December 31, 1993
------------------ -----------------
(In thousands)
Inventories consist of the following:
First-in, first-out ("FIFO") method:
Crude oil $12,310 $ 4,820
Refined products 10,879 10,607
Refinery and shop supplies 5,296 5,372
Retail method:
Merchandise 2,587 2,495
------- -------
31,072 23,294
Allowance for last-in, first-out
("LIFO") method 212 3,747
Allowance for lower of cost or market (3,700)
------- -------
$31,284 $23,341
======= =======
NOTE 4 - LONG-TERM DEBT:
In November 1993, the Company issued $100,000,000 of 9-3/4% senior
subordinated notes ("Notes"). Repayment of the Notes is jointly and
severally guaranteed on an unconditional basis by the Company's direct
and indirect wholly-owned subsidiaries, subject to a limitation designed
to ensure that such guarantees do not constitute a fraudulent
conveyance. Except as otherwise allowed in the Indenture pursuant to
which the Notes were issued, there are no restrictions on the ability of
such subsidiaries to transfer funds to the Company in the form of cash
dividends, loans or advances. General provisions of applicable State
law, however, may limit the ability of any subsidiary to pay dividends
or make distributions to the Company in certain circumstances.
No separate financial statements of the subsidiaries are included
herein because the subsidiaries are jointly and severally liable; the
aggregate assets, liabilities, earnings, and equity of the subsidiaries
are substantially equivalent to the assets, liabilities, earnings and
equity of the Company on a consolidated basis; and the separate
financial statements and other disclosures concerning the subsidiaries
are not deemed material to investors.
NOTE 5 - CONTINGENCIES:
The Company and certain subsidiaries are defendants to various
legal actions. Certain of these pending legal actions involve or may
involve compensatory, punitive or other damages. Litigation is subject
to many uncertainties and it is possible that some of the legal actions,
proceedings or claims referred to above could be decided adversely.
Although the amount of liability at September 30, 1994 with respect to
these matters is not ascertainable, the Company believes that any
resulting liability should not materially affect the Company's financial
condition or results of operations.
Federal, state and local laws and regulations relating to health
and the environment affect nearly all of the operations of the Company.
As is the case with all companies engaged in similar industries, the
Company faces significant exposure from actual or potential claims and
lawsuits involving environmental matters. These matters involve alleged
soil and water contamination and air pollution and personal injuries or
property damage allegedly caused by exposure to hazardous materials
manufactured, handled or used by the Company. Future expenditures
related to health and environmental matters cannot be reasonably
quantified in many circumstances due to the speculative nature of
remediation and clean-up cost estimates and methods, the imprecise and
conflicting data regarding the hazardous nature of various types of
waste, the number of other potentially responsible parties involved,
various defenses which may be available to the Company and changing
environmental laws and interpretations of environmental laws.
The United States Environmental Protection Agency notified the
Company in May 1991 that it may be a potentially responsible party for
the release or threatened release of hazardous substances, pollutants,
or contaminants at the Lee Acres Landfill, which is owned by the United
States Bureau of Land Management ("BLM") and which is adjacent to the
Company's Farmington refinery which was operated until 1982. Potentially
responsible party liability is joint and several, such that a
responsible party may be liable for all of the clean-up costs at a site
even though the party was responsible for only a small part of such
costs. At the present time, the Company is unable to determine the
extent of potential liability, if any, in this matter and has made no
provision therefore in its financial statements.
At December 31, 1993, the Company had received approximately $2.4
million in connection with the settlement of past and future claims of
the Company against various of its insurance carriers relating to
various environmental issues. In April 1994, the Company completed a
review of its environmental matters and determined that approximately
$1.4 million of these settlements related to ongoing environmental
projects, including the remediation of a free phase hydrocarbon plume
that extends approximately 1,000 feet south of the Company's Farmington
refinery, and therefore such amounts have been designated as
environmental liability accruals in the current and long-term sections
of the Company's condensed consolidated balance sheet at September 30,
1994. The remaining $1.0 million was recorded as a credit to operating
expenses in the first quarter of 1994, reflecting a recovery of
environmental costs expensed in prior years.
The Company has received several tax notifications and assessments
from the Navajo Tribe relating to crude oil and natural gas removed from
properties located outside the boundaries of the Navajo Indian
Reservation in an area of disputed jurisdiction, including a $1.8 million
severance tax assessment issued to Giant Industries Arizona, Inc., a
wholly-owned subsidiary of the Company, in November 1991. The Company
has invoked its appeal rights with the Tribe's Tax Commission in
connection with this assessment and intends to vigorously oppose the
assessment. It is the Company's understanding that these appeals will
be held in abeyance pending further judicial clarification of the
Tribe's taxing authority by means of litigation involving other
companies. It is possible, however, that the Company's assessments will
have to be litigated by the Company before final resolution. The
Company may receive further tax assessments before judicial resolution
of the Tribe's taxing authority.
EXHIBIT 11
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE DATA
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1994 1993 1994 1993
------------------------ ------------------------
Net earnings (loss) $(2,253,000) $ 5,005,000 $ 2,116,000 $14,535,000
=========== =========== =========== ===========
Weighted average number of shares
outstanding during the period 12,112,350 12,226,034 12,159,181 12,224,532
=========== =========== =========== ===========
Earnings (loss) per common share $ (0.19) $ 0.41 $ 0.17 $ 1.19
=========== =========== =========== ===========
Additional Primary Computation:
- -------------------------------
Net earnings (loss) $(2,253,000) $ 5,005,000 $ 2,116,000 $14,535,000
=========== =========== =========== ===========
Additional adjustment to weighted average
number of shares outstanding:
Weighted average number of shares
outstanding above 12,112,350 12,226,034 12,159,181 12,224,532
Add - dilutive effect of outstanding
options (a) 98,559 34,902 51,959
----------- ----------- ----------- -----------
Weighted average number of shares
outstanding as adjusted 12,112,350 12,324,593 12,194,083 12,276,491
=========== =========== =========== ===========
Earnings (loss) per common share (b) $ (0.19) $ 0.41 $ 0.17 $ 1.18
=========== =========== =========== ===========
Fully Diluted Computation:
- --------------------------
Net earnings (loss) $(2,253,000) $ 5,005,000 $ 2,116,000 $14,535,000
=========== =========== =========== ===========
Additional adjustment to weighted average
number of shares outstanding:
Weighted average number of shares
outstanding above 12,112,350 12,226,034 12,159,181 12,224,532
Add - dilutive effect of outstanding
options (a) 98,559 37,082 94,092
----------- ----------- ----------- -----------
Weighted average number of shares
outstanding as adjusted 12,112,350 12,324,593 12,196,263 12,318,624
=========== =========== =========== ===========
Earnings (loss) per common share (b) $ (0.19) $ 0.41 $ 0.17 $ 1.18
=========== =========== =========== ===========
(a) As determined by the application of the treasury stock method.
(b) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required per note 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
[TYPE] EXHIBIT 27
[ARTICLE] 5
[MULTIPLIER] 1,000
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] DEC-31-1994
[PERIOD-END] SEP-30-1994
[CASH] 8,454
[SECURITIES] 35,243
[RECEIVABLES] 13,861<F1>
[ALLOWANCES] 0
[INVENTORY] 31,284
[CURRENT-ASSETS] 95,035
[PP&E] 311,243
[DEPRECIATION] 144,273
[TOTAL-ASSETS] 274,582
[CURRENT-LIABILITIES] 33,148
[BONDS] 116,325
[COMMON] 121
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 107,343
[TOTAL-LIABILITY-AND-EQUITY] 274,582
[SALES] 215,541
[TOTAL-REVENUES] 215,541
[CGS] 143,602
[TOTAL-COSTS] 205,221<F2>
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 8,867
[INCOME-PRETAX] 2,622
[INCOME-TAX] 506
[INCOME-CONTINUING] 2,116
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 2,116
[EPS-PRIMARY] 0.17
[EPS-DILUTED] 0
<FN>
<F1>Includes accounts receivable trade, notes and other accounts receivable, net of
allowance for doubtful accounts receivable.
<F2>Includes other operating expenses, selling, general and administrative
expenses, and reduction in carrying value of oil and gas properties.
</FN>
/TABLE
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Earnings (Loss) Before Income Taxes
- -----------------------------------
For the three months ended September 30, 1994, loss before income
taxes was $3.8 million, a decrease of $13.1 million, from earnings of
$9.3 million for the same 1993 period. The decrease is primarily the
result of a 35% decrease in average refinery margins, a reduction in
the carrying value of oil and gas properties due to a "ceiling test"
calculation, a 10% decline in refinery sourced finished product sales
volumes, higher ethanol plant grain costs and higher interest and
operating expenses. These negative factors were partially offset by a
24% increase in finished product sales volumes and a 33% increase in
merchandise sales from the Company's retail units.
For the nine months ended September 30, 1994, earnings before
income taxes were $2.6 million, a decrease of $21.0 million from $23.6
million for the same 1993 period. The decrease is primarily the result
of a 14% decrease in average refinery margins, a 10% decline in
refinery sourced finished product sales volumes, a reduction in the
carrying value of oil and gas properties due to a "ceiling test"
calculation, a 14% decline in third party ethanol sales volumes, higher
ethanol plant grain costs and higher interest and operating expenses.
These negative factors were partially offset by a 25% increase in
finished product sales volumes and a 33% increase in merchandise sales
from the Company's retail units.
For the three and nine month periods ended September 30, 1994, the
Company's exploration and production operations ("Giant E&P") recorded
losses before income taxes of $3.7 million and $4.3 million,
respectively, including a "ceiling test" writedown of approximately
$3.4 million primarily due to lower crude oil and natural gas prices at
September 30, 1994, versus June 30, 1994, impairment of certain
unproved properties and downward revisions of certain reserves.
Exclusive of the "ceiling test" writedown, the 1994 third quarter reflected
a decrease in loss of $0.2 million compared to the same 1993 period as a
result of an increase in average crude oil selling prices and
declines in lease operating and depletion expenses offset in part by
declines in crude oil and natural gas production and natural gas
selling prices. Exclusive of the "ceiling test" writedown, the nine
month period of 1994 reflected a slight decrease in loss from the same
1993 period due to declines in lease operating and depletion expenses
offset in part by declines in crude oil and natural gas production and
selling prices.
Revenues
- --------
Consolidated revenues for the three months ended September 30,
1994, decreased $4.4 million or 5% to $77.5 million from $81.9 million
in the comparable 1993 period. The decrease is primarily due to a 10%
decline in refinery sourced finished product sales volumes and a 6%
decrease in refinery weighted average selling prices. Offsetting these
decreases was a 24% increase in the volume of finished products sold
from the retail units, a 33% increase in merchandise sales from the
retail units and a 28% increase in third party ethanol sales volumes.
The decline in refinery sourced finished product sales volumes was
primarily due to an accident at the refinery in mid-July which damaged
the alkylation unit and reduced production for a period of
approximately sixty days. The increase in retail finished product and
merchandise sales is the result of the addition of nine units in the
Company's primary market area and increased same store volumes.
Volumes of refined products sold by Company retail outlets
increased approximately 24% from 1993 third quarter levels primarily
due to a 36% increase in volumes sold from the service stations offset
in part by a 4% decrease in travel center volumes.
Revenues, including intercompany revenues, from Giant E & P
totaled $1.4 million for the three months ended September 30, 1994, a
decrease of $0.3 million or 15% from the $1.7 million reported for the
comparable 1993 period. This decrease is due to a 6% decline in crude
oil production, a 10% decline in natural gas production and a 10%
decline in natural gas selling prices, offset in part by a 6% increase
in crude oil selling prices. The decline in natural gas production is
due to a 1993 year end upward adjustment of coal seam gas reserves sold
in 1992, determined pursuant to an annual redetermination clause
contained in the 1992 purchase and sale agreement.
Consolidated revenues for the nine months ended September 30,
1994, decreased $29.6 million or 12% to $215.5 million from $245.1
million in the comparable 1993 period. The decrease is primarily due to
a 13% decrease in refinery weighted average selling prices, a 10%
decline in refinery sourced finished product sales volumes and a 14%
and 8% decline in third party ethanol sales volumes and selling prices,
respectively. Offsetting these decreases was a 25% increase in the
volume of finished products sold from the retail units along with a 33%
increase in merchandise sales.
The decline in refinery sourced finished product sales volumes was
primarily due to a scheduled major maintenance turnaround at the
refinery started in March and completed as planned in April and an
accident at the refinery in mid-July which damaged the alkylation unit
and reduced production for a period of approximately sixty days. The
decline in third party ethanol sales volumes was caused by operating
problems experienced in the early part of the 1994 first quarter and a
decision to lower 1994 production due to high grain costs and low
selling prices resulting from an over supply of oxygenates. The
increase in retail finished product and merchandise sales is the result
of the addition of nine units in the Company's primary market area and
increased same store volumes.
Volumes of refined products sold by Company retail outlets increased
approximately 25% from 1993 nine month year-to-date levels primarily
due to a 36% increase in volumes sold from the service stations offset
in part by a 1% decrease in travel center volumes.
Revenues, including intercompany revenues, from Giant E & P
totaled $4.4 million for the nine months ended September 30, 1994, a
decrease of $1.3 million or 23% from the $5.7 million reported for the
comparable 1993 period. This decrease is due to a 9% decline in crude
oil production, an 11 % decline in crude oil selling prices, a 17%
decline in natural gas production and a 13% decline in natural gas
selling prices. The decline in natural gas production is due to a 1993
year end upward adjustment of coal seam gas reserves sold in 1992,
determined pursuant to an annual redetermination clause contained in
the 1992 purchase and sale agreement.
Cost of Products Sold
- ---------------------
For the three months ended September 30, 1994, cost of products
sold increased $0.8 million or 1% to $54.2 million from $53.4 million
for the corresponding 1993 period. An increase in costs relating to
increased merchandise sales from the retail units, a 7% increase in average
crude oil costs and a $1.2 million increase in average grain costs, due to
forward grain purchase contracts and higher grain costs resulting from the
continuing effects of the poor grain harvest in 1993, accounts for most of
the increase. These increases were partially offset by a 10% decline in the
volume of finished products sold from the refinery and a $1.0 million accrual
for estimated minimum reimbursements under the Company's business interruption
insurance policies relating to the mid-July accident at the refinery.
Cost of products sold by Giant E & P decreased approximately 17%
in the three months ended September 30, 1994, compared to the same 1993
period. The decline is primarily related to a decrease in production.
For the nine months ended September 30, 1994, cost of products
sold decreased $21.4 million or 13% to $143.6 million from $165.0
million for the corresponding 1993 period. An 11% decline in average
crude oil costs and a 10% decline in the volume of finished products
sold from the refinery accounts for most of the decrease. These
decreases were partially offset by an increase in costs relating to
increased merchandise sales from the retail units and a $2.1 million
increase in average grain costs.
Cost of products sold by Giant E & P decreased approximately 23%
in the nine months ended September 30, 1994, compared to the same 1993
period. The decline is primarily related to a decrease in production.
Operating Expenses
- ------------------
For the three and nine month periods ended September 30, 1994,
operating expenses increased $2.4 million or 13% and $4.4 million or
8%, respectively, compared to the corresponding 1993 periods. The
increase in each period is primarily due to operating expenses relating
to nine retail units acquired, an increase in payroll and related costs
for other operations and a reduction in the 1993 third quarter
operating expenses of $0.9 million for a decrease in the estimated
liability for self insured workmen's compensation claims. Partially
offsetting these increases in each comparative period was a decrease in
the management incentive bonus accrual. The nine month increases were
also partially offset by the recording of a $1.0 million insurance
settlement in the first quarter of 1994 relating to environmental costs
incurred in prior years.
Interest Expense, Net
- ---------------------
For the three and nine months ended September 30, 1994, interest
expense, net (interest expense less interest income) increased $2.1
million or 233% and $4.9 million or 174%, respectively, compared to the
same periods in 1993. The increase in each period is primarily due to
the issuance of $100 million of 9-3/4% senior subordinated notes in
November 1993, the proceeds of which were partially used to retire
existing debt with lower effective interest rates, but with
significantly shorter maturities. Partially offsetting these items was
an increase in interest income resulting from the investment of excess
cash in marketable securities and short-term financial instruments.
Income Taxes
- ------------
Income taxes for the three and nine months ended September 30,
1994 were computed in accordance with Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), resulting in effective (benefit)
tax rates of approximately (41%) and 19%, respectively. The variance
from the statutory U.S. federal tax rate of 35% is primarily due to the
relationship of estimated alcohol fuel and coal seam gas credits to
estimated annual income, partially offset by estimated state income
taxes.
Income taxes for the three and nine months ended September 30,
1993 were also computed in accordance with SFAS No. 109, resulting in
effective tax rates of approximately 46% and 38%, respectively. The
variance from the statutory U.S. federal tax rate of 35% is primarily
due to the enactment of the Revenue Reconciliation Act of 1993 which
increased the statutory U.S. federal income tax rate to 35% from 34%,
retroactive to January 1, 1993. The effect of the retroactive increase
of approximately $0.9 million was recorded in the third quarter of
1993. In addition, the variance is also affected by the relationship of
estimated alcohol fuel and coal seam gas credits to estimated annual
income, partially offset by estimated state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow From Operations
- -------------------------
Net cash provided by operating activities totaled $5.5 million for
the nine months ended September 30, 1994, compared to $36.6 million for
the comparable 1993 period. Operating cash flows decreased primarily as
the result of a decline in net earnings and the net changes in working
capital items.
Working Capital
- ---------------
Working capital at September 30, 1994 consisted of current assets
of $95.0 million and current liabilities of $33.1 million, or a current
ratio of 2.87:1. At December 31, 1993, the current ratio was 2.71:1
with current assets of $102.0 million and current liabilities of $37.6
million.
Current assets have decreased since December 31, 1993, primarily
due to a net decrease in cash and cash equivalents and marketable
securities, a decline in trade receivables, primarily due to lower
natural gas sales and product supply receivables, and a decrease in
prepaid expenses, principally deposits and prepaid insurance premiums.
Partially offsetting these decreases is an increase in inventories due
to a 100% increase in raw material volumes on hand, partially resulting
from a decision to accumulate raw material inventory during periods of
reduced production resulting from the scheduled major maintenance
turnaround at the refinery in March and April and a refinery accident
in July, along with an increase in market values. Finished product
volumes were down slightly from year end levels. Current liabilities
have decreased due to a decrease in accounts payable and accrued
liabilities. Accounts payable have decreased primarily due to a
decrease in trade payables. Accrued liabilities have declined primarily
due to the reclassification of deferred insurance recoveries in part to
a long-term reserve for environmental liabilities and in part as a
recovery of previously incurred environmental expenditures, the payment
of management incentive bonuses, a reduction in excise taxes payable
and a decline in estimated income taxes payable. These decreases were
offset in part by an increase in accrued interest payable.
Capital Expenditures and Resources
- ----------------------------------
Net cash used in investing activities for the purchase of
property, plant and equipment totaled approximately $14.0 million for
the first nine months of 1994, including the cash portion of the
acquisition of nine retail units, scheduled major maintenance
turnaround costs at the refinery, equipment replacement at the refinery
due to an accident in July, oil and gas well drilling and leasehold
costs and various other projects. In addition, as part of the Company's
short-term cash management program there were net sales of marketable
securities of approximately $0.9 million.
On October 10, 1994, the Company entered into an agreement for the
sale of the Company's Giant Express truck stop located in Winslow,
Arizona to Pilot Corporation, a privately-owned, Tennessee-based truck
stop operator. The proceeds from the sale will be available for general
corporate purposes, including acquisitions. The sale closed November 2,
1994. In addition to the cash purchase price, the agreement includes a
5 year supply contract for the facility, which enables the Company to
retain an outlet for approximately 10% of its Ciniza refinery's current
diesel production. The sale of this facility will not have a material
impact on the Company's future results of operations.
The Company continues to investigate other strategic acquisitions,
including the possibility of acquiring an additional refinery,
marketing assets, retail outlets and the acquisition of producing oil
and gas properties, as well as capital improvements to its existing
facilities and is actively pursuing the possible sale or exchange of
certain other non-strategic assets.
Working capital, including that necessary for capital expenditures
and debt service will be funded through cash generated from operating
activities, existing cash and marketable securities balances and, if
necessary, future borrowings. Future liquidity, both short and long-
term, will continue to be primarily dependent on producing and selling
sufficient quantities of refined products at margins sufficient to
cover fixed and variable expenses.
Capital Structure
- -----------------
At September 30, 1994, and December 31, 1993, the Company's
long-term debt was 52% and 53% of total capital, respectively.
In November 1993, the Company issued $100 million of 10 year 9-3/4%
senior subordinated notes ("Notes"). Repayment of the Notes is jointly
and severally guaranteed on an unconditional basis by the Company's
direct and indirect wholly-owned subsidiaries, subject to a limitation
designed to ensure that such guarantees do not constitute a fraudulent
conveyance. Except as otherwise allowed in the Indenture pursuant to
which the Notes were issued, there are no restrictions on the ability of
such subsidiaries to transfer funds to the Company in the form of cash
dividends, loans or advances. General provisions of applicable State law,
however, may limit the ability of any subsidiary to pay dividends or make
distributions to the Company in certain circumstances.
At September 30, 1994, the Company had a $5.0 million cash secured
credit facility available to support the issuance of letters of credit
in the ordinary course of business. At that date, there were
approximately $3.4 million in irrevocable letters of credit outstanding
under this arrangement. The Company has made arrangements with a major
bank for a $20.0 million uncommitted line of credit to support the
issuance of letters of credit in the ordinary course of business. The
Company is currently in the process of converting all letters of credit
issued under its $5.0 million cash secured credit facility to this new
facility. Once converted, the $5.0 million cash secured credit facility
will be terminated.
No dividends were declared for the first three quarters of 1994.
Future dividends, if any, are subject to the results of the Company's
operations, existing debt covenants and declaration by the Company's
Board of Directors.
On April 15, 1994, the Company's Board of Directors authorized the
repurchase of up to 5% or approximately 600,000 shares of the Company's
common stock. Through the end of the third quarter, the Company had
repurchased 117,400 shares of its common stock on the open market for
approximately $934,000, a weighted average cost of $7.96 per share,
including commissions. These shares are being treated as treasury shares.
On October 5, 1994, the Board of Directors voted to increase the
number of shares authorized to be repurchased to 1 million shares, or
approximately 8% of all outstanding shares. These purchases may be made
over the next year from time to time as conditions permit. Shares may
be repurchased through privately-negotiated transactions, block share
purchases and open market transactions.
Any repurchased shares would be available for a variety of
corporate purposes. The number of shares actually repurchased will be
dependent upon market conditions and there is no guarantee as to the
exact number of shares to be repurchased by the Company. The Company
may suspend or discontinue the program at any time without notice.
Other
- -----
In May 1991, the EPA notified the Company that it may be a
potentially responsible party for the release, or threatened release,
of hazardous substances, pollutants or contaminants at the Lee Acres
Landfill, which is adjacent to the Company's Farmington refinery which
was operated until 1982. At the present time, the Company is unable to
determine the extent of its potential liability, if any, in the matter.
In 1989, a consultant to the Company estimated, based on various
assumptions, that the Company's share of potential liability could be
approximately $1.2 million. This figure was based upon the consultant's
evaluation of such factors as available clean-up technology, BLM's
involvement at the site and the number of other entities that may have
had involvement at the site. The consultant, however, did not conduct
an analysis of the Company's potential legal defenses and arguments
including possible setoff rights. Potentially responsible party
liability is joint and several, such that a responsible party may be
liable for all of the clean-up costs at a site even though the party
was responsible for only a small part of such costs. Actual liability,
if any, may differ significantly from the consultant's estimate. In
addition, the Company is remediating a free phase hydrocarbon plume
that extends approximately 1,000 feet south of the Farmington refinery.
The Company is subject to audit on an ongoing basis of the various
taxes that it pays to federal, state, local and Tribal agencies. These
audits may result in additional assessments or refunds along with
interest and penalties. In some cases the jurisdictional basis of the
taxing authority is in dispute and is the subject of litigation or
administrative appeals. In one such case, the Company has received
several tax assessments from the Navajo Tribe, including a $1.8 million
severance tax assessment issued to Giant Industries Arizona, Inc., a
wholly-owned subsidiary of the Company, in November 1991 relating to
crude oil removed from properties located outside the boundaries of the
Navajo Indian Reservation in an area of disputed jurisdiction. It is
the Company's position that it is in substantial compliance with laws
applicable to the disputed area, and such assessments are or will be
the subject of litigation or administrative appeals.
The Company uses the full cost method of accounting for oil and
gas activities. Under this method, the Company is required to write
down capitalized costs, adjusted for accumulated amortization and
related deferred income taxes, if those costs exceed a "cost ceiling."
This "cost ceiling" is determined by calculating the value of the
Company's estimated reserves utilizing, among other things, the price
of crude oil and natural gas at the end of each quarter. During periods
of declining prices and reserves, the Company may be required to write
down these capitalized costs due to impairment in value. At September
30, 1994, the Company was required to write down the value of its oil
and gas properties by approximately $3.4 million as the result of this
calculation, primarily due to lower crude oil and natural gas prices at
September 30, 1994, versus June 30, 1994, impairment of certain
unproved properties and downward revisions of certain reserves. Whether
or not a writedown will be necessary in the future depends upon future
prices and reserve volumes.
Due to low ethanol prices and high grain costs resulting from 1993
flooding in the Midwest, the Company reduced production at its ethanol
facility for a period of time in the first quarter of 1994 and operated
at 75% of capacity in the second and third quarters. Due to improving
grain costs and selling prices, the facility is currently operating at
full capacity.
On July 16, 1994, a propane treatment vessel associated with the
refinery's alkylation unit failed, causing several units at the
refinery to be temporarily shutdown and damaging the alkylation unit,
necessitating extensive repairs. All units have been returned to
service. Repairs to the propane treatment vessel and adjacent equipment
damaged in the incident were completed on September 7, 1994, and
returned to full operation on September 16, 1994. The Company is in the
process of completing its insurance claims for reimbursement under
its business interruption and property damage policies. Based on
preliminary calculations and discussions with the insurance companies
as to the validity of the claims, the Company accrued $1.0 million under
its business interruption insurance coverage as a minimum expected
reimbursement in the third quarter of 1994. The Company expects to
reach final settlement with the insurance companies before the end of
the year and record any additional reimbursements in the fourth
quarter.
Due primarily to a decision to accumulate raw material inventory
during periods of reduced production resulting from a major maintenance
project at the refinery in early 1994 and an accident at the refinery
in July 1994, the Company's inventories of crude oil have increased to
approximately 663,000 barrels as of September 30, 1994. Based upon
projections of local crude oil availability in the field, current
levels of usage of Alaska North Slope crude oil ("ANS"), a higher
sulfur, lower quality crude oil, and Company inventory levels, the
Company believes an adequate crude oil supply will be available to
sustain refinery operations at planned levels through the remainder of
1994 and well into 1995. The Company believes that local crude oil
supply continues to approximate 95% of aggregate local crude oil
demand. Exploration and production activity in the Four Corners Area
has been at a relatively low level over the last few years with the
result that total local crude oil production currently reflects the
trend of normal depletion of reservoirs without the supplements of
significant new discoveries. The Company is able to supplement local
crude oil supplies with ANS and other alternate grades of crude oil
through its gathering system's interconnection with the Four Corners
and Texas-New Mexico common carrier pipeline systems and by truck or
rail, although the quality and delivered cost of such crude oil varies
from that produced locally. The Company has used ANS at various times
in the past and had been in the planning stages to make certain
modifications to the refinery to increase its ability to use ANS crude
oil from approximately 1,000 barrels per day under the current
equipment configuration to 5,000-6,000 barrels per day at a capital
cost of approximately $11.0 million. Because of the changing regulatory
and economic environment and the Company's desire to ensure its
selection of the most cost effective supplemental supply alternatives,
the Company has delayed the implementation of this project and is
reevaluating whether this or various other alternatives constitute the
most desirable strategy to supplement local crude oil supplies on a
long-term basis.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings required to be
reported pursuant to Item 103 of Regulation S-K. The Company is a
party to ordinary routine litigation incidental to its business. In
addition, there is hereby incorporated by reference the information
regarding contingencies in Note 5 to the Unaudited Condensed
Consolidated Financial Statements set forth in Item 1, Part I hereof
and the discussion of certain contingencies contained herein under the
heading "Liquidity and Capital Resources - Other."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
10.1 - Employee Stock Ownership Plan and Trust Agreement of the
Company, as amended.
11 - Computation of Per Share Data (see Part I, Item 1).
27 - Financial Data Schedule (see Part I, Item 1).
(b) Reports on Form 8-K - There were no reports on Form 8-K filed for
the three months ended September 30, 1994.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report on Form 10-Q for the
quarter ended September 30, 1994 to be signed on its behalf by the
undersigned thereunto duly authorized.
GIANT INDUSTRIES, INC.
A. WAYNE DAVENPORT
-------------------------------------
A. Wayne Davenport
Vice President and Corporate Controller
(Principal Accounting Officer)
Date: November 14, 1994