UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(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, 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 October 31, 1995: 29,030,755
<PAGE>
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,
1995 1994 1995 1994
REVENUES
Sales and operating revenues $ 746.3 $ 700.4 $ 2,212.7 $ 1,930.7
Other revenues, net 4.6 3.8 13.0 10.9
750.9 704.2 2,225.7 1,941.6
COSTS AND EXPENSES
Cost of products sold and
operating expenses 680.8 613.8 1,981.0 1,675.2
Depreciation 19.4 17.9 57.5 52.5
Selling and administrative 21.8 18.2 61.5 52.2
Taxes other than income taxes 9.9 10.6 30.6 30.4
Interest 11.2 10.8 34.0 32.1
743.1 671.3 2,164.6 1,842.4
Income Before Tax Provision 7.8 32.9 61.1 99.2
Provision for Income Taxes 2.1 12.3 21.9 38.9
Net Income 5.7 20.6 39.2 60.3
Dividend Requirement
on Preferred Stock 1.1 1.1 3.2 3.2
Earnings Applicable to
Common Shares $ 4.6 $ 19.5 $ 36.0 $ 57.1
Primary Earnings
Per Share $ 0.16 $ 0.67 $ 1.24 $ 1.96
Fully Diluted Earnings
Per Share $ 0.16 $ 0.64 $ 1.22 $ 1.86
Cash Dividends Per Share
Common $ 0.14 $ 0.13 $ 0.42 $ 0.39
Preferred $ 0.625 $ 0.625 $ 1.875 $ 1.875
Weighted Average Common Shares
Outstanding (thousands of shares)
Primary 29,130 29,142 29,103 29,135
Fully Diluted 32,385 32,397 32,376 32,391
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
DIAMOND SHAMROCK, INC.
CONSOLIDATED BALANCE SHEET
(dollars in millions, except per share data)
September 30, December 31,
1995 1994
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 24.4 $ 27.4
Receivables, less doubtful receivables
of $7.4; $5.8 in 1994 182.6 211.6
Inventories
Finished products 146.8 109.6
Raw materials 78.3 148.3
Supplies 36.0 33.1
261.1 291.0
Prepaid expenses 16.5 10.4
Total Current Assets 484.6 540.4
Properties and Equipment, less accumulated
depreciation of $666.4; $609.3 in 1994 1,146.2 1,026.1
Deferred Charges and Other Assets 52.7 54.3
$1,683.5 $1,620.8
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Long-term debt payable within one year $ 4.0 $ 3.9
Accounts payable 143.1 199.3
Accrued taxes 59.7 65.3
Accrued royalties 6.8 6.7
Current portion of Long-term Liability 8.0 8.0
Other accrued liabilities 76.1 90.9
Total Current Liabilities 297.7 374.1
Long-term Debt 607.3 509.2
Deferred Income Taxes 85.5 81.5
Other Liabilities and Deferred Credits 75.5 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 - 29,030,761; 29,014,711
in 1994
Outstanding shares - 29,030,761; 28,896,917
in 1994 0.3 0.3
Paid-in Capital 447.7 447.3
ESOP Stock and Stock Held in Treasury (39.4) (45.4)
Retained Earnings 208.9 186.8
Total Stockholders' Equity 617.5 589.0
$1,683.5 $1,620.8
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
DIAMOND SHAMROCK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(dollars in millions)
Nine Months Ended
September 30,
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 39.2 $ 60.3
Adjustments to arrive at net cash provided
by operating activities:
Depreciation 57.5 52.5
Deferred income taxes 4.0 16.8
Loss on sale of properties and equipment 1.0 2.0
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 29.0 (46.1)
Decrease (increase) in inventories 29.9 (45.9)
Decrease (increase) in prepaid expenses (6.1) (1.9)
Increase (decrease) in accounts payable (56.2) 15.9
Increase (decrease) in taxes payable (5.6) 5.2
Increase (decrease) in accrued liabilities (14.7) 29.7
Other, net 14.1 11.9
NET CASH PROVIDED BY OPERATING ACTIVITIES 92.1 100.4
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of properties and equipment 0.7 4.1
Purchase of properties and equipment (171.6) (95.8)
Expenditures for investments (2.1) (3.8)
NET CASH (USED IN) INVESTING ACTIVITIES (173.0) (95.5)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increases in long-term debt 312.7 162.3
Repayments of long-term debt (214.5) (146.7)
Payments of long-term liability (8.2) (7.8)
Funds received from ESOP 2.8 2.5
Issuance of Common Stock - 0.9
Sale of Common Stock 0.2 -
Sale of Common Stock held in treasury 0.3 0.4
Dividends paid (15.4) (14.5)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 77.9 (2.9)
Net increase (decrease) in cash and cash equivalents (3.0) 2.0
Cash and cash equivalents at beginning of period 27.4 12.8
Cash and cash equivalents at end of period $ 24.4 $ 14.8
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.
<PAGE>
DIAMOND SHAMROCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Financial Statements
The consolidated financial statements as of September 30, 1995 and for the three
months and nine months ended September 30, 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/A. 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 September 30, 1995, and for the three months and nine months ended
September 30, 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 September 30, 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
The Company currently has outstanding $120.0 million of debt designated as the
10.75% Senior Notes. As of May 1, 1995, $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,
1996 has been 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 $71.8 million as
of September 30, 1995, including $8.2 million paid during the nine months ended
September 30, 1995. See Note 3 of the 1994 Form 10-K for a discussion of the
change in the method of accounting for the liability during the year ended
December 31, 1993.
REVIEW BY INDEPENDENT ACCOUNTANTS
With respect to the unaudited consolidated financial information of the Company
as of September 30, 1995 and the three months and nine months ended September
30, 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 November 14, 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 Securities Act of 1933.
<PAGE>
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/A of Diamond Shamrock, Inc. and its subsidiaries (the
"Company") as of September 30, 1995 and for the three months and nine months
ended September 30, 1995 and 1994. This financial information is the
responsibility of the Company's management.
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 change in
accounting for its long-term shared cost liability in 1993, and its changes in
accounting for income taxes and post-retirement benefits other than pensions in
1992, 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
November 14, 1995
<PAGE>
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 and nine months ended September 30, 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 Nine Months
Ended Ended
September 30, September 30,
1995 1994 1995 1994
Sales and Operating Revenues:
Refining and Wholesale $ 371.3 $ 357.5 $ 1,088.0 $ 996.7
Retail 291.0 267.1 829.6 721.6
Allied Businesses 84.0 75.8 295.1 212.4
Total Sales and
Operating Revenues $ 746.3 $ 700.4 $ 2,212.7 $ 1,930.7
Operating Profit:
Refining and Wholesale $ 5.9 $ 37.9 $ 60.5 $ 130.4
Retail 19.8 16.0 46.8 34.2
Allied Businesses 11.2 5.4 39.6 12.4
Total Operating Profit $ 36.9 $ 59.3 $ 146.9 $ 177.0
Consolidated Results Third Quarter 1995 vs Third Quarter 1994
Sales and operating revenues of $746.3 million for the third quarter of 1995
were 6.5% higher than in the same period of 1994, primarily due to increases in
retail and wholesale gasoline sales volumes of 11.6% and 8.0%, respectively.
Partially offsetting this increase in volumes was a 5.1% decrease in wholesale
refined product sales prices and a 3.3% decrease in retail gasoline sales
prices. Also contributing to the increase in consolidated sales and operating
revenues was a 10.8% increase in sales in the Company's Allied Businesses
segment, primarily due to continued strong demand for polymer grade propylene
and Nitromite ammonia fertilizer.
During the third quarter of 1995, the Company had net income of $5.7 million
compared to net income of $20.6 million in the 1994 third quarter. The
Company's third quarter results were negatively impacted by lower refinery
margins in the inland markets where the Company sells most of its products.
Partially offsetting the decrease in refining margins was an improvement in the
demand for polymer grade propylene and Nitromite ammonia fertilizer in the
Company's Allied Businesses segment and a 7.3% increase in retail fuel margins
compared to the third 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 September 30, 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 negative $6.8 million and a positive $3.8 million in the third quarters of
1995 and 1994, respectively.
Consolidated Results First Nine Months 1995 vs First Nine Months 1994
Sales and operating revenues of $2.2 billion for the first nine months of 1995
were $282.0 million higher than for the same period of 1994. This increase was
primarily due to a 9.8% and a 7.4% increase in retail gasoline sales volumes and
prices, respectively, and a 4.8% and a 5.2% increase in wholesale refined
product sales volumes and prices, respectively. Also contributing to the
increase in sales and operating revenues was a 39.0% increase in sales in the
Allied Businesses segment, primarily due to an increase in polymer grade
propylene sales.
During the first nine months of 1995, the Company had net income of $39.2
million compared to net income of $60.3 million in the first nine months of
1994. This decrease was primarily due to lower refining margins in the inland
markets where the Company sells most of its products, which was partially offset
by strong demand for polymer grade propylene, an increase in retail fuel
margins, and an increase in the value of refinery inventories due primarily to
crude oil purchase price increases during the first half of 1995. The estimated
after tax change in inventory values was a positive $2.9 million and $8.0
million in the first nine months of 1995 and 1994, respectively.
Segment Results Third Quarter 1995 vs Third Quarter 1994
During the third quarter of 1995, the Refining and Wholesale segment had sales
and operating revenues of $371.3 million compared to $357.5 million during the
third quarter of 1994. The increase in sales and operating revenues was
primarily due to an 8.1% increase in wholesale refined product sales volumes,
partially offset by a 5.1% decrease in wholesale refined product sales prices.
Operating profit in the third quarter of 1995 decreased $32.0 million from the
third quarter of 1994, primarily due to a 21.1% decrease in refinery margins
from the same period a year ago. Last year, refinery margins in the Company's
inland market, where most of its products are sold, were strong relative to the
Gulf Coast market primarily because supply to the inland market was constrained
by distribution system problems. While refinery margins in the Company's inland
market remain higher than those in the Gulf Coast market, they have declined
versus last year while Gulf Coast margins have improved.
Also contributing to the decrease in operating profit was a decrease in the
value of refinery inventories due primarily to crude oil and petroleum price
decreases during the third quarter of 1995. The estimated after tax change in
inventory values was a negative $6.8 million and a positive $2.9 million in the
third quarter of 1995 and 1994, respectively.
The Retail segment in the third quarter of 1995 reported an 8.9% increase in
sales and operating revenues compared to the same period of 1994. The increase
was primarily due to an 11.6% increase in retail gasoline volumes, that was the
result of an 8.0% increase in the number of retail stores compared to the third
quarter of 1994. Also contributing to the increase in sales and operating
revenues was a 10.8% increase in retail merchandise sales. Partially offsetting
the increase in sales and operating revenues was a 3.3% decrease in retail
gasoline sales prices. Operating profit in the third quarter of 1995 was $19.8
million compared to $16.0 million in the third quarter of 1994. The increased
operating profit was primarily due to a 7.3% increase in retail gasoline
margins, partially offset by a 1.0% decrease in retail merchandise margins.
During the third quarter of 1995, the Allied Businesses segment reflected an
increase in sales and operating revenues of 10.8%, primarily due to a $3.8
million increase in sales in the Company's propane/propylene business. This
increase was primarily due to increased sales volumes and prices, reflecting
continued strong demand for polymer grade propylene. Also contributing to the
increase in sales and operating revenues was a $2.2 million increase from the
Company's Nitromite ammonia fertilizer business. Operating profits were $11.2
million for the third quarter of 1995 compared to $5.4 million in the third
quarter of 1994. Operating profits increased primarily due to a $2.5 million
and a $1.2 million increase in operating profit from the Company's propylene
and Nitromite ammonia fertilizer businesses, respectively.
Segment Results First Nine Months 1995 vs First Nine Months 1994
Sales and operating revenues from the Refining and Wholesale segment were
$1,088.0 million in the first nine months of 1995 compared to $996.7 million
during the first nine months of 1994. The increase in sales and operating
revenues was primarily due to a 4.8% and a 5.2% increase in wholesale refined
product sales volumes and prices, respectively. Operating profit in the first
nine months of 1995 was $60.5 million compared to $130.4 million in the first
nine months of 1994. The decrease in operating profit was primarily due to a
25.1% decrease in refinery margins. Industry refining margins during the first
quarter of 1995 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. Refinery margins improved in the second
quarter of 1995, reflecting strong gasoline demand and tight gasoline
inventories. Refining margins began decreasing early in the third quarter of
1995, and recovered only slightly by late in the quarter.
The Retail segment results in the first nine months of 1995 reflected a 15.0%
increase in sales and operating revenues, primarily due to a 9.8% and a 7.4%
increase in retail gasoline sales volumes and prices, respectively. This
increase also reflected the contribution from a 7.7% increase in the average
number of retail outlets in the first nine months of 1995 compared to the same
period in 1994. Also contributing to the increase in sales and operating
revenues was a 9.8% increase in merchandise sales. Operating profit in the first
nine months of 1995 was $46.8 million compared to $34.2 million in the first
nine months of 1994. The increase was primarily due to an 8.2% increase in
retail gasoline margins.
The Allied Businesses segment results reflected an increase in sales and
operating revenues of 39.0% to $295.1 million in the first nine months of 1995
as compared to the same period in 1994. This increase was primarily due to a
$59.9 million increase in sales in the Company's propylene business, reflecting
increased sales volumes and prices attributable to continued strong demand for
polymer grade propylene. Also contributing to the increase in sales and
operating revenues was a 16.5% increase from the Company's natural gas liquids
marketing business, reflecting a 14.2% and a 2.0% increase in natural gas
liquids sales volumes and prices, respectively. Operating profits were $39.6
million for the first nine months of 1995 compared to $12.4 million in 1994.
Operating profits increased primarily due to a $19.6 million and a $5.3 million
increase in operating profit from the Company's propane/propylene and Nitromite
ammonia fertilizer businesses, respectively.
While refining and marketing margins have declined recently, management believes
that the fundamentals for the refining and marketing industry remain solid.
Gasoline inventories are at a 20-year low and the usual fourth quarter refining
industry maintenance schedule is anticipated to help keep them at these levels
for the near term. Gasoline demand continues to be strong and refinery
utilization rates, while lower than in the summer due to the high level of
refining industry maintenance, remain relatively high. Middle distillate
inventories have declined steadily from spring's excessive levels, which had
built up due to exceptionally warm winter weather last year, and are now at
normal levels as we approach the winter months. Management believes that these
strong fundamentals combined with a normal winter this year should lead to
improved margins.
Management also is optimistic about major projects scheduled to come on-stream
during the next 18 months. The expansion of the Three Rivers refinery is well
underway with the first phase, a hydrogen plant, already in operation. The
Company's petroleum products pipeline from the McKee refinery to El Paso, Texas
began operating in November. In the retail segment, construction of 18 Corner
Stores has been completed year-to-date with 14 others currently under
construction.
The Company has established earnings per share improvement goals of $0.75 per
share in 1996 and another $0.75 per share the following year for a total of
$1.50 in 1997. These earnings targets do not reflect the potential impact of
the market on refining and marketing margins, of the economy and inflation on
operating expenses, or other factors outside the Company's control. As such
there necessarily can be no assurance that these goals will be realized.
Underlying our earnings improvement goals are several significant items. The
primary contributor to improved earnings is the combined impact of the
completion of capital projects currently underway or recently completed. The
most significant of these projects are the El Paso pipeline and terminal, the
Three Rivers expansion, and the second propylene splitter, all discussed above.
Project economics are based on historical product prices and raw material costs
that represent two to five year averages.
Second in significance is the migration of all of our information systems from a
mainframe system to a client/server system which will result in cost savings of
several million dollars. The migration is expected to be largely completed by
year end 1995.
The balance of the anticipated earnings improvement comes from a combination of
administrative expense control measures and the optimization of operations.
Finally, these profit improvement goals were established prior to our agreement
to acquire National Convenience Stores Incorporated ("NCS"). While management
is confident that the NCS proposed acquisition will contribute to the Company's
operating profit in 1996, we also anticipate one-time consolidation expenses
during 1996 which will affect net income for the year. (see "Acquisition of
National Convenience Stores" below).
Liquidity and Capital Resources
Cash Flow and Working Capital
For the nine months ended September 30, 1995, cash provided by operations was
$92.1 million, compared with $100.4 million in the same period of 1994.
Working capital at September 30, 1995 was up $20.6 million from December 31,
1994, and consisted of current assets of $484.6 million and current liabilities
of $297.7 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 increase in working capital in the first nine months
of 1995 was primarily due to a 28.2% decrease in accounts payable, partially
offset by a 10.3% 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. While inventory levels returned to normal levels early in the year, a
17.1% increase in inventory prices during the first nine months of 1995 served
to partially offset the decrease. The 28.2% 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
primarily 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.
On November 8, 1995, the Company announced that it had entered into a proposed
acquisition agreement with NCS (see "Acquisition of National Convenience Stores"
below for a discussion of the impact of the acquisition on capital
expenditures).
Excluding the proposed NCS acquisition, the Company's capital expenditures
budget for 1995 had increased to approximately $280.0 million from an earlier
estimate of $250.0 million. Such increase is attributable to the acceleration
of certain ongoing projects and the initiation of several recently announced
projects, including a BTX (benzene, toluene and xylene) extraction facility at
the Company's Three River's Refinery. Also contributing to this increase is the
Company's decision to purchase from the lessor its interest in the Southlake
Products Pipeline extending from the McKee Refinery to the Dallas/Fort Worth
area.
The Company's capital and investment expenditures were $183.6 million during the
first nine months of 1995, including a non-cash investment of $12.0 million for
a portion of a crude oil import and storage terminal acquired under an
installment purchase arrangement. The Company is progressing with the project
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 for completion in the third
quarter of 1996, will increase the production of gasoline and diesel at the
refinery by approximately 10 percent. The Company is also progressing with the
construction of a second 730 million pound per year propylene splitter at Mont
Belvieu with completion scheduled for the third quarter of 1996. The Company
also recently completed drilling a brine production well at the East Terminal
at Mont Belvieu and purchased four underground storage wells at the facility's
West Terminal. In addition, the Company is installing additional pumping and
metering equipment at both terminals.
The Company continued to expand its retail marketing business in the first nine
months of 1995 with the acquisition of 21 outlets in New Mexico. In addition,
the Company opened 17 new outlets and closed 3 marginal units through September
30, 1995. The newly opened outlets are leased by the Company under a pre-
existing lease arrangement. The Company has leased approximately $171.6 million
in retail outlets and related equipment under these arrangements. At September
30, 1995, approximately $18.4 million of the $190.0 million commitment remained
available to construct and/or acquire retail outlets. The Company presently
anticipates leasing approximately one to two additional outlets during 1995.
The Company announced on September 18, 1995 that it had entered into an
agreement to sell 11 of its outlets located in Amarillo, Texas to a local
convenience store chain. The purchaser has agreed to retain the Diamond
Shamrock brand on the outlets purchased, and additionally to convert its other
36 outlets located in the Amarillo area to the Diamond Shamrock brand.
Capital spending is presently estimated to be approximately $200 million in
1996, reflecting the continuation and completion of the projects being
constructed at the Three Rivers Refinery, construction of the propylene
splitter, and retail store construction.
Financing Activities
In May, 1995 the Company registered $150.0 million of unallocated securities in
a Universal Shelf Registration. That registration, which was declared effective
by the Securities and Exchange Commission in June, 1995, allows the Company to
issue up to $150.0 million of debt, equity, or warrants, or any combination
thereof, to the public on terms to be set at the time of issuance. The Company
will issue the securities so registered from time to time, based upon the
Company's capital requirements and market conditions.
On June 1, 1995, the Company issued $25.0 million of 7 1/4% debentures due June
15, 2010, and on February 13, 1995, the Company issued $75.0 million of 8 3/4%
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 $30.0 million principal installment on the Company's
10.75% Senior Notes on May 1, 1995, and to fund anticipated capital expenditures
in 1995.
The Company presently anticipates that its 1996 capital expenditures, as well as
expenditures for debt service, lease obligations, working capital, and dividend
requirements will exceed cash generated by operations. With respect to the
proposed NCS acquisition, the Company has arranged to obtain up to $340.0
million in financing from Bank of America (see "Acquisition of National
Convenience Stores" below for further discussion). In addition, to the extent
that the Company's other requirements exceed cash generated by operations, the
Company anticipates that it will be able to 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.
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.
Acquisition of National Convenience Stores
On November 8, 1995, the Company announced that it had entered into an agreement
with NCS providing for the acquisition of NCS by the Company. The total value
of the transaction, including the assumption of NCS's debt net of cash is
estimated at $260.0 million. Financing for the transaction has been arranged
through Bank of America.
NCS operates 661 "Stop N Go" convenience stores located in Texas. Nearly 600 of
the NCS outlets sell gasoline. Giving effect to the acquisition, it is
estimated that total 1995 annual revenues for the combined companies would be
approximately $3.3 billion, total assets would be approximately $2.2 billion,
and total debt would be approximately $900.0 million. In addition, the
Company's sales of gasoline through branded outlets would increase approximately
21.0% to an estimated 123,000 barrels per day. The acquisition is expected to
increase the contribution of the Company's Retail segment to operating profit
which lessens the impact of more volatile refining margins on overall results of
operations.
With respect to the Company's preliminary capital spending plans for 1996, the
acquisition will probably result in the elimination of some capital budget items
for the construction and remodeling of additional retail outlets in Texas.
However, some additional capital will be required to be spent with respect to
NCS outlets. As a result, the previously discussed estimate of capital spending
for 1996 remains at approximately $200.0 million.
The proposed NCS acquisition, which is subject to various customary conditions,
is presently expected to close in December of this year.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Agreement and Plan of Merger
15.1 Independent Accountants' Awareness Letter
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company in the third quarter of 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)
November 14, 1995
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Exhibit Pages
10.1 -- Agreement and Plan of Merger, dated November 8, 1995 by and among
Diamond Shamrock, Inc., Shamrock Acquisition Corp., and National
Convenience Stores Incorporated, filed as Exhibit (c)(1) to the
Company's Schedule 14D-1 Tender Offer Statement, filed with the
Securities Exchange Commission on November 14, 1995 and
incorporated by reference herein.
15.1 -- Independent Accountants' Awareness Letter.
27.1 -- Financial Data Schedule.
EXHIBIT 15.1
INDEPENDENT ACCOUNTANTS' AWARENESS LETTER
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sirs:
We are aware that Diamond Shamrock, Inc. has included our report dated November
14, 1995 (issued pursuant to the provisions of Statement on Auditing Standards
No. 71) in the Prospectuses constituting part of its Registration Statements on
Form S-3 (Nos. 33-67166 and 33-59451) filed on August 9, 1993, and May 19,
1995, respectively, and on Form S-8 (Nos. 33-15268, 33-34306, 33-47761, 33-50573
and 33-59025) filed on June 22, 1987, April 13, 1990, May 6, 1992, October 6,
1993 and May 2, 1995, respectively. We are also aware of our responsibilities
under the Securities Act of 1933.
Yours very truly,
/S/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
San Antonio, Texas
November 14, 1995
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