-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RXvB2J32pdcHR5tLJVTOceQbVvkUhgSjdb57XkravrNivGcVKcjbfeyoSMkyqncm 6wzfzRGLq8UnT1wN7RO6Nw== 0000089089-97-000028.txt : 19971117 0000089089-97-000028.hdr.sgml : 19971117 ACCESSION NUMBER: 0000089089-97-000028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERVICE CORPORATION INTERNATIONAL CENTRAL INDEX KEY: 0000089089 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 741488375 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06402 FILM NUMBER: 97717633 BUSINESS ADDRESS: STREET 1: 1929 ALLEN PKWY STREET 2: P O BOX 130548 CITY: HOUSTON STATE: TX ZIP: 77219 BUSINESS PHONE: 7135225141 MAIL ADDRESS: STREET 1: P O BOX 130548 CITY: HOUSTON STATE: TX ZIP: 77219-0548 10-Q 1 SERVICE CORPORATION INTERNATIONAL 9/30/97 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 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 1-6402-1 -------------------- SERVICE CORPORATION INTERNATIONAL (Exact name of registrant as specified in charter) Texas 74-1488375 (State or other jurisdiction of (I. R. S. employer identification incorporation or organization) number) 1929 Allen Parkway, Houston, Texas 77019 (Address of principal executive offices) (Zip code) (713) 522-5141 (Registrant's telephone number, including area code) -------------------- 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 and (2) has been subject to the filing requirements for the past 90 days. YES X NO The number of shares outstanding of the registrant's common stock as of November 7, 1997, was 251,876,389 (excluding treasury shares). SERVICE CORPORATION INTERNATIONAL INDEX
Page Part I Financial Information Consolidated Statement of Income (Unaudited) - Three Months Ended September 30, 1997 and 1996 Nine Months Ended September 30, 1997 and 1996 3 Consolidated Balance Sheet - September 30, 1997 (Unaudited) and December 31, 1996 4 Consolidated Statement of Cash Flows (Unaudited) - Nine Months Ended September 30, 1997 and 1996 5 Consolidated Statement of Stockholders' Equity (Unaudited) - Nine Months Ended September 30, 1997 6 Notes to the Consolidated Financial Statements (Unaudited) 7 - 12 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 - 22 Part II Other Information 23 Signature 23 2
SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 - ------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) Revenues........................$ 584,818 $ 544,500 $1,824,408 $1,684,702 Costs and expenses.............. (433,046) (413,122) (1,321,301) (1,249,093) ---------- ---------- ---------- ---------- Gross profit.................... 151,772 131,378 503,107 435,609 General and administrative expenses....................... (16,775) (12,296) (49,215) (40,837) ---------- ---------- ---------- ---------- Income from operations.......... 134,997 119,082 453,892 394,772 Interest expense................ (32,734) (35,995) (100,365) (102,926) Dividends on preferred securities of SCI Finance LLC.................... - (2,695) (4,382) (8,086) Other income.................... 9,330 8,382 21,185 15,805 Gain on sale of investment...... - - 68,077 - ---------- ---------- ---------- --------- (23,404) (30,308) (15,485) (95,207) ---------- ---------- ---------- --------- Income before income taxes and extraordinary loss........... 111,593 88,774 438,407 299,565 Provision for income taxes...... (38,869) (31,379) (155,735) (108,023) ---------- ---------- ---------- --------- Income before extraordinary loss........................... 72,724 57,395 282,672 191,542 Extraordinary loss on early extinguishment of debt (net of income taxes of $23,383).................... - - (40,802) - ---------- ---------- ---------- --------- Net income......................$ 72,724 $ 57,395 $ 241,870 $ 191,542 ========== ========== ========== ========= Earnings per share: Primary: Income before extraordinary loss.........................$ 28 $ .24 $ 1.14 $ .80 Extraordinary loss on early extinguishment of debt....... - - (.17) - ---------- ---------- ---------- --------- Net income....................$ .28 $ .24 $ .97 $ .80 ========== ========== ========== ========= Fully diluted: Income before extraordinary loss.........................$ 28 $ .23 $ 1.11 $ .77 Extraordinary loss on early extinguishment of debt....... - - (.16) - ---------- ---------- ---------- --------- Net income.....................$ .28 $ .23 $ .95 $ .77 ========== ========== ========== ========= Dividends per share.............$ .08 $ .06 $ .23 $ .18 ========== ========== ========== ========= Weighted average number of shares and equivalents......... 258,970 241,875 250,642 240,843 ========== ========== ========== =========
(See notes to consolidated financial statements) 3 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED BALANCE SHEET
September 30, 1997 December 31, (Unaudited) 1996 - -------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) Assets Current assets: Cash and cash equivalents...................... $ 62,114 $ 44,131 Receivables, net of allowances................. 502,751 494,576 Inventories.................................... 151,418 139,019 Other.......................................... 39,188 36,314 ---------- ---------- Total current assets........................... 755,471 714,040 ---------- ---------- Investments - insurance subsidiary.............. 569,339 601,565 Prearranged funeral contracts .................. 2,499,644 2,159,348 Long-term receivables .......................... 916,297 809,287 Cemetery property, at cost...................... 1,607,766 1,380,213 Property, plant and equipment, at cost (net).... 1,564,709 1,457,075 Deferred charges and other assets............... 396,000 371,608 Names and reputations (net)..................... 1,428,695 1,376,634 ---------- ---------- $9,737,921 $8,869,770 ========== ========== Liabilities & Stockholders' Equity Current liabilities: Accounts payable and accrued liabilities....... $ 414,470 $ 440,797 Current maturities of long-term debt........... 124,706 113,876 Income taxes .................................. 67,512 52,870 ---------- ---------- Total current liabilities...................... 606,688 607,543 ---------- ---------- Long-term debt.................................. 2,317,259 2,048,737 Deferred income taxes........................... 651,919 527,460 Other liabilities .............................. 524,624 552,443 Deferred prearranged funeral contract revenues.. 3,019,888 2,725,770 Company obligated, mandatorily redeemable, convertible preferred securities of SCI Finance LLC............................. - 172,500 Stockholders' equity: Common stock, $1 per share par value, 500,000,000 shares authorized, 251,837,275 and 236,193,427, respectively, issued and outstanding........................ 251,837 236,193 Capital in excess of par value................. 1,459,818 1,237,783 Retained earnings.............................. 908,690 728,108 Foreign currency translation adjustment........ (7,750) 22,315 Unrealized gain on securities available for sale, net of tax.............................. 4,948 10,918 ---------- ---------- Total stockholders' equity..................... 2,617,543 2,235,317 ---------- ---------- $9,737,921 $8,869,770 ========== ==========
(See notes to consolidated financial statements) 4 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, (Dollars in thousands) 1997 1996 - -------------------------------------------------------------------------------- Cash flows from operating activities: Net income............................................. $ 241,870 $ 191,542 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................ 113,982 101,101 Provision for deferred income taxes.................. 33,033 38,058 Extraordinary loss on early extinguishment of debt, net of income taxes................................. 40,802 - Gains from dispositions (net)........................ (83,303) (7,587) Change in assets and liabilities, net of effects from acquisitions: (Increase) in receivables........................... (87,109) (77,447) (Increase) in other assets.......................... (7,795) (58,428) Increase (decrease) in payables and other liabilities.................................. 25,211 (25,767) Other............................................... 11,210 439 --------- --------- Net cash provided by operating activities ............. 287,901 161,911 --------- --------- Cash flows from investing activities: Capital expenditures................................. (163,294) (110,675) Change in prearranged funeral balances............... (48,425) (62,139) Proceeds from sales of property and equipment........ 30,827 22,646 Acquisitions, net of cash acquired................... (306,148) (212,850) Loans issued by finance subsidiary................... (68,158) (64,945) Principal payments received on loans by finance subsidiary.................................. 29,117 153,716 Proceeds from sale of investment..................... 147,739 - Change in investments and other...................... (32,776) (27,146) --------- --------- Net cash (used in) investing activities................ (411,118) (301,393) --------- --------- Cash flows from financing activities: Increase (decrease) in borrowings under revolving credit agreements................................... 73,291 (32,387) Long-term debt issued................................ 650,000 300,000 Payments of debt..................................... (66,036) (104,584) Early extinguishment of debt......................... (449,998) - Dividends paid....................................... (50,998) (41,123) Bank overdrafts and other............................ (15,059) 4,277 --------- --------- Net cash provided by financing activities.............. 141,200 126,183 --------- --------- Net increase (decrease) in cash and cash equivalents...................................... 17,983 (13,299) Cash and cash equivalents at beginning of period............................................. 44,131 29,735 --------- --------- Cash and cash equivalents at September 30, 1997 and 1996........................... $ 62,114 $ 16,436 ========= ========= Cash used for: Interest.............................................. $ 98,663 $ 91,027 ========= ========= Taxes................................................. $ 101,604 $ 61,122 ========= ========= Non-cash investing and financing transactions: Common stock issued in acquisitions.................. $ 57,864 $ 3,277 Common stock issued under restricted stock plans..... $ 2,017 $ 1,278 Debt issued in acquisitions.......................... $ 9,656 $ 10,666 Debenture conversions to common stock................ $ 5,127 $ 790 Conversion of preferred securities of SCI Finance LLC $ 167,911 -
(See notes to consolidated financial statements) 5 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Foreign Capital currency Unrealized (Dollars in thousands, Common in excess Retained translation gain on except per share amounts) stock par value earnings adjustment securities - ------------------------------------------------------------------------------ Balance at December 31, 1996........$ 236,193 $1,237,783 $728,108 $ 22,315 $10,918 Net income ............ 241,870 Common stock issued: Stock option exercises and stock grants...... 495 1,705 Acquisitions........... 3,277 54,587 (5,590) Debenture conversions.. 411 4,716 Conversions of convertible preferred securities of SCI Finance LLC........... 11,461 161,027 Dividends on common stock ($.23 per share) (55,698) Foreign currency translation........... (30,065) Net change in unrealized gain on securities..... (5,970) -------- ---------- -------- -------- ------- Balance at September 30, 1997.......$251,837 $1,459,818 $908,690 $ (7,750) $ 4,948 ======== ========== ======== ======== =======
(See notes to consolidated financial statements) 6 SERVICE CORPORATION INTERNATIONAL NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) (Unaudited) 1. Nature of Operations The Company is the largest provider of death care services in the world. At September 30, 1997, the Company operated 3,048 funeral service locations, 376 cemeteries and 160 crematoria located in North America, Europe and the Pacific Rim. The funeral service locations and cemetery operations consist of the Company's funeral homes, cemeteries, crematoria and related businesses. Company personnel at the funeral service locations provide all professional services relating to funerals, including the use of funeral facilities and motor vehicles. Funeral related merchandise is sold at funeral service locations and certain funeral service locations contain crematoria. The Company sells prearranged funeral services whereby a customer contractually agrees to the terms of a funeral to be performed in the future. The Company's cemeteries provide cemetery interment rights (including mausoleum spaces and lawn crypts) and certain merchandise including stone and bronze memorials and burial vaults. These items are sold on an at need or preneed basis. Company personnel at cemeteries perform interment services and provide management and maintenance of cemetery grounds. Certain cemeteries also contain crematoria. There are 146 combination locations that contain a funeral service location within a company owned cemetery. The Company's financial services operations consist of a finance subsidiary, Provident Services, Inc. ("Provident"). Provident provides capital financing to independent funeral home and cemetery operators. 2. Summary of Significant Accounting Policies Basis of Presentation: The consolidated financial statements for the three and nine months ended September 30, 1997 and 1996 include the accounts of Service Corporation International and all majority-owned subsidiaries (the "Company") and are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments which management considers necessary for a fair presentation of the results for these periods. These financial statements have been prepared consistent with the accounting policies described in the annual report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") for the year ended December 31, 1996 and should be read in conjunction therewith. Certain reclassifications have been made to the prior period to conform to the current period presentation with no effect on previously reported net income. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 3. Acquisitions The Company acquired 226 funeral service locations, 34 cemeteries and 13 crematoria during the nine month period ended September 30, 1997 (153 funeral service locations, 25 cemeteries and one crematory during the nine months ended September 30, 1996). The consideration for these acquisitions consisted of combinations of cash, common stock of the Company and issued or assumed debt. The operating results of all of these acquisitions have been included since their respective dates of acquisitions. 7 The effect of acquisitions on the consolidated balance sheet at September 30, was as follows:
1997 1996 - ------------------------------------------------------------------------------- Current assets........................................ $ 15,072 $ 25,631 Prearranged funeral contracts......................... 63,014 47,136 Long-term receivables................................. 18,020 7,610 Cemetery property..................................... 218,901 125,204 Property, plant and equipment......................... 98,104 68,778 Deferred charges and other assets..................... 9,077 (4,171) Names and reputations................................. 129,023 86,627 Current liabilities................................... (24,197) (25,735) Long-term debt........................................ (19,439) (12,061) Deferred income taxes and other liabilities........... (70,059) (54,653) Deferred prearranged funeral contract revenues........ (79,094) (47,594) Stockholders' equity.................................. (52,274) (3,922) --------- --------- Cash used for acquisitions.......................... $ 306,148 $ 212,850 ========= =========
4. Prearranged Funeral Activities The Company sells price guaranteed prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. Payments under these contracts are generally placed in trust (pursuant to state law) or are used to pay premiums on life insurance policies issued by third party insurers in North America, the United Kingdom and Australia or the Company's French prearranged funeral service life insurance subsidiary, "Auxia". Unperformed price guaranteed prearranged funeral contracts are included in the consolidated balance sheet as "prearranged funeral contracts" or, in the case of contracts funded by Auxia, "investments-insurance subsidiary." A corresponding credit is recorded to "deferred prearranged funeral contract revenues." Allowances for customer cancellations are provided at the date of sale based on historical experience. Amounts paid by the customer pursuant to the prearranged funeral contracts are recognized in funeral revenue at the time the funeral is performed. Trust earnings and increasing insurance benefits are accrued and deferred until the service is performed at which time these funds are also recognized in funeral revenues and are intended to cover future increases in the cost of providing a price guaranteed funeral service. Included in deferred prearranged funeral contract revenues are net obtaining costs, including sales commissions and certain other direct marketing costs, applicable to prearranged funeral contracts which are deferred and will be expensed over a period representing the actuarially determined life of the prearranged contract. The recognition of future funeral revenues is estimated to occur in the following years based on actuarial assumptions as follows: 1997 (remaining three months)....................... $ 78,142 1998................................................ 257,366 1999................................................ 239,608 2000................................................ 225,094 2001................................................ 211,303 2002 and through 2006............................... 775,061 2007 and thereafter................................. 1,233,314 ---------- $3,019,888 ==========
8 5. Debt Debt at September 30, 1997 and December 31, 1996, was as follows:
September 30, December 31, 1997 1996 --------------------------------- Bank revolving credit agreements and commercial paper.................... $ 368,618 $ 325,875 6.375% notes due in 2000.............. 150,000 150,000 6.75% notes due in 2001............... 150,000 150,000 8.72% amortizing notes due in 2002.... 141,108 165,761 8.375% notes due in 2004.............. 51,840 200,000 7.375% notes due in 2004.............. 250,000 - 7.2% notes due in 2006................ 150,000 150,000 6.875% notes due in 2007.............. 150,000 150,000 6.95% amortizing notes due in 2010.... 60,240 61,576 7.70% notes due in 2009............... 200,000 - Floating rate notes due in 2011 (putable in 1999)................... 200,000 - 7.875% debentures due in 2013......... 55,627 150,000 7.0% notes due in 2015 (putable in 2002)................... 300,000 300,000 Medium term notes..................... 42,760 186,040 Convertible debentures................ 41,713 44,140 Mortgage notes and other notes payable............................. 143,299 151,836 Deferred loan costs................... (13,240) (22,615) ---------- ---------- Total debt....................... 2,441,965 2,162,613 Less current maturities............... (124,706) (113,876) ---------- ---------- Total long-term debt............. $2,317,259 $2,048,737 ========== ==========
The Company's primary revolving credit agreements provide for borrowing up to $1,000,000 and consist of two committed facilities -- a 364-day facility and a 5-year, multi-currency facility. The 364-day facility allows for borrowings up to $300,000, and is used primarily to support commercial paper issuance. This facility expires June 26, 1998, but has provisions to be extended for additional 364-day terms. At the end of any term, the outstanding balance may be converted into a two-year term loan at the Company's option. Interest rates on this facility are based on various indices as determined by the Company. In addition, a facility fee of 0.06% is paid quarterly on the total commitment amount. At September 30, 1997 there was $196,674 of commercial paper outstanding backed by the agreement at a weighted average interest rate of 5.85%. The five-year facility allows for borrowings up to $700,000, including $500,000 in various foreign currencies. This facility expires June 27, 2002. Interest rates on this facility are based on various indices as determined by the Company. In addition, a facility fee is paid quarterly on the total commitment amount. The facility fee, which ranges from 0.07% to 0.15%, is based on the Company's senior debt ratings. The facility fee is currently set at 0.08%. At September 30, 1997, there was $112,842 outstanding under this facility at a weighted average interest rate of 4.31%. The commercial paper borrowings and revolving notes generally have maturities ranging from one to 90 days. The credit agreements disclosed above contain financial compliance provisions with certain restrictions on levels of net worth, debt, equity, liens, letters of credit, and guarantees. The Company's outstanding commercial paper and other borrowings under its various credit facilities at September 30, 1997 are classified as long-term debt. The Company uses these revolving credit agreements primarily to finance the Company's ongoing acquisition programs. From time to time, the Company raises debt and/or equity in the public markets to reduce its revolving credit facility balances. The timing of these public debt or equity offerings is dependent on numerous factors including market conditions, long and short term interest rates, the Company's capitalization ratios and the outstanding balances under the revolving credit facilities. Therefore, the Company has classified these borrowings as long-term debt. It is the Company's intent 9 to refinance such borrowings through the use of its credit agreements or other long-term notes issued under a shelf registration filed with the Commission. During the first quarter of 1997, the Company initiated a tender offer for three issues of its higher coupon debt and repurchased approximately $386,000 of the three series, resulting in a $40,802 extraordinary loss, using commercial paper and its revolving credit facility. In April 1997, the Company refinanced these and other working capital borrowings by issuing $250,000 7.375% notes due April 2004, and $200,000 7.70% notes due April 2009, which were sold through an underwritten public offering as well as $200,000 of floating rate notes due April 2011 (putable to the Company in April 1999) through a private placement. During the three months ended September 30, 1997, pursuant to a shelf registration filed with the Commission, the Company guaranteed the following promissory notes issued through subsidiaries in connection with various acquisitions of operations:
Subsidiary Amount --------------------------------------------------------------- Moran-Ashton Funeral Home, Inc........................ $ 80 SCI Illinois Services, Inc............................ 625 SCI Ohio Funeral Services, Inc........................ 1,945 SCI Iowa Funeral Services, Inc........................ 1,200 SCI California Funeral Services, Inc.................. 1,034
6. Convertible Preferred Securities of SCI Finance LLC On May 16, 1997, the Company announced that its subsidiary, SCI Finance LLC, would redeem all the remaining outstanding shares (3,365,000 shares) of its $3.125 Term Convertible Shares, Series A ("TECONS"). Subsequently, 3,364,700 shares were converted by TECONS shareholders into 11,178,522 shares of SCI common stock. The remaining shares were redeemed on June 20, 1997, for $52.50 per share. 7. Derivatives The Company enters into derivatives primarily in the form of interest rate swaps and cross-currency interest rate swaps in combination with local currency borrowings in order to manage its mix of fixed and floating rate debt and to substantially hedge the Company's net investment in foreign assets. The Company has procedures in place to monitor and control the use of derivatives and enters into transactions only with a limited group of credit-worthy financial institutions. The Company does not engage in derivative transactions for speculative or trading purposes, nor is it a party to leveraged derivatives. In general, cross-currency swaps are entered into concurrently with significant foreign acquisitions and convert US dollar debt into the respective foreign currency of the acquisitions. Such cross-currency swaps are used in combination with local currency borrowings to substantially hedge the Company's net investment in foreign operations. The cross-currency swaps generally include interest rate provisions to enable the Company to additionally hedge a portion of the earnings of its foreign operations. Accordingly, movements in currency rates that impact the swap are generally offset by a corresponding movement in the value of the underlying assets being hedged. Similarly, currency movements that impact foreign interest expense due under the cross-currency interest rate swaps are partially offset by a corresponding movement in the earnings of the foreign operation. At September 30, 1997, after giving consideration to the interest rate and cross-currency swaps, the Company's debt (excluding $136,000 of Provident debt) consists of approximately $1,055,000 of fixed interest rate debt at a weighted average rate of 6.92% and approximately $1,207,000 of floating interest rate debt at a weighted average rate of 5.28%. Additionally, approximately $1,624,000 of the Company's debt consists of foreign denominated debt. During the first nine months of 1997, the Company converted approximately $87,600 from French fixed rates to floating German rates. In addition, as part of the repurchase and refinancing of certain issues of outstanding debt, the Company entered into a floating to fixed interest rate swap on US $200,000 notional, terminated a US $75,000 notional fixed to floating interest rate swap and converted US $450,000 of the fixed rate debt issued in April to floating rates through interest rate swaps. In August 1997, the Company entered into three cross currency interest rate swaps to increase the Company's hedge of its net investments in France and Australia. These swaps converted $212,321 of US floating rate debt into $29,760 floating and 10 $64,728 fixed Australian denominated debt and $117,833 of French denominated fixed rate debt. The net fair value of the Company's various swap agreements at September 30, 1997, was a receivable of $80,784. Fair values were obtained from counterparties to the agreements and represent their estimate of the net amount the Company would receive to terminate the swap agreements based upon the existing terms and current market conditions. 8. Sale of Investment During the first quarter of 1997, the Company sold its interest (7,994,000 shares) in Equity Corporation International ("ECI") and received sale proceeds of $147,700 producing a gain of $68,100 ($42,500 after-tax). 9. Investment in Arbor Memorial Services Inc. On August 11, 1997, the Company announced that its subsidiary, Service Corporation International (Canada) Limited, entered into an agreement to acquire 713,825 class A voting shares and 2,213,152 class B non-voting shares of Arbor Memorial Services Inc. ("Arbor"). After the completion of this transaction the Company will own 960,969 class A voting shares and 5,270,227 class B non-voting shares of Arbor. These shares represent approximately 38% of Arbor's class A shares, 66% of the class B shares and 59% of the total shares of Arbor currently outstanding. Arbor owns funeral and cemetery operations in Canada. This transaction is expected to close in the fourth quarter of 1997. 10.Ratio of Earnings to Fixed Charges
Nine Months Ended September 30, 1997 1996 ------------------------------- 4.35 3.19
For purposes of computing the ratio of earnings to fixed charges, earnings consist of income from continuing operations before income taxes, less undistributed income of equity investees which are less than 50% owned, plus the minority interest of majority-owned subsidiaries with fixed charges and plus fixed charges (excluding capitalized interest). Fixed charges consist of interest expense, whether capitalized or expensed, amortization of debt costs, dividends on preferred securities of SCI Finance LLC and one-third of rental expense which the Company considers representative of the interest factor in the rentals. The increase in the Company's ratio of earnings to fixed charges is partially attributable to the gain on the sale of the Company's investment in ECI. 11 11.Geographic Segment Information The Company conducts funeral and cemetery operations principally in the United States, Australia, Canada, France and the United Kingdom. Geographic segment information was as follows:
United Other Other States France European Foreign Consolidated - -------------------------------------------------------------------------------- Revenues: Nine months ended September 30: 1997................$1,178,470 $356,040 $162,931 $126,967 $1,824,408 1996................ 1,034,226 393,595 135,337 121,544 1,684,702 Three months ended September 30: 1997................ 384,358 103,950 51,579 44,931 584,818 1996................ 338,677 121,162 41,386 43,275 544,500 Income from operations: Nine months ended September 30: 1997................$ 346,672 $ 34,783 $ 32,831 $ 39,606 $ 453,892 1996................ 292,633 33,188 29,091 39,860 394,772 Three months ended September 30: 1997............... 104,085 7,331 7,733 15,848 134,997 1996............... 89,915 7,227 7,664 14,276 119,082 Funeral services performed: Nine months ended September 30: 1997................ 171,910 111,548 76,451 38,122 398,031 1996................ 160,186 112,050 69,719 37,697 379,652 Three months ended September 30: 1997................ 53,675 35,062 23,692 13,644 126,073 1996................ 51,009 34,403 20,809 13,571 119,792 Number of locations at September 30: 1997................ 1,528 1,093 679 284 3,584 1996................ 1,392 1,101 609 244 3,346
12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except average sales prices) Overview: The majority of the Company's funeral service locations and cemeteries are managed in groups called clusters. Clusters are established primarily in metropolitan areas to take advantage of operational efficiencies, particularly the sharing of operating expenses such as service personnel, vehicles, preparation services, clerical staff and certain building facility costs. Personnel costs, the largest operating expense for the Company, is the cost component most beneficially affected by clustering. The sharing of employees, as well as the other costs mentioned, allow the Company to more efficiently utilize its operating facilities due to the traditional fluctuation in the number of funeral services and cemetery interments performed in a given period. The Company's acquisitions are primarily located within existing cluster areas or create new cluster area opportunities. The Company has successfully implemented the cluster strategy in its North American, United Kingdom and Australian operations and is continuing with implementation in its French operations. The Company has approximately 287 clusters in North America, the United Kingdom and Australia, which range in size from two operations to 61 operations. There may be more than one cluster in a given metropolitan area, depending upon the level and degree of shared costs. Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30, 1996 Results of Operations: Segment information for the Company's three lines of business was as follows:
Nine Months Ended Percentage September 30, Increase Increase 1997 1996 (Decrease) (Decrease) ------------------------------------------------------- Revenues: Funeral................$1,274,165 $1,219,031 $55,134 4.5 % Cemetery............... 538,153 450,200 87,953 19.5 Financial services..... 12,090 15,471 (3,381) (21.9) ---------- ---------- ------- 1,824,408 1,684,702 139,706 8.3 Costs and expenses: Funeral................ 977,825 947,533 30,292 3.2 Cemetery............... 337,021 293,741 43,280 14.7 Financial services..... 6,455 7,819 (1,364) (17.4) ---------- ---------- ------- 1,321,301 1,249,093 72,208 5.8 Gross profit and margin percentage: Funeral................ 296,340 23.3% 271,498 22.3% 24,842 9.1 Cemetery............... 201,132 37.4 156,459 34.8 44,673 28.6 Financial services..... 5,635 46.6 7,652 49.5 (2,017) (26.4) ---------- ---------- ------- $ 503,107 27.6% $ 435,609 25.9% $67,498 15.5 % ========== ========== =======
13 Funeral Funeral revenues were as follows:
Nine Months ended Percentage September 30, Increase Increase 1997 1996 (Decrease) (Decrease) ------------------------------------------------- Existing clusters: United States........... $ 664,624 $ 605,330 $59,294 9.8 % France.................. 356,039 393,598 (37,559) (9.5) Other European.......... 135,254 119,519 15,735 13.2 Other foreign........... 88,207 86,106 2,101 2.4 ---------- ---------- ------- 1,244,124 1,204,553 39,571 3.3 New clusters:* United States........... 14,051 2,654 11,397 Other European.......... 10,798 1,273 9,525 Other foreign........... 563 - 563 ---------- ---------- ------- 25,412 3,927 21,485 Non-cluster and disposed operations....... 4,629 10,551 (5,922) ---------- ---------- ------- Total funeral revenues.. $1,274,165 $1,219,031 $55,134 4.5 % ========== ========== =======
The $39,571 increase in revenues from existing clusters was the result of a 3.1% increase in the number of funeral services performed (387,291 compared to 375,758) and a .2% higher average sales price ($3,212 compared to $3,206). Acquisitions since January 1, 1996, included in existing clusters, accounted for $74,604 of the existing cluster revenue increase. Excluding a $50,065 decrease in French revenue caused exclusively by a change in the US dollar / French franc exchange rate, businesses owned before 1996 had a revenue increase of $15,032. During the nine months ended September 30, 1997, the Company sold $425,029 of prearranged funeral services compared to $414,893 for the same period in 1996. Funeral costs and expenses were as follows:
Nine Months Ended Percentage September 30, Increase Increase 1997 1996 (Decrease) (Decrease) ------------------------------------------------ Existing clusters: United States........... $ 432,596 $ 392,599 $ 39,997 10.2 % France.................. 307,971 346,329 (38,358) (11.1) Other European.......... 107,251 91,393 15,858 17.4 Other foreign........... 60,368 56,548 3,820 6.8 ---------- ---------- -------- 908,186 886,869 21,317 2.4 New clusters:* United States........... 10,720 1,867 8,853 Other European.......... 9,138 960 8,178 Other foreign........... 456 - 456 ---------- ---------- -------- 20,314 2,827 17,487 Non-cluster and disposed operations....... 8,184 13,421 (5,237) Administrative overhead.... 41,141 44,416 (3,275) (7.4) Total funeral costs ---------- ---------- -------- and expenses.......... $ 977,825 $ 947,533 $ 30,292 3.2 % ========== ========== ========
- ------------------ * Represents new geographic cluster areas entered into since January 1, 1996 for the period that those businesses were owned by the Company. 14 The $21,317 increase in costs and expenses from existing clusters is primarily the result of the period to period increase in the number of funeral services performed. Acquisitions since January 1, 1996, included in existing clusters, accounted for $56,853 of the existing cluster cost increase. Excluding a $45,066 decrease in French costs caused exclusively by a change in the US dollar / French franc exchange rate, businesses owned before 1996 had a cost increase of $9,530. The gross profit margin before administrative overhead for existing clusters increased to 27.0% in 1997 from 26.4% in 1996. Typically, acquisitions will temporarily exhibit slightly lower gross profit margins than those experienced by the Company's existing locations at least until such time as these locations are assimilated into the Company's cluster management strategy. The overall funeral gross profit margin percentage improved in 1997 to 23.3%, compared to 22.3% in 1996. Contributing to this period to period improvement were the Company's North American operations, which had a margin improvement to 30.5% from 30.1%. In addition, the French gross profit margin (before administrative overhead) of 13.5% for the period ended September 30, 1997, improved from 12.0% in 1996 which is consistent with the Company's expectations for these operations which have historically produced lower gross profit margins than the Company's other operations. Administrative overhead costs, expressed as a percentage of total funeral revenues, decreased to 3.2%, compared to 3.6% in 1996. Cemetery Cemetery revenues were as follows:
Nine Months Ended September 30, Percentage 1997 1996 Increase Increase ----------------------------------------------------- Existing clusters: United States...........$ 475,811 $ 400,945 $74,866 18.7 % Other European.......... 15,902 10,962 4,940 45.1 Other foreign........... 37,855 34,995 2,860 8.2 ---------- ---------- ------- 529,568 446,902 82,666 18.5 New clusters*.............. 3,127 - 3,127 Non-cluster and disposed operations....... 5,458 3,298 2,160 ---------- ---------- ------- Total cemetery revenues.$ 538,153 $ 450,200 $87,953 19.5 % ========== ========== =======
Revenues from the existing clusters increased $82,666 due primarily to increased preneed sales of property and merchandise, higher average sales prices for these items and higher investment earnings on trusted amounts. Included in the existing cluster increase were $38,383 in increased revenues from cemeteries acquired since the beginning of 1996, while revenues from existing cluster locations owned before 1996 increased $44,283. Cemetery costs and expenses were as follows:
Nine Months Ended September 30, Percentage 1997 1996 Increase Increase ----------------------------------------------------- Existing clusters: United States...........$ 272,994 $ 243,501 $29,493 12.1% Other European.......... 8,839 6,922 1,917 27.7 Other foreign........... 20,395 18,474 1,921 10.4 ---------- ---------- ------- 302,228 268,897 33,331 12.4 New clusters*.............. 2,034 9 2,025 Non-cluster and disposed operations...... 5,390 3,242 2,148 66.3 Administrative overhead.... 27,369 21,593 5,776 26.7 ---------- ---------- ------- Total cemetery costs and expenses...........$ 337,021 $ 293,414 $43,280 14.7% ========== ========== =======
- ------------------ * Represents new geographic cluster areas entered into since January 1, 1996 for the period that those businesses were owned by the Company. 15 Costs and expenses from existing clusters increased $33,331 due primarily to an increase of $25,140 at cemeteries acquired since the beginning of 1996. The overall cemetery gross profit margin percentage improved in 1997 to 37.4% from 34.8% in 1996. This increase reflects strong growth and a favorable product mix in sales of preneed cemetery property and merchandise, increased trust investment income, as well as continued cost control in all major expense categories. Administrative overhead costs have increased to 5.1% of revenues compared to 4.8% during the nine months ended September 30, 1996. Financial Services The Company's wholly-owned finance subsidiary, Provident Services, Inc. ("Provident") reported a gross profit of $5,635 for the nine months ended September 30, 1997, compared to $7,652 for the same period in 1996. Provident's average outstanding loan portfolio during the current period decreased to $179,378 compared to $210,597 in 1996, and the average interest rate spread also decreased to 3.17% compared to 3.81% in 1996. Other Income and Expenses Expressed as a percentage of revenues, general and administrative expenses increased slightly to 2.7% for the nine months ended September 30, 1997 compared to 2.4% for the comparable period in 1996. These expenses increased $8,378 or 20.5% period to period primarily from increased personnel costs. Interest expense, which excludes the amount incurred through financial service operations, decreased $2,561 or 2.5% period to period. The decreased interest expense reflects the lower average interest rates on indebtedness offset by the Company's higher debt level in 1997 resulting from the Company's recent refinancing of certain long-term debt and hedging programs associated with its international investments. During the first quarter of 1997, the Company sold its interest in Equity Corporation International ("ECI") producing a gain of $68,100. The provision for income taxes reflected a 35.5% effective tax rate for the nine month period ended September 30, 1997, compared to a 36.1% effective tax rate for the comparable period in 1996. The decrease in the effective tax rate is due primarily to lower taxes from international operations, partially offset by the tax impact from the gain on sale of the Company's interest in ECI which is reflected at the Company's higher domestic tax rate. 16 Three Months Ended September 30, 1997 Compared to Three Months Ended September 30, 1996 Results of Operations: Segment information for the Company's three lines of business was as follows:
Three Months Ended Percentage September 30, Increase Increase 1997 1996 (Decrease) (Decrease) ------------------------------------------------------- Revenues: Funeral................$397,810 $389,031 $ 8,779 2.3 % Cemetery............... 182,624 150,584 32,040 21.3 Financial services..... 4,384 4,885 (501) (10.3) -------- -------- -------- 584,818 544,500 40,318 7.4 Costs and expenses: Funeral................ 315,670 310,646 5,024 1.6 Cemetery............... 115,135 100,456 14,679 14.6 Financial services..... 2,241 2,020 221 10.9 -------- -------- -------- 433,046 413,122 19,924 4.8 Gross profit and margin percentage: Funeral................ 82,140 20.6% 78,385 20.1% 3,755 4.8 Cemetery............... 67,489 37.0 50,128 33.3 17,361 34.6 Financial services..... 2,143 48.9 2,865 58.6 (722) (25.2) -------- -------- -------- $151,772 26.0% $131,378 24.1% $ 20,394 15.5 % ======== ======== ========
Funeral Funeral revenues were as follows:
Three Months Ended Percentage September 30, Increase Increase 1997 1996 (Decrease) (Decrease) --------------------------------------------------- Existing clusters: United States........... $ 209,379 $ 195,534 $13,845 7.1 % France.................. 103,951 121,165 (17,214) (14.2) Other European.......... 41,574 36,273 5,301 14.6 Other foreign........... 31,181 30,599 582 1.9 --------- --------- ------- 386,085 383,571 2,514 0.7 New clusters:* United States........... 5,276 1,205 4,071 Other European.......... 4,821 737 4,084 Other foreign........... 90 - 90 --------- --------- ------- 10,187 1,942 8,245 Non-cluster and disposed operations....... 1,5383 3,518 (1,980) --------- --------- ------- Total funeral revenues.. $ 397,810 $ 389,031 $ 8,779 2.3 % ========= ========= =======
- ----------------- * Represents new geographic cluster areas entered into since January 1, 1996 for the period that those businesses were owned by the Company. 17 The $2,514 increase in revenues from existing clusters was the result of a 2.8% increase in the number of funeral services performed (121,735 compared to 118,399) offset by a 2.1% lower average sales price ($3,172 compared to $3,240). Acquisitions since January 1, 1996, included in existing clusters, accounted for $22,381 of the existing cluster revenue increase. Excluding a $21,892 decrease in French revenue caused exclusively by a change in the US dollar / French franc exchange rate, businesses owned before 1996 had a revenue increase of $2,025. During the three months ended September 30, 1997, the Company sold $151,010 of prearranged funeral services compared to $145,880 for the same quarter in 1996. Funeral costs and expenses were as follows:
Three Months Ended Percentage September 30, Increase Increase 1997 1996 (Decrease) (Decrease) --------------------------------------------------- Existing clusters: United States........... $ 142,613 $ 133,807 $ 8,806 6.6 % France.................. 92,143 109,199 (17,056) (15.6) Other European.......... 36,182 29,401 6,781 23.1 Other foreign........... 20,913 19,884 1,029 5.2 --------- --------- ------- 291,851 292,291 (440) (0.2) New clusters:* United States........... 4,068 897 3,171 Other European.......... 4,568 567 4,001 Other foreign........... 93 - 93 --------- --------- ------- 8,729 1,464 7,265 Non-cluster and disposed operations....... 3,081 2,764 317 Administrative overhead.... 12,009 14,127 (2,118) (15.0) Total funeral costs --------- --------- ------- and expenses........... $ 315,670 $ 310,646 $ 5,024 1.6 % ========= ========= =======
The French existing cluster decrease of $17,056 was the result of a $19,578 decrease in French costs caused exclusively by a change in the US dollar / French franc exchange rate. Acquisitions since January 1, 1996, included in existing clusters, had a $17,737 cost increase, while existing cluster locations owned before 1996 had a $1,401 cost increase (excluding French exchange rate impact discussed above). The gross profit margin before administrative overhead for existing clusters increased to 24.4% in 1997 from 23.8% in 1996. The overall funeral gross profit margin percentage improved in 1997 (20.6% compared to 20.1% in 1996). Contributing to this quarter to quarter improvement were the Company's North American operations, which had a margin improvement to 27.6% from 26.8%. In addition, the French gross profit margin (before administrative overhead) of 11.4% for the quarter ended September 30, 1997, improved from 9.9% in 1996. Administrative overhead costs, expressed as a percentage of total funeral revenues, decreased to 3.0%, compared to 3.6% in 1996. - ----------------- * Represents new geographic cluster areas entered into since January 1, 1996 for the period that those businesses were owned by the Company. 18 Cemetery Cemetery revenues were as follows:
Three Months Ended September 30, Percentage 1997 1996 Increase Increase -------------------------------------------------- Existing clusters: United States........... $ 160,686 $ 134,399 $26,287 19.6 % Other European.......... 5,016 3,533 1,483 42.0 Other foreign........... 13,528 12,277 1,251 10.2 --------- --------- ------- 179,230 150,209 29,021 19.3 New clusters*.............. 2,331 - 2,331 Non-cluster and disposed operations....... 1,063 375 688 --------- --------- ------- Total cemetery revenues. $ 182,624 $ 150,584 $32,040 21.3 % ========= ========= =======
Revenues from the existing clusters increased $29,021 due primarily to increased preneed sales of property and merchandise as well as higher average sales prices for these items and higher investment earnings on trusted amounts. Included in the existing cluster increase were $12,931 in increased revenues from cemeteries acquired since the beginning of 1996, while revenues from existing cluster locations owned before 1996 increased $16,090. Cemetery costs and expenses were as follows:
Three Months Ended September 30, Percentage 1997 1996 Increase Increase --------------------------------------------------- Existing clusters: United States........... $ 92,439 $ 83,080 $ 9,359 11.3% Other European.......... 2,990 2,479 511 20.6 Other foreign........... 6,868 6,504 364 5.6 --------- --------- ------- 102,297 92,063 10,234 11.1 New clusters*.............. 1,248 4 1,244 Non-cluster and disposed operations....... 1,295 (36) 1,331 Administrative overhead.... 10,295 8,425 1,870 22.2 Total cemetery costs --------- --------- ------- and expenses........... $ 115,135 $ 100,456 $14,679 14.6% ========= ========= =======
Costs and expenses from existing clusters increased $10,234 due primarily to an increase of $9,604 at cemeteries acquired since the beginning of 1996. The overall cemetery gross profit margin percentage improved in 1997 to 37.0% from 33.3% in 1996. This increase reflects strong growth and a favorable product mix in sales of preneed cemetery property and merchandise, increased trust investment income, as well as continued cost control in all major expense categories. Administrative overhead costs, expressed as a percentage of total cemetery revenues, were unchanged at 5.6% during the three months ended September 30, 1997 and 1996. Financial Services The Company's wholly-owned finance subsidiary, Provident Services, Inc. ("Provident") reported a gross profit of $2,143 for the three months ended September 30, 1997, compared to $2,865 for the same period in 1996. Provident's average outstanding loan portfolio during the current quarter increased to $191,040 compared to $180,907 in 1996, while the average interest rate spread decreased to 3.19% compared to 3.94% in 1996. - ----------------- * Represents new geographic cluster areas entered into since January 1, 1996 for the period that those businesses were owned by the Company. 19 Other Income and Expenses Expressed as a percentage of revenues, general and administrative expenses increased to 2.9% for the three months ended September 30, 1997 compared to 2.3% for the same comparable period in 1996. These expenses increased $4,479 or 36.4% quarter to quarter primarily from increased personnel costs and the allocation of certain European overhead costs. Interest expense, which excludes the amount incurred through financial service operations, decreased $3,261 or 9.1% quarter to quarter. The decreased interest expense reflects the lower average interest rates on indebtedness offset by the Company's higher debt level in 1997 resulting from the Company's recent refinancing of certain long-term debt and hedging programs associated with its international investments. The provision for income taxes reflected a 34.8% effective tax rate for the quarter ended September 30, 1997 as compared to a 35.3% effective tax rate for the comparable period in 1996. The decrease in the effective tax rate is due primarily to lower taxes from international operations. Financial Condition and Liquidity at September 30, 1997: General Historically, the Company has funded its working capital needs and capital expenditures primarily through cash provided by operating activities and borrowings under bank revolving credit agreements and commercial paper. Funding required for the Company's acquisition program has been generated through public and private offerings of debt and the issuance of equity securities supplemented by the Company's revolving credit agreements and additional securities registered with the Commission. The Company believes cash from operations, additional funds available under its revolving credit agreements, proceeds from offerings of securities and the other registered securities will be sufficient to continue its current acquisition program and operating policies. At September 30, 1997, the Company had net working capital of $148,783 and a current ratio of 1.25:1, compared to working capital of $106,497 and a current ratio of 1.18:1 at December 31, 1996. Interest Rate and Currency Management In general, interest rates are managed such that 40% to 60% of the total debt (excluding $136,000 debt which offsets the Provident loan receivable portfolio) is floating rate and thus is sensitive to interest rate fluctuations. After giving effect to the interest rate and cross-currency interest rate swaps, the Company's debt (excluding the Provident debt) has been converted into approximately $1,055,000 of fixed interest rate debt at a weighted average rate of 6.92% and approximately $1,207,000 of floating interest rate debt at a weighted average rate of 5.28%. However, the Company has entered into forward interest rate swaps which convert approximately $145,000 of foreign denominated floating debt to fixed rate debt beginning in December 1997, bringing the mix of the debt portfolio on a pro forma basis to 53% fixed and 47% floating. In addition, as of September 30, 1997, $450,000 of the US interest rate swaps contain provisions which require termination of the swap if certain interest rate conditions are met. During the first quarter of 1997, as part of its ongoing interest rate management, the Company initiated a tender offer for three issues of its higher coupon debt and repurchased approximately $386,000 of the three series using commercial paper and its revolving credit facility. In April 1997, the Company refinanced these and other borrowings by issuing $250,000 7.375% notes due April 2004, $200,000 7.70% notes due April 2009, and $200,000 of floating rate notes due April 2011 (putable to the Company in April 1999). As part of the refinancing, the Company entered into certain interest rate swaps which had the net effect of converting $250,000 of the fixed rate debt to floating. In August 1997, the Company increased the hedge of its net investment in France and Australia by converting $212,321 of US dollar floating debt to $29,760 floating and $64,728 fixed Australian dollar denominated debt and $117,823 of fixed French Franc denominated debt. 20 SOURCES AND USES OF CASH Cash flows from operating activities: Net cash provided by operating activities was $287,901 for the nine months ended September 30, 1997, compared to $161,911 for the same period in 1996, an increase of $125,990. This increase was primarily due to improved operating results and an increase in payables and other liabilities during the current nine months. Significant reductions of operating cash include amounts receivable resulting from increased sales of funeral services and cemetery products and merchandise. Cash flows from investing activities: Net cash used in investing activities was $411,118 for the nine months ended September 30, 1997, compared to $301,393 for the same period in 1996, an increase of $109,725. Cash used for acquisitions increased by $93,298 and capital expenditures increased by $52,619 during the nine months ended September 30, 1997, as the Company continues to expand through both acquisitions of existing businesses and through increased construction of funeral and cemetery facilities. Additionally, the Company used approximately $20,000 to increase its investment in existing equity investees. Approximately $147,700 in cash was provided by the sale of the Company's interest in ECI during the nine months ended September 30, 1997. Cash flows from financing activities: Net cash provided by financing activities was $141,200 for the nine months ended September 30, 1997, compared to $126,183 for the same period in 1996, an increase of $15,017. The increase in 1997 compared to 1996 is mainly due to the timing of borrowings and repayments of debt. During the nine months ended September 30, 1997, the net cash flow provided by debt financed transactions was $207,501, compared to $163,029 for the same period in 1996. During 1997 the Company issued $650,000 of long-term debt and used $449,998 for an early extinguishment of debt. The Company believes that this level of debt is manageable. As of September 30, 1997, the Company's debt to capitalization ratio was 48.3% compared to 47.3% at December 31, 1996. The interest coverage ratio for the nine months ended September 30, 1997, was 4.35:1 (excluding the gain on the sale of the Company's investment in ECI), compared to 3.53:1 for the same period in 1996. This interest coverage level has been relatively consistent, despite higher levels of debt outstanding, for several years. The Company believes that the acquisition of funeral and cemetery operations funded with combinations of cash, debt or Company common stock is a prudent business strategy given the stable cash flow generated and the low failure rate exhibited by these types of businesses. The Company believes these acquired firms are capable of servicing the additional debt and providing a sufficient return on the Company's investment. The Company expects adequate sources of funds to be available to finance its future operations and acquisitions through internally generated funds, borrowings under credit facilities and the issuance of securities. The Company has various revolving credit facilities and lines of credit which provide for aggregate borrowings of up to $1,000,000. At September 30, 1997, the Company had approximately $690,000 of available borrowings under its primary and multi-currency credit facilities. In addition, at September 30, 1997 the Company had the ability to issue $550,000 in securities registered with the Commission under a shelf registration as well as 16,061,000 shares of common stock and approximately $213,000 of guaranteed promissory notes and convertible debentures registered with the Commission under a separate shelf registration to be used exclusively for future acquisitions. Prearranged Funeral Services: The Company has a marketing program to sell prearranged funeral contracts and the funds collected are generally held in trust or are used to purchase a life insurance or annuity contract. The principal amount of these prearranged funeral contracts will be received in cash by a Company funeral service location at the time the funeral is performed. Earnings on trust funds and increasing benefits under insurance funded contracts also increase the amount of cash to be received upon performance of the funeral and are intended to cover future increases in the cost of providing a price guaranteed funeral service as well as any selling costs. During 1996, the Company completed a review of the prearranged trust investment process which included an asset/liability study. This has resulted in a new investment program which entails the consolidation of multiple trustees, the use of institutional managers with differing investing styles and consolidated performance monitoring and tracking. This new program targets a real return in excess of the amount necessary to cover future increases in the cost of providing a price guaranteed funeral service as well as any selling costs. This is accomplished by allocating the portfolio mix to the appropriate investments that more 21 accurately match the anticipated maturity of the contracts. This has resulted in a new asset allocation policy of approximately 65% equity and 35% fixed income which the Company began to implement in the first quarter of 1997. Other Matters: In August 1997, the Compensation Committee of the Board of Directors granted stock options to purchase 4,360,000 shares at $31.75 to 18 key employees. These options which vest after seven years, become exercisable within four years of issuance if certain stock price targets are met as follows: 20% are exercisable at $48; 50% are exercisable at $56; 100% are exercisable at $65. The Company will adopt Statement of Financial Accounting Standards ("FAS") No. 128 "Earnings Per Share" and FAS 129 "Disclosures of Information About Capital Structure" for the year ended December 31, 1997. The Company will also adopt FAS 130 "Reporting Comprehensive Income" and FAS 131 "Disclosures About Segments of an Enterprise and Related Information" for the year ended December 31, 1998. The adoption of these standards will not have a material impact, on the Company's financial position, results of operations or statement of cash flows. Cautionary Statement on Forward-looking Statements The statements contained in this filing on Form 10-Q that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be accompanied by words such as "believe," "estimate," "expect," "anticipate," or "predict," that convey the uncertainty of future events or outcomes. These statements are based on assumptions that the Company believes are reasonable; however many important factors could cause the Company's actual results in the future to differ materially from the forward-looking statements made herein and in any other documents or oral presentations made by, or on behalf of, the Company. Important factors which could cause actual results to differ materially from those in forward- looking statements include, among others, the following: 1)Changes in general economic conditions both domestically and internationally impacting financial markets (e.g. marketable security values as well as currency and interest rate fluctuations). 2)Changes in domestic and international political and/or regulatory environments in which the Company operates, including tax and accounting policies. Changes in regulations may impact the Company's ability to enter or expand new markets. 3)Changes in consumer demand for the Company's services caused by several factors such as changes in local death rates, cremation rates, competitive pressures and local economic conditions. 4)The Company's ability to identify and complete additional acquisitions on terms that are favorable to the Company, to successfully integrate acquisitions into the Company's business and to realize expected cost savings in connection with such acquisitions. The Company's future results may be materially impacted by changes in the level of acquisition activity. The Company assumes no obligation to publicly update or revise any forward-looking statements made herein or any other forward- looking statements made by the Company. 22 SERVICE CORPORATION INTERNATIONAL PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11.1 Computation of earnings per share. 12.1 Ratio of earnings to fixed charges for the nine months ended September 30, 1997 and 1996. 27.1 Financial data schedule. (b) Reports on Form 8-K During the quarter ended September 30, 1997, the Company did not file any reports on Form 8-K. 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. November 13, 1997 SERVICE CORPORATION INTERNATIONAL By: /s/ George R. Champagne ------------------------------------------- George R. Champagne Senior Vice President Chief Financial Officer (Principal Financial Officer) 23 EX-11.1 2 COMPUTATION OF EARNINGS PER SHARE SERVICE CORPORATION INTERNATIONAL Exhibit 11.1 COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 - -------------------------------------------------------------------------------- (Thousands, except per share amounts) Primary: Income before extraordinary loss.......................... $ 72,724 $ 57,395 $282,672 $191,542 Extraordinary loss on early extinguishment of debt (net of tax).......... - - (40,802) - -------- -------- -------- -------- $ 72,724 $ 57,395 $241,870 $191,542 ======== ======== ======== ======== Average number of common share outstanding................... 251,664 235,622 243,381 235,273 Common stock equivalents applicable to options outstanding resulting from application of the "treasury stock method" using average stock price........... 7,306 6,253 7,261 5,570 ------- -------- -------- -------- Average shares used in primary earnings per share.... 258,970 241,875 250,642 240,843 ======= ======== ======== ======== Primary Earnings Per Common Share: Income before extraordinary loss........... $ .28 $ .24 $ 1.14 $ .80 Extraordinary loss on early extinguishment of debt (net of tax)......... - - (.17) - ------- -------- -------- -------- Net income.................. $ .28 $ .24 $ .97 $ .80 ======= ======== ======== ======== Fully diluted: Income before extraordinary loss.......................... $72,724 $ 57,395 $282,672 $191,542 Add after tax interest expense applicable to convertible debentures........ 348 2,007 4,264 5,892 ------- -------- -------- -------- Income as adjusted............. 73,072 59,402 286,936 197,434 Extraordinary loss on early extinguishment of debt (net of tax).......... - - (40,802) - ------- -------- -------- -------- $73,072 $ 59,402 $246,134 $197,434 ======= ======== ======== ======== Average number of common share outstanding............ 251,664 235,622 243,381 235,273 Common stock equivalents applicable to options outstanding resulting from application of the "treasury stock method" using end of period stock price (if greater than average stock price for period)....... 7,306 6,625 7,261 6,031 Assuming conversion of convertible debentures........ 2,120 13,676 9,273 13,662 ------- ------- ------- ------- Average shares used in fully diluted earnings per share.... 261,090 255,923 259,915 254,966 ======= ======= ======= ======= Fully Diluted Earnings Per Common Share: Income before extraordinary loss........................ $ .28 $ .23 $ 1.11 $ .77 Extraordinary loss on early extinguishment of debt (net of tax)........ - - (.16) - ------- ------- ------- ------- Net income.................. $ .28 $ .23 $ .95 $ .77 ======= ======= ======= =======
EX-12.1 3 RATIO OF EARNINGS TO FIXED CHARGES SERVICE CORPORATION INTERNATIONAL Exhibit 12.1 RATIO OF EARNINGS TO FIXED CHARGES
Nine Months Ended September 30, 1997 1996 - -------------------------------------------------------------------------------- (Thousands, except ratio amounts) Pretax income from continuing operations... $ 438,407 $ 299,565 Undistributed income of less than 50% owned equity investees.................... (2,618) (4,359) Minority interest in income of majority owned subsidiaries with fixed charges..... 128 408 Add fixed charges as adjusted (from below). 126,782 132,885 --------- --------- $ 562,699 $ 428,499 --------- --------- Fixed charges: Interest expense: Corporate........................... $ 99,372 $ 101,511 Financial services.................. 5,857 7,344 Capitalized......................... 2,681 1,565 Amortization of debt costs............ 993 1,415 1/3 of rental expense................. 16,178 14,529 Dividends on convertible preferred stock of subsidiary................. 4,382 8,086 --------- --------- Fixed charges.............................. 129,463 134,450 Less: Capitalized interest............ (2,681) (1,565) --------- --------- Fixed charges as adjusted.................. $ 126,782 $ 132,885 ========= ========= Ratio (earnings divided by fixed charges).. 4.35 3.19 ========= =========
EX-27.1 4 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF SERVICE CORPORATION INTERNATIONAL AS OF SEPTEMBER 30, 1997 AND THE RELATED STATEMENT OF INCOME FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 SEP-30-1997 62,114 537,379 1,067,750 95,677 151,418 755,471 1,936,922 372,213 9,737,921 606,688 2,317,259 0 0 251,837 2,365,706 9,737,921 1,725,269 1,824,408 1,314,846 1,321,301 49,813 10,790 106,222 438,407 155,735 282,672 0 40,802 0 241,870 .97 .95
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