-----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, O+NmXzMOyMaLl72tgceYTwAaWa1gGZ+FIXmRzu3TZL+PD+Z5euruDpZWzSYSo9f0 OZe42jxP1jo8rFoCbXmZCQ== 0000089089-98-000021.txt : 19981118 0000089089-98-000021.hdr.sgml : 19981118 ACCESSION NUMBER: 0000089089-98-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98752334 BUSINESS ADDRESS: STREET 1: 1929 ALLEN PKWY STREET 2: P O BOX 130548 CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 7135225141 MAIL ADDRESS: STREET 1: P O BOX 130548 CITY: HOUSTON STATE: TX ZIP: 77219-0548 10-Q 1 SERVICE CORP. INTERN'L 9/30/98 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, 1998 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 10, 1998, was 257,872,934 (excluding treasury shares). SERVICE CORPORATION INTERNATIONAL INDEX
Page Part I. Financial Information Consolidated Statement of Income (Unaudited) - Three and Nine Months Ended September 30, 1998 and 1997 3 Consolidated Balance Sheet - September 30, 1998 (Unaudited) and December 31, 1997 4 Consolidated Statement of Cash Flows (Unaudited) - Nine Months Ended September 30, 1998 and 1997 5 Consolidated Statement of Stockholders' Equity (Unaudited) - Nine Months Ended September 30, 1998 6 Notes to the Consolidated Financial Statements (Unaudited) 7 - 12 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 - 23 Part II Other Information 24 Signature 24
2 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, (Dollars in thousands, except per share amounts) 1998 1997 1998 1997 - ------------------------------------------------------------------------------- Revenues................... $712,520 $600,995 $2,101,594 $1,870,014 Costs and expenses......... (538,814) (449,223) (1,524,070) (1,366,907) -------- -------- ---------- ---------- Gross profit............... 173,706 151,772 577,524 503,107 General and administrative expenses.................. (15,422) (16,775) (49,681) (49,215) -------- -------- ---------- ---------- Income from operations..... 158,284 134,997 527,843 453,892 Interest expense........... (47,816) (32,734) (125,990) (100,365) Dividends on preferred securities of SCI Finance LLC............... - - - (4,382) Other income............... 18,087 9,330 35,266 21,185 Gain on sale of investment. - - - 68,077 -------- -------- ---------- ---------- (29,729) (23,404) (90,724) (15,485) -------- -------- ---------- ---------- Income before income taxes and extraordinary loss.... 128,555 111,593 437,119 438,407 Provision for income taxes. (45,342) (38,869) (154,172) (155,735) -------- -------- ---------- ---------- Income before extraordinary loss........ 83,213 72,724 282,947 282,672 Extraordinary loss on early extinguishment of debt (net of income taxes of $23,383)............... - - - (40,802) -------- -------- ---------- ---------- Net income................. $ 83,213 $ 72,724 $ 282,947 $ 241,870 ======== ======== ========== ========== Earnings per share: Basic: Income before extraordinary loss...... $ .32 $ .29 $ 1.11 $ 1.17 Extraordinary loss on early extinguishment of debt................. - - - (.17) -------- -------- --------- ---------- Net income............... $ .32 $ .29 $ 1.11 $ 1.00 ======== ======== ========= ========== Diluted: Income before extraordinary loss...... $ .32 $ .28 $ 1.08 $ 1.11 Extraordinary loss on early extinguishment of debt................. - - - (.16) -------- -------- --------- ---------- Net income............... $ .32 $ .28 $ 1.08 $ .95 ======== ======== ========= ========== Dividends per share........ $ .09 $ .08 $ .27 $ .23 ======== ======== ========= ========== Basic weighted average number of shares.......... 257,380 251,634 255,673 243,256 ======== ======== ========= ========== Diluted weighted average number of shares.......... 263,416 258,614 262,308 257,282 ======== ======== ========= ==========
(See notes to consolidated financial statements) 3 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED BALANCE SHEET
September 30, 1998 December 31, (Dollars in thousands, except per share amounts) (Unaudited) 1997 - -------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents......................... $ 116,980 $ 46,877 Receivables, net of allowances.................... 611,587 557,481 Inventories....................................... 183,039 172,169 Other............................................. 51,239 34,881 ----------- ----------- Total current assets............................ 962,845 811,408 ----------- ----------- Investments - insurance subsidiaries................. 1,275,234 574,728 Prearranged funeral contracts ....................... 2,455,649 2,610,632 Long-term receivables ............................... 1,237,827 981,121 Cemetery property, at cost........................... 1,907,117 1,636,859 Property, plant and equipment, at cost (net)......... 1,774,243 1,644,137 Deferred charges and other assets.................... 671,468 549,862 Names and reputations (net).......................... 1,769,592 1,498,116 ----------- ----------- $12,053,975 $10,306,863 =========== =========== Liabilities & Stockholders' Equity Current liabilities: Accounts payable and accrued liabilities.......... $ 425,142 $ 425,631 Current maturities of long-term debt.............. 83,269 64,570 Income taxes ..................................... 147,706 45,241 ----------- ----------- Total current liabilities....................... 656,117 535,442 ----------- ----------- Long-term debt....................................... 3,365,982 2,634,699 Reserves and annuity benefits - insurance subsidiaries 1,221,478 570,366 Deferred prearranged funeral contract revenues ...... 2,458,898 2,592,991 Deferred income taxes................................. 741,470 701,221 Other liabilities .................................... 606,365 546,140 Stockholders' equity: Common stock, $1 per share par value, 500,000,000 shares authorized, 257,820,737 and 252,923,784, respectively, issued and outstanding............................. 257,821 252,924 Capital in excess of par value..................... 1,554,834 1,493,246 Retained earnings.................................. 1,196,893 983,353 Accumulated other comprehensive income............. (5,883) (3,519) ----------- ----------- Total stockholders' equity....................... 3,003,665 2,726,004 ----------- ----------- $12,053,975 $10,306,863 =========== ===========
(See notes to consolidated financial statements) 4 SERVICE CORPORATION INTERNATIONAL CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, (Dollars in thousands) 1998 1997 - --------------------------------------------------------------------------------- Cash flows from operating activities: Net income................................................. $ 282,947 $241,870 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 133,880 113,982 Provision for deferred income taxes..................... 26,762 33,033 Extraordinary loss on early extinguishment of debt, net of income taxes.................................... - 40,802 Gains from dispositions (net)........................... (24,426) (83,303) Change in assets and liabilities, net of effects from acquisitions: (Increase) in receivables............................. (162,353) (87,109) (Increase) in other assets........................... (70,405) (7,795) Increase in payables and other liabilities ........... 65,204 25,211 Other................................................. 4,329 11,210 --------- -------- Net cash provided by operating activities ................. 255,938 287,901 --------- -------- Cash flows from investing activities: Capital expenditures.................................... (152,990) (163,294) Change in prearranged funeral balances.................. 53,097 (41,551) Purchases of securities - insurance subsidiaries........ (768,315) (825,010) Sales of securities - insurance subsidiaries............ 759,477 818,136 Proceeds from sales of property and equipment........... 27,563 30,827 Acquisitions, net of cash acquired...................... (668,830) (306,148) Loans issued by finance subsidiary...................... (115,527) (68,158) Principal payments received on loans issued by finance subsidiary..................................... 62,631 29,117 Proceeds from sale of equity investment................. - 147,739 Purchases of equity investments......................... (8,412) - Other................................................... 9,788 (32,776) --------- -------- Net cash (used in) investing activities.................... (801,518) (411,118) --------- -------- Cash flows from financing activities: Increase in borrowings under revolving credit agreements 257,226 73,291 Long-term debt issued................................... 500,000 650,000 Payments of long-term debt.............................. (61,433) (66,036) Early extinguishment of long-term debt.................. - (449,998) Dividends paid.......................................... (65,156) (50,998) Bank overdrafts and other............................... (14,954) (15,059) --------- -------- Net cash provided by financing activities.................. 615,683 141,200 --------- -------- Net increase in cash and cash equivalents.................. 70,103 17,983 Cash and cash equivalents at beginning of period........... 46,877 44,131 --------- -------- Cash and cash equivalents at September 30, 1998 and 1997... $ 116,980 $ 62,114 ========= ======== Cash used for: Interest................................................ $ 117,992 $ 98,663 ========= ======== Taxes................................................... 87,746 101,604 ========= ======== Non-cash investing and financing transactions: Common stock issued in acquisitions..................... $ 47,757 $ 57,864 ========= ======== Common stock issued under restricted stock plans........ 1,226 2,017 ========= ======== Debt issued in acquisitions............................. - 9,656 ========= ======== Debenture conversions to common stock................... 2,594 5,127 ========= ======== 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)
Capital in Accumulated (Dollars in thousands, excess other except per share Common of par Retained comprehensive amounts) stock value earnings income Total - -------------------------------------------------------------------------------- Balance at December 31, 1997..... $252,924 $1,493,246 $ 983,353 $(3,519) $2,726,004 Comprehensive income: Net income........... 282,947 282,947 Other comprehensive income: Foreign currency translation......... (14,693) Unrealized gain on securities....... 12,329 ---------- Total other comprehensive income. (2,364) (2,364) ---------- Comprehensive income.. 280,583 Common stock issued: Stock option exercises and stock grants....... 3,504 12,630 16,134 Acquisitions......... 1,208 46,549 47,757 Debenture conversions 185 2,409 2,594 Dividends on common stock ($.27 per share)..... (69,407) (69,407) -------- ---------- ---------- -------- ---------- Balance at September 30, 1998... $257,821 $1,554,834 $1,196,893 $ (5,883) $3,003,665 ======== ========== ========== ======== ==========
(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, 1998, the Company operated 3,370 funeral service locations, 430 cemeteries and 180 crematoria located in 18 countries on five continents. 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 contain crematoria. There are 152 combination locations that contain a funeral service location within a company owned cemetery. The financial services segment represents a combination of the Company's prearranged funeral marketing, funeral and cemetery trust administration, investments, life insurance operations, and Provident Services, Inc., the Company's finance subsidiary. 2. Summary of Significant Accounting Policies Basis of Presentation: The consolidated financial statements for the nine months ended September 30, 1998 and 1997 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, 1997 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, financial condition and cash flows. 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. As a result, actual results could differ from these estimates. 3. Acquisitions The Company acquired 255 funeral service locations, 40 cemeteries and 14 crematoria during the nine months ended September 30, 1998 (226 funeral service locations, 34 cemeteries and 13 crematoria during the nine months ended September 30, 1997). 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. Effective July 17, 1998, the Company acquired American Memorial Life Insurance Company (AML), the pre-need funeral services division of American Annuity Group, for $164,000 in cash. AML offers a variety of pre-need and final expense life insurance and annuity products to finance prearranged funerals. AML is part of the Company's financial services segment. 7 The effect of acquisitions on the consolidated balance sheet at September 30, was as follows:
1998 1997 - ------------------------------------------------------------------------------- Current assets...................................... $ 55,577 $ 15,072 Investments - insurance subsidiaries................ 622,379 - Prearranged funeral contracts....................... 47,802 63,014 Long-term receivables............................... 74,690 18,020 Cemetery property................................... 163,680 218,901 Property, plant and equipment....................... 84,342 98,104 Deferred charges and other assets................... 138,391 9,077 Names and reputations............................... 350,099 129,023 Current liabilities................................. (65,588) (24,197) Long-term debt...................................... (62,907) (19,439) Reserves and annuity benefits - insurance subsidiaries............................. (594,848) - Deferred prearranged funeral contract revenues...... (45,870) (79,094) Deferred income taxes and other liabilities......... (51,160) (70,059) Stockholders' equity................................ (47,757) (52,274) -------- -------- Cash used for acquisitions................... $668,830 $306,148 ======== ========
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 placed in trust accounts (pursuant to applicable law) or are used to pay premiums on life insurance policies. Unperformed price guaranteed prearranged funeral contracts are included in the consolidated balance sheet as "Prearranged funeral contracts". This balance represents amounts due from trust funds, customer receivables, or third party insurance companies. A corresponding credit is recorded to "Deferred prearranged funeral contract revenues". Amounts paid by customers under prearranged funeral contracts are recognized in funeral revenue at the time the funeral services are 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 incurred through the sales of trust funded and third party insurance funded prearrangements. These obtaining costs include sales commissions and certain other direct marketing costs which are deferred and amortized over a period representing the actuarially determined life of the prearranged contracts. Prearranged funeral contracts may also be funded by insurance policies written by the Company's two wholly-owned insurance subsidiaries. These insurance subsidiaries follow generally accepted accounting principles for life insurance companies. Funds collected are included in "Investments-insurance subsidiaries," while actuarially computed insurance reserves and annuity benefit liabilities are recorded in "Reserves and annuity benefits-insurance subsidiaries." At September 30, 1998, approximately $443,000 of the reserves and annuity benefits are associated with policies funding prearranged funerals at non-Company owned funeral locations. Policy acquisition costs are deferred to "Deferred charges and other assets" and amortized as prescribed by generally accepted accounting principles for life insurance companies. The total value of unperformed prearranged funerals at September 30, 1998 was $3,395,916 ($3,163,357 at December 31, 1997). 8 5. Debt Debt at September 30, 1998 and December 31, 1997, was as follows:
September 30, December 31, 1998 1997 -------------------------------- Bank revolving credit agreements and commercial paper............................... $ 870,573 $ 588,539 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.............. 114,259 141,108 8.375% notes due in 2004........................ 51,840 51,840 7.375% notes due in 2004........................ 250,000 250,000 7.2% notes due in 2006.......................... 150,000 150,000 6.875% notes due in 2007........................ 150,000 150,000 6.5% notes due in 2008.......................... 200,000 - 7.70% notes due in 2009......................... 200,000 200,000 6.95% amortizing notes due in 2010.............. 57,178 58,859 Floating rate notes due in 2011 (putable in 1999).............................. 200,000 200,000 7.875% debentures due in 2013................... 55,627 55,627 7.0% notes due in 2015 (putable in 2002)........ 300,000 300,000 6.3% notes due in 2020 (putable in 2003)........ 300,000 - Medium term notes, maturities through 2019, fixed average interest rate of 9.32%........... 35,720 35,720 Convertible debentures, interest rates range from 4.75% - 5.5%, due through 2008, conversion price ranges from $11.25 - $45.69... 47,379 45,673 Mortgage notes and other debt with maturities through 2015................................... 177,493 184,981 Deferred loan costs............................. (10,818) (13,078) ---------- ---------- Total debt...................................... 3,449,251 2,699,269 Less current maturities......................... (83,269) (64,570) ---------- ---------- Total long-term debt....................... $3,365,982 $2,634,699 ========== ==========
The Company's primary revolving credit agreement provides for borrowings up to $1,000,000 and consists of two committed tranches - a 364-day tranche and a 5-year, multi-currency tranche - which are primarily used to support commercial paper issuance and for general corporate needs. The 364-day tranche allows for borrowings up to $300,000. This facility expires June 25, 1999, 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 are based on various indices as determined by the Company. In addition, a facility fee of 0.08% is paid quarterly on the total commitment amount. The 5-year tranche 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 and is currently set at 0.08%. At September 30, 1998, there was approximately $193,000 of revolving borrowings outstanding under this facility at a weighted average interest rate of 6.15% As of September 30, 1998, there was $536,000 of commercial paper outstanding backed by the above two tranches at a weighted average interest rate of 5.73%. On September 30, 1998, the Company entered into a $141,000 bank facility and borrowed the full amount. This facility will mature November 13, 1998. On October 13, 1998, the Company entered into a $250,000 bank facility. As of November 9, 1998, $100,000 had been borrowed under this facility. This facility will also mature on November 13, 1998. It is the Company's intention to refinance these two facilities with commercial paper borrowings. 9 On November 3, 1998, the Company entered into a new revolving credit facility in the amount of $800,000. This facility will be used primarily to support commercial paper issuance, has a 364-day maturity, and expires November 2, 1999. The fee for this facility is set at 0.09%. As of November 9, 1998, this facility had no commercial paper borrowings drawn against it. The credit facilities described above have financial compliance provisions that contain certain restrictions on levels of net worth, debt, liens, and guarantees. The Company's outstanding commercial paper and other borrowings under its various credit facilities 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 refinance 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. On October 29, 1998 the Securities and Exchange Commission declared the Company's new $1,500,000 shelf registration effective. This registration replaced a $1,000,000 shelf registration. As of November 9, 1998, the Company had $1,500,000 of issuance capacity under the new shelf. The shelf allows for issuance of debt, equity, and combinations of such instruments for use in acquisitions and general corporate needs. 6. Derivatives The Company enters into derivative transactions primarily in the form of interest rate swaps to manage its mix of fixed and floating rate debt, and cross-currency interest rate swaps in combination with local currency borrowings 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 only enters into transactions 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 transactions. At September 30, 1998, after giving consideration to the interest rate and cross-currency swaps, the Company's debt (excluding Provident debt) consists of approximately 63% of fixed interest rate debt at a weighted average rate of 6.29%, and approximately 37% of floating interest rate debt at a weighted average rate of 5.69%. Approximately $1,816,000 of the Company's debt has been converted from US dollar denominated debt to foreign currency denominated debt as the result of cross-currency swaps. Including these swaps, foreign denominated debt totals $2,082,000. The net fair value of the Company's various swap agreements at September 30, 1998, was an asset of $131,000. 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. 7. Ratio of Earnings to Fixed Charges
Nine Months Ended September 30, 1998 1997 ------------------- 3.88 4.35
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 decrease in the Company's ratio of earnings to fixed charges is primarily attributable to the 1997 gain on the sale of a Company investment. 10 8. Geographic Segment Information Geographic segment information was as follows:
North Other Other America France European Foreign - -------------------------------------------------------------------------------- Revenues: Three months ended September 30: 1998............................ $ 471,032 $147,970 $ 62,281 $ 31,237 1997............................ 400,698 120,718 51,579 28,000 Nine months ended September 30: 1998............................ $1,387,260 $446,063 $188,757 $ 79,514 1997............................ 1,229,212 403,194 162,931 74,677 Income from operations: Three months ended September 30: 1998............................ $ 120,803 $ 21,324 $ 5,126 $ 11,031 1997............................ 107,912 8,684 7,556 10,845 Nine months ended September 30: 1998............................ $ 425,987 $ 52,206 $ 28,331 $ 21,319 1997............................ 360,797 37,084 32,211 23,800 Funeral services performed: Three months ended September 30: 1998............................ 61,186 35,085 28,283 8,619 1997............................ 58,734 35,062 23,692 8,585 Nine months ended September 30: 1998............................ 196,363 111,182 85,819 22,690 1997............................ 187,899 111,548 76,451 22,133 Number of locations at September 30: 1998............................ 1,837 1,200 782 161 1997............................ 1,664 1,093 679 148
11 9. Earnings Per Share A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations are presented below:
Three Months ended Nine Months ended September 30, September 30, 1998 1997 1998 1997 - -------------------------------------------------------------------------------- Income (numerator): Income before extraordinary item - basic................... $ 83,213 $ 72,724 $282,947 $282,672 After tax interest on convertible debentures......... 392 348 1,162 4,264 -------- -------- -------- -------- Income before extraordinary item - diluted................. $ 83,605 $ 73,072 $284,109 $286,936 - -------------------------------------------------------------------------------- Shares (denominator): Shares - basic.................. 257,380 251,634 255,673 243,256 Stock options and warrants...... 3,959 4,860 4,515 4,753 Convertible debentures.......... 2,077 2,120 2,120 4,891 Convertible preferred securities of SCI Finance LLC............. - - - 4,382 -------- ------- ------- ------- Shares - diluted................ 263,416 258,614 262,308 257,282 - -------------------------------------------------------------------------------- Earnings per share before extraordinary item: Basic.......................... $ .32 $ .29 $ 1.11 $ 1.17 Diluted........................ $ .32 $ .28 $ 1.08 $ 1.11 - --------------------------------------------------------------------------------
10.Other Matters On August 6, 1998, the Company announced that it has reached a definitive agreement with Equity Corporation International (ECI) to form a business combination between the two companies. ECI, the nation's fourth largest publicly traded death care company, currently owns 326 funeral homes and 81 cemeteries in 35 U.S. states and one Canadian province. The combination will occur through a stock-for-stock transaction that will result in ECI shareholders receiving common shares of the Company, and will be accounted for under the pooling-of-interests method of accounting. The transaction, subject to regulatory approval and an affirmative vote of ECI shareholders, is expected to close in the fourth quarter of 1998. 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 conducts funeral, cemetery and financial services operations in 18 countries. The Company's largest markets are North America and France, which when combined, represent approximately 76% of the Company's total operating locations, and 87% of the Company's consolidated revenue. Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30, 1997 Results of Operations: Segment information for the Company's three lines of business was as follows:
Nine Months Ended September 30, % 1998 1997 Increase Increase --------------------------------------------------------- Revenues: Funeral................$1,351,603 $1,269,346 $ 82,257 6.5% Cemetery............... 636,138 538,153 97,985 18.2 Financial services..... 113,853 62,515 51,338 82.1 ---------- ---------- -------- 2,101,594 1,870,014 231,580 12.4 Costs and expenses: Funeral................ 1,042,981 977,825 65,156 6.7 Cemetery............... 385,773 337,021 48,752 14.5 Financial services..... 95,316 52,061 43,255 83.0 ---------- ---------- -------- 1,524,070 1,366,907 157,163 11.5 Gross profit and margin percentage: Funeral................ 308,622 22.8% 291,521 23.0% 17,101 5.9 Cemetery............... 250,365 39.4 201,132 37.4 49,233 24.5 Financial services..... 18,537 16.3 10,454 16.7 8,083 77.3 ---------- ---------- -------- $ 577,524 27.5% $ 503,107 26.9% $ 74,417 14.8% ========== ========== ========
13 FUNERAL Funeral revenues were as follows:
Nine Months ended September 30, Increase %Increase 1998 1997 (Decrease) (Decrease) ---------------------------------------------- North America....................$ 752,151 $ 720,467 $31,684 4.4 % France .......................... 385,361 351,220 34,141 9.7 Other European................... 171,136 146,872 24,264 16.5 Other foreign.................... 42,955 50,787 (7,832) (15.4) ---------- ---------- ------- Total funeral revenues........$1,351,603 $1,269,346 $82,257 6.5 ========== ========== =======
The $31,684 increase in revenues from North American operations was primarily the result of a $34,788 increase in revenues from existing clusters partially offset by reduced revenues from disposed operations. The number of funeral services performed by existing clusters in North America increased 4.8% (192,800 compared to 183,924), while the average sales price remained stable ($3,830 compared to $3,834). Included in the existing cluster increase was $49,549 from locations acquired since January 1, 1997 and a decrease of $14,761 from locations acquired prior to January 1, 1997. The decline reported at locations owned prior to January 1, 1997, reflects continued weakness in mortality rates throughout many of the Company's service areas. Revenues from French operations increased $34,141 due to additional revenue from locations acquired since January 1, 1997 and increased monument revenues in 1998. These increases were partially offset by a $12,700 decrease in 1998 revenue due to an unfavorable change in the French to US currency exchange rates and a slight decline in total funeral services performed. The $24,264 increase in revenues from other European operations was primarily the result of a 12.3% increase in the number of funeral services performed (85,819 compared to 76,451). This volume increase reflects the effect of continued growth through acquisition in Europe. The decrease in revenues from other foreign operations is due primarily to a 17% decrease in the Australian to US currency exchange rates, partially offset by a 2.5% increase in the number of funeral services performed (22,690 compared to 22,133). The additional funeral services are due primarily to the Company's acquisition in Argentina during fourth quarter 1997. During the nine months ended September 30, 1998, the Company sold $420,349 of prearranged funeral services compared to $425,029 for the same period in 1997. Funeral gross margin was as follows:
Nine Months ended September 30, % of % of Increase %Increase 1998 Revenue 1997 Revenue (decrease) (decrease) ---------------------------------------------------------- North America.... $231,706 30.8% $219,779 30.5% $11,927 5.4 % France .......... 44,659 11.6 32,265 9.1 12,394 38.4 Other European... 22,457 13.1 25,533 17.4 (3,076) (12.0) Other foreign.... 9,800 22.8 13,944 27.4 (4,144) (29.7) -------- -------- ------- Total funeral gross margin.... $308,622 22.8 $291,521 23.0 $17,101 5.9 ======== ======== =======
The slight improvement in gross margin percentage in North America is due to the increase in funeral revenues mentioned above. The 1998 increase in French gross margin is primarily the result of an increase in higher margin monument sales, as well as, continued efforts to control costs. Other European gross margin decreased in 1998 due primarily to increased merchandising and promotional expenses incurred in the United Kingdom. 14 The decrease in gross margin from other foreign operations was primarily the result of a 17% decrease in the Australian to US currency exchange rates. CEMETERY Cemetery revenues were as follows:
Nine Months ended September 30, Increase %Increase 1998 1997 (Decrease) (Decrease) ---------------------------------------------- North America.................. $581,958 $498,202 $83,756 16.8% Other European................. 17,621 16,059 1,562 9.7 Other foreign.................. 36,559 23,892 12,667 53.0 -------- -------- ------ Total cemetery revenues..... $636,138 $538,153 $97,985 18.2 ======== ======== =======
The $83,756 increase in North American cemetery revenue is due primarily to a $82,448 increase in revenues from existing clusters. Included in the existing cluster increase was $56,200 from locations acquired since January 1, 1997. The $12,667 increase in other foreign cemetery revenue is due to the 1998 contribution of the Company's cemetery operations in Argentina (acquired in late 1997 and early 1998), offset by a decrease in cemetery revenue from Australia. The decrease in Australia is due primarily to an unfavorable change in the Australian to US currency exchange rates. Cemetery gross margin was as follows:
Nine Months ended September 30, % of % of Increase %Increase 1998 Revenue 1997 Revenue (decrease) (decrease) ---------------------------------------------------------- North America...... $232,972 40.0% $184,592 37.1% $48,380 26.2% Other European..... 5,874 33.3 6,678 41.6 (804) (12.0) Other foreign...... 11,519 31.5 9,862 41.3 1,657 16.8 -------- -------- ------- Total cemetery gross margin...... $250,365 39.4 $201,132 37.4 $49,233 24.5 ======== ======== =======
The increase in gross margin from the Company's North America cemetery operations is due primarily to additional revenue from locations acquired before January 1, 1997, as well as, increased trust investment income and property sales in 1998. The gross margin percentage benefited from increased trust investment income and lower merchandise costs. The decline in the other foreign gross margin percentage is due to the acquisition of the Company's Argentina cemetery operations in late 1997 and early 1998. These operations have a lower gross margin percentage than the Company's Australian cemeteries. FINANCIAL SERVICES For segment reporting, financial services represents a combination of the Company's existing finance subsidiary, Provident Services, Inc. (Provident), and the Company's two insurance subsidiaries. Financial services revenues were as follows:
Nine Months ended September 30, Increase 1998 1997 (Decrease) %Increase ---------------------------------------------- Insurance: North America...................$ 38,912 $ - $38,912 France.......................... 59,976 50,425 9,551 18.9% -------- ------- ------- Total insurance................. 98,888 50,425 48,463 96.1 Provident........................ 14,965 12,090 2,875 23.8 -------- ------- ------- Total financial services revenues........................$113,853 $62,515 $51,338 82.1 ======== ======= =======
15 Financial services gross margin was as follows:
Nine Months ended September 30, % of % of Increase 1998 Revenue 1997 Revenue (decrease) %Increase ---------------------------------------------------------- Insurance: North America..... $ 3,853 9.9% $ - $ 3,853 France............ 7,547 12.6 4,819 9.6% 2,728 56.6% -------- ------- ------- Total insurance... 11,400 11.5 4,819 9.6 6,581 136.6 Provident.......... 7,137 47.7 5,635 46.6 1,502 26.7 -------- ------- ------- Total financial services gross margin............ $ 18,537 16.3 $10,454 16.7 $ 8,083 77.3 ======== =-===== =======
The increase in North American revenue and gross margin is due to the acquisition of American Memorial Life Insurance Co. (AML) effective July 17, 1998 (see note 3). Provident reported a gross profit of $7,137 for the nine months ended September 30, 1998, compared to $5,635 for the same period in 1997. Provident's average outstanding loan portfolio during the current period increased to $218,475 compared to $179,378 in 1997, while the average interest rate spread remained stable at 3.2%. Other Income and Expenses General and administrative expenses remained constant compared to the prior year. Expressed as a percentage of revenues, general and administrative expenses decreased slightly to 2.4% for the nine months ended September 30, 1998, compared to 2.6% for the comparable period in 1997. Interest expense, which excludes the amount incurred by Provident, increased $25,625 or 25.5% period to period. The increased interest expense primarily reflects the Company's funding of acquisitions with debt. During the first quarter of 1997, the Company sold its interest in Equity Corporation International ("ECI") producing a pre-tax gain of $68,077. The provision for income taxes reflected a 35.3% effective tax rate for the nine months ended September 30, 1998, compared to a 35.5% effective tax rate for the comparable period in 1997. The decrease in the effective tax rate is due primarily to lower tax rates on international operations in 1998 and the 1997 tax impact from the gain on sale of the Company's interest in ECI which was reflected at the Company's higher domestic tax rate. Three Months Ended September 30, 1998 Compared to Three Months Ended September 30, 1997 Results of Operations: Segment information for the Company's three lines of business was as follows:
Three Months Ended September 30, % 1998 1997 Increase Increase --------------------------------------------------------- Revenues: Funeral............... $432,814 $396,777 $ 36,037 9.1% Cemetery............... 213,831 182,624 31,207 17.1 Financial services..... 65,875 21,594 44,281 205.1 -------- -------- -------- 712,520 600,995 111,525 18.6 Costs and expenses: Funeral................ 347,698 315,670 32,028 10.1 Cemetery............... 135,446 115,135 20,311 17.6 Financial services..... 55,670 18,418 37,252 202.3 -------- -------- -------- 538,814 449,223 89,591 19.9 Gross profit and margin percentage: Funeral................ 85,116 19.7% 81,107 20.4% 4,009 4.9 Cemetery............... 78,385 36.7 67,489 37.0 10,896 16.1 Financial services..... 10,205 15.5 3,176 14.7 7,029 221.3 -------- -------- -------- $173,706 24.4% $151,772 25.3% $ 21,934 14.5 % ======== ======== ========
16 FUNERAL Funeral revenues were as follows:
Three Months ended September 30, Increase %Increase 1998 1997 (Decrease) (Decrease) ---------------------------------------------- North America.................... $234,880 $228,214 $ 6,666 2.9 % France .......................... 126,049 102,916 23,133 22.5 Other European................... 56,431 46,476 9,955 21.4 Other foreign.................... 15,454 19,171 (3,717) (19.4) -------- -------- ------- Total funeral revenues........... $432,814 $396,777 $36,037 9.1 ======== ======== =======
North America funeral revenues increased $6,666 due primarily to a $8,662 increase from existing clusters. The number of funeral services performed by existing clusters in North America increased 4.9% (59,537 compared to 56,738), while the average sales price decreased slightly ($3,853 compared to $3,890). Included in the existing cluster increase was a $16,847 increase from locations acquired after January 1, 1997, while locations acquired prior to January 1, 1997, decreased $8,185. The decline reported at locations owned prior to January 1, 1997, reflects continued weakness in mortality rates throughout many of the Company's service areas. The $23,133 increase in revenues from French operations was the result of a slight increase in funeral services performed, increased monument revenue and a favorable change in the French to US currency exchange rates. Revenues from other European operations increased $9,955 due primarily to a 19.4% increase in the number of funeral services performed (28,283 compared to 23,692). The additional other European funeral services are primarily the result of the Company's acquisitions in Norway and Portugal during 1998. Funeral gross margin was as follows:
Three Months ended September 30, % of % of Increase %Increase 1998 Revenue 1997 Revenue (decrease) (decrease) ---------------------------------------------------------- North America...... $59,254 25.2% $61,893 27.1% $(2,639) (4.3)% France ............ 17,609 13.9 7,651 7.4 9,958 130.2 Other European..... 3,573 6.3 5,049 10.8 (1,476) (29.2) Other foreign...... 4,680 30.3 6,514 34.0 (1,834) (28.2) ------- ------- ------- Total funeral gross margin...... $85,116 19.7 $81,107 20.4 $ 4,009 4.9 ======= ======= =======
The North American gross margin decreased due to higher personnel and facility costs. In addition, locations acquired after January 1, 1997 experienced a lower gross margin percentage than the Company's existing locations. Typically, acquisitions will temporarily exhibit slightly lower gross margins, at least until such time as the locations are fully assimilated into the cluster management strategy. The increase in French gross margin percentage is the result of higher revenues reported above. The gross margin from other European operations decreased due to increased merchandising and promotional expenses incurred in the United Kingdom, partially offset by increased gross margin by the Company's other European operations. CEMETERY Cemetery revenues were as follows:
Three Months ended September 30, Increase 1998 1997 (Decrease) %Increase ---------------------------------------------- North America................. $192,199 $168,692 $23,507 13.9% Other European................ 5,851 5,103 748 14.7 Other foreign................. 15,781 8,829 6,952 78.7 -------- -------- ------- Total cemetery revenues....... $213,831 $182,624 $31,207 17.1 ======== ======== =======
17 The $23,507 increase in revenue from North American cemetery operations is due to an $26,508 increase in revenues from existing clusters. Cemetery locations acquired after January 1, 1997, contributed $24,283 of the increase in revenue from existing clusters. Cemetery revenue from other foreign operations increased $6,952 due to the expansion into Argentina during fourth quarter 1997 and early 1998, offset by a decrease in cemetery revenue from Australia. The decrease in Australia is due primarily to a 18.5% unfavorable change in the Australian to US currency exchange rates. Cemetery gross margin was as follows:
Three Months ended September 30, % of % of Increase %Increase 1998 Revenue 1997 Revenue (decrease) (decrease) ---------------------------------------------------------- North America...... $70,481 36.7% $60,822 36.1% $ 9,659 15.9 % Other European..... 1,553 26.5 2,336 45.8 (783) (33.5) Other foreign...... 6,351 40.2 4,331 49.0 2,020 46.6 -------- ------- ------- Total cemetery gross margin...... $78,385 36.7 $67,489 37.0 $10,896 16.1 ======== ======= =======
The North American gross margin increased due to the aforementioned increase in revenue of 13.9%. The increase in other foreign is primarily due to the contribution from the Company's acquisitions in Argentina in late 1997 and early 1998. FINANCIAL SERVICES Financial services revenues were as follows:
Three Months ended September 30, 1998 1997 Increase %Increase ---------------------------------------------- Insurance: North America................. $38,912 $ - $38,912 France........................ 21,658 17,210 4,448 25.8% ------- ------- ------- Total insurance............... 60,570 17,210 43,360 251.9 Provident...................... 5,305 4,384 921 21.0 ------- ------- ------- Total financial services revenues............. $65,875 $21,594 $44,281 205.1 ======= ======= =======
The increase in North American revenue is due to the acquisition of AML effective July 17, 1998 (see note 3). Financial services gross margin was as follows:
Three Months ended September 30, % of % of 1998 Revenue 1997 Revenue Increase %Increase ---------------------------------------------------------- Insurance: North America...... $ 3,853 9.9% $ - $ 3,853 France............. 3,715 17.2 1,033 6.0% 2,682 259.6% ------- ------- ------- Total insurance.... 7,568 12.5 1,033 6.0 6,535 632.6 Provident........... 2,637 49.7 2,143 48.9 494 23.1 ------- ------- ------- Total financial services gross margin............. $10,205 15.5 $ 3,176 14.7 $ 7,029 221.3 ======= ======= =======
Provident reported a gross margin of $2,637 for the three months ended September 30, 1998, compared to $2,143 for the same period in 1997. Provident's average outstanding loan portfolio during the current period increased to $229,408 compared to $191,040 for the comparable period in 1997, while the average interest rate spread increased slightly to 3.3% compared to 3.2% in 1997. 18 Other Income and Expenses General and administrative expenses declined 8.1% due to lower personnel costs and professional fees. Interest expense, which excludes the amount incurred by Provident, increased $15,082 or 46.1% period to period. This increased interest expense primarily reflects the Company's funding of acquisitions with debt. Financial Condition and Liquidity at September 30, 1998: 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 Securities and Exchange Commission (the "Commission"). The Company believes cash from operations, additional funds available under its revolving credit agreements, and proceeds from public and private offerings of securities will be sufficient to continue its current acquisition program and operating policies. For the nine-month period ended September 30, 1998, the Company acquired 255 funeral service locations, 40 cemeteries and 14 crematoria (see Note 3). As of September 30, 1998, the Company has received signed letters of intent to acquire an additional 117 funeral service locations, 15 cemeteries and 2 crematoria for an aggregate purchase price of approximately $249,000. Combined, these businesses are expected to produce approximately $334,000 in annualized revenues, including $129,000 in North American operations and $205,000 from operations outside North America. In addition, the Company has reached a definitive agreement to merge with ECI (see note 10) which will add 326 funeral homes and 81 cemeteries in a stock for stock transaction valued at approximately $578,000. The merger with ECI will add approximately $252,000 in assumed debt. At September 30, 1998, the Company had net working capital of $306,728 and a current ratio of 1.47:1, compared to working capital of $275,966 and a current ratio of 1.52:1 at December 31, 1997. Sources And Uses of Cash Cash flows from operating activities: Net cash provided by operating activities was $255,938 for the nine months ended September 30, 1998, compared to $287,901 for the same period in 1997, a decrease of $31,963. This decrease results from increased non-cash changes in the Company's working capital accounts (primarily increased levels of cemetery sales which generate additional receivables), partially offset by higher operating profits. Cash flows from investing activities: Net cash used in investing activities was $801,518 for the nine months ended September 30, 1998, compared to $411,118 for the same period in 1997, an increase of $390,400. Cash used for acquisitions increased by $362,682 while the level of capital expenditures remained relatively unchanged during the nine months ended September 30, 1998, as the Company continues to expand through both acquisitions of existing businesses and through increased construction of funeral and cemetery facilities. Additionally, in 1997, $147,339 in cash was provided by the sale of the Company's interest in ECI. Cash used relating to prearranged funeral activities decreased due to the timing of cash payments to and withdrawals from trusts. Cash flows from financing activities: Net cash provided by financing activities was $615,683 for the nine months ended September 30, 1998, compared to $141,200 for the same period in 1997, an increase of $474,483. The nine months ended September 30, 1997 included a use of cash of $449,998 for the early extinguishment of certain higher interest rate debt. As of September 30, 1998, the Company's debt to capitalization ratio was 53.5% compared to 49.8% at December 31, 1997. The interest rate coverage ratio for the nine months ended September 30, 1998 was 4.29:1, compared to 4.36:1 (excluding the gain on the sale of the Company's investment in ECI) for the same period in 1997. This interest rate 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 debt or Company common stock is a prudent business strategy given the stable cash 19 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. As of September 30, 1998, the Company's various revolving credit facilities and lines of credit provide for aggregate borrowings of approximately $1,141,000 ($270,000 available at September 30, 1998). As of November 13, 1998, the Company's credit facilities provided for an aggregate borrowings of $1,800,000 (see note 5). As of October 29, 1998, the Company also had the ability to issue $1,500,000 in securities registered with the Commission under a shelf registration. In addition, 14,161,000 shares of common stock and a total of $197,000 of guaranteed promissory notes and convertible debentures are 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 life insurance or annuity contracts. The principal amount of each such prearranged funeral contract 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 and annuity 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 1997, 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 investment 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 accurately match the anticipated maturity of the contracts. The Company anticipates an asset allocation of approximately 65% equity and 35% fixed income. Marketing costs incurred with the sale of prearranged funeral contracts are a current use of cash which is partially offset with cash retained, pursuant to state laws, from amounts trusted and certain commissions earned by the Company for sales of insurance products issued by third party insurers. The Company sells prearranged funerals in most of its service markets including its major foreign markets. AML has been a provider of insurance and annuity products used to fund Company prearranged funerals for several years. Auxia, the Company's French life insurance subsidiary, primarily sells insurance products used to fund prearranged funerals to be performed by the Company's French funeral service locations. Prearranged funeral service sales afford the Company the opportunity to both protect current market share and mix as well as expand market share in certain markets. The Company believes this will stimulate future revenue growth. Prearranged funeral services fulfilled as a percent of the total North American funerals performed annually approximates 25% and is expected to grow, thereby making the total number of funerals performed more predictable. Other Matters: Year 2000 issue The Year 2000 issue, also known as "Y2K," refers to the inability of some computer programs and microprocessors to correctly interpret the century from a date in which the year is represented by only two digits (e.g., 98). As a result, on January 1, 2000, computer systems used by companies throughout the world may experience operating difficulties unless they are modified or upgraded to properly process date related information. The Y2K issue can arise at any point in a company's supply, manufacturing, processing, distribution, or financial chains. The Company has established Y2K Program Management Offices at its corporate offices in Birmingham, England and Houston, Texas. These program offices, under the direction of senior management, are responsible for overseeing the numerous facets of the Company's Year 2000 Preparedness Project (the Project). The Company has engaged an external consulting firm to assist in oversight of the Project and various assessment activities associated with discovering the seriousness of the Y2K issue 20 in the Pacific Rim and South America. Additionally, the Company is utilizing internal personnel, contract project managers, programmers and testers, as well as vendors, to identify Y2K issues, test and implement the chosen solutions. In order to adequately address the Y2K issue, the Project has been divided into the following categories: production systems, networks, desktops, user developed applications, vendor supplied software, facilities & telecommunications, and merchandise supply chain. The following phases are common to all of these categories: inventory (includes determining criticality), discovery to determine Y2K problems, analysis to determine corrective action, correction, testing, and implementation. In addition to these activities, promotion of Y2K awareness and development of contingency plans is part of the Project plan. State of Readiness: The majority of the Company's internal Y2K exposure exists at the corporate office locations where the accounting and processing of the Company's business transactions takes place. Individual funeral homes and cemeteries are substantially technology independent and thus face few Y2K risks from internal systems. Production systems: In 1998, in order to improve access to business information through a common, integrated computing system across the company, the Company began a worldwide computer systems replacement project utilizing systems from Oracle Corp. (Oracle). While this project has begun at the Company's European headquarters, global implementation will not be achieved prior to the turn of the century. Therefore, all computer programs expected to be replaced by Oracle are being made Y2K ready. The only exception to this is in the United Kingdom where the implementation of Oracle is proceeding in order to achieve Y2K readiness. In general, the Company's production systems have progressed through the inventory, discovery, and analysis phases and are in various stages of correction and testing. Production systems make up the majority of the Company's "mission critical systems" and are expected to be Y2K ready by mid-1999. Networks: Inventory, discovery, and analysis of critical Networks has already been completed in several of the Company's locations and these networks are in various stages of correction and testing. Some non-critical networks exist at individual operating locations and will be assessed and made Y2K ready as time allows. Expectations are that all critical networks will be Y2K ready by mid-1999. Desktops: In an effort to ensure the continued operability of the Company's many personal computers, testing is underway to determine the extent to which the Y2K problem associated with desktops will affect the Company's ability to conduct business. It is expected that the impact will be minimal; however, contingency plans are already in place should upgrades or replacements be required. These contingency plans allow for the Y2K readiness of the Company's critical desktops to be achieved by mid-1999. User developed applications: Although applications in this category are not expected to be mission critical in nature, the Company is in the process of conducting inventory at both headquarters locations and plans to have all critical user developed applications ready by the end of the first quarter in 1999. Vendor supplied software: It is the policy of the Company to query each manufacturer of critical "off-the-shelf" software to ascertain the vendor's statement regarding the Y2K readiness of their product(s). Once the vendor's statement is obtained, upgrades, replacements and testing will be implemented to minimize the risk of Y2K issues arising from the software. Although much of the progress in this risk category is dependent on external vendors supplying Y2K ready products in a timely fashion, the Company expects that all critical vendor supplied software in use at the Company will be Y2K ready by mid-1999. Facilities & telecommunications: The Company recognizes the potential for Y2K issues to arise from embedded technology systems which may be in use at its numerous facilities. Inventory, discovery, and analysis are underway at the Company's headquarters and preparations are being made for the same to occur at the Company's various operating locations. Upon 21 completion of these phases, upgrades and/or replacements are expected to be made in time to achieve Y2K readiness by mid-1999. Merchandise supply chain: Due to the Company's disparate locations and methods of operation, assessing the Y2K readiness of the Company's merchandise supply chain must occur at both the corporate level (for core merchandise supply chain relationships) and the local level (for those relationships unique to a location). Inventory and discovery are already underway at some of the Company's locations. Assessment of corporate relationships is expected to begin prior to the end of 1998 and be concluded, along with the establishment of contingency plans, by mid-1999. Costs: The aggregate costs for the Company to achieve Y2K readiness are not expected to exceed $25,000. These costs will be incurred over the three year period from 1998 through the year 2000, with the majority to be expended in 1999. All costs associated with Y2K readiness will be funded from operating cash flows. The Company's costs associated with Y2K readiness through September 30, 1998 are estimated at $2,500. Risks: The majority of the Company's internal Y2K exposure exists at corporate locations. The failure to correct a material Y2K problem at these locations could result in an interruption of certain normal corporate business activities. Such a failure would not, however, render the Company's various operating locations unable to deliver goods and services. The Company believes that the greatest risks arise from the uncertainty of the Y2K readiness of key third party suppliers - both private businesses and government entities, especially in the Company's international markets. The possible consequences of the Company or its key third party suppliers not being Y2K ready by January 1, 2000 include temporary location closings, delays in the delivery of goods and services, delays in the receipt of goods and invoice and collection errors. Due to the inherent nature of the Y2K problem, including the uncertainty of the Y2K readiness of key third party suppliers, the Company's is unable at this time to accurately determine whether Y2K related failures will have a material impact on the business and results of operations of the Company. The Project is expected to significantly reduce the Company's level of uncertainty and, through the use of contingency planning, the possibility of significant interruptions in normal operations should be reduced. Contingency Plans: Contingency planning is an integral part of Y2K preparedness. Because of the many uncertainties that exist, it is part of the Project methodology that contingency plans be established for critical systems in each of the categories outlined above. The Company is continually developing contingency plans as new risks are uncovered and will continue to plan and implement these plans through all of 1999. The Company does not currently have comprehensive contingency plans for Y2K failures experienced by key third party suppliers; however, as part of the assessment of the corporate merchandise supply chain, these plans will be established to combat the uncertainty that exists in this category. The Y2K program offices plan to review all project contingency plans and advise senior management in early 1999 of any significant shortcomings. Recent Accounting Standards The Company will adopt Statement of Financial Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" for the year ended December 31, 2000. The Company is currently evaluating the impact of this standard, but does not anticipate that it will 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 22 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. 23 SERVICE CORPORATION INTERNATIONAL PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 12.1 Ratio of earnings to fixed charges for the nine months ended September 30, 1998 and 1997. 27.1 Financial data schedule. (b) Reports on Form 8-K There were no reports on Form 8-K during the three months ended September 30, 1998. 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 16, 1998 SERVICE CORPORATION INTERNATIONAL By: /s/ George R. Champagne ---------------------------------- George R. Champagne Senior Vice President Chief Financial Officer (Principal Financial Officer) 24 EX-12.1 2 RATIO OF EARNINGS TO FIXED CHARGES SERVICE CORPORATION INTERNATIONAL Exhibit 12.1 RATIO OF EARNINGS TO FIXED CHARGES
Nine Months Ended September 30, 1998 1997 - --------------------------------------------------------------------------------------- (Thousands, except ratio amounts) Pretax income from continuing operations................. $437,119 $438,407 Undistributed income of less than 50% owned equity investees........................................ (5,814) (2,618) Minority interest in income of majority owned subsidiaries with fixed charges......................... 320 128 Add fixed charges as adjusted (from below)............... 146,651 126,782 -------- -------- $578,276 $562,699 -------- -------- Fixed charges: Interest expense: Corporate.............................................. $126,386 $ 99,372 Financial services..................................... 7,372 5,857 Capitalized............................................ 2,431 2,681 Amortization of debt costs............................. (396) 993 1/3 of rental expense.................................. 13,289 16,178 Dividends on convertible preferred stock of subsidiary. - 4,382 -------- -------- Fixed charges............................................ 149,082 129,463 Less: Capitalized interest............................. (2,431) (2,681) -------- -------- Fixed charges as adjusted................................ $146,651 $126,782 ======== ======== Ratio (earnings divided by fixed charges)................ 3.88 4.35 ======== ========
EX-27 3 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF SERVICE CORPORATION INTERNATIONAL AS OF SEPTEMBER 30, 1998 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-31-1998 Sep-30-1998 116,980 1,241,460 1,170,662 93,594 183,039 962,845 2,225,758 451,515 12,053,975 656,117 3,365,982 0 0 257,821 2,745,844 12,053,975 1,957,340 2,101,598 1,516,242 1,524,070 50,137 20,747 133,362 437,119 154,172 282,947 0 0 0 282,947 1.11 1.08
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