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 March 31, 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 May 9,
1997, was 239,363,767 (excluding treasury shares).
SERVICE CORPORATION INTERNATIONAL
INDEX
Page
Part I.
Financial Information
Consolidated Statement of Income (Unaudited) -
Three Months Ended March 31, 1997 and 1996 3
Consolidated Balance Sheet -
March 31, 1997 (Unaudited) and December 31, 1996 4
Consolidated Statement of Cash Flows (Unaudited) -
Three Months Ended March 31, 1997 and 1996 5
Consolidated Statement of Stockholders' Equity (Unaudited) -
Three Months Ended March 31, 1997 6
Notes to the Consolidated Financial Statements (Unaudited) 7 - 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 18
Part II
Other Information 19
Signature 19
2
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended March 31,
1997 1996
- ---------------------------------------------------------------------------
Revenues....................................... $ 638,449 $ 575,453
Costs and expenses............................. (450,297) (415,285)
---------- ----------
Gross profit................................... 188,152 160,168
General and administrative expenses............ (16,628) (13,755)
---------- ----------
Income from operations......................... 171,524 146,413
Interest expense............................... (34,538) (32,686)
Dividends on preferred securities of
SCI Finance LLC............................... (2,629) (2,695)
Other income................................... 3,090 2,191
Gain on sale of investment..................... 68,077 -
---------- ----------
34,000 (33,190)
---------- ----------
Income before income taxes and
extraordinary loss............................ 205,524 113,223
Provision for income taxes..................... (74,377) (41,326)
---------- ----------
Income before extraordinary loss............... 131,147 71,897
Extraordinary loss on early extinguishment of
debt (net of income taxes of $23,383)........ (40,802) -
---------- ----------
Net income..................................... $ 90,345 $ 71,897
========== ==========
Earnings per share:
Primary:
Income before extraordinary loss............. $ .54 $ .30
Extraordinary loss on early extinguishment
of debt..................................... (.17) -
---------- ----------
Net income................................... $ .37 $ .30
========== ==========
Fully diluted:
Income before extraordinary loss............. $ .52 $ .29
Extraordinary loss on early extinguishment
of debt..................................... (.16) -
---------- ----------
Net income................................... $ .36 $ .29
========== ==========
Dividends per share............................ $ .08 $ .06
========== ==========
Weighted average number of shares and
equivalents................................... 244,394 239,476
========== ==========
(All 1996 common stock and per share data has been restated for a two-for-one
common stock split on August 30, 1996)
(See notes to consolidated financial statements)
3
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
March 31,
1997 December 31,
(Dollars in thousands, except per share amounts) (Unaudited) 1996
- ------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents............................$ 47,411 $ 44,131
Receivables, net of allowances....................... 518,053 494,576
Inventories.......................................... 141,421 139,019
Other................................................ 24,225 36,314
----------- -----------
Total current assets................................. 731,110 714,040
----------- -----------
Investments - insurance subsidiary..................... 567,205 601,565
Prearranged funeral contracts ......................... 2,265,631 2,159,348
Long-term receivables ................................. 852,959 809,287
Cemetery property, at cost............................. 1,475,262 1,380,213
Property, plant and equipment, at cost (net)........... 1,467,748 1,457,075
Deferred charges and other assets...................... 348,452 371,608
Names and reputations (net)............................ 1,372,705 1,376,634
----------- -----------
$ 9,081,072 $ 8,869,770
=========== ===========
Liabilities & Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities.............$ 400,297 $ 440,797
Current maturities of long-term debt................. 100,062 113,876
Income taxes ........................................ 73,992 52,870
----------- -----------
Total current liabilities............................ 574,351 607,543
----------- -----------
Long-term debt......................................... 2,128,708 2,048,737
Deferred income taxes.................................. 583,261 527,460
Other liabilities ..................................... 537,403 552,443
Deferred prearranged funeral contract revenues ....... 2,784,123 2,725,770
Company obligated, mandatorily redeemable,
convertible preferred securities
of SCI Finance LLC, whose principal asset is a 6.25%,
$216,315 note from the Company....................... 168,250 172,500
Stockholders' equity:
Common stock, $1 per share par value,
500,000,000 shares authorized, 239,005,829 and
236,193,427, respectively, issued and outstanding... 239,006 236,193
Capital in excess of par value....................... 1,260,126 1,237,783
Retained earnings.................................... 795,052 728,108
Foreign currency translation adjustment ............. 5,186 22,315
Unrealized gain on securities available for sale,
net of tax.......................................... 5,606 10,918
----------- -----------
Total stockholders' equity........................... 2,304,976 2,235,317
----------- -----------
$ 9,081,072 $ 8,869,770
=========== ===========
(See notes to consolidated financial statements)
4
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
(Dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income................................................$ 90,345 $ 71,897
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............................ 37,321 31,794
Provision for deferred income taxes...................... 16,216 11,990
Extraordinary loss on early extinguishment of debt,
net of income taxes..................................... 40,802 -
Gains from dispositions (net)............................ (68,970) -
Change in assets and liabilities, net of effects
from acquisitions:
(Increase) in receivables............................... (34,037) (33,419)
(Increase) decrease in other assets.................... 1,209 (19,371)
Increase in payables and other liabilities ............. 952 17,686
Other.................................................... 7,274 (4,153)
--------- ---------
Net cash provided by operating activities ................ 91,112 76,424
--------- ---------
Cash flows from investing activities:
Capital expenditures..................................... (31,593) (37,895)
Changes in prearranged funeral balances.................. (24,158) (14,856)
Proceeds from sales of property and equipment............ 1,886 5,202
Acquisitions, net of cash acquired....................... (117,266) (83,363)
Loans issued by finance subsidiary....................... (27,643) (16,693)
Principal payments received on loans
by finance subsidiary................................... 2,676 4,633
Proceeds from sale of investment......................... 147,739 -
Change in investments and other.......................... (26,767) (2,554)
--------- ---------
Net cash (used in) investing activities................... (75,126) (145,526)
--------- ---------
Cash flows from financing activities:
Increase in borrowings under revolving credit agreements. 469,655 168,302
Payments of debt......................................... (15,842) (79,204)
Early extinguishment of debt............................. (449,998) -
Dividends paid........................................... (17,946) (12,903)
Bank overdrafts and other................................ 1,425 1,880
-------- ---------
Net cash provided by (used in) financing activities....... (12,706) 78,075
-------- ---------
Net increase in cash and cash equivalents................. 3,280 8,973
Cash and cash equivalents at beginning of period.......... 44,131 29,735
-------- ---------
Cash and cash equivalents at March 31, 1997 and 1996...... $ 47,411 $ 38,708
======== =========
Cash used for:
Interest................................................. $ 32,646 $ 11,158
======== =========
Taxes.................................................... $ 14,841 $ 9,821
======== =========
Non-cash transactions:
Common stock issued in acquisitions...................... $ 9,039 $ 3,240
======== =========
Debt issued in acquisitions.............................. $ 1,752 $ 2,887
======== =========
Debenture conversions to common stock.................... $ 5,127 $ 590
======== =========
Conversion of preferred securities of SCI Finance LLC.... $ 4,142 $ -
======== =========
(See notes to consolidated financial statements)
5
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands, except per share amounts)
Capital
in Foreign
excess currency Unrealized
Common of par Retained translation gain on
stock value earnings adjustment securities
- --------------------------------------------------------------------------------
Balance at
December 31, 1996..........$236,193 $1,237,783 $728,108 $22,315 $10,918
Net income ................. 90,345
Common stock issued:
Stock option exercises..... 157 1,236
Acquisitions............... 1,963 12,531 (5,455)
Debenture conversions...... 411 4,716
Conversions of convertible
preferred securities of
SCI Finance LLC........... 282 3,860
Dividends on common stock
($.08 per share).......... (17,946)
Foreign currency
translation............... (17,129)
Net change in unrealized
gain on securities........ (5,312)
-------- ---------- -------- ------- -------
Balance at March 31, 1997...$239,006 $1,260,126 $795,052 $ 5,186 $ 5,606
======== ========== ======== ======= ========
(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
March 31, 1997, the Company operated 2,946 funeral service locations, 356
cemeteries and 148 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.
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
months ended March 31, 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. Actual results could differ from those estimates.
3. Acquisitions
The Company acquired 60 funeral service locations, 12 cemeteries and one
crematory during the three month period ended March 31, 1997 (55 funeral service
locations, 12 cemeteries and one crematory during the three months ended March
31, 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 March 31, was
as follows:
1997 1996
- --------------------------------------------------------------------------------
Current assets...................................... $ 6,841 $ 844
Prearranged funeral contracts....................... 40,606 16,131
Long-term receivables............................... 5,405 4,057
Cemetery property................................... 72,730 36,374
Property, plant and equipment....................... 28,425 24,622
Deferred charges and other assets................... 8,479 175
Names and reputations............................... 39,035 35,042
Current liabilities................................. (10,906) (4,415)
Long-term debt...................................... (5,093) (2,842)
Deferred income taxes and other liabilities......... (18,273) (7,327)
Deferred prearranged funeral contract revenues...... (40,944) (16,058)
Stockholders' equity................................ (9,039) (3,240)
-------- --------
Cash used for acquisitions................... $117,266 $ 83,363
======== ========
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 average life of the prearranged contract.
8
The recognition of future funeral revenues is estimated to occur in the
following years based on actuarial assumptions as follows:
1997 (remaining nine months).................... $ 182,859
1998............................................ 222,475
1999............................................ 205,888
2000............................................ 192,245
2001............................................ 179,272
2002 and through 2006........................... 704,810
2007 and thereafter............................. 1,096,574
----------
$2,784,123
==========
5. Debt
Debt at March 31, 1997 and December 31, 1996, was as follows:
March 31, December 31,
1997 1996
-----------------------------
Bank revolving credit agreements and
commercial paper............................... $ 756,626 $ 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.............. 153,302 165,761
8.375% notes due in 2004........................ 51,840 200,000
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.............. 61,576 61,576
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.......................... 40,713 44,140
Mortgage notes and other notes payable.......... 184,765 151,836
Deferred loan costs............................. (18,439) (22,615)
---------- ----------
Total debt................................. 2,228,770 2,162,613
Less current maturities......................... (100,062) (113,876)
---------- ----------
Total long-term debt....................... $2,128,708 $2,048,737
========== ==========
The Company's primary revolving credit agreements provide for borrowings up
to $800,000. The 364-day portion allows for borrowings up to $450,000, and is
used primarily to support commercial paper. The agreement expires June 27, 1997,
but has provisions to be extended for 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 ranging from .06% to .15% is paid quarterly
on the total commitment amount. At March 31, 1997, there was $382,771 of
commercial paper outstanding backed by this agreement at a weighted average
interest rate of 5.64%. These commercial paper borrowings and revolving notes
generally have maturities ranging from one to 90 days. In addition, the Company
has a multi-currency revolving credit agreement which allows for borrowings of
up to $350,000, including up to $75,000 each in United Kingdom Pound Sterling,
Canadian Dollar and Australian Dollar. This agreement expires June 30, 2000, but
has provisions to extend the termination date each year for 364-day periods.
Interest rates are based on various indices as determined by the Company. In
addition, a facility fee ranging from .085% to .15% is paid quarterly on the
total commitment amount. At March 31, 1997, there was $340,752 outstanding under
this agreement at a weighted average interest rate of 5.59%. These credit
agreements disclosed above contain financial compliance provisions that contain
certain restrictions on levels of net worth, debt,
9
equity, liens, letters of credit and guarantees.
The Company's outstanding commercial paper and other borrowings under its
various credit facilities at March 31, 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. Additionally, the Company has excluded these
borrowings from the five-year maturity of long-term debt disclosure due to the
uncertainty of the eventual term of the related debt. It is the Company's intent
to refinance such borrowings through the use of its credit agreements or other
long-term notes issued under the Company's shelf registration.
The Company's French revolving credit agreement allows for borrowings, in
French francs, up to $50,000 and expires in August 1997. Interest rates are
based on various indices as determined by the Company. In addition, a facility
fee of .075% is paid quarterly on the total commitment amount. At March 31,
1997, $15,957 was outstanding under this agreement at a weighted average
interest rate of 3.49%.
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 March 31, 1997, pursuant to the Company's 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
------------------------------------------------------------
SCI California Funeral Services, Inc................ $ 271
6. 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 expense due under the cross-currency interest rate swaps are
generally offset by a corresponding movement in the earnings of the foreign
operation.
At March 31, 1997, after giving consideration to the interest rate and
cross-currency swaps, the Company's debt (excluding $128,000 of Provident debt)
has been converted into approximately $898,000 of fixed interest rate debt at a
weighted average rate of 7.33% and approximately $1,190,000 of floating interest
rate debt at a weighted average rate of 5.13%. Additionally, approximately
$1,375,000 of the US denominated debt has been converted into foreign
denominated debt using cross-currency swaps.
During the first quarter of 1997, the Company converted approximately $87,600
from French fixed rates to floating German rates. In addition, the Company
entered into a US dollar floating to fixed interest rate swap on $200,000
notional and terminated
10
a US $75,000 notional fixed to floating interest rate swap as part of the
repurchase and refinancing of certain issues of outstanding debt.
The net fair value of the Company's various swap agreements at March 31,
1997, was a payable of $22,413. Fair values were obtained from counterparties
to the agreements and represent their estimate of the amount the Company would
pay to terminate the swap agreements based upon the existing terms and current
market conditions.
7. Sale of Investment
During the first quarter of 1997, the Company sold its interest in Equity
Corporation International (approximately 7,994,000 shares) and received sale
proceeds of approximately $147,700 producing a gain of approximately $68,100
($42,500 after-tax).
8. Ratio of Earnings to Fixed Charges
Three Months Ended March 31,
1997 1996
----------------------------
5.52 3.56
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
primarily attributable to the gain on the sale of the Company's investment in
ECI.
9. SCI International Limited
SCI International Limited ("International") is a wholly owned subsidiary of the
Company. International, through wholly owned subsidiaries, owns the Company's
foreign operations.
Set forth below is certain March 31, summary financial information for
International:
1997 1996
-----------------------
Revenues....................................... $ 235,167 $ 225,719
========== ==========
Gross profit................................... $ 45,735 $ 39,913
========== ==========
Net income..................................... $ 13,984 $ 13,206
========== ==========
Current assets................................. $ 223,557 $ 234,517
Non-current assets............................. 2,568,642 2,247,908
---------- ----------
Total assets................................... $2,792,199 $2,482,425
========== ==========
Current liabilities............................ $ 269,657 $ 273,844
Non-current liabilities........................ 2,294,961 2,090,117
---------- ----------
Total liabilities.............................. $2,564,618 $2,363,961
========== ==========
Stockholder's equity........................... $ 227,581 $ 118,464
========== ==========
11
10.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:
Three months ended
March 31:
1997.................. $403,282 $133,010 $ 61,313 $40,844 $638,449
1996.................. 349,734 136,725 51,403 37,591 575,453
Income from operations:
Three months ended
March 31:
1997.................. $126,640 $ 14,894 $ 17,112 $12,878 $171,524
1996.................. 106,740 12,743 14,738 12,192 146,413
Funeral services performed:
Three months ended
March 31:
1997.................. 61,964 41,587 29,772 12,240 145,563
1996.................. 56,593 41,011 26,804 11,891 136,299
Number of locations
at March 31:
1997.................. 1,483 1,073 633 261 3,450
1996.................. 1,331 1,068 619 239 3,257
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 proceeding with implementation in its French operations which
were acquired in August 1995. The Company has approximately 303 clusters in
North America, United Kingdom and Australia, which range in size from two
operations to 64 operations. There may be more than one cluster in a given
metropolitan area, depending upon the level and degree of shared costs.
Three Months Ended March 31, 1997
Compared to Three Months Ended March 31, 1996
Results of Operations:
Segment information for the Company's three lines of business was as follows:
Three Months Ended Percentage
March 31, Increase Increase
1997 1996 (Decrease) (Decrease)
---------------------------------------------------------
Revenues:
Funeral................$457,071 $424,700 $32,371 7.6 %
Cemetery............... 177,790 145,562 32,228 22.1
Financial services..... 3,588 5,191 (1,603) (30.9)
-------- -------- ------
638,449 575,453 62,996 10.9
Costs and expenses:
Funeral................ 337,368 318,541 18,827 5.9
Cemetery............... 110,997 93,813 17,184 18.3
Financial services..... 1,932 2,931 (999) (34.1)
-------- -------- -------
450,297 415,285 35,012 8.4
Gross profit and margin
percentage:
Funeral................ 119,703 26.2% 106,159 25.0% 13,544 12.8
Cemetery............... 66,793 37.6 51,749 35.6 15,044 29.1
Financial services..... 1,656 46.2 2,260 43.5 (604) (26.7)
-------- -------- -------
$188,152 29.5% $160,168 27.8% $27,984 17.5 %
======== ======== =======
13
Funeral
Funeral revenues were as follows:
Percentage
Three Months Ended March 31, Increase Increase
1997 1996 (Decrease) (Decrease)
---------------------------------------------------
Existing clusters:
United States.............. $ 234,235 $ 212,158 $22,077 10.4 %
France .................... 133,010 136,725 (3,715) (2.7)
Other European............. 52,806 47,365 5,441 11.5
Other foreign.............. 28,318 26,536 1,782 6.7
--------- --------- -------
448,369 422,784 25,585 6.1
New clusters:*
United States.............. 4,198 317 3,881
Other European............. 2,835 84 2,751
Other foreign.............. 221 - 221
--------- --------- -------
7,254 401 6,853
Non-cluster and disposed
operations................. 1,448 1,515 (67)
--------- --------- -------
Total funeral revenues...... $ 457,071 $ 424,700 $32,371 7.6 %
========= ========= =======
The $25,585 increase in revenues from existing clusters was the result of a
4.9% increase in the number of funeral services performed (142,423 compared to
135,826) and a 1.1% higher average sales price ($3,148 compared to $3,113).
Acquisitions since January 1, 1996, included in existing clusters, accounted for
$26,692 of the existing cluster revenue increase, offset by a $1,107 decrease
from businesses owned before January 1, 1996. The impact from businesses owned
before January 1, 1996 was adversely effected by approximately $13,000 caused
exclusively by a change in the currency exchange rates for the Company's French
operations.
During the three months ended March 31, 1997, the Company sold $125,315 of
prearranged funeral services compared to $126,640 for the same quarter in 1996.
Funeral costs and expenses were as follows:
Percentage
Three Months Ended March 31, Increase Increase
1997 1996 (Decrease) (Decrease)
----------------------------------------------------
Existing clusters:
United States............. $143,714 $131,394 $12,320 9.4 %
France ................... 113,717 119,183 (5,466) (4.6)
Other European............ 36,928 34,383 2,545 7.4
Other foreign............. 19,201 17,676 1,525 8.6
-------- -------- -------
313,560 302,636 10,924 3.6
New clusters:*
United States............. 2,977 161 2,816
Other European............ 2,054 37 2,017
Other foreign............. 175 - 175
-------- -------- -------
5,206 198 5,008
Non-cluster and disposed
operations................ 2,529 2,405 124
Administrative overhead.... 16,073 13,302 2,771 20.8
-------- -------- -------
Total funeral costs and
expenses.................. $337,368 $318,541 $18,827 5.9 %
======== ======== =======
- ------------------------
* Represents new geographic cluster areas entered into since January 1, 1996
for the period that those businesses were owned by the Company.
14
The $10,924 increase in costs and expenses from existing clusters is
primarily the result of the quarter to quarter increase in the number of funeral
services performed. The gross profit margin before administrative overhead for
existing clusters increased to 30.1% in 1997 from 28.4% in 1996. Acquisitions
since the beginning of 1996, included in existing clusters, accounted for
$19,872 of the existing cluster cost increase, while existing cluster locations
owned before 1996, had a cost decrease of $8,948. 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 (26.2%
compared to 25.0% in 1996). Contributing to this quarter to quarter improvement
were the Company's North American operations. In addition, the French gross
profit margin of 14.5% (before administrative overhead) for the quarter ended
March 31, 1997, improved from 12.8% 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 increased due primarily to the Company's
realignment of its North American operating structure which occurred in the
latter half of 1996. This realignment is expected to enhance the clusters'
ability to manage increased levels of business. Administrative overhead costs,
expressed as a percentage of total funeral revenues, increased to 3.5%, compared
to 3.1% in 1996.
Cemetery
Cemetery revenues were as follows:
Three Months Ended March 31, Percentage
1997 1996 Increase Increase
---------------------------------------------------
Existing clusters:
United States............. $ 158,079 $ 129,684 $28,395 21.9 %
Other European............ 5,809 3,825 1,984 51.9
Other foreign............. 12,204 11,075 1,129 10.2
--------- --------- -------
176,092 144,584 31,508 21.8
New clusters:*
United States............. 225 - 225
Non-cluster and disposed
operations................ 1,473 978 495
--------- --------- -------
Total cemetery revenues.... $ 177,790 $ 145,562 $32,228 22.1 %
========= ========= =======
Revenues from the existing clusters increased $31,508 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 $10,938 in increased revenues
from cemeteries acquired since the beginning of 1996, while revenues from
existing cluster locations owned before 1996 increased $20,570.
Cemetery costs and expenses were as follows:
Three Months Ended March 31, Increase Percentage
1997 1996 (Decrease) Increase
---------------------------------------------------
Existing clusters:
United States............. $ 91,249 $ 78,054 $13,195 16.9%
Other European............ 2,961 2,054 907 44.2
Other foreign............. 6,572 5,782 790 13.7
--------- --------- -------
100,782 85,890 14,892 17.3
--------- --------- -------
New clusters:*
United States............. 222 2 220
Non-cluster and disposed
operations................ 546 1,469 (923)
Administrative overhead.... 9,447 6,452 2,995 46.4
--------- --------- -------
Total cemetery costs and
expenses.................. $ 110,997 $ 93,813 $17,184 18.3%
========= ========= =======
- ------------------------
* 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 $14,892 due primarily to
an increase of $7,757 at cemeteries acquired since the beginning of 1996. The
overall cemetery gross profit margin percentage improved in 1997 to 37.6% from
35.6% in 1996. This increase reflects strong growth and a favorable product mix
in sale 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 5.3% of revenues compared to
4.4% during the three months ended March 31, 1996. This administrative overhead
cost increase was primarily attributable to increased costs from additional
infrastructure added in the Company's United Kingdom operations as well as the
Company's realignment of its North American operating structure in 1996. This
additional infrastructure is expected to enhance clusters ability to manage
increased levels of business.
Financial Services
The Company's wholly-owned finance subsidiary, Provident Services, Inc.
("Provident") reported a gross profit of $1,656 for the quarter ended
March 31, 1997. Provident's average outstanding loan portfolio during
the current quarter decreased to $165,384 compared to $220,248 in 1996,
and the average interest rate spread also decreased to 3.1% compared to
3.7% in 1996.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses
increased to 2.6% for the quarter ended March 31, 1997 compared to 2.4 % for
the comparable period in 1996. These expenses increased $2,873 or 20.9%
quarter to quarter primarily from increased personnel costs.
Interest expense, which excludes the amount incurred through financial
service operations, increased $1,852 or 5.7 % quarter to quarter. The increased
interest expense reflects the Company's higher debt level in 1997 offset by a
slightly lower average interest rate quarter to quarter.
During the first quarter of 1997, the Company sold its interest in Equity
Corporation International ("ECI") producing a gain of approximately $68,100.
The provision for income taxes reflected a 36.2% effective tax rate for the
quarter ended March 31, 1997 as compared to a 36.5% 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.
Financial Condition and Liquidity at March 31, 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 March 31, 1997, the Company had net working capital of $156,759 and a
current ratio of 1.27:1, 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 $128,000 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 $898,000 of fixed interest rate debt
at a weighted average rate of 7.33% and approximately $1,190,000 of floating
interest rate debt at a weighted average rate of 5.13%. However, the Company
has entered into forward interest rate swaps which convert approximately
$150,000 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
50% fixed and 50% floating. In addition, as of March 31, 1997, $150,000 of the
US fixed to floating 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
16
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 do not substantially change the fixed/floating mix as of March 31, 1997.
SOURCES AND USES OF CASH
Cash flows from operating activities: Net cash provided by operating activities
was $91,112 for the three months ended March 31, 1997, compared to $76,424 for
the same period in 1996, an increase of $14,688. This increase was primarily due
to improved operating results for the quarter ended March 31, 1997. Significant
uses of operating cash include an increase in net receivables resulting from
increased sales of funeral services and cemetery products and merchandise.
Cash flows from investing activities: Net cash used in investing activities was
$75,126 for the three months ended March 31, 1997, compared to $145,526 for the
same period in 1996, a decrease of $70,400. Cash used for acquisitions increased
by approximately $34,000 during the three months ended March 31, 1997 due to
increased activity. Additionally, the Company used approximately $15,000 to
increase its investment in an existing equity investee. However, these increases
were more than offset by the approximate $147,700 in cash provided by the sale
of the Company's interest in ECI during the three months ended March 31, 1997.
In addition to acquisitions, capital expenditures including new construction of
facilities and major improvements to existing properties continue to require
significant amounts of cash.
Cash flows from financing activities: Net cash used in financing activities
was $12,706 for the three months ended March 31, 1997, compared to cash
provided by financing activities of $78,075 for the same period in 1996,
a decrease of $90,781. The decrease in 1997 compared to 1996 is mainly
due to borrowings exceeding debt repayments by approximately $89,000 during the
three months ended March 31, 1996, while borrowings effectively offset
repayments of debt during the three months ended March 31, 1997, which also
included approximately $450,000 for the early extinguishment of debt.
The Company believes that debt service has no adverse effect on its
operations or financing activities at the current levels of debt outstanding. As
of March 31, 1997, the Company's debt to capitalization ratio was 47.4% compared
to 47.3% at December 31, 1996. The interest coverage ratio for the three months
ended March 31, 1997, was 4.54:1 (excluding the gain on the sale of the
Company's investment in ECI), compared to 3.97:1 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 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 $850,000. At March 31, 1997, the Company had
approximately $76,475 of available borrowings under its primary and multi-
currency credit facilities. In addition, as of March 31, 1997 the Company had
the ability to issue $1,000,000 in securities registered with the Commission
under a shelf registration as well as 17,375,000 shares of common stock and
approximately $222,000 of guarantee promissory notes and convertible debentures
registered with the Commission under a separate shelf registration to be used
exclusively for future acquisitions. As previously discussed, in April 1997
the Company issued $450,000 of debt securities under the existing shelf
registration which was used to reduce borrowings under its credit facilities.
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
17
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. 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:
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 does not anticipate
that the adoption of these standards 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
Certain disclosures in this filing on Form 10-Q that are not historical facts
are forward looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. 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 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, and to successfully integrate
acquisitions into the Company's business. 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.
18
SERVICE CORPORATION INTERNATIONAL
PART II. OTHER INFORMATION
6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Supplemental Indenture, dated as of March 14, 1997, to the Indenture
dated as of November 1, 1987 between the Company and the
Bank of New York, as trustee.
11.1 Computation of earnings per share.
12.1 Ratio of earnings to fixed charges for the three months ended
March 31, 1997 and 1996.
27.1 Financial data schedule.
(b) Reports on Form 8-K
During the quarter ended March 31, 1997, the Company filed a Form 8-K
dated January 8, 1997 reporting under "Item 5. Other Events" a press
release announcing the Company's withdrawal of an exchange offer for
The Loewen Group, Inc.
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.
May 14, 1997
SERVICE CORPORATION INTERNATIONAL
By:/s/George R. Champagne
----------------------------------
George R. Champagne
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
19