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