<PAGE> 1
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 JUNE 30, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 1-6402-1
-------------------
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 August
10, 1995, was 96,336,886 (excluding treasury shares).
<PAGE> 2
SERVICE CORPORATION INTERNATIONAL
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Consolidated Balance Sheet -
June 30, 1995 (Unaudited) and December 31, 1994 3
Consolidated Statement of Income (Unaudited) -
Three Months Ended June 30, 1995 and 1994 4
Six Months Ended June 30, 1995 and 1994
Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended June 30, 1995 and 1994 5
Consolidated Statement of Stockholders' Equity (Unaudited) -
Six Months Ended June 30, 1995 6
Notes to the Consolidated Financial Statements (Unaudited) 7 -11
Management's Discussion and Analysis of Results of Operations
and Financial Condition 12 - 20
Part II. Other Information 21 - 22
Signature 22
</TABLE>
2
<PAGE> 3
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30,
1995 December 31,
(Unaudited) 1994
--------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 20,251 $ 218,341
Receivables, net of allowances . . . . . . . . . . . . . . . . . . . . . 347,790 291,135
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,192 60,897
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,814 21,436
----------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 448,047 591,809
----------- ----------
Prearranged funeral contracts . . . . . . . . . . . . . . . . . . . . . . 1,537,085 1,418,104
Long-term receivables . . . . . . . . . . . . . . . . . . . . . . . . . . 615,355 529,843
Cemetery property, at cost . . . . . . . . . . . . . . . . . . . . . . . . 812,198 748,639
Property, plant and equipment, at cost (net) . . . . . . . . . . . . . . . 909,857 832,401
Deferred charges and other assets . . . . . . . . . . . . . . . . . . . . . 233,258 230,336
Names and reputations (net) . . . . . . . . . . . . . . . . . . . . . . . . 888,975 810,756
----------- ----------
$ 5,444,775 $5,161,888
=========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . $ 191,547 $ 154,770
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,351 39,084
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . 21,217 277,709
----------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 245,115 471,563
----------- ----------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,579,918 1,330,177
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 275,162 238,088
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278,475 233,356
Deferred prearranged funeral contract revenues . . . . . . . . . . . . . 1,597,454 1,519,582
Convertible preferred shares of subsidiary . . . . . . . . . . . . . . . . 172,500 172,500
Stockholders' equity:
Common stock, $1 per share par value, 200,000,000 shares authorized,
96,321,367 and 94,857,060, respectively, issued and outstanding . . . 96,321 94,857
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . 751,346 718,858
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 448,377 381,509
Foreign translation adjustment . . . . . . . . . . . . . . . . . . . . . 107 1,398
----------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 1,296,151 1,196,622
----------- ----------
$ 5,444,775 $5,161,888
=========== ==========
</TABLE>
(See notes to consolidated financial statements)
3
<PAGE> 4
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1995 1994 1995 1994
-------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . $ 353,649 $ 262,862 $ 701,762 $ 524,120
Costs and expenses . . . . . . . . . . . . . . . (247,667) (186,121) (479,105) (357,837)
---------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . . . . . . . 105,982 76,741 222,657 166,283
General and administrative expenses . . . . . . . (11,018) (11,370) (23,471) (24,871)
---------- ---------- ---------- ----------
Income from operations . . . . . . . . . . . . . 94,964 65,371 199,186 141,412
Interest expense . . . . . . . . . . . . . . . . (27,525) (16,832) (52,809) (32,456)
Dividends on convertible preferred stock
of subsidiary . . . . . . . . . . . . . . . . . (2,696) - (5,391) -
Other income . . . . . . . . . . . . . . . . . . 1,757 2,171 3,073 4,686
---------- ---------- ---------- ----------
(28,464) (14,661) (55,127) (27,770)
---------- ---------- ---------- ----------
Income before income taxes . . . . . . . . . . . 66,500 50,710 144,059 113,642
Provision for income taxes . . . . . . . . . . . (25,860) (20,515) (56,039) (46,002)
---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . $ 40,640 $ 30,195 $ 88,020 $ 67,640
========== ========== ========== ==========
Earnings per share:
Primary . . . . . . . . . . . . . . . . . . . $ .42 $ .35 $ .91 $ .79
========== ========== ========== ==========
Fully diluted . . . . . . . . . . . . . . . . $ .39 $ .33 $ .85 $ .74
========== ========== ========== ==========
Dividends per share . . . . . . . . . . . . . . . $ .11 $ .105 $ .22 $ .21
========== ========== ========== ==========
Weighted average number of shares and equivalents 96,987 86,281 96,729 86,033
========== ========== ========== ==========
</TABLE>
(See notes to consolidated financial statements)
4
<PAGE> 5
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1995 1994
---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,020 $ 67,640
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 44,661 30,501
Provision for deferred income taxes . . . . . . . . . . . . . . . . . . 14,292 10,116
(Gain) from dispositions (net) . . . . . . . . . . . . . . . . . . . . . (365) (796)
Change in assets and liabilities net of effects from acquisitions:
(Increase) in receivables . . . . . . . . . . . . . . . . . . . . . . . (88,498) (37,240)
Change in prearranged funeral contracts and associated deferred revenues (53,085) 44,439
(Increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . (1,837) (29,938)
Increase in other liabilities . . . . . . . . . . . . . . . . . . . . . 43,645 33,313
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,865) (4,309)
------------ -----------
Net cash provided by operating activities . . . . . . . . . . . . . . . 36,968 113,726
------------ -----------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . (44,831) (39,845)
Proceeds from sales of property and equipment . . . . . . . . . . . . . 2,959 7,837
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (169,980) (112,743)
Loans issued by finance subsidiary . . . . . . . . . . . . . . . . . . . (12,740) (20,012)
Principal payments received on loans by finance subsidiary . . . . . . . 10,077 41,504
Change in investments and other . . . . . . . . . . . . . . . . . . . . (2,134) (23,115)
------------ -----------
Net cash (used in) investing activities . . . . . . . . . . . . . . . . . (216,649) (146,374)
------------ -----------
Cash flows from financing activities:
Increase (decrease) in borrowings under revolving credit agreements . . (51,129) 82,784
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . 300,000 -
Payments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . (268,590) (14,912)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,600) (17,926)
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . 19,266 -
Exercise of stock options and other . . . . . . . . . . . . . . . . . . 2,644 518
------------ -----------
Net cash (used in) provided by financing activities . . . . . . . . . . . (18,409) 50,464
------------ -----------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . (198,090) 17,816
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . 218,341 20,822
------------ -----------
Cash and cash equivalents at June 30, 1995 and 1994 . . . . . . . . . . . $ 20,251 $ 38,638
============ ===========
Cash used for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,580 $ 35,225
============ ===========
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,723 $ 39,182
============ ===========
Non cash transactions:
Common stock issued under restricted stock plans . . . . . . . . . . . . $ 1,647 $ 1,646
Debenture conversion . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,346 $ -
Property distributed from prearranged funeral trust. . . . . . . . . . . $ - $ 9,920
</TABLE>
(See notes to consolidated financial statements)
5
<PAGE> 6
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Capital in Foreign
Common excess of Retained translation
stock par value earnings adjustment
---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at December 31, 1994. . . . . . . . . . . . $ 94,857 $ 718,858 $ 381,509 $ 1,398
Net income. . . . . . . . . . . . . . . . . . . . - - 88,020 -
Common stock issued:
Common stock offering . . . . . . . . . . . . . 780 18,486 - -
Stock option exercises and stock grants . . . . 266 4,025 - -
Acquisitions. . . . . . . . . . . . . . . . . . 180 5,225 - -
Debenture conversion. . . . . . . . . . . . . . 238 5,108 - -
Dividends on common stock ($.22 per share). . . . . - - (21,152) -
Foreign translation adjustment . . . . . . . . . . - - (1,291)
Other . . . . . . . . . . . . . . . . . . . . . . . - (356) - -
---------- ---------- ----------- ---------
Balance at June 30, 1995 . . . . . . . . . . . . . $ 96,321 $ 751,346 $ 448,377 $ 107
========== ========== =========== =========
</TABLE>
(See notes to consolidated financial statements)
6
<PAGE> 7
SERVICE CORPORATION INTERNATIONAL
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements for the six months ended June 30, 1995
and 1994 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, 1994 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.
2. NAMES AND REPUTATIONS
The excess of purchase price over the fair value of assets acquired and
liabilities assumed is included in names and reputations and is being
amortized over a 40 year period. The Company monitors the recoverability of
names and reputations based on projections of future undiscounted operating
income and cash flows of acquired businesses. Historically, the death care
industry has exhibited stable earnings and cash flows as well as a low
failure rate.
3. ACQUISITIONS
The Company has acquired certain funeral and cemetery operations during each
six month period ended June 30, 1995 and 1994. The consideration for these
acquisitions consisted of cash, common stock of the Company, issued or assumed
debt and the retirement of loans receivable issued by the Company's financial
services subsidiary. The operating results of all of these acquisitions have
been included since their respective dates of acquisitions.
The effect of acquisitions on the consolidated balance sheet at June 30,
was as follows:
<TABLE>
<CAPTION>
1995 1994
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,939 $ 12,347
Prearranged funeral contracts . . . . . . . . . . . . . . . . . . . 16,955 44,524
Long-term receivables . . . . . . . . . . . . . . . . . . . . . . . 42,230 3,732
Cemetery property . . . . . . . . . . . . . . . . . . . . . . . . . 64,827 47,773
Property, plant and equipment . . . . . . . . . . . . . . . . . . . 59,274 45,456
Deferred charges and other assets . . . . . . . . . . . . . . . . . 621 3,560
Names and reputations . . . . . . . . . . . . . . . . . . . . . . . 84,525 70,189
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . (13,738) (20,580)
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . (19,168) (25,271)
Deferred income taxes and other liabilities . . . . . . . . . . . . (55,019) (17,464)
Deferred prearranged funeral contract revenues . . . . . . . . . . (25,061) (46,219)
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . (5,405) (5,304)
--------- ---------
Cash used for acquisitions . . . . . . . . . . . . . . . . . $ 169,980 $ 112,743
========= =========
</TABLE>
7
<PAGE> 8
The following unaudited pro forma information assumes that the
acquisition by the Company of all operations acquired during the year ended
December 31, 1994 and the six months ended June 30, 1995 took place on January
1, 1994 (766 funeral homes and 54 cemeteries acquired in 122 separate
transactions). This information also assumes that the net proceeds from the
Company's December 1994 public offerings of Company common stock, 8.375% notes
and convertible preferred shares of a subsidiary were issued at the beginning
of 1994 and such proceeds were used to fund, to the extent available, the
acquisitions mentioned above. This unaudited pro forma information may not be
indicative of results that would have actually resulted if these transactions
had occurred on the dates indicated or which may be obtained in the future.
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------------------------------------------------------------------------------
1995 1994
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 720,201 $ 663,110
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87,730 $ 70,381
Primary earnings per common share . . . . . . . . . . . . . . . . . $ .91 $ .73
</TABLE>
In addition to the acquisitions disclosed above, during the six month
period ended June 30, 1995, the Company entered into an agreement to acquire
Gibraltar Mausoleum Corporation ("Gibraltar"). Gibraltar, a private funeral and
cemetery company based in Indianapolis, owns and operates 23 funeral homes and
54 cemeteries. The Company expects to complete the Gibraltar transaction during
the fourth quarter of 1995 for a purchase price of approximately $260,000
consisting of 3,286,759 shares of Company common stock, $99,000 in cash and the
assumption of $54,000 of Gibraltar debt.
During July 1995, the Company announced that it reached an agreement
with Lyonnaise des Eaux S.A. ("LDE"), A French company, to purchase their
funeral service business subject to regulatory approvals. LDE's funeral service
business is comprised of a 51% ownership of Omnium de Gestion et de Financement
S.A. ("OGF") which, in turn, owns approximately 65% of Pompes Funebres
Generales S.A. ("PFG"). The Company will make public tender offers for the
remaining shares of OGF and PFG. The total purchase price for OGF and the
portion of PFG not owned by OGF is expected to be approximately US $600,000.
The net cost to the Company, taking into account the estimated cash balances of
OGF and PFG, is expected to be approximately US $425,000. OGF and PFG, when
combined, is the largest funeral service organization in Europe.
Also during July 1995, the Company announced that it reached an
agreement to acquire the shares of SCI Canada ("SCIC") not already owned by the
Company. This transaction will eliminate the minority interest ownership of SCIC
and will make SCIC a wholly owned subsidiary of the Company. This transaction
is subject to approval by the minority shareholders of SCIC and, if approved,
will be completed in the third quarter of 1995. The purchase price will be
approximately US $60,000 net of proceeds received from exercise of outstanding
SCIC stock options and will be financed through borrowings under the
Company's revolving credit agreements.
The Company is currently in the process of accumulating the financial
information for the anticipated foreign and domestic acquisitions discussed
above.
4. DEFERRED PREARRANGED FUNERAL CONTRACT REVENUES
Deferred prearranged funeral contract revenues include the contract amount of
all price guaranteed prearranged funeral service contracts as well as the trust
earnings and increasing insurance benefits earned through June 30, 1995. The
Company will continue to defer additional trust earnings and insurance benefits
as they are earned until the performance of the funeral service. Upon
performance of the funeral service, the Company will recognize the fixed
contract price as well as total accumulated trust earnings and increasing
insurance benefits as funeral revenues.
8
<PAGE> 9
The recognition in future funeral revenues is estimated to occur in the
following years based on actuarial assumptions as follows:
<TABLE>
<S> <C>
1995 (remaining six months) . . . . . . . . . $ 72,235
1996 . . . . . . . . . . . . . . . . . . . . . 133,310
1997 . . . . . . . . . . . . . . . . . . . . . 122,741
1998 . . . . . . . . . . . . . . . . . . . . . 112,790
1999 . . . . . . . . . . . . . . . . . . . . . 103,459
2000 and through 2004 . . . . . . . . . . . . 397,921
2005 and thereafter . . . . . . . . . . . . . 654,998
-----------
$ 1,597,454
===========
</TABLE>
5. DEBT
Effective June 30, 1995, the Company established a 364-day revolving credit
agreement which allows for borrowings up to $450,000, which will be used to
primarily support commercial paper. The agreement expires June 28, 1996, 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.
Also effective June 30, 1995, the Company established a multicurrrency
revolving credit agreement which allows borrowings of up to $350,000, including
up to $75,000 each in 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.
The credit agreements disclosed above contain financial compliance
provisions that require certain levels of net worth, debt, equity, liens,
letters of credit and guarantees. At June 30, 1995 there was $178,700 of
commercial paper outstanding backed by such credit agreements. During the six
months ended June 30, 1995, the average interest rate incurred for amounts
borrowed under these agreements was 6.1%.
The Company's Canadian subsidiary has a line of credit with a Canadian
bank allowing for borrowings up to US$21,900. At June 30, 1995, US$16,700 was
outstanding under this agreement. This agreement requires a .125% commitment fee
and was due to expire on July 31, 1995. Interest rates are based on various
indices as determined by the Company. In July 1995, this line was increased to
US$29,100 and the expiration date was extended to December 31, 1995. The
Company's Australian subsidiary has a line of credit with an Australian bank
allowing for borrowings up to US$56,800. At June 30, 1995, US$28,400 was
outstanding under this agreement, this line requires a .15% commitment fee on
the unused portion of the line. The interest rate is .55% above quoted bank
bill buying rates. The expiration date is September 30, 1995. In July 1995,
this line was reduced to US$35,500. It is expected that these agreements will
be replaced by the foreign currency portions of the multicurrency revolving
credit agreement discussed above.
The Company's outstanding commercial paper and other borrowings under
its various credit facilities at June 30, 1995 are classified as long-term
debt. It is the Company's intent to refinance such borrowings through the use of
its long-term bank credit agreements or other long-term notes issued under the
Company's shelf registration.
In June 1995, the Company issued $300,000, 7% notes due June 1, 2015.
These notes were sold through an underwritten public offering pursuant to the
Company's $1,000,000 shelf registration that went effective in October 1994.
The holders of the notes have the right to require the Company to redeem such
notes, in whole or in part, on June 1, 2002 at a redemption price equal to
100% of the aggregate principal amount thereof plus accrued unpaid interest.
The net proceeds of the notes were used to repay existing amounts outstanding
under the Company's existing revolving credit facilities or to retire
commercial paper backed by such facilities.
In August 1995, the Company established a 364-day revolving credit
agreement which allows for borrowings up to $600,000. Such borrowings will be
used to provide short term financing for the purchase of LDE's funeral service
business (see footnote 3 above). 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.
9
<PAGE> 10
6. DERIVATIVES
The Company uses derivatives to reduce borrowing costs due to fluctuations in
interest rates and to hedge its net investment in foreign subsidiaries from
fluctuations in foreign exchange rates. To achieve this objective, the Company
entered into interest rate and foreign currency swaps to effectively change the
interest rate and currency of specific debt issuances. These interest rate and
foreign currency swaps are entered into concurrently with the issuance of the
debt they are intended to modify. The notional value, payment and maturity
dates of the swaps generally match the principal, interest payment dates and
maturity dates of the related debt. In addition, the notional amount of a
foreign currency hedge related to a specific foreign subsidiary does not exceed
the Company's net investment in that foreign subsidiary and generally has been
entered into concurrently with the acquisition of the foreign subsidiary.
Accordingly, any impact from the swaps on the Company's financial condition,
liquidity or operating results would be generally offset by the opposite impact
on the related debt or the net investment in the Company's foreign
subsidiaries.
The Company's policy is not to use derivatives for speculative purposes.
Therefore, the Company does not trade in financial instruments nor is it a party
to leveraged derivative transactions. The Company has procedures in place to
monitor and control the use of derivatives and entered into transactions only
with major financial institutions with exceptional credit worthiness. As of June
30, 1995, based on information supplied by the participating banks, the Company
would receive approximately $16,000 from the participating banks to unwind
these agreements.
7. RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six Months Ended June 30,
1995 1994
--------------------------
<S> <C>
2.94 3.65
</TABLE>
For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income 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 and preferred stock dividends of a subsidiary). Fixed
charges consist of interest expense, whether capitalized or expensed,
amortization of debt costs, one-third of rental expense which the Company
considers representative of the interest factor in the rentals and
preferred stock dividends of a subsidiary.
10
<PAGE> 11
8. SCI INTERNATIONAL LIMITED
SCI International Limited ("International") is a wholly-owned subsidiary of the
Company. International owns, through wholly-owned subsidiaries, the Company's
operations in Australia and the United Kingdom as well as the Company's
investment in a Canadian company, Arbor Memorial Service, Inc.
Set forth below is certain June 30, summary financial information for
International.
<TABLE>
<CAPTION>
1995 1994
-------------------------------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $ 109,377 $ 22,661
============= =============
Gross profit . . . . . . . . . . . . . . . . . . . . . . . $ 32,666 $ 7,207
============= =============
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 5,009 $ 2,286
============= =============
Current assets . . . . . . . . . . . . . . . . . . . . . . $ 40,783 $ 10,514
Non-current assets . . . . . . . . . . . . . . . . . . . . 921,550 126,459
------------- -------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 962,333 $ 136,973
============= =============
Current liabilities . . . . . . . . . . . . . . . . . . . . $ 70,610 $ 10,931
Non-current liabilities . . . . . . . . . . . . . . . . . . 816,900 100,762
------------- -------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . $ 887,510 $ 111,693
============= =============
Stockholder's equity . . . . . . . . . . . . . . . . . . . $ 74,823 $ 25,280
============= =============
</TABLE>
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICES)
OVERVIEW:
The majority of the Company's funeral homes 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 above, allow the Company's operations to more efficiently
process the traditionally wide fluctuations in the volume of funeral services
and cemetery interments performed during a given time period. The Company's
acquisitions are primarily concentrated within existing cluster areas or create
new cluster area opportunities. The Company has successfully implemented the
cluster strategy in its North American and Australian operations and is
proceeding with implementation in the United Kingdom operations which were
acquired in the latter half of 1994. The Company has approximately 162 clusters
in North America and Australia, which range in size from two operations to 54
operations. There may be more than one cluster in a given metropolitan area,
depending upon the level and degree of shared costs.
SIX MONTHS ENDED JUNE 30, 1995
COMPARED TO SIX MONTHS ENDED JUNE 30, 1994
RESULTS OF OPERATIONS:
Segment information for the Company's three lines of business are as follows:
<TABLE>
<CAPTION> Percentage
Six Months Ended June 30, Increase/ Increase
1995 1994 (Decrease) (Decrease)
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Funeral . . . . . . . . . . . $ 479,969 $ 350,008 $ 129,961 37.1%
Cemetery . . . . . . . . . . . 211,797 164,776 47,021 28.5
Financial services . . . . . . 9,996 9,336 660 7.1
--------- ---------- ---------
701,762 524,120 177,642 33.9
Costs and expenses:
Funeral . . . . . . . . . . . 335,878 240,612 95,266 39.6
Cemetery . . . . . . . . . . . 136,851 112,073 24,778 22.1
Financial services . . . . . . 6,376 5,152 1,224 23.8
--------- ---------- ---------
479,105 357,837 121,268 33.9
Gross profit and margin percentage:
Funeral . . . . . . . . . . . . . 144,091 30.0% 109,396 31.3% 34,695 31.7
Cemetery . . . . . . . . . . . . 74,946 35.4 52,703 32.0 22,243 42.2
Financial services . . . . . . . 3,620 36.2 4,184 44.8 (564) (13.5)
--------- ---------- ---------
$ 222,657 31.7% $ 166,283 31.7% $ 56,374 33.9%
========= ========== =========
</TABLE>
12
<PAGE> 13
Funeral
Funeral revenues were generated as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, Percentage
1995 1994 Increase Increase
---------------------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters . . . . . . . . . . . . $ 394,363 $ 345,428 $ 48,935 14.2%
New clusters* . . . . . . . . . . . . . . 15,125 1,643 13,482
----------- ----------- -----------
Total clusters . . . . . . . . . . . . 409,488 347,071 62,417 18.0%
United Kingdom . . . . . . . . . . . . . 66,690 - 66,690
Non-cluster and disposed operations . . . 3,791 2,937 854
----------- ----------- -----------
Total funeral revenues . . . . . . . . $ 479,969 $ 350,008 $ 129,961 37.1%
=========== =========== ===========
</TABLE>
The $48,935 increase in revenues at existing clusters was the result of
8.5% more funeral services performed (111,792 compared to 103,009) and a 5.2%
higher average sales price ($3,528 compared to $3,353). Included in this
increase were $33,880 in increased revenues from operations acquired since the
beginning of 1994. The remaining revenue increase of $15,055 was contributed by
operations acquired before 1994. These operations experienced a 7.5% increase in
average sales price partially offset by a 2.7% decline in the number of funeral
services performed. The decline in the number of funeral services performed at
these operations was most noticeable early in the first quarter, which is
seasonally a heavy funeral service volume period.
During the six months ended June 30, 1995, the Company sold $171,474 of
prearranged funeral services compared to $110,623 for the same period in 1994.
These prearranged funeral services are deferred and will be reflected in funeral
revenues in the periods that the funeral services are performed. The current
emphasis on sales of prearranged funerals is expected to continue.
Funeral costs were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, Percentage
1995 1994 Increase Increase
---------------------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters . . . . . . . . . . . . $ 256,838 $ 222,162 $ 34,676 15.6%
New clusters* . . . . . . . . . . . . . . 11,232 954 10,278
----------- ----------- -----------
Total clusters . . . . . . . . . . . . 268,070 223,116 44,954 20.1%
United Kingdom . . . . . . . . . . . . . 49,287 - 49,287
Non-cluster and disposed operations . . . 3,696 3,351 345
Administrative overhead . . . . . . . . . 14,825 14,145 680
----------- ----------- -----------
Total funeral costs . . . . . . . . . $ 335,878 $ 240,612 $ 95,266 39.6%
=========== =========== ===========
</TABLE>
The gross profit margin for existing clusters declined to 34.9% from
35.7% last year. Acquisitions since the beginning of 1994, included in existing
clusters, accounted for $26,775 of the existing cluster cost increase and were
the primary reason for the existing cluster gross profit margin decline.
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. This was especially noticeable given the large number of
acquired operations incorporated into existing clusters in 1995 and 1994. The
gross profit margin for those operations in existing clusters that were acquired
before 1994 increased slightly to 36.5% in 1995 from 36.1% last year due
primarily to higher average sales price accomplished from improved merchandising
of funeral services and products as well as price increases. Costs and expenses
for those same operations remained relatively flat when expressed as a
percentage of revenues.
--------------------
* Represents new geographic cluster areas entered into since the beginning of
1994 for the period that those businesses were ownedby the Company.
13
<PAGE> 14
Cemetery
Cemetery revenues were generated as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, Increase/ Percentage
1995 1994 (Decrease) Increase
---------------------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters . . . . . . . . . . . . $ 199,874 $ 161,902 $ 37,972 23.5%
New clusters* . . . . . . . . . . . . . . 3,106 - 3,106
----------- ----------- ----------
Total clusters . . . . . . . . . . . . 202,980 161,902 41,078 25.4%
United Kingdom . . . . . . . . . . . . . 5,970 - 5,970
Non-cluster and disposed operations . . . 2,847 2,874 (27)
----------- ----------- ----------
Total cemetery revenues . . . . . . . $ 211,797 $ 164,776 $ 47,021 28.5%
=========== =========== ==========
</TABLE>
Revenues for the existing clusters increased due primarily to increased
volume of sales and higher average sales prices for property and merchandise.
Included in this increase were $11,806 in increased revenues from locations
acquired since the beginning of 1994. The remaining revenue increase of $26,166
was contributed by locations acquired before 1994.
Cemetery costs and expenses were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, Percentage
1995 1994 Increase Increase
---------------------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters . . . . . . . . . . . . $ 120,789 $ 102,223 $ 18,566 18.2%
New clusters* . . . . . . . . . . . . . . 2,237 - 2,237
----------- ----------- ----------
Total clusters . . . . . . . . . . . . 123,026 102,223 20,803 20.4%
United Kingdom . . . . . . . . . . . . . 3,147 - 3,147
Non-cluster and disposed operations . . . 2,022 1,630 392
Administrative overhead . . . . . . . . . 8,656 8,220 436
----------- ----------- ----------
Total cemetery costs . . . . . . . . . $ 136,851 $ 112,073 $ 24,778 22.1%
=========== =========== ==========
</TABLE>
Costs at existing clusters increased $18,566 associated with the
increased revenues discussed above. Costs from cemeteries acquired since the
beginning of 1994, included in existing clusters, increased $8,966, while costs
from cemeteries acquired before 1994, included in existing clusters, increased
$9,600. The overall cemetery gross profit margin increased to 35.4% from 32.0%
last year reflecting the strong revenue growth within existing clusters as well
as continued cost control in the majority of operating expenses and
administrative overhead.
Financial Services
The Company's wholly-owned finance subsidiary, Provident Services, Inc.
(Provident) reported a gross profit decrease of $564 in the current period
compared with the same period in 1994. Provident's average outstanding loan
portfolio during the current period declined to $203,589 compared to $246,408
last year, while the average interest rate spread increased to 3.69% compared
to 3.45% last year.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses were
3.3% during the six months ended June 30, 1995 compared to 4.7% in the same
period in 1994. These expenses decreased by $1,400 or 5.6% period to period.
The lower level of expenses this period was primarily associated with reduced
compensation, legal and professional expenses.
---------------------
* Represents new geographic cluster areas entered into since the beginning of
1994 for the period that those businesses were owned by the Company.
14
<PAGE> 15
Interest expense, which excludes the amount incurred through financial
service operations, increased $20,353 or 62.7% during the current period. This
increase was due to increased borrowings and higher interest rates incurred
under bank loans, revolving lines of credit and commercial paper along with
approximately $400,000 of fixed rate debt at a weighted average interest rate
of 8.5% issued in December 1994 and January 1995. Additionally, in June 1995,
the Company issued $300,000 of 7% notes. The additional borrowings were
primarily used to fund the Company's world-wide acquisition activities and
repay existing revolving lines of credit and commercial paper.
The convertible preferred shares of a subsidiary were issued in December
1994 and the proceeds were used in the acquisition of the United Kingdom
operations. Dividends on these securities yield 6.25% and totalled $5,391 for
the first six months of 1995.
The provision for income taxes reflects a 38.9% effective tax rate for
this year as compared to a 40.5% effective tax rate last year.
THREE MONTHS ENDED JUNE 30, 1995
COMPARED TO THREE MONTHS ENDED JUNE 30, 1994
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICES)
RESULTS OF OPERATIONS:
Segment information for the Company's three lines of business are as follows:
<TABLE>
<CAPTION>
Percentage
Three Months Ended June 30, Increase/ Increase
1995 1994 (Decrease) (Decrease)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Funeral . . . . . . . . . . . . $ 237,213 $ 172,651 $ 64,562 37.4%
Cemetery . . . . . . . . . . . 111,400 85,393 26,007 30.5
Financial services . . . . . . 5,036 4,818 218 4.5
--------- ---------- ----------
353,649 262,862 90,787 34.5
Costs and expenses:
Funeral . . . . . . . . . . . 171,407 123,629 47,778 38.6
Cemetery . . . . . . . . . . . 73,089 59,576 13,513 22.7
Financial services . . . . . . 3,171 2,916 255 8.7
--------- ---------- ----------
247,667 186,121 61,546 33.1
Gross profit and margin percentage:
Funeral . . . . . . . . . . . 65,806 27.7% 49,022 28.4% 16,784 34.2
Cemetery . . . . . . . . . . . 38,311 34.4 25,817 30.2 12,494 48.4
Financial services . . . . . . 1,865 37.0 1,902 39.5 (37) (1.9)
--------- ---------- ----------
$ 105,982 30.0% $ 76,741 29.2% $ 29,241 38.1%
========= ========== ==========
</TABLE>
15
<PAGE> 16
Funeral
Funeral revenues were generated as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Increase/ Percentage
1995 1994 (Decrease) Increase
------------------------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters . . . . . . . . . . . . $ 194,125 $ 169,767 $ 24,358 14.3%
New clusters* . . . . . . . . . . . . . . 9,031 1,329 7,702
---------- ---------- ---------
Total clusters . . . . . . . . . . . 203,156 171,096 32,060 18.7%
United Kingdom . . . . . . . . . . . . . 32,607 - 32,607
Non-cluster and disposed operations . . . 1,450 1,555 (105)
---------- ---------- ---------
Total funeral revenues . . . . . . . $ 237,213 $ 172,651 $ 64,562 37.4%
========== ========== =========
</TABLE>
The $24,358 increase in revenues at existing clusters was the result of
7.8% more funeral services performed (54,639 compared to 50,679) and a 6.1%
higher average sales price ($3,553 compared to $3,350). Included in this
increase were $15,336 in increased revenues from operations acquired since April
1, 1994. The remaining increase of $9,022 was contributed by operations acquired
before April 1, 1994. The locations that were acquired before April 1, 1994
experienced a 7.9% increase in average sales prices which was partially offset
by a 2.3% decline in the number of funeral services performed.
During the three months ended June 30, 1995, the Company sold $90,994
of prearranged funeral services compared to $60,771 for the same quarter in
1994. These prearranged funeral services are deferred and will be reflected in
funeral revenues in the periods that the funeral services are performed. The
current emphasis on sales of prearranged funerals is expected to continue.
Funeral costs were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Increase/ Percentage
1995 1994 (Decrease) Increase
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters . . . . . . . . . . . . $ 131,145 $ 114,578 $ 16,567 14.5%
New clusters* . . . . . . . . . . . . . . 6,902 728 6,174
---------- ---------- ---------
Total clusters . . . . . . . . . . . 138,047 115,306 22,741 19.7%
United Kingdom . . . . . . . . . . . . . 24,762 - 24,762
Non-cluster and disposed operations . . . 1,464 1,689 (225)
Administrative overhead . . . . . . . . . 7,134 6,634 500
---------- ---------- ---------
Total funeral costs . . . . . . . . . $ 171,407 $ 123,629 $ 47,778 38.6%
========== ========== =========
</TABLE>
The gross profit margin for existing clusters declined slightly to 32.4%
from 32.5% last year. Acquisitions since April 1, 1994, included in existing
clusters, accounted for $12,897 of the existing cluster cost increase and were
the primary reason for the existing cluster gross profit margin decline. The
gross profit margin for those funeral operations in existing clusters that were
acquired before April 1, 1994 increased to 33.9% in 1995 from 32.6% last year
due to the increase in average sales prices discussed above and reduced
personnel and facility costs when expressed as a percentage of revenues.
--------------------
* Represents new geographic cluster areas entered into since April 1, 1994
for the period that those businesses were owned by the Company.
16
<PAGE> 17
Cemetery
Cemetery revenues were generated as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Percentage
1995 1994 Increase Increase
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters . . . . . . . . . . . . $ 104,709 $ 84,092 $ 20,617 24.5%
New clusters* . . . . . . . . . . . . . . 2,350 - 2,350
---------- ---------- ---------
Total clusters . . . . . . . . . . . 107,059 84,092 22,967 27.3%
United Kingdom . . . . . . . . . . . . . 2,897 - 2,897
Non-cluster and disposed operations . . . 1,444 1,301 143
---------- ---------- ---------
Total cemetery revenues . . . . . . . $ 111,400 $ 85,393 $ 26,007 30.5%
========== ========== =========
</TABLE>
Revenues for the existing clusters increased due primarily to increased
volume of sales and higher average sales prices for property and merchandise.
Included in this increase were $5,680 in increased revenues from locations
acquired since April 1, 1994. The remaining revenue increase of $14,937 was
contributed by locations acquired before April 1, 1994.
Cemetery costs and expenses were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Percentage
1995 1994 Increase Increase
------------------------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters . . . . . . . . . . . . $ 64,799 $ 55,318 $ 9,481 17.1%
New clusters* . . . . . . . . . . . . . . 1,725 - 1,725
---------- ---------- ---------
Total clusters . . . . . . . . . . . 66,524 55,318 11,206 20.3%
United Kingdom . . . . . . . . . . . . . 1,503 - 1,503
Non-cluster and disposed operations . . . 1,124 848 276
Administrative overhead . . . . . . . . . 3,938 3,410 528
---------- ---------- ---------
Total cemetery costs . . . . . . . . $ 73,089 $ 59,576 $ 13,513 22.7%
========== ========== =========
</TABLE>
Costs at existing clusters increased $9,481 associated with the
increased revenues discussed above. Costs from cemeteries acquired after April
1, 1994 included in existing clusters, increased $4,448, while costs from
cemeteries acquired before April 1, 1994, included in existing clusters,
increased $5,033. The overall cemetery gross profit margin increased to 34.4%
from 30.2% last year reflecting the strong revenue growth within existing
clusters as well as continued cost control in the majority of operating
expenses.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses were
3.1% in the three months ended June 30, 1995 compared to 4.3% in the same
period in 1994. These expenses decreased by $352 or 3.1% quarter to quarter. The
lower level of expenses this quarter was primarily associated with reduced
compensation, legal and professional expenses.
Interest expense, which excludes the amount incurred through financial
service operations, increased $10,693 or 63.5% during the current quarter. This
increase was due to increased borrowings and higher interest rates incurred
under bank loans, lines of credit and commercial paper along with approximately
$400,000 of fixed rate debt at a weighted average interest rate of 8.5%
issued in December 1994 and January 1995. Additionally, in June 1995,
the Company issued $300,000 of 7% notes.
--------------------
* Represents new geographic cluster areas entered into since April 1, 1994
for the period that those businesses were owned by the Company.
17
<PAGE> 18
FINANCIAL CONDITION AND LIQUIDITY AT JUNE 30, 1995:
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 offerings of debt and equity securities supplemented by the Company's
revolving credit agreements. The Company believes cash from operations,
additional funds available under its revolving credit agreements, and proceeds
from public offerings of securities will be sufficient to continue its current
acquisition and operating policies.
At June 30, 1995, the Company had net working capital of $202,932 and a
current ratio of 1.83:1, compared to working capital of $120,246 and a current
ratio of 1.25:1 at December 31, 1994. The cash balance at December 31, 1994
included net proceeds from the Company's December 1994 public offerings which
were used in the first quarter of 1995 to repay bank debt associated with the
1994 United Kingdom acquisitions.
Shelf Registration of Securities
In October 1994, the Company registered $1,000,000 of securities through a shelf
registration filed with the Securities and Exchange Commission ("Commission").
During the fourth quarter of 1994 and the year to date period ended June 30,
1995, the Company has issued approximately $889,000 of securities under this
shelf registration. The proceeds from these securities were used to finance the
United Kingdom acquisitions and to repay borrowings under the Company's
revolving credit agreements.
In June 1995, the Company filed an $889,000 shelf registration of
securities with the Commission. This filing is currently in the review process
with the Commission and is not currently effective. This shelf registration,
combined with the remaining amount available under the October 1994 shelf
registration, will offer the Company the ability to issue up to $1,000,000 in
securities. A portion of these securities are expected to be used to
permanently finance the acquisition of the funeral service business of
LDE discussed below.
Revolving Credit Agreements
Effective June 30, 1995, the Company replaced its existing revolving credit
agreements with two new agreements that allow for borrowings of up to $800,000.
The first agreement establishes a new 364-day revolving credit agreement which
allows for borrowings up to $450,000, which will be used to primarily support
commercial paper. The agreement expires June 28, 1996, 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. The second agreement represents a multicurrency revolving
credit agreement which allows borrowings of up to $350,000, including up to
$75,000 each in 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.
The Company's Canadian and Australian subsidiaries have lines of credit
which expire December 31, 1995 and September 30, 1995, respectively, It is
expected that these agreements will be replaced by the foreign currency portions
of the multicurrency revolving credit agreement discussed above.
Derivatives
The Company uses derivatives to reduce borrowing costs due to fluctuations in
interest rates and to hedge its net investment in foreign subsidiaries from
fluctuations in foreign exchange rates. To achieve this objective, the Company
entered into interest rate and foreign currency swaps to effectively change the
interest rate and currency of specific debt issuances. These interest rate and
foreign currency swaps are entered into concurrently with the issuance of the
debt they are intended to modify. The notional value, payment and maturity
18
<PAGE> 19
dates of the swaps generally match the principal, interest payment dates and
maturity dates of the related debt. In addition, the notional amount of a
foreign currency hedge related to a specific foreign subsidiary does not exceed
the Company's net investment in that foreign subsidiary and generally has been
entered into concurrently with the acquisition of the foreign subsidiary.
Accordingly, any impact from the swaps on the Company's financial condition,
liquidity or operating results would be generally offset by the opposite impact
on the related debt or the net investment in the Company's foreign subsidiaries.
The Company's policy is not to use derivatives for speculative purposes.
Therefore, the Company does not trade in financial instruments nor is it a party
to leveraged derivative transactions. The Company has procedures in place to
monitor and control the use of derivatives and entered into transactions only
with major financial institutions with exceptional credit worthiness. For a more
complete description of the Company's derivatives activities, including
quantitative disclosures of specific transactions, refer to footnotes 1 and 6 to
the Company's December 31, 1994 consolidated financial statements contained in
the Company's 1994 annual report on Form 10-K.
Foreign Matters
The Company believes, due to the foreign currency hedges described
above, that the effects of foreign currency translations are immaterial. The
death care industries in countries where the Company has foreign operations and
those countries related to the proposed acquisitions (see note 3) are very
stable, have predictable cash flows and those countries do not have highly
inflationary economies.
Sources and Uses of Cash
Cash Flows from Operating Activities
Net cash provided by operating activities was $36,968 for the six months ended
June 30, 1995, compared to $113,726 for the same period in 1994, a decrease of
$76,758. This decrease was due primarily to an increase in receivables due
primarily to increased sales of funeral services and cemetery products and
merchandise. Also contributing to the decrease was a net use of cash relating
to prearranged funeral activities primarily due to the timing of cash payments
and withdrawals to and from trusts and increased cash outlays on marketing
efforts.
Cash Flows from Investing Activities
Net cash used in investing activities was $216,649 for the six months
ended June 30, 1995, compared to $146,374 for the same period in 1994. This
increase reflects the Company's aggressive acquisition of funeral homes and
cemeteries. During the six months ended June 30, 1995, $169,980 of cash was
used for acquisitions. The effect of acquisitions on the Company's balance
sheet is detailed in note 3. 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 used in
capital expenditures was $44,831 during the six months ended June 30, 1995.
Cash Flows from Financing Activities
Net cash used in financing activities was $18,409 for the six months
ended June 30, 1995, compared to cash provided of $50,464 for the same period in
1994. This variance is primarily the result of transactions involving the
Company's long-term debt. In the first six months of 1995, the Company's total
debt decreased by $6,751 to $1,601,135 reflecting the repayment of
borrowings under the Company's revolving credit agreements. These repayments
were partially offset by increased long term debt resulting from the issuance of
$300,000 of 7% notes due in 2015 and the January 1995 issuance of $199,000
seven year, fixed rate notes. The Company's total debt, after giving effect
for interest rate swaps, has been converted into approximately $1,028,000 of
fixed interest rate debt at an average interest rate of 8.3% and $572,000 of
variable interest rate debt at an average interest rate of 7.1%. The Company
believes that debt service is manageable at the current levels of debt
outstanding. The interest rate coverage for the six months ended June 30, 1995
was 3.27. This interest rate coverage level has been consistent, despite higher
levels of debt outstanding, for several years. The Company believes that the
acquisition of funeral and cemetery operations funded primarily with debt is a
prudent business strategy given the stable cash flow generated and the low
non-failure rate exhibited by these 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. At
June 30, 1995, the Company had approximately $621,000 of available borrowings
under its primary credit facilities. As disclosed above, upon effectiveness of
the June 1995 shelf registration, the Company may issue additional securities.
In addition, the Company has 11,015,000 shares of common stock, $46,725 of
guarantees of promissory notes and $73,882 of convertible debentures registered
with the Commission to be used exclusively for future acquisitions.
19
<PAGE> 20
Other Matters
During the six month period ended June 30, 1995, the Company entered into an
agreement to acquire Gibraltar. Gibraltar, a private funeral and cemetery
company based in Indianapolis, owns and operates 23 funeral homes and 54
cemeteries. The Company expects to complete the Gibraltar transaction during
the fourth quarter of 1995 for a purchase price of approximately $260,000. This
transaction will be financed through the issuance of common stock under
the Company's shelf registration and borrowings under the Company's revolving
credit agreements.
During July 1995, the Company announced that it reached an agreement
with LDE to purchase their funeral service business subject to regulatory
approvals. LDE's funeral service business is comprised of a 51% ownership of
OGF which, in turn, owns approximately 65% of PFG. The Company will make public
tender offers for the remaining shares of OGF and PFG. OGF and PFG, when
combined, is the largest funeral service organization in Europe. The total
purchase price is expected to approximate US $600,000. The net cost to the
Company, taking into account the estimated cash balances of OGF and PFG, is
expected to be approximately US$425,000. This transaction is expected to be
financed initially with temporary bridge financing secured from banks (see note
5) with permanent financing derived from securities issued under the shelf
registrations of securities discussed above.
Also during July 1995, the Company announced that it reached an
agreement to acquire the shares of SCIC not already owned by the
Company. This transaction will eliminate the minority interest ownership of SCIC
and will make SCIC a wholly owned subsidiary of the Company. This transaction,
which is expected to be completed in the third quarter of 1995, will cost
approximately US$60,000 and will be financed through borrowings under the
Company's revolving credit agreements.
The Company will adopt Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (FAS 121) in January 1996. FAS 121 attempts to
standarize matters used to determine whether the costs of long-lived assets
will be recovered, and how much costs should be tested for value impairment.
The Company has not experienced impairment of its assets, including names and
reputations, in the past and does not anticipate that FAS 121 will have a
material impact, if any, on the Company's financial position or results of
operations in the future.
20
<PAGE> 21
SERVICE CORPORATION INTERNATIONAL
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently engaged in a settlement process with the staff
of the Division of Enforcement ("Staff") of the Securities and Exchange
Commission involving the matters arising out of the previously
disclosed informal investigation by the Staff with respect to the
Company's disclosure about the change in accountants. Such
investigation was initially disclosed by the Company in May 1993 and in
subsequent reports filed with the Commission, the most recent being the
report on Form 10-Q for the quarterly period ended March 31, 1995.
See such report for further information. The Company recently
submitted an Offer of Settlement in this matter. The Commission will
make the final determinations on such Offer of Settlement. There is
no assurance that the settlement process will be satisfactorily
concluded.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 11, 1995, the Company held its annual meeting of shareholders
and the shareholders elected five directors. The shares voting on the
director nominees were cast as follows:
<TABLE>
<CAPTION>
Abstentions or Broker
Nominee Votes For Votes Withheld Non-votes
------- --------- -------------- ---------
<S> <C> <C> <C>
Douglas M. Conway 78,862,886 644,526 -0-
James J. Gavin, Jr 78,868,238 639,174 -0-
B. D. Hunter 78,806,557 700,855 -0-
John W. Mecom, Jr. 78,861,793 645,619 -0-
Samuel W. Rizzo 78,871,157 636,255 -0-
</TABLE>
In addition, the shareholders approved the Company's 1995 Stock Plan
for Non-Employee Directors ("Proposal No. 1"), the Company's 1995
Incentive Equity Plan ("Proposal No. 2") and the proposal correcting
the Company's 1993 Long-Term Incentive Stock Option Plan ("Proposal No.
3"), all of which are described in the Company's proxy statement dated
April 17, 1995. The shares voting were cast as follows:
<TABLE>
<CAPTION>
Abstentions or Broker
Proposal Votes For Votes Against Votes Withheld Non-votes
-------- --------- ------------- -------------- ---------
<S> <C> <C> <C> <C>
Proposal No. 1 70,839,175 7,962,350 705,887 -0-
Proposal No. 2 74,198,836 4,933,189 375,387 -0-
Proposal No. 3 73,456,854 5,517,697 532,861 -0-
</TABLE>
21
<PAGE> 22
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.
27.1 Financial data schedule.
(b) Reports on Form 8-K
During the quarter ended June 30, 1995, the Company filed a Form
8-K dated May 23, 1995 reporting under "Item 5. Other Events" (i)
the announcement of a transaction whereby the shareholders of
Service Corporation International (Canada) Limited ("SCIC") would
be given the opportunity to sell their shares of SCIC to the
Company, (ii) information regarding a possible acquisition of
Pompes Funebres Generales S.A., and (iii) unaudited proforma
combined financial information concerning all operations acquired
during 1994, including Great Southern Group plc and Plantsbrook
Group plc. The Company also filed a Form 8-K dated June 7, 1995
reporting under "Item 5. Other Events" the announcement of the
execution of an agreement for the acquisition of Gibraltar
Mausoleum Corporation.
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.
August 14, 1995
SERVICE CORPORATION INTERNATIONAL
By: /s/ George R. Champagne
----------------------------------------
George R. Champagne
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
22
<PAGE> 23
INDEX TO EXHIBITS
Exhibit 11.1 Computation of Earnings per Share
Exhibit 12.1 Ratio of Earnings to Fixed Charges
Exhibit 27.1 Financial data schedule
<PAGE> 1
Exhibit 11.1
SERVICE CORPORATION INTERNATIONAL
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
1995 1994 1995 1994
--------------------------------------------------------------------------------------------------------------------
(Thousands, except per share amounts)
<S> <C> <C> <C> <C>
PRIMARY:
Net income . . . . . . . . . . . . . . . $ 88,020 $ 67,640 $ 40,640 $ 30,195
Average number of common shares
outstanding . . . . . . . . . . . . . . . 95,941 85,633 96,131 85,907
Common stock equivalents applicable to options
outstanding resulting from application
of the "treasury stock method" using
average stock price . . . . . . . . . . . 788 400 856 374
---------- ---------- ----------- -----------
Average common and common equivalent shares
used in earnings per share . . . . . . . 96,729 86,033 96,987 86,281
========== ========== =========== ===========
Primary Earnings Per Common Share:
Net income . . . . . . . . . . . . . . . $ .91 $ .79 $ .42 $ .35
========== ========== =========== ===========
FULLY DILUTED:
Net income . . . . . . . . . . . . . . . . . . . $ 88,020 $ 67,640 $ 40,640 $ 30,195
Add after tax interest expense applicable to
convertible debentures . . . . . . . . . 7,451 4,037 3,711 2,036
---------- ---------- ----------- -----------
$ 95,471 $ 71,677 $ 44,351 $ 32,231
========== ========== =========== ===========
Average number of common shares
outstanding . . . . . . . . . . . . . . 95,941 85,633 96,131 85,907
Common stock equivalents applicable to options
outstanding resulting from application
of the "treasury stock method" using
end of period stock price (if greater
than average stock price for period) . . . 919 413 1,117 401
Assuming conversion of convertible debentures . . . 15,751 10,120 15,708 10,209
---------- ---------- ----------- -----------
Average shares used in fully diluted
earnings per share . . . . . . . . . . . . . 112,611 96,166 112,956 96,517
========== ========= =========== ===========
Fully Diluted Earnings Per Common Share:
Net income . . . . . . . . . . . . . . . . $ .85 $ .74 $ .39 $ .33
========= ========== =========== ===========
</TABLE>
<PAGE> 1
Exhibit 12.1
SERVICE CORPORATION INTERNATIONAL
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six Months Ended June 30,
1995 1994
-----------------------------------------------------------------------------------------------------------------------
(Thousands, except ratio amounts)
<S> <C>
Pretax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 144,059 $113,642
Undistributed income of less than 50% owned equity investees . . . . . . . (1,739) (456)
Minority interest in income of majority owned subsidiaries
with fixed charges . . . . . . . . . . . . . . . . . . . . . . . . . . 1,466 1,041
Add fixed charges as adjusted (from below) . . . . . . . . . . . . . . . . 65,723 42,577
------------ ------------
$ 209,509 $ 156,804
------------ ------------
Fixed charges:
Interest expense:
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,809 $ 32,456
Financial services . . . . . . . . . . . . . . . . . . . . . . . . 5,365 4,577
Capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 355
Amortization of debt costs . . . . . . . . . . . . . . . . . . . . . . 436 140
1/3 of rental expense . . . . . . . . . . . . . . . . . . . . . . . . 7,113 5,404
Dividends on convertible preferred stock of subsidiary . . . . . . . . 5,391 -
------------ ------------
Fixed charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,260 42,932
Less: Capitalized interest . . . . . . . . . . . . . . . . . . . . . (146) (355)
Dividends on convertible preferred stock of subsidiary . . . . (5,391) -
------------ ------------
Fixed charges as adjusted . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,723 $ 42,577
============ ============
Ratio (earnings divided by fixed charges) . . . . . . . . . . . . . . . . . 2.94 3.65
============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 20,251
<SECURITIES> 0
<RECEIVABLES> 757,785
<ALLOWANCES> 41,192
<INVENTORY> 72,192
<CURRENT-ASSETS> 448,047
<PP&E> 1,133,434
<DEPRECIATION> 223,577
<TOTAL-ASSETS> 5,444,775
<CURRENT-LIABILITIES> 245,115
<BONDS> 1,579,918
<COMMON> 96,321
0
0
<OTHER-SE> 1,199,830
<TOTAL-LIABILITY-AND-EQUITY> 5,444,775
<SALES> 664,188
<TOTAL-REVENUES> 701,762
<CGS> 472,729
<TOTAL-COSTS> 472,729
<OTHER-EXPENSES> 24,482
<LOSS-PROVISION> 3,735
<INTEREST-EXPENSE> 58,756
<INCOME-PRETAX> 144,059
<INCOME-TAX> 56,039
<INCOME-CONTINUING> 88,020
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 88,020
<EPS-PRIMARY> .91
<EPS-DILUTED> .85
</TABLE>
