<PAGE>
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, 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 August
8, 1997, was 251,560,520 (excluding treasury shares).
<PAGE>
SERVICE CORPORATION INTERNATIONAL
INDEX
<TABLE>
<CAPTION>
Page
Part I Financial Information
<S> <C> <C>
Consolidated Statement of Income (Unaudited) -
Three Months Ended June 30, 1997 and 1996
Six Months Ended June 30, 1997 and 1996 3
Consolidated Balance Sheet -
June 30, 1997 (Unaudited) and December 31, 1996 4
Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended June 30, 1997 and 1996 5
Consolidated Statement of Stockholders' Equity (Unaudited) -
Six Months Ended June 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
</TABLE>
2
<PAGE>
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Dollars in thousands, June 30, June 30,
except per share amounts) 1997 1996 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues..................... $601,141 $564,749 $1,239,590 $1,140,202
Costs and expenses........... (437,958) (420,686) (888,255) (835,971)
-------- -------- ---------- ----------
Gross profit................. 163,183 144,063 351,335 304,231
General and administrative
expenses.................... (15,812) (14,786) (32,440) (28,541)
-------- -------- ---------- ----------
Income from operations....... 147,371 129,277 318,895 275,690
Interest expense............. (33,093) (34,245) (67,631) (66,931)
Dividends on preferred
securities of SCI
Finance LLC................. (1,753) (2,696) (4,382) (5,391)
Other income................. 8,765 5,232 11,855 7,423
Gain on sale of investment... - - 68,077 -
-------- -------- ---------- ----------
(26,081) (31,709) 7,919 (64,899)
-------- -------- ---------- ----------
Income before income taxes and
extraordinary loss........ 121,290 97,568 326,814 210,791
Provision for income taxes... (42,489) (35,318) (116,866) (76,644)
-------- -------- ---------- ----------
Income before extraordinary
loss........................ 78,801 62,250 209,948 134,147
Extraordinary loss on early
extinguishment of
debt (net of income taxes
of $23,383)................. - - (40,802) -
-------- -------- ---------- ----------
Net income................... $ 78,801 $ 62,250 $ 169,146 $ 134,147
======== ======== ========== ==========
Earnings per share:
Primary:
Income before extraordinary
loss....................... $ .32 $ .26 $ .86 $ .56
Extraordinary loss on early
extinguishment of debt..... - - (.17) -
-------- -------- ---------- ----------
Net income.................. $ .32 $ .26 $ .69 $ .56
======== ======== ========== ==========
Fully diluted:
Income before extraordinary
loss....................... $ .31 $ .25 $ .83 $ .54
Extraordinary loss on early
extinguishment of debt..... - - (.16) -
-------- -------- ---------- ----------
Net income............... $ .31 $ .25 $ .67 $ .54
======== ======== ========== ==========
Dividends per share.......... $ .08 $ .06 $ .15 $ .12
======== ======== ========== ==========
Weighted average number of
shares and equivalents...... 248,562 241,112 246,478 240 294
======== ======== ========== ==========
</TABLE>
(All 1996 common stock and per share data has been restated for a two-for-one
common stock split on August 30, 1996)
(See notes to consolidated financial statements)
3
<PAGE>
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30,
(Dollars in thousands, 1997 December 31,
except per share amounts) (Unaudited) 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................... $ 31,557 $ 44,131
Receivables, net of allowances................ 504,188 494,576
Inventories................................... 150,803 139,019
Other......................................... 32,720 36,314
---------- ----------
Total current assets........................ 719,268 714,040
---------- ----------
Investments - insurance subsidiary............... 560,405 601,565
Prearranged funeral contracts ................... 2,374,191 2,159,348
Long-term receivables ........................... 888,094 809,287
Cemetery property, at cost....................... 1,568,913 1,380,213
Property, plant and equipment, at cost (net)..... 1,521,256 1,457,075
Deferred charges and other assets................ 388,121 371,608
Names and reputations (net)...................... 1,388,309 1,376,634
---------- ----------
$9,408,557 $8,869,770
========== ==========
Liabilities & Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities...... $ 386,084 $ 440,797
Current maturities of long-term debt.......... 100,858 113,876
Income taxes ................................. 52,750 52,870
---------- ----------
Total current liabilities.................. 539,692 607,543
---------- ----------
Long-term debt................................... 2,268,369 2,048,737
Deferred income taxes............................ 635,206 527,460
Other liabilities ............................... 508,522 552,443
Deferred prearranged funeral contract revenues... 2,888,894 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,
251,468,703 and 236,193,427, respectively,
issued and outstanding....................... 251,469 236,193
Capital in excess of par value................ 1,449,921 1,237,783
Retained earnings............................. 854,855 728,108
Foreign currency translation adjustment ...... 6,555 22,315
Unrealized gain on securities available for
sale, net of tax............................. 5,074 10,918
---------- ----------
Total stockholders' equity................. 2,567,874 2,235,317
---------- ----------
$9,408,557 $8,869,770
========== ==========
</TABLE>
(See notes to consolidated financial statements)
4
<PAGE>
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
(Dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 169,146 $ 134,147
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 75,063 66,491
Provision for deferred income taxes............ 24,789 25,165
Extraordinary loss on early extinguishment of
debt, net of income taxes..................... 40,802 -
Gains from dispositions (net).................. (76,645) (1,991)
Change in assets and liabilities, net of
effects from acquisitions:
(Increase) in receivables..................... (60,474) (51,407)
(Increase) decrease in other assets.......... 15,426 (28,385)
Decrease in payables and other liabilities ... (27,036) (31,406)
Other......................................... 11,232 (2,445)
---------- ----------
Net cash provided by operating activities ........ 172,303 110,169
---------- ----------
Cash flows from investing activities:
Capital expenditures........................... (118,163) (66,486)
Change in prearranged funeral balances......... (40,159) (47,903)
Proceeds from sales of property and equipment.. 11,585 9,681
Acquisitions, net of cash acquired............. (190,692) (175,466)
Loans issued by finance subsidiary............. (50,638) (31,743)
Principal payments received on loans by
finance subsidiary............................ 5,418 12,736
Proceeds from sale of investment............... 147,739 -
Change in investments and other................ (30,641) (32,637)
---------- ----------
Net cash (used in) investing activities........... (265,551) (331,818)
---------- ----------
Cash flows from financing activities:
Increase (decrease) in borrowings under
revolving credit agreements................... (37,349) 112,878
Long-term debt issued.......................... 650,000 300,000
Payments of debt............................... (35,877) (98,961)
Early extinguishment of debt................... (449,998) -
Dividends paid................................. (32,136) (27,003)
Bank overdrafts and other...................... (13,966) 3,823
---------- ----------
Net cash provided by financing activities......... 80,674 290,737
---------- ----------
Net increase (decrease) in cash and
cash equivalents................................. (12,574) 69,088
Cash and cash equivalents at beginning of period.. 44,131 29,735
---------- ----------
Cash and cash equivalents at June 30, 1997
and 1996......................................... $ 31,557 $ 98,823
========== ==========
Cash used for:
Interest....................................... $ 81,807 $ 60,310
========== ==========
Taxes.......................................... $ 74,769 $ 55,811
========== ==========
Non-cash transactions:
Common stock issued in acquisitions............ $ 43,499 $ 3,237
Common stock issued under restricted stock plans$ 1,223 $ 1,105
Debt issued in acquisitions.................... $ 4,771 $ 9,191
Debenture conversions to common stock.......... $ 5,127 $ 590
Conversion of preferred securities of SCI
Finance LLC................................... $ 167,911 $ -
</TABLE>
(See notes to consolidated financial statements)
5
<PAGE>
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Capital currency Unrealized
(Dollars in thousands, Common in excess Retained translation gain on
except per share amounts) stock par value earnings adjustment securities
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1996........$ 236,193 $1,237,783 $728,108 $ 22,315 $10,918
Net income ............ 169,146
Common stock issued:
Stock option exercises
and stock grants...... 403 4,884
Acquisitions........... 3,001 46,088 (5,590)
Debenture conversions.. 411 4,716
Conversions of
convertible preferred
securities of SCI
Finance LLC........... 11,461 156,450
Dividends on common
stock ($.08 per share) (36,809)
Foreign currency
translation........... (15,760)
Net change in unrealized
gain on securities..... (5,844)
-------- ---------- -------- -------- -------
Balance at June 30, 1997..$251,469 $1,449,921 $854,855 $ 6,555 $ 5,074
======== ========== ======== ======== =======
</TABLE>
(See notes to consolidated financial statements)
6
<PAGE>
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 June
30, 1997, the Company operated 3,012 funeral service locations, 365 cemeteries
and 156 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 144
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
six months ended June 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. Actual results could differ
from those estimates.
3. Acquisitions
The Company acquired 136 funeral service locations, 22 cemeteries and 7
crematoria during the six month period ended June 30, 1997 (120 funeral service
locations, 20 cemeteries and one crematory during the six months ended June 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
<PAGE>
The effect of acquisitions on the consolidated balance sheet at June 30, was
as follows:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Current assets.................................. $ 8,180 $ 20,713
Prearranged funeral contracts................... 52,346 19,876
Long-term receivables........................... 11,881 18,770
Cemetery property............................... 179,829 84,763
Property, plant and equipment................... 59,929 55,048
Deferred charges and other assets............... 14,604 (183)
Names and reputations........................... 70,507 68,677
Current liabilities............................. (23,977) (12,934)
Long-term debt.................................. (19,612) (10,785)
Deferred income taxes and other liabilities..... (51,698) (45,145)
Deferred prearranged funeral contract revenues.. (67,798) (20,097)
Stockholders' equity............................ (43,499) (3,237)
-------- --------
Cash used for acquisitions................ $190,692 $175,466
======== ========
</TABLE>
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:
<TABLE>
<S> <C>
1997 (remaining six months).............. $ 125,457
1998..................................... 239,146
1999..................................... 222,076
2000..................................... 208,092
2001..................................... 194,800
2002 and through 2006.................... 736,281
2007 and thereafter...................... 1,163,042
----------
$2,888,894
==========
</TABLE>
8
<PAGE>
5. Debt
Debt at June 30, 1997 and December 31, 1996, was as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------------------------
<S> <C> <C>
Bank revolving credit agreements and
commercial paper........................ $ 282,968 $ 325,875
6.375% notes due in 2000................. 150,000 150,000
6.75% notes due in 2001.................. 150,000 150,000
8.72% amortizing notes due in 2002....... 153,697 165,761
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 -
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
Floating rate notes due in 2011
(putable in 1999)....................... 200,000 -
Convertible debentures................... 41,713 44,140
Mortgage notes and other notes payable... 143,323 151,836
Deferred loan costs...................... (12,941) (22,615)
---------- ----------
Total debt.......................... 2,369,227 2,162,613
Less current maturities.................. (100,858) (113,876)
---------- ----------
Total long-term debt................ $2,268,369 $2,048,737
========== ==========
</TABLE>
The Company's primary revolving credit agreements provide for borrowing up to
$1,000,000. The 364-day portion allows for borrowings up to $300,000, and is
used primarily to support commercial paper. The Agreement expires June 26, 1998,
but has provisions to be extended for a 364-day term. At the end of any term,
the outstanding balance may be converted into a two year term loan at the
Company's option. Interest rates are based on various indices as determined by
the Company. In addition, a facility fee of .06% is paid quarterly on the total
commitment amount. At June 30, 1997, there was $108,829 of commercial paper
outstanding backed by this agreement at a weighted average interest rate of
5.59%. In addition, the Company has a multi-currency revolving credit agreement
which allows for borrowings of up to $700,000, including $500,000 in various
foreign currencies. This agreement expires June 27, 2002. Interest rates are
based on various indices as determined by the Company. In addition, a facility
fee ranging from .07% to .15% is paid quarterly on the total commitment amount.
At June 30, 1997, there was $94,694 outstanding under this agreement at a
weighted average interest rate of 4.66%. These commercial paper borrowings and
revolving notes generally have maturities ranging from one to 90 days. These
credit agreements disclosed above contain financial compliance provisions that
contain 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 June 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. Additionally, the Company has excluded these
borrowings from the five-year maturity of long-term debt disclosure due to the
uncertainty of the eventual term of the related debt. It is the Company's intent
to refinance such borrowings through the use of its credit agreements or other
long-term notes issued under the Company's shelf registration.
9
<PAGE>
At June 30, 1997, $15,309 was outstanding (at an average interest rate of
3.60%) under the Company's $50,000 French revolving credit agreement. This
agreement expired in August 1997 and was replaced by a portion of the Company's
$700,000 multi-currency revolving credit agreement.
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 June 30, 1997, pursuant to the Company's shelf
registration filed with the Commission, the Company guaranteed the following
promissory notes issued through subsidiaries in connection with various
acquisitions of operations:
<TABLE>
<CAPTION>
Subsidiary Amount
-----------------------------------------------------
<S> <C>
SCI Louisiana Funeral Services, Inc......... $3,000
SCI Ohio Funeral Services, Inc.............. 500
</TABLE>
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 expense due under the cross-currency interest rate swaps are
partially offset by a corresponding movement in the earnings of the foreign
operation.
At June 30, 1997, after giving consideration to the interest rate and
cross-currency swaps, the Company's debt (excluding $145,000 of Provident debt)
has been converted into approximately $884,000 of fixed interest rate debt at a
weighted average rate of 7.31% and approximately $1,301,000 of floating interest
rate debt at a weighted average rate of 5.23%. Additionally, approximately
$1,375,000 of the US denominated debt has been converted into foreign
denominated debt using cross-currency swaps.
During the first six 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.
The net fair value of the Company's various swap agreements at June 30, 1997,
was a receivable of $30,806. Fair values were obtained from counterparties to
the agreements and represent their estimate of the net amount the Company would
receive
10
<PAGE>
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 in Equity
Corporation International (7,994,000 shares) 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% class B shares and 59% of the total shares of Arbor currently
outstanding. Arbor owns funeral and cemetery operations in Canada.
10.Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Six Months Ended June 30,
1997 1996
------------------------
<S> <C>
4.66 3.32
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
United Other Other
States France European Foreign Consolidated
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Six months ended June 30:
1997.....................$794,112 $252,090 $111,352 $82,036 $1,239,590
1996..................... 695,549 272,433 93,951 78,269 1,140,202
Three months ended June 30:
1997..................... 390,830 118,983 50,136 41,192 601,141
1996..................... 345,815 135,708 42,548 40,678 564,749
Income from operations:
Six months ended June 30:
1997.....................$242,587 $ 27,452 $ 25,098 $23,758 $ 318,895
1996..................... 202,718 25,961 21,427 25,584 275,690
Three months ended June 30:
1997..................... 115,947 12,544 8,000 10,880 147,371
1996..................... 95,978 13,218 6,689 13,392 129,277
Funeral services performed:
Six months ended June 30:
1997..................... 118,235 76,486 52,759 24,478 271,958
1996..................... 109,177 77,647 48,910 24,126 259,860
Three months ended June 30:
1997..................... 56,271 34,899 22,987 12,238 126,395
1996..................... 52,584 36,636 22,106 12,235 123,561
Number of locations
at June 30:
1997..................... 1,514 1,087 647 285 3,533
1996..................... 1,381 1,078 607 243 3,309
</TABLE>
12
<PAGE>
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 283 clusters in North America, the United Kingdom and
Australia, which range in size from two operations to 64 operations. There may
be more than one cluster in a given metropolitan area, depending upon the level
and degree of shared costs.
Six Months Ended June 30, 1997
Compared to Six Months Ended June 30, 1996
Results of Operations:
Segment information for the Company's three lines of business was as follows:
<TABLE>
<CAPTION>
Percentage
Six Months Ended June 30, Increase Increase
1997 1996 (Decrease) (Decrease)
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Funeral................$ 876,355 $ 830,000 $ 46,355 5.6 %
Cemetery............... 355,529 299,616 55,913 18.7
Financial services..... 7,706 10,586 (2,880) (27.2)
---------- ---------- ---------
1,239,590 1,140,202 99,388 8.7
Costs and expenses:
Funeral................ 662,155 636,887 25,268 4.0
Cemetery............... 221,886 193,285 28,601 14.8
Financial services..... 4,214 5,799 (1,585) (27.3)
---------- ---------- ---------
888,255 835,971 52,284 6.3
Gross profit and margin
percentage:
Funeral................ 214,200 24.4% 193,113 23.3% 21,087 10.9
Cemetery............... 133,643 37.6 106,331 35.5 27,312 25.7
Financial services..... 3,492 45.3 4,787 45.2 (1,295) (27.1)
---------- ---------- --------
$ 351,335 28.3% $ 304,231 26.7% $ 47,104 15.5 %
========== ========== ========
</TABLE>
13
<PAGE>
Funeral
Funeral revenues were as follows:
<TABLE>
<CAPTION>
Six Months Ended Percentage
June 30, Increase Increase
1997 1996 (Decrease) (Decrease)
----------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States.................... $455,245 $409,796 $ 45,449 11.1 %
France........................... 252,088 272,433 (20,345) (7.5)
Other European................... 93,680 83,246 10,434 12.5
Other foreign.................... 57,026 55,507 1,519 2.7
-------- -------- --------
858,039 820,982 37,057 4.5
New clusters:*
United States.................... 8,775 1,449 7,326
Other European................... 5,977 536 5,441
Other foreign.................... 473 - 473
-------- -------- --------
15,225 1,985 13,240
Non-cluster and disposed
operations....................... 3,091 7,033 (3,942)
-------- -------- --------
Total funeral revenues............ $876,355 $830,000 $ 46,355 5.6 %
======== ======== ========
</TABLE>
The $37,057 increase in revenues from existing clusters was the result of a
3.2% increase in the number of funeral services performed (265,556 compared to
257,359) and a 1.3% higher average sales price ($3,231 compared to $3,190).
Acquisitions since January 1, 1996, included in existing clusters, accounted for
$52,223 of the existing cluster revenue increase, offset by a $15,166 decrease
from businesses owned before January 1, 1996. The impact from businesses owned
before January 1, 1996 was adversely effected by approximately $29,100 caused
exclusively by a change in the currency exchange rates for the Company's French
operations.
During the six months ended June 30, 1997, the Company sold $274,019 of
prearranged funeral services compared to $269,013 for the same period in 1996.
Funeral costs and expenses were as follows:
<TABLE>
<CAPTION>
Six Months Ended Percentage
June 30, Increase Increase
1997 1996 (Decrease) (Decrease)
---------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States.................... $289,984 $258,799 $ 31,185 12.0 %
France........................... 215,828 237,130 (21,302) (9.0)
Other European................... 71,069 61,992 9,077 14.6
Other foreign.................... 39,455 36,664 2,791 7.6
-------- -------- --------
616,336 594,585 21,751 3.7
New clusters:*
United States.................... 6,652 970 5,682
Other European................... 4,570 393 4,177
Other foreign.................... 363 - 363
-------- -------- --------
11,585 1,363 10,222
Non-cluster and disposed
operations....................... 5,102 10,650 (5,548)
Administrative overhead........... 29,132 30,289 (1,157) (3.8)
-------- -------- --------
Total funeral costs and expense... $662,155 $636,887 $ 25,268 4.0 %
======== ======== ========
</TABLE>
- ---------------------
* Represents new geographic cluster areas entered into since January 1, 1996
for the period that those businesses were owned by the Company.
14
<PAGE>
The $21,751 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. The gross profit margin before administrative overhead for
existing clusters increased to 28.2% in 1997 from 27.6% in 1996. Acquisitions
since the beginning of 1996, included in existing clusters, accounted for
$39,115 of the existing cluster cost increase, while existing cluster locations
owned before 1996, had a cost decrease of $17,364. 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 (24.4%
compared to 23.3% in 1996). Contributing to this period to period improvement
were the Company's North American operations. In addition, the French gross
profit margin of 14.4% (before administrative overhead) for the period ended
June 30, 1997, improved from 13.0% 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 3.3%, compared to 3.6% in 1996.
Cemetery
Cemetery revenues were as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30, Increase Percentage
1997 1996 (Decrease) Increase
---------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States.................... $316,828 $266,546 $ 50,282 18.9 %
Other European................... 10,886 7,429 3,457 46.5
Other foreign.................... 24,327 22,718 1,609 7.1
-------- -------- --------
352,041 296,693 55,348 18.7
New clusters*..................... 754 - 754
Non-cluster and disposed
operations....................... 2,734 2,923 (189)
--------- -------- --------
Total cemetery revenues........... $355,529 $299,616 $ 55,913 18.7 %
========= ======== ========
</TABLE>
Revenues from the existing clusters increased $55,348 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 $25,494 in increased revenues
from cemeteries acquired since the beginning of 1996, while revenues from
existing cluster locations owned before 1996 increased $29,854.
Cemetery costs and expenses were as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30, Increase Percentage
1997 1996 (Decrease) Increase
--------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States.................... $182,074 $160,421 $21,653 13.5%
Other European................... 5,849 4,443 1,406 31.6
Other foreign.................... 13,527 11,970 1,557 13.0
-------- -------- -------
201,450 176,834 24,616 13.9
-------- -------- -------
New clusters*..................... 690 5 685
Non-cluster and disposed
operations....................... 2,672 3,279 (607)
Administrative overhead........... 17,074 13,167 3,907 29.7
-------- -------- -------
Total cemetery costs and expenses. $221,886 $193,285 $28,601 14.8%
======== ======== =======
</TABLE>
- ---------------------
* Represents new geographic cluster areas entered into since January 1, 1996
for the period that those businesses were owned by the Company.
15
<PAGE>
Costs and expenses from existing clusters increased $24,616 due primarily to
an increase of $15,633 at cemeteries acquired since the beginning of 1996. The
overall cemetery gross profit margin percentage improved in 1997 to 37.6% from
35.5% 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 4.8% of revenues
compared to 4.4% during the six months ended June 30, 1996.
Financial Services
The Company's wholly-owned finance subsidiary, Provident Services, Inc.
("Provident") reported a gross profit of $3,492 for the six months ended June
30, 1997, compared to $4,787 for the same period in 1996. Provident's average
outstanding loan portfolio during the current period decreased to $173,547
compared to $225,443 in 1996, and the average interest rate spread also
decreased to 3.2% compared to 3.7% in 1996.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses
increased slightly to 2.6% for the six months ended June 30, 1997 compared to
2.5% for the comparable period in 1996. These expenses increased $3,899 or 13.7%
period to period primarily from increased personnel costs.
Interest expense, which excludes the amount incurred through financial
service operations, increased $700 or 1.0% period to period. The increased
interest expense reflects the Company's higher debt level in 1997 offset by a
lower average interest rates on indebtedness 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 35.8% effective tax rate for the
six month period ended June 30, 1997, compared to a 36.4% 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
<PAGE>
Three Months Ended June 30, 1997
Compared to Three Months Ended June 30, 1996
Results of Operations:
Segment information for the Company's three lines of business was as follows:
<TABLE>
<CAPTION>
Three Months Ended Percentage
June 30, Increase Increase
1997 1996 (Decrease) (Decrease)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Funeral...................$419,284 $405,300 $13,984 3.5 %
Cemetery.................. 177,739 154,054 23,685 15.4
Financial services........ 4,118 5,395 (1,277) (23.7)
-------- -------- -------
601,141 564,749 36,392 6.4
Costs and expenses:
Funeral................... 324,787 318,346 6,441 2.0
Cemetery.................. 110,889 99,472 11,417 11.5
Financial services........ 2,282 2,868 (586) (20.4)
-------- -------- -------
437,958 420,686 17,272 4.1
Gross profit and margin
percentage:
Funeral................... 94,497 22.5% 86,954 21.5% 7,543 8.7
Cemetery.................. 66,850 37.6 54,582 35.4 12,268 22.5
Financial services........ 1,836 44.6 2,527 46.8 (691) (27.3)
-------- -------- -------
$163,183 27.1% $144,063 25.5% $19,120 13.3 %
======== ======== =======
</TABLE>
Funeral
Funeral revenues were as follows:
<TABLE>
<CAPTION>
Three Months Ended Percentage
June 30, Increase Increase
1997 1996 (Decrease) (Decrease)
----------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States.................... $221,010 $197,638 $ 23,372 11.8 %
France........................... 119,078 135,708 (16,630) (12.3)
Other European................... 40,874 35,881 4,993 13.9
Other foreign.................... 28,708 28,971 (263) (.9)
-------- -------- --------
409,670 398,198 11,472 2.9
New clusters:*
United States.................... 4,577 1,132 3,445
Other European................... 3,142 452 2,690
Other foreign.................... 252 - 252
-------- ------ --------
7,971 1,584 6,387
Non-cluster and disposed
operations....................... 1,643 5,518 (3,875)
-------- -------- --------
Total funeral revenues............ $419,284 $405,300 $ 13,984 3.5 %
======== ======== ========
</TABLE>
- ---------------------
* Represents new geographic cluster areas entered into since January 1, 1996
for the period that those businesses were owned by the Company.
17
<PAGE>
The $11,472 increase in revenues from existing clusters was the result of a
1.3% increase in the number of funeral services performed (123,133 compared to
121,533) and a 1.6% higher average sales price ($3,327 compared to $3,276).
Acquisitions since January 1, 1996, included in existing clusters, accounted for
$25,531 of the existing cluster revenue increase, offset by a $14,059 decrease
from businesses owned before January 1, 1996. The impact from businesses owned
before January 1, 1996 was adversely effected by approximately $14,400 caused
exclusively by a change in the currency exchange rates for the Company's French
operations.
During the three months ended June 30, 1997, the Company sold $148,704 of
prearranged funeral services compared to $142,373 for the same quarter in 1996.
Funeral costs and expenses were as follows:
<TABLE>
<CAPTION>
Three Months Ended Percentage
June 30, Increase Increase
1997 1996 (Decrease) (Decrease)
---------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States.................... $146,270 $127,405 $18,865 14.8 %
France........................... 102,111 117,947 (15,836) (13.4)
Other European................... 34,141 27,609 6,532 23.7
Other foreign.................... 20,254 18,988 1,266 6.7
------ -------- -------
302,776 291,949 10,827 3.7
New clusters:*
United States.................... 3,675 809 2,866
Other European................... 2,516 356 2,160
Other foreign.................... 188 - 188
-------- -------- -------
6,379 1,165 5,214
Non-cluster and disposed
operations....................... 2,572 8,245 (5,673)
Administrative overhead........... 13,060 16,987 (3,927) (23.1)
-------- -------- -------
Total funeral costs and expenses.. $324,787 $318,346 $ 6,441 2.0 %
======== ======== =======
</TABLE>
The $10,827 increase in costs and expenses from existing clusters is
primarily the result of the quarter to quarter increase in the number of funeral
services performed. The gross profit margin before administrative overhead for
existing clusters slightly decreased to 26.1% in 1997 from 26.7% in 1996.
Acquisitions since the beginning of 1996, included in existing clusters,
accounted for $23,243 of the existing cluster cost increase, while existing
cluster locations owned before 1996, had a cost decrease of $12,416 . 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 (22.5%
compared to 21.5% in 1996). Contributing to this quarter to quarter improvement
were the Company's North American operations. In addition, the French gross
profit margin of 14.2% (before administrative overhead) for the quarter ended
June 30, 1997, improved from 13.1% in 1996.
Administrative overhead costs, expressed as a percentage of total funeral
revenues, decreased to 3.1%, compared to 4.2% 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
<PAGE>
Cemetery
Cemetery revenues were as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30, Increase Percentage
1997 1996 (Decrease) Increase
--------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States.................... $158,749 $136,862 $21,887 16.0 %
Other European................... 5,077 3,604 1,473 40.9
Other foreign.................... 12,123 11,643 480 4.1
-------- -------- -------
175,949 152,109 23,840 15.7
New clusters*..................... 529 - 529
Non-cluster and disposed
operations....................... 1,261 1,945 (684)
-------- -------- -------
Total cemetery revenues........... $177,739 $154,054 $23,685 15.4 %
======== ======== =======
</TABLE>
Revenues from the existing clusters increased $23,840 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 $13,421 in increased revenues
from cemeteries acquired since the beginning of 1996, while revenues from
existing cluster locations owned before 1996 increased $10,419.
Cemetery costs and expenses were as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30, Percentage
1997 1996 Increase Increase
--------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States.................... $ 90,825 $82,367 $ 8,458 10.3%
Other European................... 2,888 2,389 499 20.9
Other foreign.................... 6,955 6,188 767 12.4
-------- ------- -------
100,668 90,944 9,724 10.7
-------- ------- -------
New clusters*..................... 468 3 465
Non-cluster and disposed
operations....................... 2,126 1,810 316
Administrative overhead........... 7,627 6,715 912 13.6
-------- ------- -------
Total cemetery costs and expenses. $110,889 $99,472 $11,417 11.5%
======== ======= =======
</TABLE>
Costs and expenses from existing clusters increased $9,724 due primarily to
an increase of $7,579 at cemeteries acquired since the beginning of 1996. The
overall cemetery gross profit margin percentage improved in 1997 to 37.6% from
35.4% 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 decreased slightly to 4.3% of
revenues compared to 4.4% during the three months ended June 30, 1996.
Financial Services
The Company's wholly-owned finance subsidiary, Provident Services, Inc.
("Provident") reported a gross profit of $1,836 for the three months ended June
30, 1997, compared to $2,527 for the same period in 1996. Provident's average
outstanding loan portfolio during the current quarter decreased to $181,709
compared to $230,637 in 1996, and the average interest rate spread also
decreased to 3.2% compared to 3.8% 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
<PAGE>
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses were
unchanged at 2.6% for the three months ended June 30, 1997 compared to the
comparable period in 1996. These expenses increased $1,026 or 6.9% quarter to
quarter primarily from increased personnel costs.
Interest expense, which excludes the amount incurred through financial
service operations, decreased $1,152 or 3.4% quarter to quarter. The decreased
interest expense reflects the Company's higher debt level in 1997 offset by a
lower average interest rates on indebtedness 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 35.0% effective tax rate for the
quarter ended June 30, 1997 as compared to a 36.2% 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 June 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 June 30, 1997, the Company had net working capital of $179,576 and a
current ratio of 1.33:1, 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 $145,000 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 $884,000 of fixed interest rate debt at a weighted average rate of
7.31% and approximately $1,301,000 of floating interest rate debt at a weighted
average rate of 5.23%. However, the Company has entered into forward interest
rate swaps which convert approximately $147,000 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 47% fixed and 53% floating. In addition, as of
June 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
the net effect was to convert $250,000 of the fixed rate debt to floating.
SOURCES AND USES OF CASH
Cash flows from operating activities: Net cash provided by operating activities
was $172,303 for the six months ended June 30, 1997, compared to $110,169 for
the same period in 1996, an increase of $62,134. This increase was primarily due
to improved operating results for 1997. Significant uses of operating cash
include an increase in net receivables resulting from increased sales of funeral
services and cemetery products and merchandise.
20
<PAGE>
Cash flows from investing activities: Net cash used in investing activities was
$265,551 for the six months ended June 30, 1997, compared to $331,818 for the
same period in 1996, a decrease of $66,267. Cash used for acquisitions increased
by approximately $15,226 and capital expenditures increased by $51,677 during
the six months ended June 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
$15,000 to increase its investment in an existing equity investee. However,
these increases were more than offset by the approximate $147,700 in cash
provided by the sale of the Company's interest in ECI during the six months
ended June 30, 1997.
Cash flows from financing activities: Net cash provided by financing activities
was $80,674 for the six months ended June 30, 1997, compared to $290,737 for the
same period in 1996, a decrease of $210,063. The decrease in 1997 compared to
1996 is mainly due to the timing of borrowings and repayments of debt. During
the six months ended June 30, 1997, the net cash flow provided by debt financed
transactions was $126,776, compared to $313,917 for the same period in 1996.
During 1997 the Company issued $650,000 of long-term debt and used $450,000 for
an early extinguishment of debt.
The Company believes that debt service has no adverse effect on its
operations or financing activities at the current levels of debt outstanding. As
of June 30, 1997, the Company's debt to capitalization ratio was 48.0% compared
to 47.3% at December 31, 1996. The interest coverage ratio for the six months
ended June 30, 1997, was 4.42:1 (excluding the gain on the sale of the Company's
investment in ECI), compared to 3.71:1 for the same period in 1996. This
interest coverage level has been relatively consistent, despite higher levels of
debt outstanding, for several years. The Company believes that the acquisition
of funeral and cemetery operations funded with debt or Company common stock is a
prudent business strategy given the stable cash flow generated and the low
failure rate exhibited by these types of businesses. The Company believes these
acquired firms are capable of servicing the additional debt and providing a
sufficient return on the Company's investment.
The Company expects adequate sources of funds to be available to finance its
future operations and acquisitions through internally generated funds,
borrowings under credit facilities and the issuance of securities. The Company
has various revolving credit facilities and lines of credit which provide for
aggregate borrowings of up to $1,050,000. At June 30, 1997, the Company had
approximately $796,000 of available borrowings under its primary and
multi-currency credit facilities. In addition, as of June 30, 1997 the Company
had the ability to issue $550,000 in securities registered with the Commission
under a shelf registration as well as 16,337,000 shares of common stock and
approximately $218,000 of guarantee promissory notes and convertible debentures
registered with the Commission under a separate shelf registration to be used
exclusively for future acquisitions. As previously discussed, in April 1997, the
Company issued $450,000 of debt securities under the existing shelf registration
which was used to reduce borrowings under its credit facilities.
Prearranged Funeral Services: The Company has a marketing program to sell
prearranged funeral contracts and the funds collected are generally held in
trust or are used to purchase a life insurance or annuity contract. The
principal amount of these prearranged funeral contracts will be received in cash
by a Company funeral service location at the time the funeral is performed.
Earnings on trust funds and increasing benefits under insurance funded contracts
also increase the amount of cash to be received upon performance of the funeral
and are intended to cover future increases in the cost of providing a price
guaranteed funeral service as well as any selling costs. During 1996, the
Company completed a review of the prearranged trust investment process which
included an asset/liability study. This has resulted in a new investment program
which entails the consolidation of multiple trustees, the use of institutional
managers with differing investing styles and consolidated performance monitoring
and tracking. This new program targets a real return in excess of the amount
necessary to cover future increases in the cost of providing a price guaranteed
funeral service as well as any selling costs. This is accomplished by allocating
the portfolio mix to the appropriate investments that more accurately match the
anticipated maturity of the contracts. This has resulted in a new asset
allocation policy of approximately 65% equity and 35% fixed income which the
Company began to implement in the first quarter of 1997.
21
<PAGE>
Other Matters
The Company will adopt Statement of Financial Accounting Standards ("FAS") No.
128 "Earnings Per Share" and FAS 129 "Disclosures of Information About Capital
Structure" for the year ended December 31, 1997. The Company 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
<PAGE>
SERVICE CORPORATION INTERNATIONAL
PART II. OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 8, 1997, 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:
Abstentions or Broker
Nominee Votes For Votes Withheld Non-votes
--------------------- ------------ -------------- ---------
Anthony L. Coelho 205,596,953 1,621,195 -0-
A. J. Foyt, Jr. 205,593,674 1,624,474 -0-
E. H. Thornton, Jr. 205,607,988 1,610,160 -0-
R. L. Waltrip 205,615,283 1,602,865 -0-
Edward E. Williams 205,642,588 1,575,560 -0-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Second Amendment to Supplemental Executive Retirement Plan
for Senior Officers.
11.1 Computation of earnings per share.
12.1 Ratio of earnings to fixed charges for the six months ended
June 30, 1997 and 1996.
27.1 Financial data schedule.
(b) Reports on Form 8-K
During the quarter ended June 30, 1997, the Company filed a
Form 8-K dated April 15, 1997, reporting (i) under "Item 5.
Other Events" certain information regarding a registration
statement relating to the public offering of securities from
time to time, and (ii) under "Item 7. Financial Statements and
Exhibits" certain exhibits which were underwriting agreements
relating to the aforementioned registration statement.
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 12, 1997
SERVICE CORPORATION INTERNATIONAL
By: /s/ George R. Champagne
---------------------------------
George R. Champagne
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
23
<PAGE>
EXHIBIT 10.1
SECOND AMENDMENT TO
SERVICE CORPORATION INTERNATIONAL
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN FOR SENIOR OFFICERS
(As Amended and Restated Effective as of December 31, 1993)
W I T N E S S E T H:
WHEREAS, Service Corporation International (the "Company") executed the
plan entitled "Service Corporation International Supplemental Executive
Retirement Plan for Senior Officers (as Amended and Restated Effective as of
December 31, 1993)" (hereinafter called the "Plan"); and
WHEREAS, the Company retained the right in Section 8.1 of the Plan to amend
the Plan from time to time; and
WHEREAS, the Company adopted, on February 27, 1995, the First Amendment to
the Plan, to be effective as of November 9, 1994; and
WHEREAS, the Company now wishes to clarify certain provision of the Plan as
amended by said First Amendment thereto, and to make other desired changes to
the Plan, by adopting this Second Amendment to the Plan:
NOW, THEREFORE, the Plan is hereby amended as follows:
A. Effective as of November 9, 1994:
1. Section 3.2, relating to the standard form of payment, is amended to
revise the heading of subsection (a) thereof, so that such heading provides
"Standard Form: Life and 180-Month Certain Annuity."
2. Section 3.2(b), is amended by revising the last sentence of the last
paragraph thereof to delete the period at the end thereof and to substitute
the words "by such Participant."
3. Section 3.2(c), is amended by adding the following sentence at the
end thereof:
"The opportunity to elect in-service commencement under this Section
3.2(c) shall be available only once to any Participant and, once such
an election is made, it may not be revoked by the Participant except
to the extent that such Participant requests, and the Committee
approves, a lump sum payment under Section 3.2(e) below."
4. Section 3.2(d), is amended by adding the following sentence at the
end thereof:
"The opportunity to elect in-service commencement under this Section
3.2(d) shall be available only once to any Participant and, once such
an election is made, it may not be revoked by the Participant except
to the extent that such Participant requests, and the Committee
approves, a lump sum payment under Section 3.2(e) below."
5. Section 3.2(e), is amended by adding the following sentence at the
end thereof:
"The opportunity to request, under this Section 3.2(e), a lump sum
payment after commencement of an annuity under Section 3.2(c) or (d)
above shall be available only once to any Participant and, once such a
request is made, it may not be revoked by such Participant."
<PAGE>
6. Clause (i) of the first sentence of Article IV is amended in its
entirety to provide as follows:
"...(i) each Participant who, on the date of the Change of Control, (a)
is an active Employee of the Company, and (b) has not commenced receipt
of his Retirement Benefit under the Plan, a lump sum cash payment equal
to the Actuarially Equivalent value, as of the date of such Change of
Control, of the Accrued Benefit to which the Participant would have
been entitled if he had continued to earn Credited Service from the
date of the Change of Control to the date of his 65th birthday; and"
B. Effective as of January 1, 1997:
1. Article I, relating to definitions, is amended to insert in the
alphabetically appropriate place the new defined term "Cause," which shall
provide as follows:
""Cause" means the reason or reasons for which the Company terminates a
Participant's employment as such reasons are described in, and as the
quoted term is defined in, the latest employment agreement entered into
by and between the Company and each Participant, and such definition of
"Cause" is incorporated by reference into this Plan."
2. Section 3.2(b), relating to lump sum payments, is amended to add,
immediately after the subsection heading thereof, and immediately before the
first sentence thereof, the new paragraph heading that provides:
"(1)Participants May Request."
3. Section 3.2(b) is further amended by adding, immediately following the
last paragraph of paragraph (1), as so designated by this Amendment, the
following new paragraph (2) that provides in its entirety as follows:
"(2)Committee May Initiate. Regardless of whether a Participant
requests a single lump sum payment of his entire Retirement Benefit
pursuant to paragraph (1) of this Section 3.2(b), the Committee may, in
its sole discretion, determine that any Participant who terminates
employment with the Company for any reason (except a Participant who is
discharged by the Company for Cause) shall receive, as soon as
administratively feasible after such termination, a single lump sum
payment of the Actuarially Equivalent value (determined as of the
Participant's termination date) of his unpaid vested Retirement Benefit
otherwise payable upon his attainment of age 65.
Within such time as it considers appropriate under the
circumstances, the Committee shall notify a Participant whose
Retirement Benefit is to be paid pursuant to this paragraph (2) of
Section 3.2(b)."
4. Section 3.2(d), relating to in-service commencement of benefits, is
amended in its entirety to provide as follows:
"(d)In-Service Commencement of Retirement Benefits.
(1) Years Prior to 1997. During calendar years ending on or before
December 31, 1996, a Participant who is under the age of 65 but is at
least age 59, and is an active Employee of the Company, may elect to
receive his entire Retirement Benefit in the form of a monthly annuity
that is payable for the lesser of 180 months or his lifetime,
commencing as of the first day of the month following the later of
the date the Participant attains age 60 or the subsequent date
specified by the Participant that is prior to this age 65;
provided that the Participant's written election of such form of
payment is received by the Committee not less than 12 calendar months
before the applicable commencement date.
<PAGE>
(2) Years Beginning After 1996. During calendar years beginning
after December 31, 1996, a Participant who is under the age of 65 but
is at least age 54, and is an active Employee of the Company, may elect
to receive his entire Retirement Benefit in the form of a monthly
annuity that is payable for the lesser of 180 months or his lifetime,
commencing as of the first day of the month following the later of the
date the Participant attains age 55 or the subsequent date specified by
the Participant that is prior to his age 65; provided that the
participant's written election of such form of payment is received by
the Committee not less than 12 calendar months before the applicable
commencement date.
(3) Rules Applicable to All Pre-Age 65 Commencements. Because the
Retirement Benefit annuity described in this Section 3.2(d) commences
before the Participant attains the age of 65, the monthly amount of the
Participant's annuity that would otherwise commence at his age 65 shall
be discounted to the Actuarially Equivalent value of such annuity having
a commencement date determined under paragraphs (1) or (2), whichever is
applicable. Moreover, the amount of any annuity commenced prior to age
65 pursuant to paragraphs (1) or (2) of this Section 3.2(d) shall not be
increased after its payment commencement date on account of any
subsequent increase in the Participant's years of Credited Service,
compensation, or otherwise; provided, however, that the Committee in its
sole discretion may provide for cost-of-living increases in the amount
of such annuity.
The opportunity to elect in-service commencement prior to age 65
under this Section 3.2(d) shall be available only once to any
Participant and, once such an election is made, it may not be revoked by
the Participant except to the extent that such Participant requests, and
the Committee approves, a lump sum payment under Section 3.2(e) below."
5. Section 6.3, relating to forfeiture for cause, is amended:
(1) by adding, immediately after the heading thereof and immediately
before the first sentence thereof, the new subsection heading "(a) General
Rule".;
(2) by revising the first sentence thereof to delete the words "fraud,
embezzlement, theft, commission of a felony, proven dishonesty in the
course of his employment that damaged the Company, or for disclosing trade
secrets of the Company" and to insert in their place the word "Cause";
(3) by revising the second sentence thereof in its entirety to provide
"The decision of the Committee as to whether a Participant was discharged
for Cause will be final.";
(4) by revising the fourth sentence to add, immediately after the word
"Section," the word "6.3(a)";
(5) by adding at the end of subsection (a), as so designated by this
Amendment, the following new subsection (b), which provides in its entirety
as follows:
"(b)Special Rule. Notwithstanding any provision of this Plan to the
contrary except the succeeding provisions of this subsection (b), in the
event that, at any time within the first ten calendar years after a
Participant (including for purposes of this subsection, a former
Participant) terminates employment with the Company, he becomes an
employee, director, partner, member, advisor, agent or consultant of any
business entity that is in competition with the Company or any of its
Subsidiaries or affiliates (the "Noncompete Rule"), such Participant's
entire Accrued Benefit attributable to his participation in the Plan
after December 31, 1996 shall be immediately forfeited, and neither such
Participant nor any Beneficiary shall have any claim to benefits that
accrued on or after January 1, 1997 under this Plan. After full
consideration of the facts presented on behalf of both the Company and
the Participant, the decision of the Committee as to whether Participant
has violated the Noncompete Rule shall be final.
<PAGE>
In the event that a Participant violates the Noncompete Rule after
having received all or part of his Retirement Benefit that is subject to
forfeiture under that rule, such Participant shall be required, and by
agreeing to participate in this Plan each Participant specifically
agrees, to repay the Company the full amount of such Retirement Benefits
he has received, plus interest from the date of the violation of the
Noncompete Rule as determined by the Committee; and to make such
repayment at the time or times and in the manner determined by the
Committee. The interest rate shall be the weekly quoted one-year
Treasury bill rate at the last weekly auction held immediately before
the Committee's determination that such Participant has violated the
Noncompete Rule, plus one percent (1%).
By agreeing to participate in this Plan each Participant further
consents to the Company's deduction from any amounts the Company or any
of its Subsidiaries or affiliates owes to such Participant from time to
time (including amounts owed to such Participant as wages or other
compensation, fringe benefits, or other amounts owed to such Participant
by the Company) to the extent of the amount such Participant owes the
Company under this subsection (b). Whether or not the Company elects to
make any set-off in whole or in part under this subsection (b), if the
Company does not recover the full amount such Participant owed to it by
such Participant, calculated as set forth above, such Participant agrees
to pay the unpaid balance to the Company. Such Participant may be
released from this obligation to repay the Company only if the
Committee, in its sole discretion, determines that his action is not
detrimental to the best interests of the Company or any of its
Subsidiaries or affiliates.
The covenants in this subsection (b) shall not be held invalid or
unenforceable because of the specified period of time within which such
covenant is operative, but the maximum period of time in which such
covenants are operative is subject to determination by a final judgement
of any court that has jurisdiction over the parties and subject matter."
IN WITNESS WHEREOF, the company adopts, approves and consents to the
amendment of the Plan by this Second Amendment this 21st day of April, 1997, to
be effective as of the dates provided herein.
SERVICE CORPORATION INTERNATIONAL
ATTEST:
By: /s/ JACK L. STONER
------------------------------
By: /s/ HELEN R. DUGAND Name: JACK L. STONER
------------------------- Title: Sr. V.P. Administration
Name: HELEN R. DUGAND
Title: Dir. Human Resources
<PAGE>
SERVICE CORPORATION INTERNATIONAL Exhibit 11.1
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------
(Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Primary:
Income before extraordinary loss.... $78,801 $62,250 $209,948 $134,147
Extraordinary loss on early
extinguishment
of debt (net of tax).............. - - (40,802) -
------- ------- -------- --------
$78,801 $62,250 $169,146 $134,147
======= ======= ======== ========
Average number of common shares
oustanding........................ 241,081 235,304 239,240 235,099
Common stock equivalents
applicable to options
outstanding resulting from
application of the
"treasury stock method" using
average stock price............... 7,481 5,808 7,238 5,195
Average shares used in primary
earnings per share................ 248,562 241,112 246,478 240,294
Primary Earnings Per Common Share:
Income before extraordinary loss.. $ .32 $ .26 $ .86 $ .56
Extraordinary loss on early
extinguishment of debt
(net of tax)...................... - - (.17) -
------- ------- -------- --------
Net income........................ $ .32 $ .26 $ .69 $ .56
======= ======= ======== ========
Fully diluted:
Income before extraordinary loss.... $78,801 $62,250 $209,948 $134,147
Add after tax interest expense
applicable to
convertible debentures............ 1,838 1,953 3,916 3,894
------- ------- -------- --------
Income as adjusted.................. 80,639 64,203 213,864 138,041
Extraordinary loss on early
extinguishment
of debt (net of tax).............. - - (40,802) -
------- ------- -------- --------
$80,639 $64,203 $173,062 $138,041
======= ======= ======== ========
Average number of common shares
oustanding........................ 241,081 235,304 239,240 235,098
Common stock equivalents
applicable to options
outstanding resulting from
application of the "treasury
stock method" using end of
period stock price (if greater
than average stock price
for period)...................... 7,481 6,323 7,238 5,734
Assuming conversion of
convertible debentures........... 11,801 13,681 12,850 13,675
------- ------- ------- -------
Average shares used in fully
diluted earnings per share....... 260,363 255,308 259,328 254,507
======= ======= ======= =======
Fully Diluted Earnings Per
Common Share:
Income before extraordinary loss. $ .31 $ .25 $ .83 $ .54
Extraordinary loss on early
extinguishment
of debt (net of tax)............. - - (.16) -
------- ------- ------- -------
Net income....................... $ .31 $ .25 $ .67 $ .54
======= ======= ======= =======
</TABLE>
(All 1996 common stock and per share data has been restated for a two-for-one
common stock split on August 30, 1996)
<PAGE>
SERVICE CORPORATION INTERNATIONAL Exhibit 12.1
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six Months Ended June 30,
1997 1996
- ---------------------------------------------------------------------------
(Thousands, except ratio amounts)
<S> <C> <C>
Pretax income from continuing operations......... $326,814 $210,791
Undistributed income of less than 50%
owned equity investees........................ (2,049) (3,222)
Minority interest in income of majority owned
subsidiaries with fixed charges................. 125 395
Add fixed charges as adjusted (from below)....... 86,524 88,063
-------- --------
$411,414 $296,027
-------- --------
Fixed charges:
Interest expense:
Corporate................................ $ 66,762 $ 66,215
Financial services....................... 3,719 5,450
Capitalized.............................. 1,704 994
Amortization of debt costs................. 869 716
1/3 of rental expense...................... 10,792 10,291
Dividends on convertible preferred stock
of subsidiary............................ 4,382 5,391
Fixed charges.................................... 88,228 89,057
-------- --------
Less: Capitalized interest................. (1,704) (994)
-------- --------
Fixed charges as adjusted........................ $ 86,524 $ 88,063
======== ========
Ratio (earnings divided by fixed charges)........ 4.66 3.32
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF SERVICE CORPORATION INTERNATIONAL AS OF JUNE 30,
1997 AND THE RELATED STATEMENT OF INCOME FOR THE SIX MONTHS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 31,557
<SECURITIES> 528,256
<RECEIVABLES> 1,060,733
<ALLOWANCES> 90,509
<INVENTORY> 150,803
<CURRENT-ASSETS> 719,268
<PP&E> 1,876,020
<DEPRECIATION> 354,764
<TOTAL-ASSETS> 9,408,557
<CURRENT-LIABILITIES> 539,692
<BONDS> 2,268,369
0
0
<COMMON> 251,469
<OTHER-SE> 2,316,405
<TOTAL-LIABILITY-AND-EQUITY> 9,408,557
<SALES> 1,180,906
<TOTAL-REVENUES> 1,239,590
<CGS> 884,041
<TOTAL-COSTS> 888,255
<OTHER-EXPENSES> 32,935
<LOSS-PROVISION> 7,364
<INTEREST-EXPENSE> 71,350
<INCOME-PRETAX> 326,814
<INCOME-TAX> 116,866
<INCOME-CONTINUING> 209,948
<DISCONTINUED> 0
<EXTRAORDINARY> 40,802
<CHANGES> 0
<NET-INCOME> 169,146
<EPS-PRIMARY> .69
<EPS-DILUTED> .67
</TABLE>
