<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 March 31, 1998
or
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6402-1
--------------------
SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in charter)
Texas 74-1488375
(State or other jurisdiction of (I. R. S. employer identification
incorporation or organization) number)
1929 Allen Parkway, Houston, Texas 77019
(Address of principal executive offices) (Zip code)
(713) 522-5141
(Registrant's telephone number, including area code)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to the
filing requirements for the past 90 days.
YES X NO
The number of shares outstanding of the registrant's common stock as of
May 12, 1998, was 255,998,673 (excluding treasury shares).
<PAGE>
SERVICE CORPORATION INTERNATIONAL
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I Financial Information
Consolidated Statement of Income (Unaudited) -
Three Months Ended March 31, 1998 and 1997 3
Consolidated Balance Sheet -
March 31, 1998 (Unaudited) and December 31, 1997 4
Consolidated Statement of Cash Flows (Unaudited) -
Three Months Ended March 31, 1998 and 1997 5
Consolidated Statement of Stockholders' Equity (Unaudited) -
Three Months Ended March 31, 1998 6
Notes to the Consolidated Financial Statements (Unaudited) 7 - 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 18
PartII Other Information 19
Signature 19
2
</TABLE>
<PAGE>
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
(Dollars in thousands, except per share amounts) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Revenues......................................... $682,684 $638,449
Costs and expenses............................... (466,556) (450,297)
-------- --------
Gross profit..................................... 216,128 188,152
General and administrative expenses.............. (17,008) (16,628)
-------- --------
Income from operations........................... 199,120 171,524
Interest expense................................. (37,710) (34,538)
Dividends on preferred securities of SCI Finance LLC - (2,629)
Other income..................................... 6,651 3,090
Gain on sale of investment....................... - 68,077
-------- --------
(31,059) 34,000
Income before income taxes and
extraordinary loss............................ 168,061 205,524
Provision for income taxes....................... (59,275) (74,377)
-------- --------
Income before extraordinary loss................. 108,786 131,147
Extraordinary loss on early extinguishment of
debt (net of income taxes of $23,383)......... - (40,802)
-------- --------
Net income....................................... $108,786 $ 90,345
======== ========
Earnings per share:
Basic:
Income before extraordinary loss............. $ .43 $ .55
Extraordinary loss on early extinguishment
of debt - (.17)
-------- --------
Net income................................... $ .43 $ .38
======== ========
Diluted:
Income before extraordinary loss............. $ .42 $ .52
Extraordinary loss on early extinguishment
of debt - (.16)
-------- --------
Net income................................... $ .42 $ .36
======== ========
Dividends per share.............................. $ .09 $ .08
======== ========
Basic weighted average number of shares ......... 254,635 237,264
======== ========
Diluted weighted average number of shares ....... 261,768 255,538
======== ========
</TABLE>
(See notes to consolidated financial statements)
3
<PAGE>
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31,
1998 December 31,
(Dollars in thousands, except per share amounts) (Unaudited) 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................... $ 241,587 $ 46,877
Receivables, net of allowances................ 574,154 557,481
Inventories................................... 170,410 172,169
Other......................................... 36,919 34,881
----------- -----------
Total current assets......................... 1,023,070 811,408
----------- -----------
Investments - insurance subsidiary............... 606,629 574,728
Prearranged funeral contracts ................... 2,683,364 2,610,632
Long-term receivables ........................... 1,049,608 981,121
Cemetery property, at cost....................... 1,680,857 1,636,859
Property, plant and equipment, at cost (net)..... 1,674,988 1,644,137
Deferred charges and other assets................ 559,958 549,862
Names and reputations (net)...................... 1,520,286 1,498,116
----------- ------------
$10,798,760 $ 10,306,863
=========== ============
Liabilities & Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities...... $ 405,933 $ 425,631
Current maturities of long-term debt.......... 64,603 64,570
Income taxes ................................. 99,752 45,241
----------- ------------
Total current liabilities.................... 570,288 535,442
----------- ------------
Long-term debt................................... 2,842,697 2,634,699
Deferred income taxes............................ 707,852 701,221
Other liabilities ............................... 566,950 546,140
Deferred prearranged funeral contract revenues . 3,280,549 3,163,357
Stockholders' equity:
Common stock, $1 per share par value,
500,000,000 shares authorized,
255,902,790 and 252,923,784, respectively,
issued and outstanding 255,903 252,924
Capital in excess of par value................ 1,503,626 1,493,246
Retained earnings............................. 1,069,086 983,353
Accumulated other comprehensive income/(loss). 1,809 (3,519)
----------- ------------
Total stockholders' equity................... 2,830,424 2,726,004
----------- ------------
$10,798,760 $ 10,306,863
=========== ============
</TABLE>
(See notes to consolidated financial statements)
4
<PAGE>
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................ $108,786 $ 90,345
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................. 42,853 37,321
Provision for deferred income taxes............ 10,708 16,216
Extraordinary loss on early extinguishment of
debt, net of income taxes - 40,802
Gains from dispositions (net).................. (2,117) (68,970)
Change in assets and liabilities, net of
effects from acquisitions:
(Increase) in receivables..................... (64,812) (34,037)
(Increase) decrease in other assets........... (14,912) 1,209
Increase (decrease) in payables and
other liabilities............................ 57,906 (2,805)
Other......................................... 1,219 7,274
-------- ---------
Net cash provided by operating activities ........ 139,631 87,355
-------- ---------
Cash flows from investing activities:
Capital expenditures........................... (56,465) (31,593)
Change in prearranged funeral balances......... 16,718 (7,000)
Purchases of securities - insurance subsidiary. (245,244) (451,602)
Sales of securities - insurance subsidiary..... 244,687 434,444
Proceeds from sales of property and equipment.. 5,135 1,886
Acquisitions, net of cash acquired............. (55,608) (117,266)
Loans issued by finance subsidiary............. (23,837) (27,643)
Principal payments received on loans by
finance subsidiary............................ 4,296 2,676
Proceeds from sale of equity investment........ - 147,739
Purchases of equity investments................ (2,436) (18,960)
Other.......................................... 7,952 (7,807)
--------- ---------
Net cash (used in) investing activities........... (104,802) (75,126)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in borrowings under
revolving credit agreements................... (284,031) 469,655
Long-term debt issued.......................... 500,000 -
Payments of debt............................... (27,021) (15,842)
Early extinguishment of debt................... - (449,998)
Dividends paid................................. (18,795) (14,189)
Bank overdrafts and other...................... (10,272) 1,425
--------- ---------
Net cash provided by (used in) financing activities 159,881 (8,949)
--------- ---------
Net increase in cash and cash equivalents......... 194,710 3,280
Cash and cash equivalents at beginning of period.. 46,877 44,131
--------- ---------
Cash and cash equivalents at
March 31, 1998 and 1997.......................... $ 241,587 $ 47,411
========= =========
Cash used for:
Interest....................................... $ 21,719 $ 32,646
========= =========
Taxes.......................................... 16,126 14,841
========= =========
Non-cash investing and financing transactions:
Common stock issued in acquisitions............ $ 6,499 $9,039
========= ========
Debt issued in acquisitions.................... 4,300 1,752
========= ========
Debenture conversions to common stock.......... 1,493 5,127
========= ========
Conversion of preferred securities of
SCI Finance LLC............................... - 4,142
========= ========
</TABLE>
(See notes to consolidated financial statements)
5
<PAGE>
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
other
(Dollars In Thousands, Retained comprehensive Common Paid in
Except Per Share Amounts) Total earnings income stock capital
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1997.........$2,726,004 $ 983,353 $(3,519) $252,924 $1,493,246
Comprehensive income:
Net income.............. 108,786 108,786
Other comprehensive income:
Foreign currency
translation............ 1,378
Unrealized gain on
securities............. 3,950
---------
Total other comprehensive
income................. 5,328 5,328
---------
Comprehensive income.... 114,114
Common stock issued:
Stock option exercises
and stock grants....... 5,367 2,685 2,682
Acquisitions............ 6,499 179 6,320
Debenture conversions... 1,493 115 1,378
Dividends on common stock
($.09 per share)........ (23,053) (23,053)
---------- ---------- ------- -------- ----------
Balance at March 31, 1998.$2,830,424 $1,069,086 $ 1,809 $255,903 $1,503,626
========== ========== ======= ======== ==========
</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
March 31, 1998, the Company operated 3,166 funeral service locations, 398
cemeteries and 166 crematoria located in 18 countries on five continents.
The funeral service locations and cemetery operations consist of the
Company's funeral homes, cemeteries, crematoria and related businesses. Company
personnel at the funeral service locations provide all professional services
relating to funerals, including the use of funeral facilities and motor
vehicles. Funeral related merchandise is sold at funeral service locations and
certain funeral service locations contain crematoria. The Company sells
prearranged funeral services whereby a customer contractually agrees to the
terms of a funeral to be performed in the future. The Company's cemeteries
provide cemetery interment rights (including mausoleum spaces and lawn crypts)
and certain merchandise including stone and bronze memorials and burial vaults.
These items are sold on an at need or preneed basis. Company personnel at
cemeteries perform interment services and provide management and maintenance of
cemetery grounds. Certain cemeteries also contain crematoria. There are 147
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
months ended March 31,1998 and 1997 include the accounts of Service Corporation
International and all majority-owned subsidiaries (the "Company") and are
unaudited but include all adjustments, consisting of normal recurring accruals
and any other adjustments which management considers necessary for a fair
presentation of the results for these periods. These financial statements have
been prepared consistent with the accounting policies described in the annual
report on Form 10-K filed with the Securities and Exchange Commission (the
"Commission") for the year ended December 31, 1997 and should be read in
conjunction therewith. Certain reclassifications have been made to the prior
period to conform to the current period presentation with no effect on
previously reported net income, financial condition and cash flows.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.
3. Acquisitions
The Company acquired 45 funeral service locations and 7 cemeteries during the
three month period ended March 31, 1998 (60 funeral service locations, 12
cemeteries and one crematory during the three months ended March 31, 1997). The
consideration for these acquisitions consisted of combinations of cash, common
stock of the Company and issued or assumed debt. The operating results of all of
these acquisitions have been included since their respective dates of
acquisitions.
7
<PAGE>
The effect of acquisitions on the consolidated balance sheet at March 31,
was as follows:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Current assets...................................... $ (3,622) $ 6,841
Prearranged funeral contracts....................... (216) 40,606
Long-term receivables............................... 5,083 5,405
Cemetery property................................... 33,499 72,730
Property, plant and equipment....................... 10,679 28,425
Deferred charges and other assets................... 2,945 8,479
Names and reputations............................... 34,098 39,035
Current liabilities................................. 205 (10,906)
Long-term debt...................................... (13,258) (5,093)
Deferred income taxes and other liabilities......... (7,536) (18,273)
Deferred prearranged funeral contract revenues...... 230 (40,944)
Stockholders' equity................................ (6,499) (9,039)
-------- --------
Cash used for acquisitions.................... $ 55,608 $117,266
======== ========
</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:
<TABLE>
<S> <C>
1998 (remaining nine months)............. $ 227,570
1999..................................... 260,208
2000..................................... 242,762
2001..................................... 228,138
2002..................................... 214,057
2003 and through 2007.................... 822,404
2008 and thereafter...................... 1,285,410
----------
$3,280,549
==========
</TABLE>
8
<PAGE>
5. Debt
Debt at March 31, 1998 and December 31, 1997, was as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------------------------------
<S> <C> <C>
Bank revolving credit agreements
and commercial paper.................... $ 349,455 $ 616,589
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....... 127,154 141,108
8.375% notes due in 2004................. 51,840 51,840
7.375% notes due in 2004................. 250,000 250,000
7.2% notes due in 2006................... 150,000 150,000
6.875% notes due in 2007................. 150,000 150,000
6.5% notes due in 2008................... 200,000 -
7.70% notes due in 2009.................. 200,000 200,000
6.95% amortizing notes due in 2010....... 58,859 58,859
Floating rate notes due in 2011
(putable in 1999)....................... 200,000 200,000
7.875% debentures due in 2013............ 55,627 55,627
7.0% notes due in 2015 (putable in 2002). 300,000 300,000
6.3% notes due in 2020 (putable in 2003). 300,000 -
Medium term notes, maturities through
2019, fixed average
interest rate of 9.32%.................. 35,720 35,720
Convertible debentures, interest rates
range from 4.75% - 5.5%,
due through 2008, conversion price
ranges from $11.25 - $45.69............. 48,272 45,673
Mortgage notes and other notes payable
with maturities through 2015........... 139,969 156,931
Deferred loan costs...................... (9,596) (13,078)
---------- ----------
Total debt............................... 2,907,300 2,699,269
Less current maturities.................. (64,603) (64,570)
---------- ----------
Total long-term debt................ $2,842,697 $2,634,699
========== ==========
</TABLE>
The Company's primary revolving credit agreement provides for borrowings up
to $1,000,000 and consist of two committed facilities -- a 364-day facility and
a 5-year, multi-currency facility - which are primarily used to support
commercial paper issuance and for general corporate needs.
The 364-day facility allows for borrowings up to $300,000. This facility
expires June 26, 1998, but has provisions to be extended for additional 364-day
terms. At the end of any term, the outstanding balance may be converted into a
two-year term loan at the Company's option. Interest rates are based on various
indices as determined by the Company. In addition, a facility fee of 0.06% is
paid quarterly on the total commitment amount.
The 5-year facility allows for borrowings up to $700,000, including $500,000
in various foreign currencies. This facility expires June 27, 2002. Interest
rates on this facility are based on various indices as determined by the
Company. In addition, a facility fee is paid quarterly on the total commitment
amount. The facility fee, which ranges from 0.07% to 0.15%, is based on the
Company's senior debt ratings and is currently set at 0.08%. At March 31, 1998,
there was approximately $173,000 of revolving notes outstanding under this
facility at a weighted average interest rate of 6.62%.
As of March 31, 1998, the Company had no commercial paper outstanding.
On March 6, 1998, Service Corporation International (Canada), ("SCIC"), a
wholly owned subsidiary of the Company, entered into a 364-day, $148,000
revolving credit agreement which allows SCIC the option to convert to a five
year term loan. This facility is used primarily to support acquisition and
working capital requirements of the Company's Canadian subsidiaries. This new
facility carries no facility fee. At March 31, 1998, there was approximately
$148,000 outstanding under this facility at an average interest rate of 5.1%.
9
<PAGE>
The Company's outstanding commercial paper and other borrowings under its
various credit facilities at March 31, 1998 are classified as long-term debt.
The Company uses these revolving credit agreements primarily to finance the
Company's ongoing acquisition programs. From time to time, the Company raises
debt and/or equity in the public markets to reduce its revolving credit
facility balances. The timing of these public debt or equity offerings is
dependent on numerous factors including market conditions, long and short term
interest rates, the Company's capitalization ratios and the outstanding
balances under the revolving credit facilities. Therefore, the Company has
classified these borrowings as long-term debt. It is the Company's intent to
refinance such borrowings through the use of its credit agreements or other
long-term notes issued under a shelf registration filed with the Commission.
The credit facilities described above have financial compliance provisions
that contain certain restrictions on levels of net worth, debt, liens, and
guarantees.
In March of 1998, the Company issued two senior note securities. The first
note issued was a $200,000, 10-year, non-callable security with a 6.5% coupon,
due in March of 2008. The second note was a $300,000, 22-year security due in
March of 2020. This security is subject to mandatory tender to a remarketing
agent in March of 2003 and in March of 2010. The coupon on this issue is 6.30%.
The proceeds of this offering were primarily used to repay existing debt
outstanding under the Company's revolving credit agreeements.
Similarly, the stated coupons described above have substantially been
modified through the use of interest rate and cross-currency interest rate
swaps used in the management of interest rates within defined targets for
fixed and floating interest rate exposure.
During the three months ended March 31, 1998, pursuant to a shelf
registration filed with the Commission, the Company guaranteed the following
promissory notes issued through subsidiaries in connection with various
acquisitions of operations:
<TABLE>
<CAPTION>
Subsidiary Amount
-------------------------------------------- ------
<S> <C>
SCI Illinois Services, Inc.................. $ 800
</TABLE>
6. Derivatives
The Company enters into derivatives primarily in the form of interest rate swaps
to manage its mix of fixed and floating rate debt, and cross-currency interest
rate swaps in combination with local currency to substantially hedge the
Company's net investment in foreign assets. The Company has procedures in place
to monitor and control the use of derivatives and only enters into transactions
with a limited group of credit-worthy financial institutions. The Company does
not engage in derivative transactions for speculative or trading purposes, nor
is it a party to leveraged transactions.
At March 31, 1998, after giving consideration to the interest rate and
cross-currency swaps, the Company's debt (excluding Provident debt) consists
of approximately 40% of fixed interest rate debt at a weighted average rate of
7.23% and approximately 60% of floating interest rate debt at a weighted average
rate of 5.53%. Approximately $1,385,000 of the Company's debt has been converted
from US dollar denominated debt to foreign currency denominated debt as the
result of cross-currency swaps. Including these swaps, foreign denominated debt
totals $1,752,000.
The net fair value of the Company's various swap agreements at March 31,
1998, was an asset of $138,000. Fair values were obtained from counterparties to
the agreements and represent their estimate of the net amount the Company would
receive to terminate the swap agreements based upon the existing terms and
current market conditions.
10
<PAGE>
7. Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
----------------------------
<S> <C>
4.69 5.52
</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 decrease in the Company's ratio of earnings to fixed charges
is primarily attributable to the 1997 gain on the sale of a Company investment.
8. Geographic Segment Information
The Company conducts funeral and cemetery operations in 18 countries and offers
financial services in the United States. Geographic segment information was as
follows:
<TABLE>
<CAPTION>
United Other Other
States France European Foreign
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Three months ended March 31:
1998......................... $453,026 $122,928 $63,714 $43,396
1997......................... 403,282 133,614 61,313 40,844
Income from operations:
Three months ended March 31:
1998......................... $163,804 $ 11,554 $13,293 $10,469
1997......................... 126,721 15,258 16,590 12,806
Funeral services performed:
Three months ended March 31:
1998......................... 66,069 38,776 29,330 13,300
1997......................... 61,964 41,587 29,772 12,240
Number of locations at March 31:
1998......................... 1,584 1,118 731 297
1997......................... 1,483 1,073 633 261
</TABLE>
11
<PAGE>
9. Earnings Per Share
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". All prior periods presented
have been restated to conform to this new standard. A reconciliation of the
numerators and denominators of the basic and diluted per share computations for
income before extraordinary item follows:
<TABLE>
<CAPTION>
Three Months ended March 31,
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Income (numerator):
Income before extraordinary item - basic....... $108,786 $131,147
After tax interest on convertible debentures... 371 2,078
-------- --------
Income before extraordinary item - diluted..... $109,157 $133,255
- -------------------------------------------------------------------------------
Shares (denominator):
Shares - basic................................. 254,635 237,264
Stock options and warrants.................. 4,992 4,376
Convertible debentures...................... 2,141 2,493
Convertible preferred securities of
SCI Finance LLC............................ - 11,405
-------- --------
Shares - diluted............................... 261,768 255,538
- -------------------------------------------------------------------------------
Earnings per share before extraordinary item:
Basic.......................................... $ .43 $ .55
Diluted........................................ $ .42 $ .52
- -------------------------------------------------------------------------------
</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
approximately 400 clusters, which range in size from two operations to 73
operations. There may be more than one cluster in a given metropolitan area,
depending upon the level and degree of shared costs.
Three Months Ended March 31, 1998
Compared to Three Months Ended March 31, 1997
Results of Operations:
Segment information for the Company's three lines of business was as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, Percentage
1998 1997 Increase Increase
--------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Funeral............. $ 472,128 $ 457,071 $ 15,057 3.3 %
Cemetery............ 205,941 177,790 28,151 15.8
Financial services.. 4,615 3,588 1,027 28.6
--------- --------- --------
682,684 638,449 44,235 6.9
Costs and expenses:
Funeral............. 339,436 337,368 2,068 0.6
Cemetery............ 124,688 110,997 13,691 12.3
Financial services.. 2,432 1,932 500 25.9
--------- --------- --------
466,556 450,297 16,259 3.6
Gross profit and
margin percentage:
Funeral............. 132,692 28.1% 119,703 26.2% 12,989 10.9
Cemetery............ 81,253 39.5 66,793 37.6 14,460 21.6
Financial services.. 2,183 47.3 1,656 46.2 527 31.8
--------- --------- --------
$ 216,128 31.7% $ 188,152 29.5% $ 27,976 14.9 %
========= ========= ========
</TABLE>
13
<PAGE>
Funeral
Funeral revenues were as follows:
<TABLE>
<CAPTION>
Three Months ended Percentage
March 31, Increase Increase
1998 1997 (Decrease) (Decrease)
-----------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States............... $ 257,877 $ 234,699 $23,178 9.9 %
France...................... 122,548 133,010 (10,462) (7.9)
Other European.............. 51,741 54,493 (2,752) (5.1)
Other foreign............... 27,676 28,336 (660) (2.3)
---------- --------- -------
459,842 450,538 9,304 2.1
New clusters:*
United States............... 2,635 527 2,108
Other European.............. 6,032 181 5,851
Other foreign............... 1,185 222 963
---------- --------- -------
9,852 930 8,922
Non-cluster and disposed
operations.................... 2,434 5,603 (3,169)
---------- --------- -------
Total funeral revenues...... $ 472,128 $ 457,071 $15,057 3.3 %
========== ========= =======
</TABLE>
The $9,304 increase in revenues from existing clusters was the result of a
3.6% higher average sales price ($3,243 compared to $3,130), offset by a 1.5%
decline in the number of funeral services performed (141,808 compared to
143,936). Acquisitions since January 1, 1997, included in existing clusters,
contributed $23,451 to the existing cluster revenue increase, while locations
acquired before 1997 had a decline of $14,147. French funeral revenues for the
quarter decreased $10,237 caused exclusively by an adverse change in the US
dollar / French franc exchange rate.
During the three months ended March 31, 1998, the Company sold $135,830 of
prearranged funeral services compared to $125,315 for the same period in 1997.
Funeral costs and expenses were as follows:
<TABLE>
<CAPTION>
Three Months ended Percentage
March 31, Increase Increase
1998 1997 (Decrease) (Decrease)
-----------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States............... $ 147,883 $ 144,288 $ 3,595 2.5 %
France...................... 105,734 113,652 (7,918) (7.0)
Other European.............. 39,137 38,347 790 2.1
Other foreign............... 19,564 19,237 327 1.7
--------- --------- -------
312,318 315,524 (3,206) (1.0)
New clusters:*
United States............... 1,752 417 1,335
Other European.............. 4,444 106 4,338
Other foreign............... 803 175 628
--------- --------- -------
6,999 698 6,301
Non-cluster and disposed
operations.................... 3,208 5,073 (1,865)
Administrative overhead........ 16,911 16,073 838 5.2
--------- --------- -------
Total funeral costs and expenses $ 339,436 $ 337,368 $ 2,068 0.6 %
========= ========= =======
</TABLE>
- --------------------
* Represents new geographic cluster areas entered into since January 1, 1997
for the period that those businesses were owned by the Company.
14
<PAGE>
The $3,206 decrease in costs and expenses from existing clusters is primarily
the result of a period to period 1.5% decline in the number of funeral services
performed. Acquisitions since January 1, 1997, included in existing clusters,
reported $19,026 of increased costs, while continued cost controls at existing
locations acquired before 1997 contributed to a $22,232 cost decrease. French
funeral costs and expenses decreased $9,228 due to a change in the US dollar /
French franc exchange rate. The gross profit margin for existing clusters
increased to 28.4% in 1998 from 26.4% in 1997. 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 1998 to 28.1%,
compared to 26.2% in 1997. Contributing to this period to period improvement
were the Company's North American operations, which had a margin improvement to
38.2% from 34.0% due primarily to seasonal volume levels and continued cost
control efforts. Partially offsetting was the French gross profit margin of
10.1% for the period ended March 31, 1998 which declined from 11.6% in 1997
due primarily to weaker than expected funeral service volumes. The reduced
funeral service volume was noticeable throughout Europe and is primarily due
to milder winter weather.
Administrative overhead costs, expressed as a percentage of total funeral
revenues, increased slightly to 3.6%, compared to 3.5% in 1997.
Cemetery
Cemetery revenues were as follows:
<TABLE>
<CAPTION>
Three Months ended Percentage
March 31, Increase Increase
1998 1997 (Decrease) (Decrease)
-----------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States............... $ 180,402 $157,936 $22,466 14.2 %
Other European.............. 5,117 5,809 (692) (11.9)
Other foreign............... 11,560 12,203 (643) (5.3)
--------- -------- -------
197,079 175,948 21,131 12.0
New clusters*.................. 7,775 293 7,482
Non-cluster and disposed
operations.................... 1,087 1,549 (462)
--------- -------- -------
Total cemetery revenues..... $ 205,941 $177,790 $28,151 15.8 %
========= ======== =======
</TABLE>
Revenues from the existing clusters increased $21,131 in 1998. Included in
the existing cluster increase were $14,052 in increased revenues from
cemeteries acquired since the beginning of 1997, while revenues from existing
cluster locations owned before 1997 increased $7,079.
Cemetery costs and expenses were as follows:
<TABLE>
<CAPTION>
Three Months ended Percentage
March 31, Increase Increase
1998 1997 (Decrease) (Decrease)
-----------------------------------------------
<S> <C> <C> <C> <C>
Existing clusters:
United States............... $ 99,517 $ 90,740 $ 8,777 9.7%
Other European.............. 3,200 2,961 239 8.1
Other foreign............... 6,701 6,572 129 2.0
-------- -------- -------
109,418 100,273 9,145 9.1
New clusters*.................. 5,350 327 5,023
Non-cluster and disposed
operations.................... 1,371 950 421
Administrative overhead........ 8,549 9,447 (898) (9.5)
-------- -------- -------
Total cemetery costs
and expenses............... $124,688 $110,997 $13,691 12.3%
======== ======== =======
</TABLE>
- ---------------------
* Represents new geographic cluster areas entered into since January 1, 1997
for the period that those businesses were owned by the Company.
15
<PAGE>
Costs and expenses from existing clusters increased $9,145 due primarily to
an increase of $9,351 at cemeteries acquired since the beginning of 1997. The
overall cemetery gross profit margin percentage improved in 1998 to 39.5% from
37.6% in 1997. This increase reflects 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
primarily in the United States. Administrative overhead costs have decreased to
4.2% of revenues compared to 5.3% during the three months ended March 31, 1998.
Financial Services
The Company's wholly-owned finance subsidiary, Provident Services, Inc.
("Provident") reported a gross profit of $2,183 for the three months ended
March 31, 1998, compared to $1,656 for the same period in 1997. Provident's
average outstanding loan portfolio during the current period increased to
$197,551 compared to $165,384 in 1997, and the average interest rate spread
also increased to 3.5% compared to 3.1% in 1997.
Other Income and Expenses
Expressed as a percentage of revenues, general and administrative expenses
decreased slightly to 2.5% for the three months ended March 31, 1998 compared
to 2.6% for the comparable period in 1997.
Interest expense, which excludes the amount incurred through financial
service operations, increased $3,172 or 9.2% period to period. The increased
interest expense reflects the lower average interest rates on indebtedness
offset by the Company's higher debt level in 1998.
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 35.3% effective tax rate for the
quarter ended March 31, 1998, compared to a 36.2% effective tax rate for the
comparable period in 1997. The decrease in the effective tax rate is due
primarily to lower taxes from international operations, partially offset by the
1997 tax impact from the gain on sale of the Company's interest in ECI which
was reflected at the Company's higher domestic tax rate.
Financial Condition and Liquidity at March 31, 1998:
General
Historically, the Company has funded its working capital needs and capital
expenditures primarily through cash provided by operating activities and
borrowings under bank revolving credit agreements and commercial paper. Funding
required for the Company's acquisition program has been generated through public
and private offerings of debt and the issuance of equity securities supplemented
by the Company's revolving credit agreements and additional securities
registered with the Securities and Exchange Commission (the "Commission"). The
Company believes cash from operations, additional funds available under its
revolving credit agreements, proceeds from public and private offerings of
securities will be sufficient to continue its current acquisition program and
operating policies. During the first quarter of 1998, the Company acquired 45
funeral service locations and 7 cemeteries (see Note 3). In addition, the
Company has received signed letters of intent to acquire an additional 138
funeral service locations, 29 cemeteries and 2 crematoria for an aggregate
purchase price of approximately $386,000. These businesses are expected to
produce approximately $189,000 in annualized revenues, including $64,000
in North American operations and $125,000 from operations outside North
America.
At March 31, 1998, the Company had net working capital of $452,782 and a
current ratio of 1.79:1, compared to working capital of $275,966 and a current
ratio of 1.52:1 at December 31, 1997.
Sources And Uses of Cash
Cash flows from operating activities: Net cash provided by operating activities
was $139,631 for the three months ended March 31, 1998, compared to $87,355 for
the same period in 1997, an increase of $52,276. This increase was primarily due
to improved operating results and an increase in payables and other liabilities
during the current three months. Significant reductions of operating cash
include amounts receivable resulting from increased sales of funeral services
and cemetery products and merchandise.
16
<PAGE>
Cash flows from investing activities: Net cash used in investing activities was
$104,802 for the three months ended March 31, 1998, compared to $75,126 for the
same period in 1997, an increase of $29,676. Cash used for acquisitions
decreased by $61,658 and capital expenditures increased by $24,872 during the
three months ended March 31, 1998, as the Company continues to expand through
both acquisitions of existing businesses and through increased construction of
funeral and cemetery facilities. Additionally, in 1997 approximately $147,000
in cash was provided by the sale of the Company's interest in ECI. Cash used
relating to prearranged funeral activities decreased due to the timing of cash
payments to and withdrawals from trusts, offset by increased cash outlays on
prearranged marketing efforts.
Cash flows from financing activities: Net cash provided by financing activities
was $159,881 for the three months ended March 31, 1998, compared to net used of
$8,949 for the same period in 1997, an increase of $168,830. Last year included
a use of cash of $449,998 for the early extinguishment of certain higher
interest rate debt.
As of March 31, 1998, the Company's debt to capitalization ratio was 50.7%
compared to 49.8% at December 31, 1997. The interest rate coverage ratio for the
three months ended March 31, 1998 was 5.20:1, compared to 4.54:1 (excluding the
gain on the sale of the Company's investment in ECI) for the same period in
1997. This interest rate coverage level has been relatively consistent, despite
higher levels of debt outstanding, for several years. The Company believes that
the acquisition of funeral and cemetery operations funded with debt or Company
common stock is a prudent business strategy given the stable cash 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's
various revolving credit facilities and lines of credit currently provide for
aggregate borrowings of approximately $1,148,000 of which approximately $828,000
was available under these facilities at March 31, 1998. The Company also had the
ability to issue $50,000 in securities registered with the Commission under a
shelf registration. In addition, 15,190,000 shares of common stock and a total
of $197,000 of guaranteed promissory notes and convertible debentures are
registered with the Commission under a separate shelf registration to be used
exclusively for future acquisitions.
Prearranged Funeral Services
The Company has a marketing program to sell prearranged funeral contracts and
the funds collected are generally held in trust or are used to purchase 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 1997, the Company completed a review of the prearranged trust
investment process which included an asset/liability study. This has resulted in
a new investment program which entails the consolidation of multiple trustees,
the use of institutional managers with differing investment styles and
consolidated performance monitoring and tracking. This new program targets a
real return in excess of the amount necessary to cover future increases in the
cost of providing a price guaranteed funeral service as well as any selling
costs. This is accomplished by allocating the portfolio mix to the appropriate
investments that more accurately match the anticipated maturity of the policies.
The Company anticipates an asset allocation of approximately 65% equity and 35%
fixed income.
Marketing costs incurred with the sale of prearranged funeral contracts are a
current use of cash which is partially offset with cash retained, pursuant to
state laws, from amounts trusted and certain commissions earned by the Company
for sales of insurance products issued by third party insurers. The Company
sells prearranged funerals in most of its service markets including its foreign
markets. Auxia, the Company's French life insurance subsidiary, primarily sells
insurance products used to fund prearranged funerals to be performed by the
Company's French funeral service locations. Prearranged funeral service sales
afford the Company the opportunity to both protect current market share and mix
as well as expand market share in certain markets. The Company believes this
will stimulate future revenue growth. Prearranged funeral services fulfilled as
a percent of the total North American
17
<PAGE>
funerals performed annually approximates 25% and is expected to grow, thereby
making the total number of funerals performed more predictable.
Other Matters:
Year 2000 Issue
The "Year 2000" issue refers to the inability of certain computer programs to
correctly differentiate the century from a date in which the year is represented
by only two digits. A computer system which is not year 2000 compliant might not
be able to process certain data or possibly cause the entire computer system to
malfunction. The Company is currently assessing any potential impact that
changing to the year 2000 will have on the computer programs that operate within
the Company or are used by major vendors or service providers.
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.
18
<PAGE>
SERVICE CORPORATION INTERNATIONAL
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 Ratio of earnings to fixed charges for the three months
ended March 31, 1998 and 1997.
27.1 Financial data schedule.
(b) Reports on Form 8-K
During the quarter ended March 31, 1998, the Company filed a
Form 8-K dated March 24, 1998 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, including 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.
May 14, 1998
SERVICE CORPORATION INTERNATIONAL
By: /s/ George R. Champagne
--------------------------------------
George R. Champagne
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
19
<PAGE>
SERVICE CORPORATION INTERNATIONAL Exhibit 12.1
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
- --------------------------------------------------------------------------------
(Thousands, except ratio amounts)
<S> <C> <C>
Pretax income from continuing operations......... $ 168,061 $ 205,524
Undistributed income of less than 50%
owned equity investees........................ (1,507) (476)
Minority interest in income of majority
owned subsidiaries with fixed charges........... 76 106
Add fixed charges as adjusted (from below)....... 44,229 44,293
--------- ---------
$ 210,859 $ 249,447
Fixed charges:
Interest expense:
Corporate................................ $ 37,533 $ 33,929
Financial services....................... 2,294 1,712
Capitalized.............................. 689 863
Amortization of debt costs................. 177 609
1/3 of rental expense...................... 4,225 5,414
Dividends on convertible preferred
stock of subsidiary....................... - 2,629
--------- ---------
Fixed charges.................................... 44,918 45,156
less: Capitalized interest................. (689) (863)
--------- ---------
Fixed charges as adjusted........................ $ 44,229 $ 44,293
========= =========
Ratio (earnings divided by fixed charges)........ 4.69 5.52
========= =========
</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 MARCH 31,
1998 AND THE RELATED STATEMENT OF INCOME FOR THE THREE MONTHS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 241,587
<SECURITIES> 575,633
<RECEIVABLES> 997,593
<ALLOWANCES> 90,621
<INVENTORY> 170,410
<CURRENT-ASSETS> 1,023,070
<PP&E> 2,499,468
<DEPRECIATION> 412,240
<TOTAL-ASSETS> 10,798,760
<CURRENT-LIABILITIES> 570,288
<BONDS> 2,842,697
0
0
<COMMON> 255,903
<OTHER-SE> 2,574,521
<TOTAL-LIABILITY-AND-EQUITY> 10,798,760
<SALES> 638,118
<TOTAL-REVENUES> 682,684
<CGS> 464,124
<TOTAL-COSTS> 466,556
<OTHER-EXPENSES> 17,146
<LOSS-PROVISION> 10,426
<INTEREST-EXPENSE> 40,004
<INCOME-PRETAX> 168,061
<INCOME-TAX> 59,275
<INCOME-CONTINUING> 108,786
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108,786
<EPS-PRIMARY> .43
<EPS-DILUTED> .42
</TABLE>
