Business Context and Reporting Period
Company: Service Corporation International (SCI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: SCI is North America's leading provider of deathcare products and services, operating funeral homes and cemeteries across the U.S., Canada, and Germany. The company manages significant preneed funeral and cemetery contracts, the proceeds of which are held in trust or backed by insurance policies.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Revenues | $516.4 million | $1,638.7 million |
| Gross Profit | $82.1 million | $327.0 million |
| Operating Income | $48.8 million | $231.7 million |
| Net Income | $14.6 million | $87.6 million |
| Diluted EPS | $0.06 | $0.33 |
| Cash and Equivalents | $171.9 million | (Balance Sheet Item) |
| Total Debt | $1,892.1 million | (Balance Sheet Item) |
| Operating Cash Flow (9mo) | N/A | $233.3 million |
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 4.2% ($22.9 million) in Q3 2008 and 4.3% ($73.7 million) for the nine-month period compared to 2007. This was primarily driven by significant divestitures of non-strategic assets in 2007 and a decline in cemetery property sales.
- Net Income Volatility: Net income for Q3 2008 dropped 48% to $14.6 million from $28.2 million in Q3 2007. Conversely, net income for the nine-month period increased 8% to $87.6 million from $80.9 million in 2007.
- Impairment Charges: The company recognized a net pretax loss of $12.8 million in Q3 2008 and $28.7 million for the nine months, primarily due to impairment charges on cemetery locations held for sale in Michigan, West Virginia, and Oregon. This contrasts with a net gain on divestitures in the same periods of 2007.
- Hurricane Impact: A $4.3 million net expense was recorded in Q3 2008 related to property damage from Hurricane Ike.
- Comparable Performance: Despite consolidated declines, comparable average revenue per funeral service increased 3.8% in Q3 and 4.5% for the nine months, reflecting successful strategic pricing initiatives.
Guidance, Outlook, and Risks
- Market Volatility: Trust investments held for preneed contracts suffered significant unrealized losses due to financial market volatility. However, management states these losses are offset by non-controlling interests and have no impact on the income statement or current ability to fulfill obligations.
- Goodwill Impairment Risk: Management noted that if market conditions continue to deteriorate, the likelihood of recording a goodwill impairment charge in the fourth quarter of 2008 increases.
- Liquidity: The company maintains approximately $201.3 million in borrowing capacity under its revolving credit facility and expects to receive a $95 million federal income tax refund in Q4 2008.
- Legal Contingencies: SCI faces various litigation matters, including antitrust claims regarding casket sales (potential damages estimated between $950 million and $1.5 billion by plaintiffs) and burial practices lawsuits. Management believes it is remote that liabilities will exceed recorded reserves but notes outcomes are uncertain.
- Internal Controls: The company disclosed material weaknesses in internal controls over financial reporting related to income tax accounting and account reconciliations, which remained unremediated as of September 30, 2008.
Investor Verification Checklist
- Trust Fund Valuation: Verify the extent of unrealized losses in funeral and cemetery trust investments and confirm the offsetting non-controlling interest treatment.
- Divestiture Pipeline: Assess the status of assets held for sale and the potential for further impairment charges in Q4 2008.
- Legal Exposure: Review the status of the antitrust class actions and burial practices lawsuits to gauge potential future liabilities beyond current reserves.
- Internal Control Remediation: Monitor progress on remediation steps for income tax and account reconciliation weaknesses to ensure future reporting reliability.
- Preneed Backlog: Confirm the stability of the $6.6 billion preneed backlog and the financial health of third-party insurers funding insurance-backed contracts.