Service Corporation International (SCI) - 10-Q Summary
Business Context and Reporting Period
Company: Service Corporation International (SCI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: SCI is North America's largest provider of deathcare products and services, operating funeral homes and cemeteries across the U.S., Canada, and Germany. The company sells services at-need and on a preneed basis, managing significant trust funds to fulfill future contractual obligations.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenues | $497.2 | $1,521.8 |
| Gross Profit | $101.2 | $303.1 |
| Operating Income | $78.0 | $232.6 |
| Net Income (Attributable to Common Stockholders) | $31.2 | $88.8 |
| Diluted EPS | $0.12 | $0.35 |
| Cash and Cash Equivalents | $233.5 (Sep 30, 2009) | N/A |
| Net Cash Provided by Operating Activities | N/A | $305.3 |
| Total Debt (Long-term + Current) | $1,743.6 (Sep 30, 2009) | N/A |
| Preneed Backlog (Trust + Insurance) | $6.5 billion (Total) | N/A |
Material Changes vs. Prior Period
- Revenue: Total revenues decreased 3.7% in the third quarter and 7.1% in the nine-month period compared to 2008. This decline was driven by a decrease in funeral services performed (down 7.2% Q3, 8.0% YTD) and unfavorable foreign currency impacts.
- Profitability: Despite lower revenues, Net Income increased significantly in the third quarter (up 113% vs. Q3 2008) due to cost control initiatives, lower impairment charges, and a reduction in self-insurance reserves. Nine-month net income remained relatively flat compared to 2008.
- Impairment Charges: Loss on divestitures and impairment charges decreased substantially to $2.2 million in Q3 2009 from $12.8 million in Q3 2008. For the nine months, the net loss was $1.3 million, offset by a $17.7 million release of indemnification liabilities related to former French operations.
- Trust Investments: Trust fund assets increased 19.9% during the nine months ended September 30, 2009, recovering from the 2008 market downturn. However, the company recorded impairment charges of $6.3 million (Q3) and $16.8 million (YTD) for funeral trusts, and $20.6 million (Q3) and $33.5 million (YTD) for cemetery trusts.
- Debt Reduction: The company reduced total debt by approximately $105 million during the nine-month period through scheduled payments and open market purchases, resulting in a $3.9 million gain on early extinguishment of debt.
Guidance, Outlook, and Risks
- Acquisition: On October 14, 2009, SCI agreed to acquire Keystone North America Inc. for approximately $256 million. The transaction is expected to close in Q1 2010, subject to regulatory approval.
- Capital Structure: SCI intends to amend its credit facility to increase availability from $300 million to $400 million and plans to prepay $150 million in Series B Senior notes due in November 2011.
- Market Outlook: Management expects trust funds to continue participating in the capital market recovery. However, the weakened economy continues to impact cemetery property sales production, though Q3 2009 showed a 15.9% recovery in same-store production.
- Internal Controls: The company disclosed a material weakness in internal control over financial reporting related to income tax accounting, which remained unremediated as of September 30, 2009. Management is working with an outside firm to address this.
- Litigation: SCI faces various legal proceedings, including antitrust claims (class certification denied), wage and hour lawsuits, and burial practices claims. While the company intends to defend these vigorously, adverse outcomes could be material.
Investor Verification Checklist
- Trust Fund Valuation: Verify the impact of unrealized losses on trust investments ($119.1 million in funeral/cemetery trusts and $54.5 million in perpetual care trusts) and the company's ability to meet future obligations despite market volatility.
- Internal Control Remediation: Monitor progress on the material weakness regarding income tax accounting and the timeline for remediation.
- Acquisition Financing: Confirm the funding structure for the Keystone acquisition and the impact on leverage ratios.
- Funeral Volume Trends: Assess the sustainability of the decline in funeral services performed and its long-term impact on revenue.
- Legal Reserves: Review updates on pending litigation, particularly the antitrust and wage/hour cases, to ensure reserves are adequate.