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: June 30, 2009
Business Overview: SCI is North America's leading provider of deathcare products and services, operating 1,264 funeral service locations and 365 cemeteries across the U.S., Canada, and Germany. The company generates revenue through "at-need" services and "preneed" contracts, where customers prepay for future services. A significant portion of preneed funds is held in trust investments.
Key Financial Metrics (Six Months Ended June 30, 2009)
| Metric | 2009 (YTD) | 2008 (YTD) |
|---|---|---|
| Total Revenues | $1,024.5 million | $1,122.2 million |
| Gross Profit | $201.9 million | $244.8 million |
| Operating Income | $154.6 million | $182.7 million |
| Net Income (Attributable to Common Stockholders) | $57.6 million | $72.9 million |
| Diluted EPS | $0.23 | $0.28 |
| Cash Provided by Operating Activities | $211.1 million | $116.5 million |
| Total Debt (Long-term + Current) | $1,755.1 million | $1,848.5 million |
| Cash and Cash Equivalents | $170.4 million | $128.4 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 8.7% year-over-year. This was driven by an 8.4% decline in funeral services performed and a 10.3% decline in cemetery revenues. The decline in deaths and negative consumer sentiment regarding preneed cemetery property sales were primary factors.
- Profitability: Net income decreased 21.0% to $57.6 million. Funeral gross profit fell 14.2% and cemetery gross profit fell 26.9% due to lower volume and reduced trust fund income.
- Trust Investment Performance: The company realized aggregate net losses of $67.1 million in preneed funeral and cemetery merchandise/service trusts and $7.4 million in cemetery perpetual care trusts during the first half of 2009. Cumulative net unrealized losses totaled $319.4 million (merchandise/service) and $132.2 million (perpetual care) as of June 30, 2009.
- Divestitures and Impairments: SCI recognized a net pre-tax gain of $0.9 million on divestitures and impairments for the six months ended June 30, 2009. This was due to a $17.7 million release of indemnification liabilities related to former French operations, offset by $16.8 million in impairment charges and asset divestitures.
- Debt Reduction: The company reduced total debt by approximately $93.4 million through scheduled payments and open market purchases of senior notes, resulting in a $3.4 million gain on early extinguishment of debt.
Guidance, Outlook, and Risks
- Outlook: Management noted a recovery in trust investment values in the second quarter of 2009, with combined SCI trusts increasing approximately 12% during the quarter. However, the weakened economy continues to negatively impact preneed cemetery property sales.
- Liquidity: SCI maintains strong liquidity with $170.4 million in cash and approximately $250 million in excess borrowing capacity under its revolving credit facility. The company is in compliance with all debt covenants (Leverage ratio: 3.63 vs. 4.25 max; Interest coverage: 3.50 vs. 2.75 min).
- Internal Controls: The company disclosed a material weakness in internal control over financial reporting related to the accounting for income taxes. This weakness existed as of June 30, 2009, though management performed additional procedures to ensure the financial statements were fairly presented.
- Legal Risks: SCI is involved in various litigation matters, including antitrust claims regarding casket sales (Funeral Consumers Case), wage and hour lawsuits, and claims regarding burial practices. While the company intends to vigorously defend these matters, adverse outcomes could have a material effect on financial results.
Key Facts for Investor Verification
- Trust Fund Exposure: Verify the sustainability of the $2.7 billion in trust assets given the significant unrealized losses ($451.6 million total) and the reliance on these funds to meet future preneed contract obligations.
- Volume Trends: Monitor the decline in funeral services performed (down 8.4% YTD) and cemetery property production (down 12.5% YTD) to assess the impact of the economic downturn on core operations.
- Internal Control Remediation: Track the progress of remediation efforts regarding the material weakness in income tax accounting controls.
- Legal Reserves: Review updates on the "Funeral Consumers Case" antitrust litigation and wage/hour lawsuits, as potential liabilities are currently unquantifiable.
- Divestiture Gains: Note that the net gain on divestitures was driven by the release of indemnification reserves from former French operations, which may not be a recurring benefit.