Business Context and Reporting Period
Company: Service Corporation International (SCI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: SCI is North America's leading provider of deathcare products and services, operating 1,286 funeral service locations and 365 cemeteries across the U.S., Canada, and Germany. The company sells products and services on both an "at-need" and "preneed" basis, with a significant portion of preneed funds held in trust investments.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $510,595 | $573,451 |
| Gross Profit | $100,120 | $137,597 |
| Operating Income | $85,564 | $99,370 |
| Net Income (Attributable to Common Stockholders) | $34,530 | $41,519 |
| Diluted EPS | $0.14 | $0.16 |
| Cash and Cash Equivalents | $215,971 | $128,397 (Dec 31, 2008) |
| Net Cash Provided by Operating Activities | $141,354 | $46,344 |
| Total Debt | $1,844,567 | $1,848,508 (Dec 31, 2008) |
| Preneed Backlog (Total) | $6.32 Billion | N/A |
Note: Debt figures represent total debt including current maturities. Backlog includes trust-funded and insurance-funded contracts.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 11.0% to $510.6 million, driven by a 10.4% decline in funeral services performed and a 16.3% decline in cemetery property production due to the weakened economy.
- Profitability: Gross profit fell 27.2% to $100.1 million. Funeral gross profit dropped 22.4%, while cemetery gross profit declined 45.5% due to lower trust fund income and reduced property sales.
- Operating Cash Flow: Net cash provided by operating activities increased significantly to $141.4 million from $46.3 million in Q1 2008. This increase is largely attributed to a one-time $90 million federal transaction-related tax payment in Q1 2008 and lower incentive compensation and payroll costs in 2009.
- Divestiture Gains: The company recognized a net pre-tax gain of $7.2 million on divestitures and impairment charges, primarily due to a $14.1 million release of VAT and litigation indemnifications related to former French operations. This contrasts with a $12.0 million loss in the same period in 2008.
- Trust Investment Losses: The company realized aggregate net losses of $40.8 million in preneed funeral and cemetery merchandise/service trusts and $10.7 million in cemetery perpetual care trusts. Net unrealized losses totaled $500.8 million and $189.3 million, respectively, though these are largely offset by liability reclassifications and do not fully impact the income statement.
Guidance, Outlook, and Risks
- Outlook: Management expects the trust funds to participate in market recovery as capital markets improve. The company maintains a $6.3 billion backlog of future revenues, providing financial stability.
- Liquidity: SCI reported $216 million in cash and cash equivalents as of March 31, 2009, with approximately $202 million in excess borrowing capacity under its revolving credit facility. The company is in compliance with all debt covenants.
- Capital Allocation: No shares were repurchased in Q1 2009. The remaining authorized amount for the share repurchase program is $123.4 million. A quarterly dividend of $0.04 per share was declared.
- Key Risks:
- Market Volatility: Continued declines in financial markets could reduce trust fund income and future earnings.
- Economic Conditions: The weakened economy negatively impacts cemetery property sales and may cause customers to reassess preneed arrangements or opt for cremation over burial.
- Legal Proceedings: Significant pending litigation includes antitrust claims (Funeral Consumers Case), burial practices lawsuits (Valls, Garcia), and wage/hour claims. While class certification was denied in some antitrust cases, appeals are pending.
- Internal Controls: A material weakness in internal control over financial reporting regarding income tax accounting continues to exist as of March 31, 2009, though remediation efforts are underway.
Investor Verification Checklist
- Trust Fund Performance: Verify the extent of unrealized losses in trust investments ($690 million total) and the company's assessment of "other-than-temporary" impairments.
- Divestiture Gains: Confirm the sustainability of the $14.1 million gain from the release of French operation indemnifications, as this is a non-recurring item.
- Operational Volume: Monitor the trend in funeral services performed (down 10.4%) and cemetery property sales (down 16.3%) to assess the impact of the economic downturn on core operations.
- Legal Exposure: Review the status of the "Funeral Consumers Case" antitrust appeal and the "Valls" burial practices lawsuit for potential liability impacts.
- Internal Controls: Track the progress of remediation for the material weakness in income tax accounting controls.