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| SCI > SEC Filings for SCI > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
• Drive operating discipline and leverage our scale; and
• Manage and grow the footprint.
For additional information on these strategies, see our Annual Report on Form
10-K for the year ended December 31, 2007.
Financial Condition, Liquidity and Capital Resources
Recent Volatility in Financial Markets
Our funeral, cemetery merchandise and service, and cemetery perpetual care
trusts have been and continue to be impacted by recent adverse conditions in the
U.S. and global financial markets. We reported significant net unrealized losses
associated with available-for-sale securities held by these trusts as of
September 30, 2008, as discussed in Part I, Item 1, Financial Statements, Notes
4, 5, and 6 of this Form 10-Q. As explained below in Critical Accounting
Policies, Fair Value Measurements, changes in unrealized gains and/or losses
related to these securities are reflected in other comprehensive income
(loss) and offset by the non-controlling interest in those unrealized gains
and/or losses; therefore, these significant net unrealized losses had no impact
on our condensed consolidated statement of operations for the three and nine
months ended September 30, 2008. We do, however, rely on our trust investments
to provide funding for the various contractual obligations that arise upon
maturity of the underlying preneed contracts, which is typically 8-12 years from
the time they were originally entered into. Because of the long-term
relationship between the establishment of trust investments and the required
performance of the underlying contractual obligations, the impact of current
market conditions that may exist at any given time is not necessarily
determinative of our ability to fulfill our future performance obligations.
Consequently, the decline in the fair market value of our trust assets resulting
from the recent volatility in U.S. and Global markets has not had a material
impact on our present financial condition, results of operations or cash flow.
Goodwill
We test goodwill for impairment on an annual basis, or more often if events
or circumstances indicate that there might be impairment. We will perform our
annual review of goodwill during the fourth quarter of 2008 in accordance with
our accounting policy. If market conditions continue to deteriorate, this could
increase the likelihood of recording an impairment charge in the future to the
extent that the book value, including goodwill, exceeds the estimated fair value
of a reporting unit.
Capital Allocation Considerations
We rely on cash flow from operations as a significant source of liquidity. In
addition, we have approximately $201.3 million in borrowing capacity under our
5-year, $300.0 million revolving credit facility. As of September 30, 2008, we
were in compliance with all of our debt covenants. We believe that our liquidity
and available financial resources are sufficient to meet our financial
obligations over the next 12 months.
Cash Flow
We believe our ability to generate strong operating cash flow is one of our
fundamental financial strengths and provides us with substantial flexibility in
meeting operating and investing needs. We expect to receive a partial refund of
our 2007 U.S. federal income tax estimated payments in the fourth quarter of
2008. We currently estimate the refund to be approximately $95 million. We will
file our 2007 U.S. federal income tax return during the fourth quarter of 2008.
The tax return filing date was extended by the Internal Revenue Service to
provide relief to companies that were impacted by Hurricane Ike. Highlights of
our cash flow for the nine months ended September 30, 2008 and 2007 are as
follows:
Operating Activities
Nine Months Ended
September 30,
(In millions) 2008 2007
Net cash provided by operating activities, as reported $ 233.3 $ 328.6
One-time Alderwoods transition and other costs 3.3 24.7
Premiums paid on extinguishment of debt - 11.4
United States Federal transaction-related tax payment 90.0 -
Net cash provided by operating activities, excluding special
items $ 326.6 $ 364.7
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Net cash provided by operating activities, excluding special items, decreased
$38.1 million in the first nine months of 2008. This decrease reflects the sale
of Mayflower Insurance Co., which contributed $17.3 million of operating cash
flows from discontinued operations in the first nine months of 2007. The
remaining decrease was driven by a decline in our operating income related to
decrease in preneed cemetery sales and funeral case volume.
Investing Activities - Net cash provided by investing activities decreased
$306.8 million in the first nine months of 2008 compared to the first nine
months of 2007 primarily due to a $295.0 million decrease in proceeds from the
sales of businesses in North America and a $21.2 million increase in deposits of
restricted funds and other. In the first nine months of 2007, we received $313.8
million in proceeds from the sales of businesses in North America driven by the
sale of properties in accordance with our consent decree with the FTC.
Financing Activities - Net cash used in financing activities decreased
$160.8 million in the first nine months of 2008 compared to the same period in
2007 due to a $374.7 million decrease in debt payments and a $131.6 million
decrease in purchases of the Company's common stock that was partially offset by
a $319.7 million decrease in proceeds from the issuance of long-term debt and a
$13.3 million reduction in proceeds from the exercise of stock options. Payments
of debt in 2008 included a $45.2 million repayment of our 6.5% notes due
March 2008, $9.2 million in other scheduled debt payments, and $18.6 million in
payments on capital leases. Payments of debt in 2007 were due to the acceptance
of the tenders of $149.8 million of our 6.50% senior notes due 2008 and
$173.8 million of our 7.70% senior notes due 2009, a $100.0 million repayment of
our term loan, $3.0 million in scheduled debt payments, and $22.1 million in
payments on capital leases.
Financial Assurances
In support of our operations, we have entered into arrangements with certain
surety companies whereby such companies agree to issue surety bonds on our
behalf as financial assurance and/or as required by existing state and local
regulations. The surety bonds are used for various business purposes; however,
the majority of the surety bonds issued and outstanding have been used to
support our preneed funeral and cemetery sales activities that are not backed by
trust investments. The obligations underlying these surety bonds are recorded on
the condensed consolidated balance sheet as Deferred preneed funeral revenues
and Deferred preneed cemetery revenues. The breakdown of surety bonds between
funeral and cemetery preneed arrangements, as well as surety bonds for other
activities, is described below.
September 30, 2008 December 31, 2007
(Dollars in millions)
Preneed funeral $ 130.6 $ 134.9
Preneed cemetery:
Merchandise and services 136.7 148.0
Pre-construction 2.9 6.4
Bonds supporting preneed funeral and cemetery obligations 270.2 289.3
Bonds supporting preneed business permits 5.1 5.4
Other bonds 17.0 8.4
Total surety bonds outstanding $ 292.3 $ 303.1
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When selling preneed funeral and cemetery contracts, we may post surety bonds
where allowed by state law. We post the surety bonds in lieu of trusting a
certain amount of funds received from the customer. The amount of the bond
posted is generally determined by the total amount of the preneed contract that
would otherwise be required to be trusted, in accordance with applicable state
law. For the three months ended September 30, 2008 and 2007, we had $7.3 million
and $9.3 million, respectively, of cash receipts attributable to bonded sales.
For the nine months ended September 30, 2008 and 2007, we had $23.1 million and
$29.9 million, respectively, of cash receipts attributable to bonded sales.
These amounts do not consider reductions associated with taxes, obtaining costs,
or other costs.
Surety bond premiums are paid annually and are automatically renewable until
maturity of the underlying preneed contracts, unless we are given prior notice
of cancellation. Except for cemetery pre-construction bonds (which are
irrevocable), the surety companies generally have the right to cancel the surety
bonds at any time with appropriate notice. In the event a surety company were to
cancel the surety bond, we are required to obtain replacement surety assurance
from another surety company or fund a trust for an amount generally less than
the posted bond amount. Management does not expect that we will be required to
fund material future amounts related to these surety bonds because of lack of
surety capacity.
Preneed Funeral and Cemetery Activities and Backlog of Contracts
In addition to selling our products and services to client families at the
time of need, we sell price-guaranteed preneed funeral and cemetery contracts,
which provide for future funeral or cemetery services and merchandise. Since
preneed funeral and cemetery services or merchandise will not be provided until
some time in the future, most states and provinces require that all or a portion
of the funds collected from customers on preneed funeral and cemetery contracts
be paid into merchandise and service trusts until the merchandise is delivered
or the service is performed. These trust funds own investments in equity and
debt securities and mutual funds, which are sensitive to current market prices.
In certain situations, as described above, where permitted by state or
provincial laws, we post a surety bond as financial assurance for a certain
amount of the preneed funeral or cemetery contract in lieu of placing funds into
trust accounts.
The tables below detail our results of preneed funeral and cemetery
production and maturities, excluding insurance contracts, for the three and nine
months ended September 30, 2008 and 2007.
Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
(Dollars in millions) (Dollars in millions)
Funeral:
Preneed trust-funded (including bonded):
Sales production $ 42.8 $ 38.0 $ 121.2 $ 112.8
Sales production (number of contracts) 8,419 7,282 24,392 23,429
Maturities $ 49.2 $ 47.5 $ 157.4 $ 150.9
Maturities (number of contracts) 10,756 10,431 34,696 35,712
Cemetery:
Sales production:
Preneed $ 86.6 $ 96.0 $ 287.1 $ 299.5
Atneed 59.8 73.5 191.0 218.1
Total sales production $ 146.4 $ 169.5 $ 478.1 $ 517.6
Sales production deferred to backlog:
Preneed $ 37.8 $ 42.6 $ 118.7 $ 134.3
Atneed 45.7 47.8 145.6 156.8
Total sales production deferred to backlog $ 83.5 $ 90.4 $ 264.3 $ 291.1
Revenue recognized from backlog:
Preneed $ 32.6 $ 44.3 $ 97.8 $ 124.6
Atneed 47.8 49.5 149.3 154.4
Total revenue recognized from backlog $ 80.4 $ 93.8 $ 247.1 $ 279.0
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Insurance-Funded Preneed Funeral Contracts: Where permitted by state or
provincial law, customers may arrange their preneed funeral contract by
purchasing a life insurance or annuity policy from third-party insurance
companies, for which we earn a commission as general sales agent for the
insurance company. The policy amount of the insurance contract between the
customer and the third-party insurance company generally equals the amount of
the preneed funeral contract. We do not reflect the unfulfilled insurance-funded
preneed funeral contract amounts in our condensed consolidated balance sheet.
The table below details the results of insurance-funded preneed funeral
production and maturities for the three and nine months ended September 30, 2008
and 2007, and the number of contracts associated with those transactions.
Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
(Dollars in millions) (Dollars in millions)
Preneed funeral insurance-funded (1):
Sales production $ 83.6 $ 73.5 $ 234.0 $ 223.0
Sales production (number of contracts) 13,782 12,828 38,985 39,170
General agency revenue $ 14.9 $ 13.7 $ 41.2 $ 35.5
Maturities $ 54.5 $ 56.7 $ 181.2 $ 186.3
Maturities (number of contracts) 10,520 11,281 35,461 39,341
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(1) Amounts are not included in our unaudited condensed consolidated balance sheet.
Backlog of Preneed Funeral and Cemetery Contracts: The following table
reflects our backlog of trust-funded deferred preneed funeral and cemetery
contract revenues including amounts related to Non-controlling interest in
funeral and cemetery trusts at September 30, 2008 and December 31, 2007.
Additionally, the table reflects our backlog of unfulfilled insurance-funded
contracts (which are not included in our condensed consolidated balance sheet)
at September 30, 2008 and December 31, 2007. The backlog amounts presented are
reduced by an amount that we believe will cancel before maturity based on
historical experience.
The table also reflects our preneed funeral and cemetery receivables and
trust investments (market and cost bases) associated with the backlog of
deferred preneed funeral and cemetery contract revenues, net of the estimated
cancellation allowance. We believe that the table below is meaningful because it
sets forth the aggregate amount of future revenues we expect to recognize as a
result of preneed sales, as well as the amount of assets associated with those
revenues. Because the future revenues exceed the asset amounts, future revenues
will exceed the cash distributions actually received from the associated trusts.
September 30, 2008 December 31, 2007
Market Cost Market Cost
(Dollars in billions)
Deferred preneed funeral revenues $ 0.58 $ 0.58 $ 0.53 $ 0.53
Non-controlling interest in funeral
trusts 1.14 1.25 1.24 1.26
$ 1.72 $ 1.83 $ 1.77 $ 1.79
Allowance for cancellation on trust
investments, at market (0.12 ) (0.12 ) (0.13 ) (0.13 )
Backlog of trust-funded deferred preneed
funeral revenues $ 1.60 $ 1.71 $ 1.64 $ 1.66
Backlog of insurance-funded preneed
funeral revenues 3.32 3.32 3.36 3.36
Total backlog of preneed funeral
revenues $ 4.92 $ 5.03 $ 5.00 $ 5.02
Preneed funeral receivables and trust
investments $ 1.34 $ 1.45 $ 1.43 $ 1.45
Allowance for cancellation on trust
investments, at market (0.11 ) (0.11 ) (0.11 ) (0.11 )
Assets associated with backlog of
trust-funded deferred preneed funeral
revenues, net of estimated allowance for
cancellation $ 1.23 $ 1.34 $ 1.32 $ 1.34
Insurance policies associated with
insurance-funded deferred preneed
funeral revenues, net of estimated
allowance for cancellation 3.32 3.32 3.36 3.36
Total assets associated with backlog of
preneed funeral revenues $ 4.55 $ 4.66 $ 4.68 $ 4.70
Deferred preneed cemetery revenues $ 0.78 $ 0.78 $ 0.75 $ 0.75
Non-controlling interest in cemetery
trusts 1.05 1.19 1.15 1.12
$ 1.83 $ 1.97 $ 1.90 $ 1.87
Allowance for cancellation on trust
investments, at market (0.13 ) (0.13 ) (0.12 ) (0.12 )
Backlog of deferred cemetery revenues $ 1.70 $ 1.84 $ 1.78 $ 1.75
Preneed cemetery receivables and trust
investments $ 1.30 $ 1.43 $ 1.43 $ 1.40
Allowance for cancellation on trust
investments, at market (0.14 ) (0.14 ) (0.15 ) (0.15 )
Assets associated with backlog of
deferred cemetery revenues, net of
estimated allowance for cancellation $ 1.16 $ 1.29 $ 1.28 $ 1.25
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The difference between the backlog and asset amounts represents the contracts
for which we have posted surety bonds as financial assurance in lieu of
trusting, the amounts collected from customers that were not required to be
deposited into trust, and allowable cash distributions from trust assets. The
table also reflects the amounts expected to be received from insurance companies
through the assignment of policy proceeds related to insurance-funded funeral
contracts.
Results of Operations - Three Months Ended September 30, 2008 and 2007
Management Summary
Key highlights in the third quarter of 2008 were as follows:
• Revenues decreased $22.9 million, or 4.2%, as a result of decreased cemetery
property sales production and significant divestiture activity in the second
half of 2007 which included the sale of approximately 400 locations that
generated more than $400 million of proceeds and
• Despite a difficult economic environment, comparable average revenue per funeral service increased 3.8%. Comparable funeral services performed decreased 3.9%.
Results of Operations
In the third quarter of 2008, we reported net income of $14.6 million ($.06
per diluted share) compared to net income in the third quarter of 2007 of
$28.2 million ($.10 per diluted share). These results were impacted by the
following items:
• an after-tax loss on asset sales of $9.3 million in the third quarter of
2008 versus a net after-tax gain of $5.1 million in the third quarter of
2007;
• an after-tax charge of $2.6 million related to Hurricane Ike losses in third quarter of 2008;
• an after-tax loss of $3.1 million due to the termination of our SCI Cash Balance Pension Plan in the third quarter of 2007;
• after-tax expenses related to our acquisition and integration of Alderwoods of $1.8 million in the third quarter of 2007; and
• after-tax loss from discontinued operations of $0.7 million in the third quarter of 2007.
Consolidated Versus Comparable Results
The table below reconciles our consolidated GAAP results to our comparable,
or "same store," results for the three months ended September 30, 2008 and 2007.
We define comparable operations (or same store operations) as those funeral and
cemetery locations that were owned for the entire period beginning January 1,
2007 and ending September 30, 2008. The following tables present operating
results for funeral and cemetery locations that were owned by us during this
period. As implied by our definition of comparable operations, these results
include results from the properties that we acquired in the Alderwoods
transaction.
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