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Service Corp. International Reports Operating Results (10-Q)

November 05, 2009 | About:
10qk

10qk

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Service Corp. International (SCI) filed Quarterly Report for the period ended 2009-09-30.

Service Corp. is the largest provider of funeral and cemetery services in the world. The funeral and cemetery operations consist of the Company's funeral service locations cemeteries and related businesses. The financial services operations represent a combination of the Company'sinsurance operations primarily related to the funding of prearranged funeral contracts and a lending subsidiary which previously provided capital financing for independent funeral home and cemetery operations. Service Corp. International has a market cap of $1.73 billion; its shares were traded at around $6.89 with a P/E ratio of 16.8 and P/S ratio of 0.8. The dividend yield of Service Corp. International stocks is 2.4%. Service Corp. International had an annual average earning growth of 18.7% over the past 5 years.

Highlight of Business Operations:

In the fourth quarter of 2009, we intend to amend and extend our senior credit facility to increase the availability thereunder from $300 million to $400 million, and we expect to use cash on hand and the increased availability under our facility to prepay in full our privately placed $150 million aggregate principal amount of Series B Senior notes due November 2011.

As of September 30, 2009, we have cumulative net unrealized losses of $119.1 million in our preneed funeral and cemetery merchandise and service trusts, and cumulative net unrealized losses of $54.5 million in our cemetery perpetual care trusts, as discussed in Notes 4, 5, and 6 in Part I, Item 1, Financial Statements. In the third quarter of 2009, we experienced a substantial recovery in our trust investments, with net investment activity that reduced our net unrealized losses by $200.3 million in our preneed funeral and cemetery merchandise and service trusts and by $77.7 million in our cemetery perpetual care trusts. At September 30, 2009, these net unrealized losses represented 6.6% of our original cost basis of $2.6 billion. As explained in Critical Accounting Policies, Fair Value Measurements in our 2008 Annual Report on Form 10-K, changes in unrealized gains and/or losses related to these securities are reflected in Accumulated other comprehensive income and offset by the Deferred preneed funeral and cemetery receipts held in trust and Care trusts corpus interests in those unrealized gains and/or losses. Therefore, the majority of these significant net unrealized losses are not reflected in our consolidated statement of operations for the nine months ended September 30, 2009. 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. 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 indicative of our ability to generate profit on our future performance obligations.

Operating Activities Net cash provided by operating activities increased $71.9 million during the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008. The increase was the result of a $90 million United States Federal transaction-related tax payment in the prior year, partially offset by an $18.1 million net decrease in working capital. The net decrease in working capital reflects lower collections of preneed and atneed receivables, which were partially offset by our cost control initiatives in the current year.

Investing Activities Net cash used in investing activities decreased $72.4 million during the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008, primarily due to a decrease of $45.9 million in capital expenditures, a $20.5 million decrease in deposits of restricted funds, and a $5.2 million decrease in acquisition activity.

Financing Activities Net cash used in financing activities increased by $52.8 million during the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008, primarily due to a $64.2 million increase in debt payments in 2009 to early extinguish certain of our debt, partially offset by a $7.3 million increase in proceeds from exercise of stock options.

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, 2009 and 2008, we had $6.0 million and $7.3 million, respectively, of cash receipts attributable to bonded sales. For the nine months ended September 30, 2009 and 2008, we had $18.6 million and $23.1 million, respectively, of cash receipts attributable to bonded sales. These amounts do not consider reductions associated with taxes, obtaining costs, or other costs.

Read the The complete ReportSCI is in the portfolios of Mason Hawkins of Southeastern Asset Management, George Soros of Soros Fund Management LLC.

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