SERVICE CORP INTERNATIONAL
10-Ks and 10-Qs
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Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2010 | ||
|
OR
|
||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission file number 1-6402-1
Service Corporation
International
(Exact name of registrant as
specified in its charter)
|
Texas
|
74-1488375 | |
|
(State or other jurisdiction
of
incorporation or organization) |
(I.R.S. employer
identification no.) |
|
|
1929 Allen Parkway
Houston, Texas (Address of principal executive offices) |
77019
(Zip code) |
Registrant’s telephone number, including area code:
713-522-5141
Securities registered pursuant to Section 12(b) of the
Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| Common Stock ($1 par value) | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
þ
No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files. Yes
þ
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
|
Large accelerated filer
þ
|
Accelerated filer o | |||||
|
Non-accelerated filer
o
(Do
not check if a smaller reporting company)
|
Smaller Reporting company o | |||||
Indicate by check mark whether the registrant is a shell company
(as defined in the Securities Exchange Act of 1934
Rule 12b-2). Yes
o
No
þ
The aggregate market value of the common stock held by
non-affiliates of the registrant (assuming that the
registrant’s only affiliates are its officers and
directors) was $1,694,974,655 based upon a closing market price
of $7.40 on June 30, 2010 of a share of common stock as
reported on the New York Stock Exchange.
The number of shares outstanding of the registrant’s common
stock as of February 9, 2011 was 240,135,250 (net of
treasury shares)
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement in connection
with its 2011 Annual Meeting of Stockholders (Part III)
SERVICE
CORPORATION INTERNATIONAL
INDEX
2
Table of Contents
GLOSSARY
The following terms are common to the deathcare industry, are
used throughout this report, and have the following meanings:
Atneed
— Funeral and cemetery arrangements
after a death has occurred.
Burial Vaults
— A reinforced container intended
to house and protect the casket before it is placed in the
ground.
Cemetery Perpetual Care or Endowment Care
Fund
— A trust fund established for the purpose of
maintaining cemetery grounds and property into perpetuity.
Cremation
— The reduction of human remains to
bone fragments by intense heat.
General Agency (GA) Revenues
— Commissions we
receive from third-party life insurance companies for life
insurance policies or annuities sold to preneed customers for
the purpose of funding preneed funeral arrangements. The
commission rate paid is determined based on the product type
sold, the length of payment terms, and the age of the
insured/annuitant.
Interment
— The burial or final placement of
human remains in the ground.
Lawn Crypt
— An underground outer burial
receptacle constructed of concrete and reinforced steel, which
is usually pre-installed in predetermined designated areas.
Marker
— A method of identifying a deceased
person in a particular burial space, crypt, or niche. Permanent
burial markers are usually made of bronze, granite, or stone.
Maturity
— When the underlying contracted
service is performed or merchandise is delivered, typically at
death. This is the point at which preneed contracts are
converted to atneed contracts (note — delivery of
certain merchandise and services can occur prior to death).
Mausoleum
— An above ground structure that is
designed to house caskets and cremation urns.
Preneed
— Purchase of products and services
prior to a death occurring.
Preneed Backlog
— Future revenues from
unfulfilled preneed funeral and cemetery contractual
arrangements.
Production
— Sales of preneed funeral and
preneed or atneed cemetery contracts.
As used herein, “SCI”, “Company”,
“we”, “our”, and “us” refer to
Service Corporation International and companies owned directly
or indirectly by Service Corporation International, unless the
context requires otherwise.
3
Table of Contents
| Item 1. | Business. |
General
We are North America’s largest provider of deathcare
products and services, with a network of funeral homes and
cemeteries unequalled in geographic scale and reach. At
December 31, 2010, we operated 1,405 funeral service
locations and 381 cemeteries (including 218 funeral
service/cemetery combination locations) in North America, which
are geographically diversified across 43 states, eight
Canadian provinces, the District of Columbia, and Puerto Rico.
Our funeral segment also includes operations in Germany that we
intend to exit when economic values and conditions are conducive
to a sale. Our funeral service and cemetery operations consist
of funeral service locations, cemeteries, funeral
service/cemetery combination locations, crematoria, and related
businesses. We sell cemetery property and funeral and cemetery
products and services at the time of need and on a preneed basis.
History
We were incorporated in Texas in July of 1962. Our original
business plan was based on efficiencies of scale, specifically
reducing overhead costs by sharing resources such as embalming,
accounting, transportation, and personnel among funeral homes in
a business “cluster.” After proving the plan’s
effectiveness in Houston in the early 1960s, SCI set out to
apply this operating strategy through the acquisition of death
care businesses in other markets. It was the beginning of a
three-decade period of expansion that would create a North
American network of nearly 1,400 funeral homes and cemeteries by
the end of 1992. Beginning in 1993, we expanded beyond
North America, acquiring major deathcare companies in
Australia, the United Kingdom, and France, plus smaller holdings
in other European countries and South America. By the end of
1999, our global network numbered more than 4,500 funeral
service locations, cemeteries, and crematories in more than 20
countries.
During the mid to late 1990s, acquisitions of deathcare
facilities became extremely competitive, resulting in increased
prices for acquisitions and substantially reduced returns on
invested capital. In 1999, we significantly reduced our level of
acquisition activity and over the next several years implemented
various initiatives to pay down debt, increase cash flow, reduce
overhead costs, and increase efficiency. We divested our
international businesses and many North American funeral homes
and cemeteries that were either underperforming or did not fit
our long-term strategy. At the same time, we began to capitalize
on the strength of our network by introducing to
North America the first transcontinental brand of death
care services and products — Dignity
Memorial
®
(See
www.dignitymemorial.com
).
In late 2006, having arrived at a position of significant
financial strength and improved operating efficiency, we
acquired the then second largest company in the North American
deathcare industry, Alderwoods Group. By combining the two
leading companies in the deathcare industry, we were able to
realize more than $90 million in annual pretax cost
synergies, savings, and revenue enhancement opportunities. In
early 2010, we acquired the fifth largest company in the North
American deathcare industry, Keystone North America.
Funeral
and Cemetery Operations
Worldwide, we have 1,417 funeral service locations and 381
cemeteries (including 218 funeral
service/cemetery
combination locations) covering 43 states, eight Canadian
provinces, the District of Columbia, Puerto Rico, and Germany.
See Note 17 in Part II, Item 8. Financial
Statements and Supplementary Data, for financial information
about our business segments and geographic areas.
Our funeral service and cemetery operations consist of funeral
service locations, cemeteries, funeral
service/cemetery
combination locations, crematoria, and related businesses. We
provide all professional services relating to funerals and
cremations, including the use of funeral facilities and motor
vehicles and preparation and embalming services. Funeral-related
merchandise, including caskets, casket memorialization products,
burial vaults, cremation receptacles, cremation memorial
products, flowers, and other ancillary products and services, is
sold at funeral service locations. Our cemeteries provide
cemetery property interment rights, including mausoleum
4
Table of Contents
spaces, lots, and lawn crypts, and sell cemetery-related
merchandise and services, including stone and bronze memorials,
markers, merchandise installations, and burial openings and
closings.
We also sell preneed funeral and cemetery products and services
whereby a customer contractually agrees to the terms of certain
products and services to be delivered and performed in the
future. We define these sales as preneed sales. As a result of
such preneed sales, our backlog of unfulfilled preneed funeral
and preneed cemetery contracts was $6.8 billion and
$6.4 billion at December 31, 2010 and 2009,
respectively.
Funeral service/cemetery combination locations are those
businesses in which a funeral service location is physically
located within or adjoining a cemetery that we own. Combination
locations allow certain facility, personnel, and equipment costs
to be shared between the funeral service location and cemetery.
Such combination facilities typically can be more cost
competitive and have higher gross margins than if the funeral
and cemetery operations were operated separately. Combination
locations also create synergies between funeral and cemetery
preneed sales force personnel and give families added
convenience to purchase both funeral and cemetery products and
services at a single location. With the acquisition of
Alderwoods, we acquired Rose Hills, which is the largest
combination operation in the United States, performing over
4,500 funeral services and 8,000 cemetery interments per year.
In 2010 our operations in the United States and Canada were
organized into 30 major markets, 45 metro markets, and 70 main
street markets. Each market is led by a market director with
responsibility for funeral
and/or
cemetery operations and preneed sales. Within each market, the
funeral homes and cemeteries share common resources such as
personnel, preparation services, and vehicles. There are four
market support centers in North America to assist market
directors with financial, administrative, pricing, and human
resource needs. These support centers are located in Houston,
Miami, New York, and Los Angeles. The primary functions of the
support centers are to help facilitate the execution of
corporate strategies, coordinate communication between the field
and corporate offices, and serve as liaisons for the
implementation of policies and procedures.
The following table (which includes businesses
held-for-sale
at December 31, 2010) provides the number of our
funeral homes and cemeteries by country, and by state,
territory, or province:
|
Number of
|
Number of
|
|||||||||||
| Country, State/Territory/Province | Funeral Homes | Cemeteries | Total | |||||||||
|
United States
|
||||||||||||
|
Alabama
|
31 | 9 | 40 | |||||||||
|
Arizona
|
30 | 11 | 41 | |||||||||
|
Arkansas
|
9 | — | 9 | |||||||||
|
California
|
123 | 30 | 153 | |||||||||
|
Colorado
|
23 | 11 | 34 | |||||||||
|
Connecticut
|
18 | — | 18 | |||||||||
|
District of Columbia
|
1 | — | 1 | |||||||||
|
Florida
|
108 | 53 | 161 | |||||||||
|
Georgia
|
40 | 19 | 59 | |||||||||
|
Hawaii
|
2 | 2 | 4 | |||||||||
|
Idaho
|
9 | 1 | 10 | |||||||||
|
Illinois
|
43 | 25 | 68 | |||||||||
|
Indiana
|
43 | 9 | 52 | |||||||||
|
Iowa
|
4 | 2 | 6 | |||||||||
|
Kansas
|
8 | 2 | 10 | |||||||||
|
Kentucky
|
16 | 3 | 19 | |||||||||
|
Louisiana
|
26 | 5 | 31 | |||||||||
|
Maine
|
11 | — | 11 | |||||||||
|
Maryland
|
14 | 7 | 21 | |||||||||
5
Table of Contents
|
Number of
|
Number of
|
|||||||||||
| Country, State/Territory/Province | Funeral Homes | Cemeteries | Total | |||||||||
|
Massachusetts
|
29 | — | 29 | |||||||||
|
Michigan
|
35 | — | 35 | |||||||||
|
Minnesota
|
11 | 2 | 13 | |||||||||
|
Mississippi
|
20 | 2 | 22 | |||||||||
|
Missouri
|
24 | 8 | 32 | |||||||||
|
Nebraska
|
2 | — | 2 | |||||||||
|
Nevada
|
12 | 6 | 18 | |||||||||
|
New Hampshire
|
6 | — | 6 | |||||||||
|
New Jersey
|
21 | — | 21 | |||||||||
|
New York
|
90 | — | 90 | |||||||||
|
North Carolina
|
47 | 11 | 58 | |||||||||
|
Ohio
|
43 | 11 | 54 | |||||||||
|
Oklahoma
|
14 | 7 | 21 | |||||||||
|
Oregon
|
11 | 3 | 14 | |||||||||
|
Pennsylvania
|
23 | 17 | 40 | |||||||||
|
Puerto Rico
|
4 | 5 | 9 | |||||||||
|
Rhode Island
|
4 | — | 4 | |||||||||
|
South Carolina
|
6 | 5 | 11 | |||||||||
|
Tennessee
|
33 | 14 | 47 | |||||||||
|
Texas
|
137 | 55 | 192 | |||||||||
|
Utah
|
3 | 3 | 6 | |||||||||
|
Vermont
|
4 | — | 4 | |||||||||
|
Virginia
|
29 | 12 | 41 | |||||||||
|
Washington
|
42 | 15 | 57 | |||||||||
|
West Virginia
|
3 | 6 | 9 | |||||||||
|
Wisconsin
|
16 | — | 16 | |||||||||
|
Canada
|
||||||||||||
|
Alberta
|
10 | — | 10 | |||||||||
|
British Columbia
|
34 | 7 | 41 | |||||||||
|
Manitoba
|
4 | 3 | 7 | |||||||||
|
New Brunswick
|
5 | — | 5 | |||||||||
|
Nova Scotia
|
13 | — | 13 | |||||||||
|
Ontario
|
46 | — | 46 | |||||||||
|
Quebec
|
48 | — | 48 | |||||||||
|
Saskatchewan
|
17 | — | 17 | |||||||||
|
Germany
|
12 | — | 12 | |||||||||
|
Total
|
1,417 | 381 | 1,798 | |||||||||
We believe we have satisfactory title to the properties owned
and used in our business, subject to various liens,
encumbrances, and easements that are incidental to ownership
rights and uses and do not materially detract from the value of
the property. We also lease a number of facilities that we use
in our business under both capital and operating leases.
6
Table of Contents
At December 31, 2010, we owned approximately 92% of the
real estate and buildings used at our facilities, and the
remainder of the facilities were leased. At December 31,
2010, our 381 cemeteries contained a total of approximately
26,852 acres, of which approximately 60% was developed.
A map of our locations in North America is presented below:
Competition
Although there are several public companies that own funeral
homes and cemeteries, the majority of deathcare businesses in
North America are locally-owned, independent operations. We
estimate that our funeral and cemetery market share in North
America is approximately 12% based on estimated total industry
revenues. The position of a single funeral home or cemetery in
any community is a function of the name, reputation, and
location of that funeral home or cemetery, although competitive
pricing, professional service and attention, and well-maintained
locations are also important.
We believe we have an unparalleled network of funeral service
locations and cemeteries that offer high-quality products and
services at prices that are competitive with local competing
funeral homes, cemeteries, and retail locations. Within this
network, the funeral service locations and cemeteries operate
under various names as most operations were acquired as existing
businesses. We have co-branded our funeral operations in North
America under the name Dignity
Memorial
®
.
We believe our transcontinental branding strategy gives us a
strategic advantage and identity in the industry. While this
branding process is intended to emphasize our seamless national
network of funeral service locations and cemeteries, the
original names associated with acquired operations, and their
inherent goodwill and heritage, generally remain the same. For
example, Geo. H. Lewis & Sons Funeral Directors is now
Geo. H. Lewis & Sons Funeral Directors, a Dignity
Memorial
®
provider.
Strategies
for Growth
We believe we are well-positioned for long-term profitable
growth. We are the largest company in the North American
deathcare industry with unparalleled scale on both a national
and local basis and are poised to benefit from the aging of
America. We have demonstrated that we can generate significant
and consistent cash flow, even in difficult economic times.
This, coupled with our financial position and liquidity, allows
us to deploy capital to enhance the value of the company. Our
capital deployment focus is centered on strategic acquisitions,
share
7
Table of Contents
repurchases and dividends, and opportunistic debt repurchases
when we believe we can reduce liquidity risk and enhance our
near-term maturity profile.
Our strategies for growth can be categorized in three areas as
follows:
Target
Our Customer
We continue to build on our extensive consumer research to
market our products and services on a preneed basis. Our
strategy to combine targeted direct mail, select media
advertising, seminars and the internet is generating quality
preneed sales leads. During 2010 we continued to focus on
enhanced training for sales management and sales counselors and
also added additional sales management resources in certain
markets aimed at increasing preneed sales production and sales
counselor productivity.
During 2010, we updated our individual location websites and our
Dignity
Memorial
®
website (www.DignityMemorial.com) in order to capture customers
and generate preneed sales leads via the power of the internet.
We now have the ability to display obituaries on our
locations’ websites that allow friends and family of the
deceased to check the schedule of services, write condolences,
post photos or videos, and share this information through social
media. In addition, those reading the obituaries have the
opportunity to learn more about Dignity
Memorial
®
and begin developing their own funeral plans. Similarly, we
continue to enhance and develop our Dignity
Planning
®
website at www.DignityPlanning.com which allows customers
to make
end-of-life
arrangements online whether direct or through a partnership with
select insurance companies.
We continue to develop and test new products and services
including catering services, enhanced floral offerings, a
broader cemetery merchandise program, and “green”
burial products and services. We are also focused on product and
services offerings that appeal specifically to cremation
customers. Additionally, in 2011 we will leverage technology to
improve our sales presentation to the customer.
Drive
Operating Discipline and Leverage Our Scale
We continue to drive operating discipline and leverage our scale
through the standardization of processes and the use of key
performance metrics for staffing and other operational and
administrative activities. We continually examine our purchasing
spend to look for ways to consolidate our supplier base, modify
processes and policies for more efficient purchasing, and employ
metrics to manage and improve supplier performance. In 2010, we
completed a major implementation of our cemetery maintenance
expenses, which resulted in the outsourcing of routine lawn care
activities to a limited number of regional vendors and improving
cemetery interment efficiency. In 2011, we expect to benefit
from streamlining the preneed funeral and cemetery arrangement
and record-keeping process with technological improvements.
Manage
and Grow the Footprint
We are managing our network of business locations by positioning
each business location to support the preferences of its local
customer base, while monitoring each market for changing
demographics and competitive dynamics. We are also looking to
optimize our portfolio through strategic market reviews. We
expect to pursue selective business expansion through
construction or targeted acquisitions of cemeteries and funeral
homes with a focus on the highest return customer categories.
Employees
At December 31, 2010, we employed 13,063 (13,033 in North
America) individuals on a full-time basis and 7,662 (7,653 in
North America) individuals on a part-time basis. Of the
full-time employees, 12,361 were employed in the funeral and
cemetery operations and 702 were employed in corporate or other
overhead activities and services. All eligible employees in the
United States who so elect are covered by our group health and
life insurance plans. Eligible employees in the United States
are participants in retirement plans of SCI or various
subsidiaries, while international employees are covered by other
SCI (or SCI subsidiary) defined or government-mandated benefit
plans. Approximately 3.1% of our employees in North America are
represented by unions. Although labor disputes occur from time
to time, relations with employees are generally considered
favorable.
8
Table of Contents
Regulation
Our operations are subject to regulations, supervision, and
licensing under numerous foreign, federal, state, and local
laws, ordinances, and regulations, including extensive
regulations concerning trust funds, preneed sales of funeral and
cemetery products and services, and various other aspects of our
business. We strive to comply in all material respects with the
provisions of these laws, ordinances, and regulations. Since
1984, we have operated in the United States under the Federal
Trade Commission (FTC) comprehensive trade regulation rule for
the funeral industry. The rule contains requirements for funeral
industry practices, including extensive price and other
affirmative disclosures and imposes mandatory itemization of
funeral goods and services.
Other
Our corporate headquarters are located at 1929 Allen Parkway,
Houston, Texas 77019. The property consists of approximately
120,000 square feet of office space and 185,000 square
feet of parking space. We own and utilize an additional building
located in Houston, Texas for corporate activities containing a
total of approximately 38,000 square feet of office space.
We also lease approximately 29,000 square feet of office
space in Houston, Texas, which we utilize for corporate
activities.
We make available free of charge, on or through our website, our
annual, quarterly, and current reports and any amendments to
those reports, as soon as reasonably practicable after
electronically filing such reports with the Securities and
Exchange Commission (SEC). Our website is
http://www.sci-corp.com
and our telephone number is
(713) 522-5141.
The SEC also maintains an internet site at
http://www.sec.gov
that contains reports, proxy and information statements, and
other information regarding issuers that file electronically.
The public may read and copy any materials we file with the SEC
at the SEC’s Public Reference Room at
100 F Street, N.E., Washington, DC 20549.
Information on the operation of the Public Reference Room may be
obtained by calling the SEC at
1-800-SEC-0330.
Each of our Board of Directors’ standing committee
charters, our Corporate Governance Guidelines, our Code of
Ethics for Board Members, and our Code of Conduct for Officers
and Employees are available, free of charge, through our website
or, upon request, in print. We will post on our internet website
all waivers to or amendments of our Code of Conduct for Officers
and Employees, which are required to be disclosed by applicable
law and rules of the New York Stock Exchange listing standards.
Information contained on our website is not part of this report.
| Item 1A. | Risk Factors. |
Cautionary
Statement on Forward-Looking Statements
The statements in this
Form 10-K
that are not historical facts are forward-looking statements
made in reliance on the safe harbor protections provided under
the Private Securities Litigation Reform Act of 1995. These
statements may be accompanied by words such as
“believe”, “estimate”, “project”,
“expect”, “anticipate”, or
“predict” that convey the uncertainty of future events
or outcomes. These statements are based on assumptions that we
believe are reasonable; however, many important factors could
cause our actual consolidated results in the future to differ
materially from the forward-looking statements made herein and
in any other documents or oral presentations made by, or on
behalf of, the Company. These factors are discussed below. We
assume no obligation to publicly update or revise any
forward-looking statements made herein or any other
forward-looking statements made by the Company, whether as a
result of new information, future events, or otherwise.
Our
affiliated funeral and cemetery trust funds own investments in
equity securities, fixed income securities, and mutual funds,
which are affected by market conditions that are beyond our
control.
Our affiliated funeral and cemetery trust funds own investments
in equity securities, fixed income securities, and mutual funds.
Our earnings or gains and losses on these investments are
affected by market conditions that are beyond our control. The
fair market value of the investments in our trust funds were
negatively impacted by the downturn in the U.S. and global
financial markets in the second half of 2008. Since that time,
our trusts have recovered commensurate with the overall
improvement in the financial markets.
9
Table of Contents
The following table summarizes our investment returns (realized
and unrealized), excluding certain fees, on our trust funds for
the years ended December 31:
| 2010 | 2009 | 2008 | ||||||||||
|
Preneed funeral merchandise and service trust funds
|
12.3 | % | 23.0 | % | (23.5 | )% | ||||||
|
Preneed cemetery merchandise and service trust funds
|
14.0 | % | 27.3 | % | (26.9 | )% | ||||||
|
Perpetual care trust funds
|
13.0 | % | 22.4 | % | (15.4 | )% | ||||||
Generally, earnings or gains and losses on our trust investments
are recognized, and we withdraw cash, when the underlying
service is performed, merchandise is delivered, or upon contract
cancellation; however, our cemetery perpetual care trusts
recognize earnings, and in certain states, capital gains and
losses, and we withdraw cash when we incur qualifying cemetery
maintenance costs.
If the investments in our trust funds experience significant
declines in 2011 or subsequent years, there could be
insufficient funds in the trusts to cover the costs of
delivering services and merchandise or maintaining cemeteries in
the future. We would have to cover any such shortfall with cash
flows from operations, which could have a material adverse
effect on our financial condition, results of operations, or
cash flows. For more information related to our trust
investments, see Notes 4, 5, and 6 in Part II,
Item 8. Financial Statements and Supplementary Data.
If the fair market value of these trusts, plus any other amount
due to us upon delivery of the associated contracts, were to
decline below the estimated costs to deliver the underlying
products and services, we would record a charge to earnings to
record a liability for the expected losses on the delivery of
the associated contracts. As of December 31, 2010, no such
charge was required. For additional information, see Critical
Accounting Policies in Part II, Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
We may
be required to replenish our affiliated funeral and cemetery
trust funds in order to meet minimum funding requirements, which
would have a negative effect on our earnings and cash
flow.
In certain states and provinces, we have withdrawn allowable
distributable earnings including unrealized gains prior to the
maturity or cancellation of the related contract. Additionally,
some states have laws that either require replenishment of
investment losses under certain circumstances or impose various
restrictions on withdrawals of future earnings when trust fund
values drop below certain prescribed amounts. In the event of
market declines, we may be required to deposit portions or all
of these amounts into the respective trusts in some future
period. As of December 31, 2010, we had unrealized losses
of $10.2 million in the various trusts in certain states.
See Off-Balance Sheet Arrangements, Contractual Obligations, and
Commercial and Contingent Commitments in Part II,
Item 7.
Our
ability to execute our strategic plan depends on many factors,
some of which are beyond our control.
Our strategic plan is focused on cost management and the
continued implementation of key revenue initiatives. Many of the
factors that impact our ability to execute our strategic plan,
such as the number of deaths and general economic conditions,
are beyond our control. Changes in operating conditions, such as
supply disruptions and labor disputes, could negatively impact
our operations. Our inability to achieve the levels of cost
savings, productivity improvements, or earnings growth
anticipated by management could affect our financial
performance. Our inability to complete acquisitions,
divestitures, or strategic alliances as planned or to realize
expected synergies and strategic benefits could impact our
financial performance. We cannot give assurance that we will be
able to execute any or all of our strategic plan. Failure to
execute any or all of our strategic plan could have a material
adverse effect on our financial condition, results of
operations, or cash flows.
Our
credit agreements contain covenants that may prevent us from
engaging in certain transactions.
Our bank credit facility contains, among other things, various
affirmative and negative covenants that may prevent us from
engaging in certain transactions that might otherwise be
considered beneficial to us. The covenants limits, among other
things, our and our subsidiaries’ ability to:
| • | Incur additional indebtedness (including guarantee obligations); | |
| • | Create liens on assets; |
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| • | Engage in certain transactions with affiliates; | |
| • | Enter into sale-leaseback transactions; | |
| • | Engage in mergers, liquidations, and dissolutions; | |
| • | Sell assets; | |
| • | Pay dividends, distributions, and other payments in respect of our capital stock; | |
| • | Purchase our capital stock in the open market; | |
| • | Make investments, loans, or advances; | |
| • | Repay indebtedness or amend the agreements relating thereto; | |
| • | Create restrictions on our ability to receive distributions from subsidiaries; and | |
| • | Change our lines of business. |
Our bank credit facility requires us to maintain certain
leverage and interest coverage ratios. These covenants and
coverage ratios may require us to take actions to reduce our
indebtedness or act in a manner contrary to our strategic plan
and business objectives. In addition, events beyond our control,
including changes in general economic and business conditions,
may affect our ability to satisfy these covenants. A breach of
any of these covenants could result in a default under our
indebtedness. If an event of default (if incurred 30 days
after we receive notice of such bank credit facility default)
under our bank credit facility occurs, the lenders could elect
to declare all amounts outstanding thereunder, together with
accrued interest, immediately due and payable. Any such
declaration would also result in an event of default under our
Senior Indenture governing our various senior notes. For
additional information, see Liquidity and Capital Resources in
Part II, Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations and
Note 11 in Part II, Item 8. Financial Statements
and Supplementary Data.
If we
lost the ability to use surety bonding to support our preneed
funeral and preneed cemetery activities, we may be required to
make material cash payments to fund certain trust
funds.
We have entered into arrangements with certain surety companies
whereby such companies agree to issue surety bonds on our behalf
as financial assurance 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 issued to support our preneed
funeral and cemetery activities. In the event all of the surety
companies cancelled or did not renew our surety bonds, which
generally have twelve-month renewal periods, we would be
required to either obtain replacement coverage or fund
approximately $216.5 million into state-mandated trust
accounts as of December 31, 2010. There can be no assurance
that we would be able to obtain replacement coverage at a
similar cost or at all.
The
funeral home and cemetery industry continues to be increasingly
competitive.
In North America, the funeral home and cemetery industry is
characterized by a large number of locally-owned, independent
operations. To compete successfully, our funeral service
locations and cemeteries must maintain good reputations and high
professional standards, as well as offer attractive products and
services at competitive prices. In addition, we must market the
Company in such a manner as to distinguish us from our
competitors. We have historically experienced price competition
from independent funeral home and cemetery operators, monument
dealers, casket retailers, low-cost funeral providers, and other
non-traditional providers of services and merchandise. If we are
unable to successfully compete, our financial condition, results
of operations, and cash flows could be materially adversely
affected.
Increasing
death benefits related to preneed funeral contracts funded
through life insurance or annuity contracts may not cover future
increases in the cost of providing a price-guaranteed funeral
service.
We sell price-guaranteed preneed funeral contracts through
various programs providing for future funeral services at prices
prevailing when the agreements are signed. For preneed funeral
contracts funded through life insurance or annuity contracts, we
receive in cash a general agency commission that typically
averages approximately 18% of the total sale from the
third-party insurance company. Additionally, there is an
increasing death
11
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benefit associated with the contract of approximately 1% per
year to be received in cash at the time the funeral is
performed. There is no guarantee that the increasing death
benefit will cover future increases in the cost of providing a
price-guaranteed funeral service, and any such excess cost could
be materially adverse to our future cash flows, revenues, and
operating margins.
The
financial condition of third-party insurance companies that fund
our preneed funeral contracts may impact our future
revenues.
Where permitted, customers may arrange their preneed funeral
contract by purchasing a life insurance or annuity policy from
third-party insurance companies. The customer/policy holder
assigns the policy benefits to our funeral home to pay for the
preneed funeral contract at the time of need. If the financial
condition of the third-party insurance companies were to
deteriorate materially because of market conditions or
otherwise, there could be an adverse effect on our ability to
collect all or part of the proceeds of the life insurance
policy, including the annual increase in the death benefit, when
we fulfill the preneed contract at the time of need. Failure to
collect such proceeds could have a material adverse effect on
our financial condition, results of operations, or cash flows.
Unfavorable
results of litigation could have a material adverse impact on
our financial statements.
As discussed in Note 13 of Part II, Item 8.
Financial Statements and Supplementary Data, we are subject to a
variety of claims and lawsuits in the ordinary course of our
business. Adverse outcomes in some or all of the pending cases
may result in significant monetary damages or injunctive relief
against us. Management currently believes that resolving all of
these matters, individually or in the aggregate, will not have a
material adverse impact on our financial position, cash flows,
or results of operations; however, litigation and other claims
are subject to inherent uncertainties, and management’s
view of these matters may change in the future. There exists the
possibility of a material adverse impact on our financial
position, cash flows, and results of operations for the period
in which the effect of an unfavorable final outcome becomes
probable and reasonably estimable.
Unfavorable
publicity could affect our reputation and
business.
Since our operations relate to life events involving emotional
stress for our client families, our business is dependent on
consumer trust and confidence. Unfavorable publicity about our
business generally or in relation to any specific location could
affect our reputation and consumers’ trust and confidence
in our products and services, thereby having an adverse impact
upon our sales and financial results as well as the price of our
common stock.
If the
number of deaths in our markets declines, our cash flows and
revenues may decrease.
If the number of deaths in our markets declines, the number of
funeral services and interments performed by us could decrease
and our financial condition, results of operations, and cash
flows could be materially adversely affected.
The
continuing upward trend in the number of cremations performed in
North America could result in lower revenues and gross
profit.
There is a continuing upward trend in the number of cremations
performed in North America as an alternative to traditional
funeral service dispositions. In our North American operations
during 2010, 41.6% of the comparable funeral services we
performed were cremation cases compared to 40.9% and 39.3%
performed in 2009 and 2008, respectively. We continue to expand
our cremation memorialization products and services, which have
resulted in higher average revenues per cremation service
performed. If we are unable to continue to successfully expand
our cremation memorialization products and services, and
cremations remain a significant percentage of our funeral
services, our financial condition, results of operations, and
cash flows could be materially adversely affected.
Our
funeral home and cemetery businesses are high fixed-cost
businesses.
The majority of our operations are managed in groups called
“markets”. Markets are geographical groups of funeral
service locations and cemeteries that share common resources
such as operating personnel, preparation services, clerical
staff, motor vehicles, and preneed sales personnel. Personnel
costs, the largest component of our
12
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operating expenses, are the cost components most beneficially
affected by this grouping. We must incur many of these costs
regardless of the number of funeral services or interments
performed. Because we cannot necessarily decrease these costs
when we experience lower sales volumes, a sales decline may
cause our margin percentages to decline at a greater rate than
the decline in revenues.
Regulation
and compliance could have a material adverse impact on our
financial results.
Our operations are subject to regulation, supervision, and
licensing under numerous foreign, federal, state, and local
laws, ordinances, and regulations, including extensive
regulations concerning trust funds, preneed sales of funeral and
cemetery products and services, and various other aspects of our
business. The impact of such regulations varies depending on the
location of our funeral and cemetery operations. Violations of
applicable laws could result in fines or sanctions against us.
In addition, from time to time, governments and agencies propose
to amend or add regulations, which could increase costs and
decrease cash flows. For example, foreign, federal, state,
local, and other regulatory agencies have considered and may
enact additional legislation or regulations that could affect
the deathcare industry. These include regulations that require
more liberal refund and cancellation policies for preneed sales
of products and services, limit or eliminate our ability to use
surety bonding, increase trust requirements, require the deposit
of funds or collateral to offset unrealized losses of trusts,
and/or
prohibit the common ownership of funeral homes and cemeteries in
the same market. If adopted by the regulatory authorities of the
jurisdictions in which we operate, these and other possible
proposals could have a material adverse effect on our financial
condition, results of operations, and cash flows.
Compliance with laws, regulations, industry standards, and
customs concerning burial procedures and the handling and care
of human remains is critical to the continued success of our
business and any operations we may acquire. Litigation and
regulatory proceedings regarding these issues could have a
material adverse effect on our financial condition, results of
operations, and cash flows. We are continually monitoring and
reviewing our operations in an effort to insure that we are in
compliance with these laws, regulations, and standards and,
where appropriate, taking appropriate corrective action.
A
number of years may elapse before particular tax matters, for
which we have established accruals, are audited and finally
resolved.
The number of tax years with open tax audits varies depending on
the tax jurisdiction. In the United States, the Internal Revenue
Service is currently examining our tax returns for 1999 through
2005 and various state jurisdictions are auditing years through
2008. While it is often difficult to predict the final outcome
or the timing of resolution of any particular tax matter, we
believe that our accruals reflect the probable outcome of known
tax contingencies. However, unfavorable settlement of any
particular issue may reduce a deferred tax asset or require the
use of cash. Favorable resolution could result in reduced income
tax expense reported in the financial statements in the future.
See Note 10 of Part II, Item 8. Financial
Statements and Supplementary Data for additional information.
Declines
in overall economic conditions beyond our control could reduce
future potential earnings and cash flows and could result in
future goodwill impairments.
In addition to an annual review, we assess the impairment of
goodwill whenever events or changes in circumstances indicate
that the carrying value may be greater than fair value. Factors
that could trigger an interim impairment review include, but are
not limited to, a significant decline in our stock price,
significant underperformance relative to historical or projected
future operating results, and significant negative industry or
economic trends. If these factors occur, we may have a
triggering event, which could result in an impairment of our
goodwill. Based on the results of our annual goodwill impairment
test in 2010, we concluded that there was no impairment of our
goodwill. However, if economic conditions worsen causing
deterioration in our operating revenues, operating margins and
cash flows, we may have a triggering event that could result in
an impairment of our goodwill. Our cemetery segment, which has a
goodwill balance of $63.3 million as of December 31,
2010, is more sensitive to market conditions and goodwill
impairments because it is more reliant on preneed sales, which
are
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impacted by customer discretionary spending. For additional
information, see Critical Accounting Policies in Part II,
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
| Item 1B. | Unresolved Staff Comments. |
None.
| Item 2. | Properties. |
Information regarding properties is set forth in Part I,
Item 1. Business.
| Item 3. | Legal Proceedings. |
Information regarding legal proceedings is set forth in
Note 13 of Part II, Item 8. Financial Statements
and Supplementary Data.
EXECUTIVE
OFFICERS OF THE COMPANY
The following table sets forth as of February 14, 2011 the
name and age of each executive officer of the Company, the
office held, and the year first elected an officer.
|
Year First
|
||||||||||||
|
Became
|
||||||||||||
| Officer Name | Age | Position | Officer | |||||||||
|
R. L. Waltrip
|
80 | Chairman of the Board | 1962 | |||||||||
|
Thomas L. Ryan
|
45 | President and Chief Executive Officer | 1999 | |||||||||
|
Michael R. Webb
|
52 | Executive Vice President and Chief Operating Officer | 1998 | |||||||||
|
J. Daniel Garrison
|
59 | Senior Vice President Sales | 1998 | |||||||||
|
Philip C. Jacobs
|
56 | Senior Vice President and Chief Marketing Officer | 2007 | |||||||||
|
Stephen M. Mack
|
59 | Senior Vice President Middle Market Operations | 1998 | |||||||||
|
Elisabeth G. Nash
|
49 | Senior Vice President Operations Services | 2004 | |||||||||
|
Gregory T. Sangalis
|
55 | Senior Vice President General Counsel and Secretary | 2007 | |||||||||
|
Eric D. Tanzberger
|
42 | Senior Vice President Chief Financial Officer and Treasurer | 2000 | |||||||||
|
Sumner J. Waring, III
|
42 | Senior Vice President Operations | 2002 | |||||||||
|
John H. Faulk
|
35 | Vice President Business Development | 2010 | |||||||||
|
Joseph A. Hayes
|
54 | Vice President Ethics and Business Conduct and Assistant General Counsel | 2007 | |||||||||
|
Jane D. Jones
|
55 | Vice President Human Resources | 2005 | |||||||||
|
Albert R. Lohse
|
50 | Vice President Litigation and Risk Management | 2004 | |||||||||
|
John Del Mixon, II
|
47 | Vice President Information Technology | 2010 | |||||||||
|
Tammy R. Moore
|
43 | Vice President and Corporate Controller | 2010 | |||||||||
|
Steven A. Tidwell
|
48 | Vice President Main Street Market Operations | 2010 | |||||||||
Mr. Waltrip is the founder and Chairman of the Board of
SCI. He has provided invaluable leadership to the Company for
over 40 years. A licensed funeral director,
Mr. Waltrip grew up in his family’s funeral business
and assumed management of the firm in the 1950s. He began buying
additional funeral homes in the 1960’s and achieved
significant cost efficiencies through the “cluster”
strategy of sharing pooled resources among numerous locations.
At the end of 2010, the network he began had grown to include
more than 1,700 funeral service locations and cemeteries.
Mr. Waltrip took the Company public in 1969.
Mr. Waltrip holds a Bachelor’s degree in business
administration from the University of Houston.
Mr. Ryan was elected Chief Executive Officer of the Company
in February 2005 and has served as President of SCI since July
2002. Mr. Ryan joined the Company in 1996 and served in a
variety of financial management roles
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until November 2000, when he was asked to serve as Chief
Executive Officer of European Operations. In July 2002,
Mr. Ryan was appointed Chief Operating Officer of SCI, a
position he held until February 2005. Before joining SCI,
Mr. Ryan was a Certified Public Accountant with
Coopers & Lybrand LLP for eight years. He holds a
Bachelor’s degree in Business Administration from the
University of Texas at Austin. Mr. Ryan serves on the Board
of Directors of the American Diabetes Association. Mr. Ryan
also serves on the Board of Trustees and the Executive Committee
of the United Way of Greater Houston where he chaired the
2009-2010
Community Campaign. Mr. Ryan also serves on the Board of
Directors of the Greater Houston Partnership. Mr. Ryan is a
member and Chapter Secretary of the Young Presidents
Organization. Mr. Ryan also serves on the University of
Texas McCombs Business School Advisory Council.
Mr. Webb joined the Company in 1991 when it acquired
Arlington Corporation, a regional funeral and cemetery
consolidator, where he was then Chief Financial Officer. Prior
to joining Arlington Corporation, Mr. Webb held various
executive financial and development roles at Days Inns of
America and Telemundo Group, Inc. In 1993, Mr. Webb joined
our corporate development group, which he later led on a global
basis before accepting operational responsibility for our
Australian and Hispanic businesses. Mr. Webb was promoted
to Vice President International Corporate Development in
February 1998 and was named Executive Vice President in July
2002. In February 2005, he was promoted to Chief Operating
Officer. He is a graduate of the University of Georgia, where he
earned a Bachelor of Business Administration degree.
Mr. Garrison joined the Company in 1978 and worked in a
series of management positions until he was promoted to
President of the Southeastern Region in 1992. In 1998,
Mr. Garrison was promoted to Vice President International
Operations. In 2000, Mr. Garrison became Vice President
North American Cemetery Operations, was promoted to Vice
President Operations Services in August 2002, and was promoted
to Senior Vice President Operations Support in February 2005. He
assumed his current position as Senior Vice President Sales in
February 2010. Mr. Garrison has a Bachelor of Science
degree in Administrative Management from Clemson University.
Mr. Jacobs joined SCI in 2007 as Senior Vice President and
Chief Marketing Officer. Prior to joining the Company,
Mr. Jacobs was employed by CompUSA as Chief Marketing
Officer. Prior to that, he was employed by Publicis Worldwide as
Chief Marketing Officer and prior to that held other management
roles over the past 23 years at several of the
nation’s top advertising agencies, as well as client-side
positions. Mr. Jacobs holds a Bachelor of Science degree
from the University of Tennessee and a Masters degree from
Vanderbilt University.
Mr. Mack joined the Company in 1973 as a resident director
after graduating from Farmingdale State University of New York.
He became Vice President of the Eastern Region in 1987, and in
February 1998 Mr. Mack was appointed Vice President North
American Funeral Operations. Mr. Mack was promoted to
Senior Vice President Eastern Operations in August 2002 and
assumed the office of Senior Vice President Middle Market
Operations, his current position, in May 2004.
Ms. Nash joined SCI in 2002 as Managing Director of
Strategic Planning and Process Improvement. Prior to joining
SCI, Ms. Nash worked for the Pennzoil Corporation and held
various senior management accounting and financial positions. In
2004, Ms. Nash was promoted to Vice President
Process & Technology. In 2010, Ms. Nash was named
Senior Vice President Operations Services. She is a graduate of
Texas A&M University where she received a Bachelor of
Business Administration degree in Accounting.
Mr. Sangalis joined the Company in 2007 as Senior Vice
President, General Counsel and Secretary. He previously served
as Senior Vice President, Law and Administration for Team Inc.,
a leading provider of specialty industrial maintenance and
construction services. Prior to that, Mr. Sangalis served
as Managing Director and General Counsel of Main Street Equity
Ventures II, a private equity investment firm, and as Senior
Vice President General Counsel and Secretary for Waste
Management, Inc., the leading provider of waste management
services in North America. Mr. Sangalis holds a
Bachelor’s degree in Finance from Indiana University and a
Master of Business Administration from the University of
Minnesota. He earned his Juris Doctorate from the University of
Minnesota Law School.
Mr. Tanzberger joined the Company in August 1996 as Manager
of Budgets & Financial Analysis. He was promoted to
Vice President Investor Relations and Assistant Corporate
Controller in January 2000 and to Corporate Controller in August
2002. In 2006, Mr. Tanzberger was promoted to the position
of Senior Vice President and
15
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Chief Financial Officer. In 2007, Mr. Tanzberger was
appointed Treasurer. Prior to joining the Company,
Mr. Tanzberger was Assistant Corporate Controller at Kirby
Marine Transportation Corporation, an inland waterway barge and
tanker company, from January through August 1996. Prior thereto,
he was a Certified Public Accountant with Coopers &
Lybrand L.L.P. for more than five years. Mr. Tanzberger is
a graduate of the University of Notre Dame, where he earned a
Bachelor of Business Administration degree.
Mr. Waring, a licensed funeral director, joined the Company
as an Area Vice President in 1996 when we merged with his
family’s funeral business. Mr. Waring was appointed
Regional President of the Northeast Region in 1999 and was
promoted to Regional President of the Pacific Region in
September 2001. Mr. Waring was promoted to Vice President
Western Operations in August 2002 and assumed the office of Vice
President Major Market Operations in November 2003. In February
2006, Mr. Waring was promoted to Senior Vice President
Major Market Operations. In July 2008, Mr. Waring’s
responsibilities were expanded to include business development.
In February 2010, Mr. Waring’s responsibilities were
further expanded to include human resources. He has held his
current position as Senior Vice President Operations since
February 2010. Mr. Waring holds a Bachelor of Science
degree in Business Administration from Stetson University, a
degree in Mortuary Science from Mt. Ida College and a Master of
Business Administration degree from the University of
Massachusetts Dartmouth.
Mr. Faulk joined SCI in March 2010 as Vice President
Business Development, to oversee the Company’s strategic
growth, including mergers and acquisitions, real estate, and
construction. Prior to joining the Company, Mr. Faulk
worked for Bain & Company, Inc. since 2002. At Bain,
he helped Fortune 500 Companies and specialty retailers identify
profit growth opportunities and achieve strong operating
results. He holds a Master’s degree in Business
Administration from the Darden Graduate School of Business at
the University of Virginia and a Bachelor’s degree in
Electrical Engineering from the University of Virginia.
Mr. Hayes was appointed Vice President Ethics and Business
Conduct and Assistant General Counsel in November 2007.
Mr. Hayes joined the Company in 1991 as corporate counsel.
He was named Managing Counsel in 1996 and Assistant General
Counsel in 2005. Prior to joining SCI, Mr. Hayes practiced
law in Chicago and San Diego, specializing in securities,
mergers and acquisitions, and commercial transactions. He
received a Bachelor’s degree in Commerce from DePaul
University and earned his Juris Doctorate from the University of
California at Berkeley.
Mrs. Jones joined SCI in 2003 from Dynegy, Inc., where she
served as Vice President of Total Rewards. She oversees human
resources, training and education, and payroll and commission
services — activities that assist more than
20,000 employees in North America. Mrs. Jones was
promoted to Vice President Human Resources in February 2005. She
holds a Bachelor of Business Administration degree in Accounting
with a minor in Finance from Southern Methodist University. She
is a Certified Compensation Professional.
Mr. Lohse joined SCI in 2000 as Managing Director of
Litigation and has since been involved in the resolution of
major litigation issues for the Company. Mr. Lohse was
promoted to Vice President Corporate Governance in 2004 and to
Vice President Litigation and Risk Management in 2007. Before
joining the Company, Mr. Lohse was Managing Partner at
McDade, Fogler, Maines & Lohse, where he conducted a
general civil trial practice. Prior to that, he practiced tort
and commercial litigation at Fulbright & Jaworski.
Mr. Lohse received a Bachelor of Business Administration
degree from the University of Texas and a Juris Doctorate from
the University of Houston Law Center.
Mr. Mixon joined SCI in 1995 as a Project Manager in the
Information Technology Department. He later served as Directeur
Informatique for OGF, a former subsidiary company based in
Paris, France. Most recently, he has led the Information
Technology Department and the Outsourcing Management Office as
Managing Director. Prior to SCI, Mr. Mixon worked for
Andersen Consulting (now Accenture PLC) and served on active
duty in the United States Army achieving the rank of Captain. He
holds a Bachelor of Science degree in Commerce from Washington
and Lee University and a Master of Science degree in Systems
Management from the University of Southern California.
Mrs. Moore joined the Company in August 2002 as Manager of
Financial Reporting. She was promoted to Director of Financial
Reporting in 2004 and Managing Director and Assistant Controller
in June 2006. In February 2010, she was promoted to Vice
President and Corporate Controller and oversees all general
accounting, internal and external reporting, customer service
and strategic planning and analysis. Prior to joining the
Company,
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Table of Contents
Mrs. Moore was a Certified Public Accountant with
PricewaterhouseCoopers LLP for more than three years. She holds
a Bachelor of Business Administration degree in Accounting from
the University of Texas at San Antonio.
Mr. Tidwell joined SCI as Vice President Main Street Market
Operations in March 2010. As a co-founder, Mr. Tidwell
served as its President and Chief Executive Officer of Keystone
North America, Inc. from May of 2007 until it was acquired by
SCI in March 2010. In his role, Steve worked closely with
Keystone’s Senior Leadership Team to develop and implement
organic growth strategies, as well as external growth and
acquisition strategies. He began his career as a licensed
Funeral Director and Embalmer in Nashville, Tennessee and has
been actively involved in the funeral home and cemetery
profession for three decades. He holds an Associate of Arts
degree from John A. Gupton College and has attended executive
management and leadership programs at the Harvard Business
School, the Owen School of Business at Vanderbilt University,
and the Center for Creative Leadership.
Each officer of the Company is elected by the Board of Directors
and holds their office until a successor is elected and
qualified or until earlier death, resignation, or removal in the
manner prescribed in the Bylaws of the Company. Each officer of
a subsidiary of the Company is elected by the subsidiary’s
board of directors and holds their office until a successor is
elected and qualified or until earlier death, resignation, or
removal in the manner prescribed in the Bylaws of the Subsidiary.
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our common stock has been traded on the New York Stock Exchange
since May 14, 1974. On December 31, 2010, there were
4,482 holders of record of our common stock. In calculating the
number of stockholders, we consider clearing agencies and
security position listings as one stockholder for each agency or
listing. At December 31, 2010, we had
241,035,250 shares outstanding, net of 984,400 treasury
shares.
During 2010, we paid cash dividends totaling $40.0 million
and accrued $9.6 million for dividends paid on
January 14, 2011. During 2009, we paid cash dividends
totaling $40.2 million. While we intend to pay regular
quarterly cash dividends for the foreseeable future, all
subsequent dividends are subject to final determination by our
Board of Directors each quarter after its review of our
financial performance.
The table below shows our quarterly high and low closing common
stock prices for the two years ended December 31:
| 2010 | 2009 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
|
First quarter
|
$ | 9.07 | $ | 7.36 | $ | 5.28 | $ | 2.74 | ||||||||
|
Second quarter
|
$ | 9.48 | $ | 7.29 | $ | 5.79 | $ | 3.46 | ||||||||
|
Third quarter
|
$ | 8.65 | $ | 7.04 | $ | 7.67 | $ | 5.37 | ||||||||
|
Fourth quarter
|
$ | 8.71 | $ | 7.82 | $ | 8.25 | $ | 6.66 | ||||||||
Options in our common stock are traded on the Philadelphia Stock
Exchange. Our common stock is traded on the New York Stock
Exchange under the symbol SCI.
Stock Performance Graph.
This graph assumes
the total return on $100 invested on December 31, 2005, in
SCI Common Stock, the S&P 500 Index, and a peer group
selected by the Company (the “Peer Group”). The Peer
Group is comprised of Alderwoods Group, Inc., Carriage Services,
Inc., Hillenbrand Inc., Matthews International Corp., Rock of
Ages Corporation, and Stewart Enterprises, Inc. Hillenbrand
Inc. is included in the Peer Group starting March 31, 2008
when it was spun off from Hillenbrand Industries, Inc. Prior to
the spin-off, the Peer Group included Hillenbrand Industries,
Inc. Alderwoods Group is included in the Peer Group until
November 28, 2006, when it was acquired by SCI. Total
return data assumes reinvestment of dividends.
17
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TOTAL
STOCKHOLDER RETURNS
INDEXED
RETURNS
Years Ending
Years Ending
For equity compensation plan information, see Part III of
this
Form 10-K
On October 29, 2010, we issued 1,081 deferred common stock
equivalents or units pursuant to provisions regarding the
receipt of dividends under the Amended and Restated Director Fee
Plan to four non-employee directors. These issuances were
unregistered as they did not constitute a “sale”
within the meaning of Section 2(3) of the Securities Act of
1933, as amended.
Since August 2004, we have repurchased a total of
$1.1 billion of common stock at an average cost per share
of $9.30. During the three months ended December 31, 2010,
we repurchased 3,649,792 shares of our common stock. In
November 2010, our Board of Directors approved an increase in
our share repurchase program authorizing the investment of up to
an additional $171.5 million to repurchase our common
stock. The remaining dollar value of shares to be purchased
under the share repurchase program was $178.8 million at
December 31, 2010. As discussed in Item 1A, our credit
agreement contains covenants that restrict our ability to
repurchase our common stock. Pursuant to the program, we
repurchased shares of our common stock during the fourth quarter
of 2010 as set forth in the table below:
|
Total Number
|
||||||||||||||||
|
of Shares
|
Dollar Value of
|
|||||||||||||||
|
Purchased as
|
Shares That
|
|||||||||||||||
|
Total Number of
|
Average
|
Part of Publicly
|
May Yet be
|
|||||||||||||
|
Shares
|
Price Paid
|
Announced
|
Purchased Under
|
|||||||||||||
| Period | Purchased | per Share | Programs | the Program | ||||||||||||
|
October 1, 2010 — October 31, 2010
|
275,892 | $ | 8.48 | 275,892 | 34,923,921 | |||||||||||
|
November 1, 2010 — November 30, 2010
|
1,724,500 | $ | 8.12 | 1,724,500 | 192,429,597 | |||||||||||
|
December 1, 2010 — December 31, 2010
|
1,649,400 | $ | 8.29 | 1,649,400 | 178,755,020 | |||||||||||
| 3,649,792 | 3,649,792 | |||||||||||||||
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Subsequent to December 31, 2010, we repurchased an
additional 1.8 million shares of common stock at an
aggregate cost of $15.6 million including commissions
(average cost per share of $8.44). After these purchases, the
remaining dollar value of shares authorized to be purchased
under our share repurchase program was approximately
$163.2 million.
| Item 6. | Selected Financial Data. |
The data set forth below should be read in conjunction with our
consolidated financial statements and accompanying notes to
these consolidated financial statements. This historical
information is not necessarily indicative of future results. The
table below contains selected consolidated financial data as of
and for the years ended December 31, 2006 through
December 31, 2010.
Selected
Consolidated Financial Information
| Years Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007(2) | 2006 | ||||||||||||||||
| (Dollars in millions, except per share amounts) | ||||||||||||||||||||
|
Selected Consolidated Statements of Operations Data:
|
||||||||||||||||||||
|
Revenue
|
$ | 2,190.6 | $ | 2,053.5 | $ | 2,155.6 | $ | 2,285.3 | $ | 1,752.9 | ||||||||||
|
Income from continuing operations before cumulative effect of
accounting changes
|
$ | 127.0 | $ | 123.1 | $ | 97.6 | $ | 243.3 | $ | 52.6 | ||||||||||
|
(Loss) income from discontinued operations, net of tax(1)
|
$ | — | $ | — | $ | (0.4 | ) | $ | 4.4 | $ | 3.9 | |||||||||
|
Net income
|
$ | 127.0 | $ | 123.1 | $ | 97.2 | $ | 247.7 | $ | 56.5 | ||||||||||
|
Net income attributable to noncontrolling interests
|
$ | (0.6 | ) | $ | — | $ | (0.1 | ) | — | — | ||||||||||
|
Net income attributable to common stockholders
|
$ | 126.4 | $ | 123.1 | $ | 97.1 | $ | 247.7 | $ | 56.5 | ||||||||||
|
Earnings per share:
|
||||||||||||||||||||
|
Income from continuing operations attributable to common
stockholders
|
||||||||||||||||||||
|
Basic
|
$ | .51 | $ | .49 | $ | .38 | $ | .85 | $ | .17 | ||||||||||
|
Diluted
|
$ | .50 | $ | .49 | $ | .37 | $ | .83 | $ | .17 | ||||||||||
|
Net income (loss) attributable to common stockholders
|
||||||||||||||||||||
|
Basic
|
$ | .51 | $ | .49 | $ | .38 | $ | .87 | $ | .18 | ||||||||||
|
Diluted
|
$ | .50 | $ | .49 | $ | .37 | $ | .85 | $ | .18 | ||||||||||
|
Cash dividends declared per share
|
$ | .16 | $ | .16 | $ | .16 | $ | .13 | $ | .105 | ||||||||||
|
Selected Consolidated Balance Sheet Data (at December 31):
|
||||||||||||||||||||
|
Total assets
|
$ | 9,190.5 | $ | 8,890.9 | $ | 8,110.9 | $ | 8,932.2 | $ | 9,729.4 | ||||||||||
|
Long-term debt (less current maturities), including capital
leases
|
$ | 1,832.4 | $ | 1,840.5 | $ | 1,821.4 | $ | 1,820.1 | $ | 1,912.7 | ||||||||||
|
Equity
|
$ | 1,479.9 | $ | 1,482.8 | $ | 1,293.2 | $ | 1,492.1 | $ | 1,594.8 | ||||||||||
|
Selected Consolidated Statement of Cash Flows Data:
|
||||||||||||||||||||
|
Net cash provided by operating activities
|
$ | 354.4 | $ | 372.1 | $ | 350.3 | $ | 356.2 | $ | 324.2 | ||||||||||
| (1) | Our operations in Singapore, which were sold in 2006, and the operations of Mayflower, which were sold in 2007, have been classified as discontinued operations for all periods presented. | |
| (2) | Results for 2007 include a $158.1 million pretax gain on redemption of securities related to our former equity investment in France. |
19
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The
Company
We are North America’s largest provider of deathcare
products and services, with a network of funeral homes and
cemeteries unequalled in geographic scale and reach. Our funeral
service and cemetery operations consist of funeral service
locations, cemeteries, funeral service/cemetery combination
locations, crematoria, and related businesses. We sell cemetery
property and funeral and cemetery products and services at the
time of need and on a preneed basis.
Recent
Events
Acquisition
In March 2010, pursuant to a tender offer, we acquired Keystone
North America, Inc. for C$8.07 per share in cash, resulting in a
total purchase price of $288.9 million. This purchase price
included the refinancing of $80.7 million of
Keystone’s debt.
In November 2010, we issued $250 million of unsecured
7.0% Senior Notes due May 2019. The net proceeds of these
notes were used to pay down our bank credit facility and for
general corporate purposes.
Financial
Condition, Liquidity and Capital Resources
Trust Investments
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
sometime 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 trusts
and/or
escrow accounts until the merchandise is delivered or the
service is performed. Investment earnings associated with the
trust investments are expected to mitigate the inflationary
costs of providing the preneed funeral and cemetery services and
merchandise in the future for the prices that were guaranteed at
the time of sale.
Also, we are required by state and provincial law to pay a
portion of the proceeds from the preneed or atneed sale of
cemetery property interment rights into perpetual care trusts.
For these investments, the original corpus remains in the trust
in perpetuity and the net ordinary earnings are distributed and
are intended to offset the expense to maintain the cemetery
property. The majority of states require that net gains or
losses are retained and added to the corpus, but certain states
allow the net realized gains and losses to be included in the
net ordinary earnings that are distributed.
Independent trustees manage and invest all of the funds
deposited into the funeral and cemetery merchandise and service
trusts as well as the cemetery perpetual care trusts. The
trustees are selected based on their respective geographic
footprint and qualifications per state and provincial
regulations. All of the trustees engage the same independent
investment advisor. The trustees, with input from the investment
advisor, establish an investment policy that serves as an
operating document to guide the investment activities of the
trusts including asset allocation and manager selection. The
investments are also governed by state and provincial
guidelines. Asset allocation is based on the liability structure
of each funeral, cemetery, and perpetual care trust. The
investment advisor recommends investment managers to the
trustees that are selected on the basis of various criteria set
forth in the investment policy. The primary investment
objectives for the funeral and cemetery merchandise and service
trusts include (1) achieving growth of principal over time
sufficient to preserve and increase the purchasing power of the
assets and (2) preserving capital within acceptable levels
of volatility and risk. Preneed funeral and cemetery contracts
generally take years to mature. Therefore, the funds associated
with these contracts are often invested for several market
cycles. While cemetery perpetual care trusts share the same
investment objectives as listed above, these trusts emphasize
providing a steady stream of investment income with some capital
appreciation. All of the
20
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trusts seek to control risk and volatility through a combination
of asset styles, asset classes, and institutional investment
managers.
As of the end of the year, 87% of our trusts were under the
control and custody of two large financial institutions engaged
as preferred trustees. The U.S. trustees primarily use
common trust fund structures as the investment vehicle for their
trusts. Through the common trust fund structure, each respective
trustee manages the allocation of assets through individual
managed accounts or institutional mutual funds. In the event a
particular state prohibits the use of a common trust fund as a
qualified investment, the trustee utilizes institutional mutual
funds. The U.S. trusts include a modest allocation to
alternative investments, which are comprised primarily of
private equity investments and real estate investment trusts.
These investments are structured as limited liability companies
(LLCs) and are managed by certain trustees. The trusts that are
eligible to allocate a portion of their investments to
alternative investments purchase units of the respective LLCs.
Fixed
Income Securities
Fixed income investments are intended to preserve principal,
provide a source of current income, and reduce overall portfolio
volatility. The SCI trusts have direct investments primarily in
government and corporate fixed income securities.
Canadian government fixed income securities are investments in
Canadian federal and provincial government instruments. In many
cases, regulatory restrictions mandate that the funds from the
sales of preneed funeral and cemetery products sold in certain
Canadian jurisdictions must be invested in these instruments.
Equity
Securities
Equity investments have historically provided long-term capital
appreciation in excess of inflation. The SCI trusts have direct
investments primarily in domestic equity portfolios that include
large, mid, and small capitalization companies of different
investment objectives (i.e., growth and value). The majority of
the equity portfolio is managed by multiple institutional
investment managers that specialize in an objective-specific
area of expertise. Our equity securities are exposed to market
risk; however, we believe these securities are well-diversified.
As of December 31, 2010, the largest single equity position
represented less than 1% of the total equity securities
portfolio.
Mutual
Funds
The SCI trust funds employ institutional mutual funds where
operationally or economically efficient. Institutional mutual
funds are utilized to invest in various asset classes including
US equities, non-US equities, convertible bonds, corporate
bonds, government bonds, Treasury inflation protected securities
(TIPS), high yield bonds, real estate investment trusts (REITs),
and commodities. The mutual funds are governed by guidelines
outlined in their individual prospectuses.
Private
Equity
The objective of these investments is to provide high rates of
return with controlled volatility. These investments are
typically long-term in duration. These investments are
diversified by strategy, sector, manager, and vintage year.
Private equity exposure is accessed through LLCs established by
certain preferred trustees. These LLCs invest in numerous
limited partnerships, including private equity, fund of funds,
distressed debt, and mezzanine financing. The trustees that have
oversight of their respective LLCs work closely with the
investment advisor in making all current investments.
Trust Investment
Performance
The trust fund income recognized over a period of years from
these investment assets can be volatile. During the twelve
months ended December 31, 2010, the Standard and
Poor’s 500 Index increased approximately 15.1% and the
Barclay’s Aggregate Index increased approximately 6.5%,
while the combined SCI trust assets increased approximately
13.3%.
21
Table of Contents
SCI, its trustees, and the investment advisor continue to
monitor the capital markets and the trusts on an ongoing basis.
The trustees, with input from the investment advisor, will take
prudent action as needed to achieve the investment goals and
objectives of the trusts.
Capital
Allocation Considerations
We rely on our cash flow from operations as a significant source
of liquidity. Our cash flow from operating activities provided
$354.4 million in 2010. In addition, we have approximately
$357.9 million in excess borrowing capacity under our bank
credit facility, which matures in November 2013 (currently used
to support $42.1 million of letters of credit). We have no
significant maturities of long-term debt until October 2014.
Our bank credit facility requires us to maintain certain
leverage and interest coverage ratios. As of December 31,
2010 we were in compliance with all of our debt covenants. Our
financial covenant requirements and actual ratios as of
December 31, 2010 are as follows:
| Per Credit Agreement | Actual | |||||||
|
Leverage ratio
|
4.00(Max | ) | 3.25 | |||||
|
Interest coverage ratio
|
3.00(Min | ) | 4.21 | |||||
We believe our sources of liquidity can be supplemented by our
ability to access the capital markets for additional debt or
equity securities. We believe that our cash on hand, future
operating cash flows, and the available capacity under our
long-term bank credit facility will be adequate to meet our
financial obligations over the next 12 months.
We expect to continue to focus on funding growth initiatives
that generate increased profitability, revenue, and cash flows.
These capital investments include the construction of high-end
cemetery property (such as private family estates) and the
construction of funeral home facilities. We will also consider
the acquisition of additional deathcare operations that fit our
long-term customer-focused strategy, if such acquisitions have
the proper return on investment. Our outlook for capital
improvements at existing facilities and cemetery development
expenditures in 2011 is $85 to $95 million.
Since November 2007, we have paid quarterly dividends of $0.04
per common share. On February 9, 2011, our Board of
Directors approved the payment of a quarterly dividend of $0.05
per share. While we intend to pay regular quarterly cash
dividends for the foreseeable future, all future dividends are
subject to limitations in our debt covenants and final
determination by our Board of Directors each quarter upon review
of our financial performance.
Currently, we have approximately $163.2 million authorized
under our share repurchase program. We intend to make purchases
from time to time in the open market or through privately
negotiated transactions, subject to market conditions, debt
covenants, and normal trading restrictions. Our credit agreement
contains covenants that limit our ability to repurchase our
common stock. There can be no assurance that we will buy our
common stock under our share repurchase program in the future.
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.
Operating
Activities
Net cash provided by operating activities decreased
$17.7 million to $354.4 million in 2010 from
$372.1 million in 2009. This decrease was driven by:
| • | a $47.0 million increase in employee compensation as a result of merit increases in 2010 that did not occur in 2009, and an increase in 2010 incentive payments due to achieving certain targets for 2009; | |
| • | a $70.1 million increase in vendor payments resulting from increases in variable costs from the Keystone and Palm Mortuaries acquisitions; | |
| • | an $11.3 million decrease in certain life insurance proceeds in 2010 compared to 2009; partially offset by |
22
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| • | an $87.1 million increase in cash receipts from customers resulting from increased funeral case volume and revenues primarily from the Keystone and Palm Mortuaries acquisitions; | |
| • | a $12.8 million increase in GA revenue receipts due to increased preneed funeral insurance production; and | |
| • | an $11.9 million increase in net trust fund withdrawals due to increased withdrawals on qualifying cemetery perpetual care expenses. |
Net cash provided by operating activities increased
$21.8 million to $372.1 million in 2009 from $350.3 in
2008. This increase was driven by:
| • | a $58.7 million decrease in employee compensation as a result of work force initiatives and decreased incentive payments; | |
| • | a $73.0 million decrease in vendor payments resulting from decreased variable costs due to various cost reduction initiatives; | |
| • | the receipt of $14.9 million in certain life insurance proceeds; | |
| • | a $5.8 million increase in GA revenue receipts due to increased preneed funeral insurance production; partially offset by | |
| • | a $131.8 million decrease in cash receipts from customers resulting from the decrease in funeral case volume primarily attributable to a decrease in the number of deaths in our markets. |
Investing
Activities
Cash flows from investing activities used $279.7 million in
2010 compared to using $152.5 million in 2009. This
increase was primarily attributable to an increase of
$214.2 million in cash spent for acquisitions (primarily
the Keystone North America acquisition) and a $14.1 million
increase in capital expenditures, partially offset by a
$58.1 million increase in cash receipts from divestitures
and assets sales and a $42.9 million increase in
withdrawals of restricted funds.
Cash flows from investing activities used $152.5 million in
2009 compared to using $151.3 million in 2008. This
$1.2 million increase was primarily attributable to a
$70.3 million decrease in capital expenditures and a
$5.3 million decrease in deposits, partially offset by a
$76.1 million increase in cash used for acquisitions.
Financing
Activities
Financing activities used $88.2 million in 2010 compared to
using $178.4 million in 2009. This decrease was primarily
driven by a $356.3 million increase in proceeds from the
issuance of long-term debt (net of debt issuance costs),
partially offset by a $113.0 million increase in debt
payments, a $116.9 million increase in repurchases of
Company common stock, a $15.6 million decline in proceeds
from the exercise of stock options, and a $21.9 million
increase in capital lease payments.
Financing activities used $178.4 million in 2009 compared
to using $230.6 million in 2008. This $52.2 million
net decrease in financing cash outflows was primarily driven by
a $142.2 million decrease in repurchases of Company common
stock, a $59.7 million increase in proceeds from issuance
of long-term debt (net of debt issuance costs), a
$2.6 million increase in proceeds from exercise of stock
options, offset by a $156.9 million increase in debt
payments.
Proceeds from long-term debt (net of debt issuance costs) were
$498.2 million in 2010 due to a $250.0 million
issuance of the 7.00% Notes due May 2019, the release of
funds held in escrow for the $150.0 million dollar issuance
of the 8.00% Notes due November 2021, and a
$110.0 million drawdown under our bank credit facility.
Proceeds from long-term debt (net of debt issuance costs) were
$141.9 million in 2009 due to a $150.0 million
drawdown under our bank credit facility. Proceeds from long-term
debt (net of debt issuance costs) were $82.1 million in
2008 due to a $54.3 million drawdown under our bank credit
facility and $27.8 million issuance of other debentures.
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Table of Contents
The table below sets forth the payments of debt for the years
ended December 31:
| 2010 | 2009 | 2008 | ||||||||||
|
6.5% Notes due March 2008
|
$ | — | $ | — | $ | 45.2 | ||||||
|
7.7% Notes due April 2009
|
— | 28.7 | — | |||||||||
|
7.875% Debentures due February 2013
|
25.5 | 22.8 | — | |||||||||
|
7.375% Senior Notes due October 2014
|
70.5 | 4.9 | — | |||||||||
|
6.75% Notes due April 2015
|
3.0 | 36.9 | — | |||||||||
|
6.75% Notes due April 2016
|
20.1 | 15.9 | — | |||||||||
|
7.0% Notes due June 2017
|
— | 4.5 | — | |||||||||
|
Bank credit facility due November 2013
|
260.0 | — | 54.3 | |||||||||
|
Series B Senior Notes due November 2011
|
— | 150.00 | — | |||||||||
|
Obligations under capital leases
|
46.2 | 24.3 | 25.9 | |||||||||
|
Mortgage notes and other debt, maturities through 2047
|
3.1 | 5.5 | 12.8 | |||||||||
|
Total Debt Payments
|
$ | 428.4 | $ | 293.5 | $ | 138.2 | ||||||
We repurchased 14.0 million shares in 2010 and
17.7 million shares in 2008 for $116.9 million and
$142.2 million, respectively. We did not repurchase any
shares in 2009.
We paid cash dividends of $40.0 million in 2010,
$40.2 million in 2009, and $41.5 million in 2008.
Off-Balance
Sheet Arrangements, Contractual Obligations, and Commercial and
Contingent Commitments
We have assumed various financial obligations and commitments in
the ordinary course of conducting our business. We have
contractual obligations requiring future cash payments under
existing contractual arrangements, such as debt maturities,
interest on long-term debt, operating lease agreements, and
employment, consulting, and non-competition agreements. We also
have commercial and contingent obligations that result in cash
payments only if certain events occur requiring our performance
pursuant to a funding commitment.
The following table details our known future cash payments (on
an undiscounted basis) related to various contractual
obligations as of December 31, 2010.
| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations | 2011 | 2012-2013 | 2014-2015 | Thereafter | Total | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Debt maturities(1)
|
$ | 22.5 | $ | 44.1 | $ | 417.0 | $ | 1,371.3 | $ | 1,854.9 | ||||||||||
|
Interest obligation on long-term debt(2)
|
126.4 | 252.6 | 229.8 | 425.8 | 1,034.6 | |||||||||||||||
|
Operating lease agreements(3)
|
10.6 | 18.0 | 13.1 | 44.7 | 86.4 | |||||||||||||||
|
Employment, consulting, and non-competition agreements(4)
|
6.4 | 9.2 | 5.0 | 6.7 | 27.3 | |||||||||||||||
|
Total contractual obligations
|
$ | 165.9 | $ | 323.9 | $ | 664.9 | $ | 1,848.5 | $ | 3,003.2 | ||||||||||
| (1) | Our outstanding indebtedness contains standard provisions, such as payment delinquency default clauses and change of control clauses. In addition, our bank credit facility agreement contains a maximum leverage ratio and a minimum interest coverage ratio. See “Capital Allocation Considerations” and Note 11 in Part II, Item 8. Financial Statements and Supplementary Data, for additional details related to our long-term debt. | |
| (2) | Approximately 93% of our total debt is fixed rate debt for which the interest obligation was calculated at the stated rate. Future interest obligations on our floating rate debt are based on the current forward rate curve of the underlying index. See Note 11 in Part II, Item 8. Financial Statements and Supplementary Data, for additional information related to our future interest obligations. |
24
Table of Contents
| (3) | The majority of our lease arrangements contain options to (i) purchase the property at fair value on the exercise date, (ii) purchase the property for a value determined at the inception of the leases, or (iii) renew for the fair rental value at the end of the primary lease term. Our leases primarily relate to funeral service locations and cemetery operating and maintenance equipment. See Note 13 in Part II, Item 8. Financial Statements and Supplementary Data, for additional details related to our leases. | |
| (4) | We have entered into management employment, consulting, and non-competition agreements that contractually require us to make cash payments over the contractual period. The agreements have been primarily entered into with certain officers and employees and former owners of businesses acquired. Agreements with contractual periods less than one year are excluded. See Note 13 in Part II, Item 8. Financial Statements and Supplementary Data, for additional details related to these agreements. |
The following table details our known potential or possible
future cash payments (on an undiscounted basis) related to
various commercial and contingent obligations as of
December 31, 2010.
| Expiration by Period | ||||||||||||||||||||
| Commercial and Contingent Obligations | 2011 | 2012-2013 | 2014-2015 | Thereafter | Total | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Surety obligations(1)
|
$ | 216.5 | $ | — | $ | — | $ | — | $ | 216.5 | ||||||||||
|
Long-term obligations related to uncertain tax positions(2)
|
2.5 | 126.6 | 10.9 | 51.6 | 191.6 | |||||||||||||||
|
Letters of credit(3)
|
— | 42.1 | — | — | 42.1 | |||||||||||||||
|
Total commercial and contingent obligations
|
$ | 219.0 | $ | 168.7 | $ | 10.9 | $ | 51.6 | $ | 450.2 | ||||||||||
| (1) | Represents the aggregate funding obligation associated with our surety bond arrangements assuming our surety partners did not renew any of our surety obligations and we could not find replacement surety assurance. See the section titled “Financial Assurances” following this table in this Form 10-K for more information related to our surety bonds. | |
| (2) | In accordance with the Income Tax Topic of the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC), we have recorded a liability for unrecognized tax benefits and related interest and penalties of $191.6 million as of December 31, 2010. See Note 10 in Part II, Item 8. Financial Statements and Supplementary Data, for additional information related to our uncertain tax positions. | |
| (3) | We are occasionally required to post letters of credit, issued by a financial institution, to secure certain insurance programs or other obligations. Letters of credit generally authorize the financial institution to make a payment to the beneficiary upon the satisfaction of a certain event or the failure to satisfy an obligation. The letters of credit are generally posted for one-year terms and are usually automatically renewed upon maturity until such time as we have satisfied the commitment secured by the letter of credit. We are obligated to reimburse the issuer only if the beneficiary collects on the letter of credit. We believe it is unlikely we will be required to fund a claim under our outstanding letters of credit. As of December 31, 2010, the full amount of our letters of credit was supported by our bank credit facility, which expires in November 2013. |
Not included in the above table are potential funding
obligations related to our funeral and cemetery merchandise and
service trusts. In certain states and provinces, we have
withdrawn allowable distributable earnings including unrealized
gains prior to the maturity or cancellation of the related
contract. Additionally, some states have laws that either
require replenishment of investment losses under certain
circumstances or impose various restrictions when trust fund
values drop below certain prescribed amounts. In the event that
our trust investments do not recover from recent market
declines, we may be required to deposit portions or all of these
amounts into the respective trusts in some future period. As of
December 31, 2010, we had unrealized losses of
$10.2 million in the various trusts within these states.
25
Table of Contents
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. The obligations underlying these surety bonds are
recorded on the 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.
|
December 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Preneed funeral
|
$ | 121.0 | $ | 126.6 | ||||
|
Preneed cemetery:
|
||||||||
|
Merchandise and services
|
120.2 | 126.0 | ||||||
|
Pre-construction
|
5.1 | 3.3 | ||||||
|
Bonds supporting preneed funeral and cemetery obligations
|
246.3 | 255.9 | ||||||
|
Bonds supporting preneed business permits
|
5.1 | 4.6 | ||||||
|
Other bonds
|
14.2 | 22.1 | ||||||
|
Total surety bonds outstanding
|
$ | 265.6 | $ | 282.6 | ||||
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 $246.3 million in bonds supporting
preneed funeral and cemetery obligations differs from the
$216.5 million potential funding obligation disclosed in
our “Commercial and Contingent Obligations” table
above because 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, at the time we enter into the contract. We
would only be required to fund the trust for the portion of the
preneed contract for which we have received payment from the
customer, less any applicable retainage, in accordance with
state law. For the years ended December 31, 2010, 2009, and
2008, we had $18.8 million, $23.8 million, and
$29.5 million, respectively, of cash receipts from sales
attributable to bonded contracts. 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
due to a lack of surety capacity or surety company
non-performance.
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
sometime 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. 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.
Trust-Funded Preneed Funeral and Cemetery
Contracts:
The funds collected from customers are
deposited into trust and invested by independent trustees in
accordance with state and provincial laws. We retain any funds
26
Table of Contents
above the amounts required to be deposited into trust accounts
and use them for working capital purposes, generally to offset
the selling and administrative costs of our preneed programs.
Investment earnings associated with the trust investments are
expected to mitigate the inflationary costs of providing the
preneed funeral and cemetery services and merchandise in the
future for the prices that were guaranteed at the time of sale.
Our preneed funeral and cemetery trust assets are consolidated
and recorded in our consolidated balance sheet at fair market
value. Investment earnings on trust assets are generally
accumulated in the trust and distributed as the revenue
associated with the preneed funeral or cemetery contract is
recognized or cancelled by the customer. In certain states and
provinces, the trusts are allowed to distribute a portion of the
investment earnings to us prior to that date.
If a preneed funeral or cemetery contract is cancelled prior to
delivery, state or provincial law determines the amount of the
refund owed to the customer, if any, including the amount of the
attributed investment earnings. Upon cancellation, we receive
the amount of principal deposited to trust and previously
undistributed net investment earnings and, where required, issue
a refund to the customer. We retain excess funds, if any, and
recognize the attributed investment earnings (net of any
investment earnings payable to the customer) as revenues in our
consolidated statement of operations. In certain jurisdictions,
we may be obligated to fund any shortfall if the amounts
deposited by the customer exceed the funds in trust. Funds in
trust assets exceeded customer deposits at December 31,
2010. See Off-Balance Sheet Arrangements, Contractual
Obligations, and Commercial and Contingent Commitments for
additional information about potential funding obligations
related to our funeral and cemetery merchandise and service
trusts. Based on our historical experience, we have included a
cancellation reserve for preneed funeral and cemetery contracts
in our consolidated balance sheet of $134.8 million and
$130.9 million as of December 31, 2010 and 2009,
respectively.
The cash flow activity over the life of a trust-funded preneed
funeral or cemetery contract from the date of sale to its
recognition or cancellation is captured in the following
operating cash flow line items in our consolidated statement of
cash flows:
| • | Decrease in preneed funeral receivables, net and trust investments; | |
| • | (Increase) decrease in preneed cemetery receivables, net and trust investments; | |
| • | (Decrease) increase in deferred preneed funeral revenue; | |
| • | Increase in deferred preneed cemetery revenue; | |
| • | Decrease in deferred preneed funeral receipts held in trust; | |
| • | Decrease in deferred preneed cemetery receipts held in trust; and | |
| • | Net income . |
While the contract is outstanding, cash flow is provided by the
amount retained from funds collected from the customer and any
distributed investment earnings. At the time of death maturity,
we receive the principal and undistributed investment earnings
from the funeral trust and any remaining receivable due from the
customer. At the time of delivery or storage of cemetery
merchandise and service items for which we were required to
deposit funds to trust, we receive the principal and
undistributed investment earnings from the cemetery trust. There
is generally no remaining receivable due from the customer, as
our policy is to deliver preneed cemetery merchandise and
service items only upon payment of the contract balance in full.
This cash flow at the time of service, delivery, or storage is
generally less than the associated revenue recognized, thus
reducing cash flow from operating activities.
27
Table of Contents
The tables below detail our North America results of preneed
funeral and cemetery production and maturities, excluding
insurance contracts, for the years ended December 31, 2010
and 2009.
| North America | ||||||||
|
Years Ended
|
||||||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Funeral:
|
||||||||
|
Preneed trust-funded (including bonded):
|
||||||||
|
Sales production
|
$ | 117.3 | $ | 141.7 | ||||
|
Sales production (number of contracts)
|
26,954 | 26,947 | ||||||
|
Maturities
|
$ | 179.8 | $ | 175.5 | ||||
|
Maturities (number of contracts)
|
41,205 | 42,826 | ||||||
|
Cemetery:
|
||||||||
|
Sales production:
|
||||||||
|
Preneed
|
$ | 412.6 | $ | 387.4 | ||||
|
Atneed
|
240.6 | 239.1 | ||||||
|
Total sales production
|
653.2 | 626.5 | ||||||
|
Sales production deferred to backlog:
|
||||||||
|
Preneed
|
$ | 169.7 | $ | 160.6 | ||||
|
Atneed
|
180.1 | 182.3 | ||||||
|
Total sales production deferred to backlog
|
349.8 | 342.9 | ||||||
|
Revenue recognized from backlog:
|
||||||||
|
Preneed
|
$ | 153.7 | $ | 134.7 | ||||
|
Atneed
|
180.1 | 182.2 | ||||||
|
Total revenue recognized from backlog
|
333.8 | 316.9 | ||||||
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. These general agency
commissions (GA revenues) are based on a percentage per contract
sold and are recognized as funeral revenues when the insurance
purchase transaction between the customer and third-party
insurance provider is completed. Direct selling costs incurred
pursuant to the sale of insurance-funded preneed funeral
contracts are expensed as incurred. 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
consolidated balance sheet. Approximately 78% of our North
America preneed funeral production in 2010 relates to
insurance-funded preneed funeral contracts.
The third-party insurance company collects funds related to the
insurance contract directly from the customer. The life
insurance contracts include a death benefit escalation
provision, which is expected to offset the inflationary costs of
providing the preneed funeral services and merchandise in the
future at the prices that were guaranteed at the time of the
preneed sale. The customer/policy holder assigns the policy
benefits to our funeral home to pay for the preneed funeral
contract at the time of need.
Additionally, we may receive cash overrides based on achieving
certain dollar volume targets of life insurance policies sold as
a result of marketing agreements entered into in connection with
the sale of our insurance subsidiaries in 2000. Included in GA
revenues for 2010 and 2009 were cash overrides in the amount of
$13.7 million and $9.4 million, respectively.
28
Table of Contents
The table below details the North America results of
insurance-funded preneed funeral production and maturities for
the years ended December 31, 2010 and 2009, and the number
of contracts associated with those transactions.
| North America | ||||||||
| Years Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
|
Preneed funeral insurance-funded(1):
|
||||||||
|
Sales production
|
$ | 413.1 | $ | 320.2 | ||||
|
Sales production (number of contracts)
|
71,532 | 53,875 | ||||||
|
General agency revenue
|
$ | 68.3 | $ | 57.3 | ||||
|
Maturities
|
$ | 282.8 | $ | 246.5 | ||||
|
Maturities (number of contracts)
|
52,650 | 46,343 | ||||||
| (1) | Amounts are not included in our consolidated balance sheet. |
29
Table of Contents
North America Backlog of Preneed Funeral and Cemetery
Contracts:
The following table reflects our
North America backlog of trust-funded deferred preneed
funeral and cemetery contract revenues, including amounts
related to
Deferred preneed funeral and cemetery receipts
held in trust
at December 31, 2010 and 2009.
Additionally, the table reflects our North America backlog of
unfulfilled insurance-funded contracts (which are not included
in our consolidated balance sheet) at December 31, 2010 and
2009. 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 North America 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 maturities of
preneed sales in the future, 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.
|
December 31,
|
December 31,
|
|||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Market | Cost | Market | Cost | |||||||||||||
| (Dollars in billions) | ||||||||||||||||
|
Deferred preneed funeral revenues
|
$ | 0.58 | $ | 0.58 | $ | 0.59 | $ | 0.59 | ||||||||
|
Deferred preneed funeral receipts held in trust
|
1.22 | 1.18 | 1.14 | 1.17 | ||||||||||||
| $ | 1.80 | $ | 1.76 | $ | 1.73 | $ | 1.76 | |||||||||
|
Allowance for cancellation on trust investments
|
(0.13 | ) | (0.13 | ) | (0.12 | ) | (0.12 | ) | ||||||||
|
Backlog of trust-funded preneed funeral revenues
|
$ | 1.67 | $ | 1.63 | $ | 1.61 | $ | 1.64 | ||||||||
|
Backlog of insurance-funded preneed funeral revenues
|
3.28 | 3.28 | 3.03 | 3.03 | ||||||||||||
|
Total backlog of preneed funeral revenues
|
$ | 4.95 | $ | 4.91 | $ | 4.64 | $ | 4.67 | ||||||||
|
Preneed funeral receivables and trust investments
|
$ | 1.42 | $ | 1.40 | $ | 1.35 | $ | 1.39 | ||||||||
|
Allowance for cancellation on trust investments
|
(0.12 | ) | (0.12 | ) | (0.11 | ) | (0.11 | ) | ||||||||
|
Assets associated with backlog of trust-funded deferred preneed
funeral revenues, net of estimated allowance for cancellation
|
$ | 1.30 | $ | 1.28 | $ | 1.24 | $ | 1.28 | ||||||||
|
Insurance policies associated with insurance-funded deferred
preneed funeral revenues, net of estimated allowance for
cancellation
|
3.28 | 3.28 | 3.03 | 3.03 | ||||||||||||
|
Total assets associated with backlog of preneed funeral
revenues, net of estimated allowance for cancellation
|
$ | 4.58 | $ | 4.56 | $ | 4.27 | $ | 4.31 | ||||||||
|
Deferred preneed cemetery revenues
|
$ | 0.81 | $ | 0.81 | $ | 0.82 | $ | 0.82 | ||||||||
|
Deferred preneed cemetery receipts held in trust
|
1.19 | 1.13 | 1.06 | 1.11 | ||||||||||||
| $ | 2.00 | $ | 1.94 | $ | 1.88 | $ | 1.93 | |||||||||
|
Allowance for cancellation on trust investments
|
(0.15 | ) | (0.15 | ) | (0.16 | ) | (0.16 | ) | ||||||||
|
Total backlog of deferred cemetery revenues
|
$ | 1.85 | $ | 1.79 | $ | 1.72 | $ | 1.77 | ||||||||
|
Preneed cemetery receivables and trust investments
|
$ | 1.56 | $ | 1.50 | $ | 1.38 | $ | 1.43 | ||||||||
|
Allowance for cancellation on trust investments
|
(0.16 | ) | (0.16 | ) | (0.14 | ) | (0.14 | ) | ||||||||
|
Total assets associated with backlog of deferred cemetery
revenues, net of estimated allowance for cancellation
|
$ | 1.40 | $ | 1.34 | $ | 1.24 | $ | 1.29 | ||||||||
The market value of our funeral and cemetery trust investments
was based on a combination of quoted market prices, observable
inputs such as interest rates or yield curves, and appraisals.
For more information on how market values are estimated, see
Critical Accounting Policies below. 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
30
Table of Contents
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 — Years Ended December 31, 2010,
2009, and 2008
Management
Summary
Key developments in 2010 were as follows:
| • | Funeral gross profit increased $11.2 million due to an increase in funeral case volume and profits from the Keystone and Palm Mortuaries acquisitions partially offset by higher preneed selling costs. | |
| • | Cemetery gross profit increased $16.6 million due to an increase in preneed property sales production partially offset by higher preneed selling costs. |
Results
of Operations — Years Ended December 31, 2010,
2009, and 2008
In 2010, we reported consolidated net income attributable to
common stockholders of $126.4 million ($.50 per diluted
share) compared to net income attributable to common
stockholders in 2009 of $123.1 million ($.49 per diluted
share) and net income attributable to common stockholders in
2008 of $97.1 million ($.37 per diluted share). These
results were impacted by certain significant items that
(decreased) increased earnings, including:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Net after-tax losses from the sale of assets
|
$ | (2,245 | ) | $ | (1,790 | ) | $ | (24,475 | ) | |||
|
After-tax (losses) gains from the early extinguishment of debt
|
$ | (5,928 | ) | $ | 2,113 | $ | — | |||||
|
After-tax losses from discontinued operations
|
$ | — | $ | — | $ | (362 | ) | |||||
|
After-tax expenses related to acquisitions
|
$ | (9,383 | ) | $ | (8,235 | ) | $ | (710 | ) | |||
|
After-tax charges related to Hurricane Ike losses
|
$ | — | $ | — | $ | (1,859 | ) | |||||
|
Change in certain tax reserves and other
|
$ | (5,033 | ) | $ | 1,977 | $ | (11,570 | ) | ||||
Consolidated
Versus Comparable Results — Years Ended
December 31, 2010, 2009, and 2008
The table below reconciles our consolidated GAAP results to our
comparable, or “same store,” results for the years
ended December 31, 2010, 2009, and 2008. We define
comparable operations (or same store operations) as those
funeral and cemetery locations owned by us for the entire period
beginning January 1, 2009 and ending
31
Table of Contents
December 31, 2010. The following tables present operating
results for funeral and cemetery locations that were owned by us
for these years.
|
Less:
|
Less:
|
|||||||||||||||
|
Activity
|
Activity
|
|||||||||||||||
|
Associated with
|
Associated
|
|||||||||||||||
|
Acquisition/New
|
with
|
|||||||||||||||
| 2010 | Consolidated | Construction | Divestitures | Comparable | ||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
North America Revenue
|
||||||||||||||||
|
Funeral revenue
|
$ | 1,486.3 | $ | 98.5 | $ | 9.6 | $ | 1,378.2 | ||||||||
|
Cemetery revenue
|
697.7 | 12.8 | 3.1 | 681.8 | ||||||||||||
| 2,184.0 | 111.3 | 12.7 | 2,060.0 | |||||||||||||
|
Germany revenue
|
6.6 | — | — | 6.6 | ||||||||||||
|
Total revenue
|
$ | 2,190.6 | $ | 111.3 | $ | 12.7 | $ | 2,066.6 | ||||||||
|
North America Gross Profits
|
||||||||||||||||
|
Funeral gross profits
|
$ | 316.1 | $ | 22.2 | $ | 0.4 | $ | 293.5 | ||||||||
|
Cemetery gross profits
|
132.2 | 2.9 | (0.1 | ) | 129.4 | |||||||||||
| 448.3 | 25.1 | 0.3 | 422.9 | |||||||||||||
|
Germany gross profits
|
0.9 | — | — | 0.9 | ||||||||||||
|
Total gross profits
|
$ | 449.2 | $ | 25.1 | $ | 0.3 | $ | 423.8 | ||||||||
|
Less:
|
Less:
|
|||||||||||||||
|
Activity
|
Activity
|
|||||||||||||||
|
Associated with
|
Associated
|
|||||||||||||||
|
Acquisition/New
|
with
|
|||||||||||||||
| 2009 | Consolidated | Construction | Divestitures | Comparable | ||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
North America Revenue
|
||||||||||||||||
|
Funeral revenue
|
$ | 1,385.1 | $ | 2.2 | $ | 21.1 | $ | 1,361.8 | ||||||||
|
Cemetery revenue
|
661.6 | 0.5 | 11.2 | 649.9 | ||||||||||||
| 2,046.7 | 2.7 | 32.3 | 2,011.7 | |||||||||||||
|
Germany revenue
|
6.8 | — | — | 6.8 | ||||||||||||
|
Total revenue
|
$ | 2,053.5 | $ | 2.7 | $ | 32.3 | $ | 2,018.5 | ||||||||
|
North America Gross Profits
|
||||||||||||||||
|
Funeral gross profits
|
$ | 305.4 | $ | (0.3 | ) | $ | 0.9 | $ | 304.8 | |||||||
|
Cemetery gross profits
|
115.6 | (0.3 | ) | 0.6 | 115.3 | |||||||||||
| 421.0 | (0.6 | ) | 1.5 | 420.1 | ||||||||||||
|
Germany gross profits
|
0.4 | — | — | 0.4 | ||||||||||||
|
Total gross profits
|
$ | 421.4 | $ | (0.6 | ) | $ | 1.5 | $ | 420.5 | |||||||
32
Table of Contents
|
Less:
|
||||||||||||
|
Activity
|
||||||||||||
|
Associated
|
||||||||||||
|
with
|
||||||||||||
| 2008 | Consolidated | Divestitures | Comparable | |||||||||
| (Dollars in millions) | ||||||||||||
|
North America Revenue
|
||||||||||||
|
Funeral revenue
|
$ | 1,468.7 | $ | 42.3 | $ | 1,426.4 | ||||||
|
Cemetery revenue
|
679.9 | 13.2 | 666.7 | |||||||||
| 2,148.6 | 55.5 | 2,093.1 | ||||||||||
|
Germany revenue
|
7.0 | — | 7.0 | |||||||||
|
Total revenue
|
$ | 2,155.6 | $ | 55.5 | $ | 2,100.1 | ||||||
|
North America Gross Profits
|
||||||||||||
|
Funeral gross profits
|
$ | 313.1 | $ | (3.4 | ) | $ | 316.5 | |||||
|
Cemetery gross profits
|
106.8 | (0.6 | ) | 107.4 | ||||||||
| 419.9 | (4.0 | ) | 423.9 | |||||||||
|
Germany gross profits
|
0.3 | — | 0.3 | |||||||||
|
Total gross profits
|
$ | 420.2 | $ | (4.0 | ) | $ | 424.2 | |||||
The following table provides the data necessary to calculate our
consolidated average revenue per funeral service for the years
ended December 31, 2010, 2009, and 2008. We calculate
average revenue per funeral service by dividing consolidated
funeral revenue, excluding General Agency (GA) revenues and
certain other revenues to avoid distorting our averages of
normal funeral services revenue, by the number of funeral
services performed during the period.
| 2010 | 2009 | 2008 | ||||||||||
|
(Dollars in millions, except average
|
||||||||||||
| revenue per funeral service) | ||||||||||||
|
Consolidated funeral revenue
|
$ | 1,492.9 | $ | 1,391.9 | $ | 1,475.7 | ||||||
|
Less: GA revenues
|
68.3 | 57.3 | 51.5 | |||||||||
|
Less: Other revenues
|
11.2 | 8.4 | 10.0 | |||||||||
|
Adjusted Consolidated funeral revenue
|
$ | 1,413.4 | $ | 1,326.2 | $ | 1,414.2 | ||||||
|
Consolidated funeral services performed
|
270,351 | 258,044 | 278,165 | |||||||||
|
Consolidated average revenue per funeral service
|
$ | 5,228 | $ | 5,139 | $ | 5,084 | ||||||
The following table provides the data necessary to calculate our
comparable average revenue per funeral service for the years
ended December 31, 2010, 2009, and 2008. We calculate
average revenue per funeral service by dividing comparable
funeral revenue, excluding General Agency (GA) revenues and
other revenues to avoid distorting our averages of normal
funeral services revenue, by the comparable number of funeral
services performed during the period.
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in millions, except average revenue per funeral service) | ||||||||||||
|
Comparable funeral revenue
|
$ | 1,384.8 | $ | 1,368.6 | $ | 1,433.4 | ||||||
|
Less: GA revenues
|
64.9 | 56.8 | 50.9 | |||||||||
|
Less: Other revenues
|
9.0 | 8.4 | 9.9 | |||||||||
|
Adjusted Comparable funeral revenue
|
$ | 1,310.9 | $ | 1,303.4 | $ | 1,372.6 | ||||||
|
Comparable funeral services performed
|
248,572 | 253,340 | 269,419 | |||||||||
|
Comparable average revenue per funeral service
|
$ | 5,274 | $ | 5,145 | $ | 5,095 | ||||||
33
Table of Contents
Funeral
Results
Funeral
Revenue
Consolidated revenues from funeral operations were
$1,492.9 million for the year ended December 31, 2010
compared to $1,391.9 million for the same period in 2009.
This increase is primarily attributable to the
$16.2 million increase in comparable revenues described
below and $96.3 million of additional revenues as the
result of acquisitions in 2010 and 2009. These increases were
partially offset by a decline of $11.5 million in revenues
contributed by non-strategic assets that were divested
throughout 2010 and 2009. Comparable revenues from funeral
operations were $1,384.8 million for the year ended
December 31, 2010 compared to $1,368.6 million for the
same period in 2009. This increase was primarily due to the 2.5%
increase in average revenue per funeral service described below
and an $8.1 million increase in GA revenues that resulted
from increased preneed insurance production. These increases
were partially offset by the 1.9% decrease in the number of
funeral services performed as described below.
Consolidated revenues from funeral operations decreased
$83.8 million in 2009 compared to the same period in 2008.
This decrease is primarily due to the decrease in comparable
revenues described below and to the divestiture of non-strategic
assets throughout 2009 and 2008, which resulted in a decrease of
$21.2 million of revenue in 2009, partially offset by
acquisitions that contributed an additional $2.2 million of
revenue. Our comparable funeral revenues decreased
$64.8 million, or 4.5%, in 2009 compared to the year ended
December 31, 2008 primarily as a result of a 6.0% decline
in the number of funeral services performed, an unfavorable
Canadian currency impact of $10.6 million, and
$12.1 million in decreased trust fund income as a result of
the weakened equity and debt markets in late 2008 and early
2009. These negative impacts were partially offset by a 1.0%
increase in comparable average revenue per funeral service and a
$5.8 million increase in GA revenue.
Funeral
Services Performed
Our consolidated funeral services performed increased 4.8%
during the year ended December 31, 2010 compared to the
same period in 2009, primarily as the result of acquisitions in
2010 and 2009, partially offset by a 1.9% decline in comparable
funeral services performed noted below. Our comparable funeral
services performed decreased 1.9% during the year ended
December 31, 2010 compared to the same period in 2009. We
believe the decline in deaths in our markets is consistent with
trends experienced by other funeral service providers and
industry vendors compared to the year ended December 31,
2009. Our comparable cremation rate of 41.6% in 2010 increased
from 40.9% and 39.3% in 2009 and 2008, respectively. We continue
to expand our cremation memorialization products and services,
which have resulted in higher average sales for cremation
services.
Average
Revenue Per Funeral Service
Our consolidated average revenue per funeral service increased
$89 or 1.7% in 2010 compared to 2009, primarily as a result of
increased comparable average revenue per funeral service
described below. Our comparable average revenue per funeral
increased $129, or 2.5% in 2010 compared to the same period in
2009. This increase was primarily attributable to a
$5.2 million ($21 per service) increase in trust fund
income as a result of improved conditions in the equity and debt
markets in 2010 compared to 2009, a 1% inflationary price
increase and a $14.2 million ($57 per service) favorable
Canadian currency impact.
Funeral
Gross Profit
Consolidated funeral gross profits increased $11.2 million
in 2010 compared to the same period in 2009. This increase is
primarily attributable to $22.5 million of additional gross
profits related to acquisitions that occurred in 2010 and 2009,
partially offset by a decline of $0.5 million of gross
profits that were contributed in 2009 by non-strategic assets
divested throughout 2010 and 2009 and the decrease in comparable
funeral gross profits described below.
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Comparable funeral gross profits decreased $10.8 million,
or 3.5%, and the comparable gross margin percentage decreased
from 22.3% to 21.3% when compared to the same period in 2009
primarily as a result of the increase in comparable revenue
described above being more than offset by the following:
| • | a $9.7 million increase in comparable selling costs resulting from increased advertising and increased commissions for preneed production. Selling costs are recognized in the period incurred; however, the revenue associated with the preneed production is not recognized until the services are performed as described in Critical Accounting Policies, Recent Accounting Pronouncements, and Accounting Changes below; | |
| • | a $3.2 million increase in insurance expense as the result of a 2009 favorable adjustment in self-insurance casualty reserves that did not recur in 2010; and | |
| • | an $11.5 million unfavorable Canadian currency impact on expenses. |
Consolidated funeral gross profits decreased $7.6 million
in 2009 as compared to 2008 primarily as a result of the
decrease in comparable gross profit described below, partially
offset by the divestiture of non-strategic assets which had
reflected gross losses of $3.4 million in 2008.
| • | Gross profit from our comparable funeral locations decreased $11.6 million, or 3.7%, in 2009 compared to 2008. This decrease is primarily a result of the decrease in comparable revenue described above partially offset by; | |
| • | a $19.9 million decrease in variable costs as a result of the decrease in the number of funeral services performed noted above; | |
| • | a $13.6 million decrease in personnel costs related to work-force initiatives; | |
| • | a $5.5 million decrease in selling costs resulting from decreased advertising expenses; | |
| • | a $6.1 million decrease in fuel and utilities costs as a result of lower prices and energy saving initiatives; and | |
| • | an $8.3 million favorable Canadian currency impact on expenses. |
Cemetery
Results
Cemetery
Revenue
Consolidated revenues from our cemetery operations increased
$36.1 million, or 5.5%, in 2010 compared to 2009 primarily
as a result of the increase in comparable revenues described
below and $12.3 million in additional revenues generated by
acquisitions in 2010 and 2009, partially offset by a decline of
$8.1 million in revenues contributed by non-strategic
assets that were divested throughout 2010 and 2009. Comparable
cemetery revenues increased $31.9 million, or 4.9%, in 2010
when compared with 2009. This increase was primarily driven by a
$20.2 million increase in recognized property revenues as a
result of 2010 marketing initiatives and a $7.8 million
increase in trust fund income as the result of improved
conditions in the equity and debt markets in 2010 compared to
2009.
Consolidated revenues from our cemetery operations decreased
$18.3 million, or 2.7%, in 2009 compared to 2008 primarily
as a result of the decrease in comparable revenues described
below and a decline of $2.0 million in revenues contributed
by non-strategic assets that were divested throughout 2008,
partially offset by $0.5 million in additional revenues
generated by acquisitions in 2009. Comparable cemetery revenues
decreased $16.8 million, or 2.5%, in 2009 when compared
with 2008. This decrease was primarily driven by an
$18.1 million decrease in atneed revenues due to a reduced
number of deaths in our markets and a $3.4 million decrease
in other revenues, partially offset by a $3.3 million
increase in recognized preneed revenues and a $1.3 million
increase in trust fund income.
Cemetery
Gross Profits
Consolidated cemetery gross profit increased $16.6 million,
or 14.4%, in 2010 compared to 2009. This increase is primarily
the result of the increase in comparable gross profits described
below:
| • | a $3.2 million in additional gross profits generated by acquisitions in 2010 and 2009, partially offset by; |
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| • | a decline of $0.7 million in gross profits contributed by non-strategic assets that were divested throughout 2010 and 2009. |
Comparable cemetery gross profits increased $14.1 million,
or 12.2%, and our comparable gross margin percentage increased
from 17.7% to 19.0% in 2010 compared to the same period in 2009.
This increase is primarily the result of:
| • | The increase in comparable revenues described above, partially offset by; | |
| • | a $12.3 million increase in selling costs stemming from increased advertising and increased commissions on preneed production; | |
| • | a $2.8 million increase in property and merchandise costs driven by higher revenues described above; and | |
| • | a $3.0 million increase in insurance expense as a result of a 2009 favorable adjustment in self-insurance casualty reserves that did not recur in 2010. |
Consolidated cemetery gross profit increased $8.8 million
or 8.2%, in 2009 compared to 2008. This is primarily the result
of the increase in comparable gross profits of
$7.9 million, or 7.4%, and our comparable gross margin
percentage increased from 16.1% to 17.7% in 2009 compared to
2008. This increase is a result of the revenue declines
described above being more than offset by the following:
| • | a $1.2 million decrease in variable selling costs; | |
| • | a $14.9 million decrease in personnel costs related to work-force initiatives; | |
| • | a $3.0 million decrease in self-insurance casualty reserves; and | |
| • | a $6.4 million decrease in property and merchandise costs driven by lower revenues described above. |
Other
Financial Statement Items
General
and Administrative Expenses
General and administrative expenses were $103.7 million in
2010 compared to $102.5 million in 2009 and
$88.9 million in 2008. For 2010 compared to 2009, general
and administrative costs increased $1.2 million primarily
due to a $4.6 million increase in acquisition and
transition costs and a $1.5 million increase in
employee-related compensation plan expenses, insurance-related
expenses, and tax-related expenses, primarily offset by a
$5.2 million decrease in professional service fees. For
2009 compared to 2008, general and administrative costs
increased $13.6 million primarily due to $12.5 million
increase in corporate bonus and long-term incentive plan costs.
Gains
(Losses) on Divestitures and Impairment Charges, Net
In 2010, we recognized a $8.5 million net pre-tax gain on
asset divestitures and impairments. This gain was primarily due
to a $6.2 million gain on assets we owned that were
divested under our agreement with the Federal Trade Commission
arising from our acquisition of Keystone North America and net
gains of $10.3 million on divestitures of certain
non-strategic funeral and cemetery assets in the United States
and Canada, partially offset by $8.0 million in impairment
charges on certain intangible assets and other asset
divestitures.
In 2009, we recognized a $4.3 million net pre-tax gain on
asset divestitures and impairments. This gain was primarily due
to an $18.8 million release of value-added tax (VAT),
Social Security, and litigation indemnifications related to our
former French operations, offset by $14.5 million in net
losses on asset divestitures and impairment charges.
In 2008, we recognized a $36.1 million net pre-tax loss on
asset divestitures and impairments. This loss was primarily due
to the impairments and asset divestitures associated with
non-strategic funeral and cemetery businesses in the United
States and Canada, including a $3.8 million impairment
charge of our trademark and tradenames and a $13.9 million
impairment of certain assets, which were classified as assets
held for sale at December 31, 2008.
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Interest
Expense
Interest expense decreased $0.8 million to
$128.2 million in 2010 compared to $129.0 million in
2009. The decrease in interest expense primarily resulted from
the retirement of scheduled debt maturities, open market debt
repurchases, and a lower weighted average borrowing rate in 2010
compared to 2009.
Interest expense decreased $5.3 million to
$129.0 million in 2009 compared to $134.3 million in
2008. The decrease in interest expense primarily resulted from
the retirement of scheduled debt maturities, open market debt
repurchases, and a lower weighted average borrowing rate in 2009
compared to 2008.
(Losses)
Gains on Early Extinguishment of Debt
During 2010, we repaid $260 million of amounts drawn on our
bank credit facility and made debt payments of
$122.2 million, which included $25.5 million aggregate
principal amount of our 7.875% Debentures due February
2013, $70.5 million aggregate principal amount of our
7.375% Senior Notes due October 2014, 3.0 million
aggregate principal amount of our 6.75% Notes due April
2015, and $20.1 million aggregate principal amount of our
6.75% Notes due April 2016. Certain of the above
transactions resulted in the recognition of a loss of
$9.4 million recorded in
(Losses) gains on early
extinguishment of debt
in our consolidated statement of
operations, which represents the write-off of unamortized
deferred loan costs of $1.4 million and $8.0 million
in premium on the purchase of these notes.
During 2009, we repaid $150.0 million aggregate principal
amount of our Series B Senior Notes due November 2011,
$23.5 million aggregate principal amount of our
7.875% Debentures due February 2013, $5.0 million
aggregate principal amount of our 7.375% Senior Notes due
October 2014, $39.8 million aggregate principal amount of
our 6.75% Notes due April 2015, $16.9 million
aggregate principal amount of our 6.75% Notes due April
2016, and $5.0 million aggregate principal amount of our
7.0% Notes due June 2017. As a result of these
transactions, we recognized a gain of $3.1 million during
the year ended December 31, 2009, which represents a
$5.1 million net discount on the purchase of the notes and
the write-off of unamortized deferred loan costs of
$2.0 million.
There were no early extinguishments of debt during 2008.
Other
Income, Net
Other income, net increased $1.7 million to
$3.0 million in 2010 compared to $1.3 million in 2009,
primarily due to a favorable foreign currency exchange impact
from liability settlements between U.S. and Canadian
subsidiaries.
Other income, net decreased $3.6 million to
$1.3 million in 2009 compared to $4.9 million in 2008,
primarily due to a $3.1 million decline in interest income
as a result of lower interest rates in 2009.
Provision
for Income Taxes
The 2010 consolidated effective tax rate was 42.1%, compared to
38.3% and 40.2% in 2009 and 2008, respectively. Our 2010, 2009,
and 2008 effective tax rate was negatively impacted by permanent
book and tax basis differences related to North American asset
divestitures. During 2010 we recognized U.S. tax on
post-acquisition integration of certain Keystone entities into
SCI’s structure. Our overall foreign tax expense increased
in 2010 due to an increase in foreign earnings. This increase
was partially offset by a decrease in foreign statutory rates.
In 2010 our state tax expense was impacted by permanent items
affecting our overall effective rate as well as an increase in
state statutory tax rates. During 2009 we experienced a decrease
in state tax expense due to a restructuring of some of our state
operating entities.
During 2010, the Internal Revenue Service approved three
requests for tax accounting method changes relating to the
recognition of trust earnings accumulated in cemetery and
funeral trusts, revenue from pre-need sales of cemetery
merchandise, and revenue from non-trusted customer payments for
pre-need funeral contracts. The effective date for these tax
accounting method changes is for the fiscal year ended
December 31, 2010. In accordance with § 481(a) of
the U.S. Internal Revenue Code this adjustment recalculates the
income previously recognized to determine what should have been
recognized under the new tax accounting method. The cumulative
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impact of these accounting method changes resulted in an
adjustment under § 481(a) for 2010 of
$190.3 million that represents a decrease in current year
taxable income, a decrease in a previously recognized deferred
tax asset related to deferred revenue, and an increase in our
deferred tax asset related to our net operating loss carryover.
Although these changes have no tax impact on the overall
effective tax rate, there is a savings in cash taxes including
SCI’s eligibility for a quick refund of its 2010 Federal
estimated tax payments of $7.1 million which should be
received in 2011. This refund has been reflected as a receivable
in other current assets. See Note 10 in Part II,
Item 8. Financial Statements and Supplementary Data, for
further discussion.
Weighted
Average Shares
The diluted weighted average number of shares outstanding was
250.6 million in 2010, compared to 252.5 million in
2009, and 261.0 million in 2008. The decrease in all years
reflects the impact of shares repurchased under our share
repurchase program.
Critical
Accounting Policies, Recent Accounting Pronouncements, and
Accounting Changes
Our consolidated financial statements are impacted by the
accounting policies used and the estimates and assumptions made
by management during their preparation. See Note 2 in
Part II, Item 8. Financial Statements and
Supplementary Data, for more information. Estimates and
assumptions affect the carrying values of assets and liabilities
and disclosures of contingent assets and liabilities at the
balance sheet date. Actual results could differ from such
estimates due to uncertainties associated with the methods and
assumptions underlying our critical accounting measurements. The
following is a discussion of our critical accounting policies
pertaining to revenue recognition, business combinations,
valuation of goodwill, valuation of intangible assets, valuation
of long-lived assets, loss contract analysis, the use of
estimates, fair value measurements, and non-controlling
interests.
Revenue
Recognition
Funeral revenue is recognized when funeral services are
performed. Our trade receivables primarily consist of amounts
due for funeral services already performed. Revenue associated
with cemetery merchandise and services is recognized when the
service is performed or merchandise is delivered. When a
customer enters into a preneed funeral trust contract, the
entire purchase price is deferred and the revenue is recognized
at the time of maturity.
Under the Revenue Recognition Topic of the ASC revenue from
constructed cemetery property is not recognized until a minimum
percentage of the sales price has been collected. The revenues
associated with a preneed cemetery contract, however, may be
recognized as different contract events occur. Preneed sales of
cemetery interment rights (cemetery burial property) are
recognized when a minimum of 10% of the sales price has been
collected and the property has been constructed or is available
for interment. For services and non-personalized merchandise
(such as vaults), we defer the revenues until the services are
performed and the merchandise is delivered. For personalized
marker merchandise, with the customer’s direction generally
obtained at the time of sale, we can choose to order, store, and
transfer title to the customer. Upon the earlier of vendor
storage of these items or delivery in our cemetery, we recognize
the associated revenues and record the cost of sale. In
situations in which we have no further obligation or involvement
related to the merchandise, we recognize revenues and record the
cost of sales in accordance with the Revenue Recognition Topic
of the ASC.
Business
Combinations
In December 2007, the FASB revised the authoritative guidance
for business combinations, establishing principles and
requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired (including
goodwill), the liabilities assumed, and any noncontrolling
interest in the acquiree. Subsequently, on April 1, 2009,
the FASB amended and clarified certain aspects of its
authoritative guidance on initial recognition and measurement,
subsequent measurement and accounting, and disclosure of assets
and liabilities arising from contingencies in a business
combination. We apply the FASB authoritative guidance to all
business combinations for which the acquisition date is on or
after January 1, 2009. In these acquisitions, tangible and
intangible assets acquired and liabilities assumed are recorded
at fair value and goodwill is recognized for any difference
between the price of the acquisition and our fair value
determination.
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Valuation
of Goodwill
We record the excess of purchase price over the fair value of
identifiable net assets acquired in business combinations as
goodwill. Goodwill is tested annually for impairment by
assessing the fair value of each of our reporting units. We test
for impairment of goodwill in accordance with the Intangibles
Topic of the ASC annually during the fourth quarter.
Our goodwill impairment test involves estimates and management
judgment. In the first step of our goodwill impairment test, we
compare the fair value of a reporting unit to its carrying
amount, including goodwill. We determine fair value of each
reporting unit using both a market and income approach. Our
methodology considers discounted cash flows and multiples of
EBITDA (earnings before interest, taxes, depreciation, and
amortization) for both SCI and its competitors. The discounted
cash flow valuation uses projections of future cash flows and
includes assumptions concerning future operating performance and
economic conditions that may differ from actual future cash
flows. We do not record an impairment of goodwill in instances
where the fair value of a reporting unit exceeds its carrying
amount. If the aggregate fair value is less than the related
carrying amount for a reporting unit, we compare the implied
fair value of goodwill (as defined in the Intangibles Topic of
the ASC) to the carrying amount of goodwill. If the carrying
amount of reporting unit goodwill exceeds the implied fair value
of that goodwill, an impairment loss is recognized in an amount
equal to that excess. Based on our most recent annual impairment
test performed during the fourth quarter with amounts recorded
as of October 1, 2010, we concluded that there was no
impairment of goodwill as of December 31, 2010.
For our most recent annual impairment test performed in the
fourth quarter, we used growth rates ranging from 1.6% to 4.3%
over a three-year period, plus a terminal value determined using
the constant growth method, in projecting our future cash flows.
We used an 8.5% discount rate, which reflected our weighted
average cost of capital based on our capital structure, as
adjusted for equity risk premiums. Fair value was calculated as
the sum of the projected discounted cash flows of our reporting
units over the next three years plus terminal value at the end
of those three years. Our terminal value was calculated using
long-term growth rates of 2.6% and 2.9% for our funeral and
cemetery reporting units, respectively.
In addition to our annual review, we assess the impairment of
goodwill whenever events or changes in circumstances indicate
that the carrying value may be greater than fair value. Factors
that could trigger an interim impairment review include, but are
not limited to, significant underperformance relative to
historical or projected future operating results and significant
negative industry or economic trends. No interim goodwill
impairments reviews were performed in 2010.
Valuation
of Intangible Assets
Our intangible assets include customer relationships, trademarks
and tradenames, and other assets primarily resulting from
acquisitions. Our trademark and tradenames and water rights
assets are considered to have an indefinite life and are not
subject to amortization. We test for impairment of intangible
assets in accordance with the Intangibles Topic of the ASC
annually during the fourth quarter.
Our intangible assets impairment tests involve estimates and
management judgment. For trademark and tradenames, our test uses
the relief from royalty method whereby we determine the fair
value of the assets by discounting the cash flows that represent
a savings over having to pay a royalty fee for use of the
trademark and tradenames. The discounted cash flow valuation
uses projections of future cash flows and includes assumptions
concerning future operating performance and economic conditions
that may differ from actual future cash flows. For our most
recent annual impairment test performed in the fourth quarter
using October 1 data, we estimated that the pre-tax savings
would be 4% of the revenues associated with the trademark and
tradenames, based primarily on our research of intellectual
property valuation and licensing databases. We also assumed a
terminal growth rate of 2.6% and 2.9% for our funeral and
cemetery segments, respectively, and discounted the cash flows
at an 8.7% discount rate based on the relative risk of these
assets to our overall business. Based on our annual impairment
test performed during the fourth quarter, we recorded a
$0.6 million impairment in
Gains (losses) on
divestitures and impairment charges, net
on certain license
assets.
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In addition to our annual review, we assess the impairment of
intangible assets whenever events or changes in circumstances
indicate that the carrying value may be greater than the fair
value. Factors that could trigger an interim impairment review
include, but are not limited to, significant underperformance
relative to historical or projected future operating results and
significant negative industry or economic trends. No interim
intangible impairment reviews were performed in 2010.
Valuation
of Long-Lived Assets
We review the carrying value of our long-lived assets for
impairment whenever events or circumstances indicate that the
carrying amount of the asset may not be recoverable, in
accordance with the Intangibles and Property, Plant, and
Equipment Topics of the ASC. This guidance requires that
long-lived assets to be held and used are reported at the lower
of their carrying amount or fair value. Fair value is based on
an income approach that utilizes projections of undiscounted
future cash flows expected to be generated by our long-lived
assets.
Assets to be disposed of and assets not expected to provide any
future service potential are recorded at the lower of their
carrying amount or fair value less estimated cost to sell. For
additional information regarding impairment or disposal of
long-lived assets, see Note 20 in Part II,
Item 8. Financial Statements and Supplementary Data.
Loss
Contract Analysis
We perform an analysis to determine whether our preneed
contracts are in a loss position, which would necessitate a
charge to earnings. For this analysis, we add the sales prices
of the underlying contracts and net realized earnings, then
subtract net unrealized losses to derive the net amount of
estimated proceeds for contracts as of the balance sheet date.
We consider unrealized gains and losses based on current market
prices quoted for the investments, and we do not include future
expected returns on the investments in our analysis. We compare
our estimated proceeds to the estimated direct costs to deliver
our contracts, which consist primarily of funeral and cemetery
merchandise costs and salaries, supplies, and equipment related
to the delivery of a preneed contract. If a deficiency were to
exist, we would record a charge to earnings and a corresponding
liability for the expected loss on delivery of those contracts
from our backlog. As of December 31, 2010, no such charge
was required. Due to the positive margins of our preneed
contracts and the trust portfolio returns we have experienced in
prior years, we believe there is currently capacity for
additional market depreciation before a loss contract would
result.
Use of
Estimates
The preparation of financial statements in conformity with
Generally Accepted Accounting Principles in the United States
(GAAP) requires management to make certain estimates and
assumptions. These estimates and assumptions affect the carrying
values of assets and liabilities and disclosures of contingent
assets and liabilities at the balance sheet date. Actual results
could differ from such estimates due to uncertainties associated
with the methods and assumptions underlying our critical
accounting measurements. Key estimates used by management
include:
Allowances
— We provide various allowances
and/or
cancellation reserves for our funeral and cemetery preneed and
atneed receivables, as well as for our preneed funeral and
preneed cemetery deferred revenues. These allowances are based
on an analysis of historical trends and include, where
applicable, collection and cancellation activity. We also record
an estimate of general agency revenues that may be cancelled in
their first year and revenue would be charged back by the
insurance company. These estimates are impacted by a number of
factors, including changes in economy, relocation, and
demographic or competitive changes in our areas of operation.
Valuation of trust investments
— The trust
investments include marketable securities that are classified as
available-for-sale
in accordance with the Investments in Debt and Equity Securities
Topic of the ASC. When available, we use quoted market prices
for specific securities. When quoted market prices are not
available for the specific security, fair values are estimated
by using either quoted market prices for securities with similar
characteristics or a fair value model with observable inputs
that include a combination of interest rates, yield curves,
credit risks, prepayment terms, rating, and tax exempt status.
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The valuation of private equity and other investments requires
significant management judgment due to the absence of quoted
market prices, inherent lack of liquidity, and the long-term
nature of such assets. The fair value of these investments is
estimated based on the market value of the underlying real
estate and private equity instruments. The underlying real
estate value is determined using the most recent appraisals. The
private equity investments are valued using appraisals and a
discounted cash flow methodology depending on the underlying
assets. The appraisals assess value based on a combination of
replacement cost, comparative sales analysis, and discounted
cash flow analysis. See Fair Value Measurements below for
additional information.
Legal liability reserves
— Contingent
liabilities, principally for legal matters, are recorded when it
is probable that a liability has been incurred and the amount of
the loss can be reasonably estimated in accordance with the
Contingencies Topic of the ASC. Liabilities accrued for legal
matters require judgments regarding projected outcomes and a
range of loss based on historical experience and recommendations
of legal counsel. However, litigation is inherently
unpredictable and excessive verdicts do occur. As disclosed in
Note 13 in Part II, Item 8. Financial Statements
and Supplementary Data, our legal exposures and the ultimate
outcome of these legal proceedings could be material to
operating results or cash flows in any given quarter or year.
Depreciation of long-lived assets
— We
depreciate our long-lived assets ratably over their estimated
useful lives. These estimates of useful lives may be affected by
such factors as changing market conditions or changes in
regulatory requirements.
Valuation of assets acquired and liabilities
assumed
— We have applied the guidance in the
Business Combinations Topic of the ASC to our business
combinations. Tangible and intangible assets and liabilities
assumed are recorded at their fair value and goodwill is
recognized for any difference between the price of acquisition
and our fair value determination. We have customarily estimated
our purchase costs and other related transactions known to us at
closing of the acquisition. To the extent that information not
available to us at the closing date subsequently became
available during the allocation period, we have adjusted our
goodwill, assets, or liabilities associated with the acquisition.
Income taxes
— We compute income taxes using
the liability method. Our ability to realize the benefit of our
federal and state deferred tax assets requires us to achieve
certain future earnings levels. We have established a valuation
allowance against a portion of our deferred tax assets and we
could be required to further adjust that valuation allowance if
market conditions change materially and future earnings are, or
are projected to be, significantly different than our current
estimates.
During the fourth quarter of 2010, the Company underwent a
restructuring of its Canadian subsidiaries. The restructuring
triggered a U.S. dividend of $6.9 million for which
U.S. federal taxes have been provided for the year ended
December 31, 2010. The dividend is less than current year
earnings and other prior year earnings required to be
permanently reinvested. At December 31, 2010 and 2009,
U.S. income taxes had not been provided on
$256.0 million and $200.2 million, respectively, of
the remaining undistributed earnings of our Canadian
subsidiaries. We intend to permanently reinvest these
undistributed foreign earnings in those businesses outside the
United States. It is not practicable to determine the amount of
federal income taxes, if any, that might become due if such
earnings are repatriated.
We file income tax returns, including tax returns for our
subsidiaries, with U.S. federal, state, local, and foreign
jurisdictions. Our tax returns are subject to routine compliance
review by the various federal, state, and foreign taxing
authorities in the jurisdictions in which we have operated and
filed tax returns in the ordinary course of business. We accrue
tax expense to reduce our tax benefits in those situations where
it is more likely than not that we will not prevail against the
tax authorities should they challenge the tax return position
that gave rise to the benefit. We believe that our tax returns
are materially correct as filed and we will vigorously defend
any challenges and proposed adjustments to those filings made by
the tax authorities. A number of years may elapse before
particular tax matters, for which we have established accruals,
are audited and finally resolved. The number of tax years that
may be subject to a tax audit varies depending on the tax
jurisdiction. Current audits are occurring in the
United States and various state and foreign locations
covering open tax years through 2008. The Internal Revenue
Service is in various stages of auditing tax years 1999 through
2005. While it is often difficult to predict the final outcome
or the timing of resolution of any particular tax matter, we
believe that our accruals reflect the probable outcome of known
tax contingencies. Unfavorable settlement of any particular
issue would reduce a deferred tax
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asset or require the payment of cash. Favorable resolution could
result in reduced income tax expense reported in the financial
statements in the future. Our tax accruals for uncertain tax
positions are presented in the balance sheet within
Other
liabilities.
Pension cost
— Our pension plans are frozen
with no benefits accruing to participants except interest.
Pension costs and liabilities are actuarially determined based
on certain assumptions, including the discount rate used to
compute future benefit obligations. Weighted-average discount
rates used to determine net periodic pension cost were 4.80% and
5.97% as of December 31, 2010 and 2009, respectively. We
verify the reasonableness of the discount rate by comparing our
rate to the rate earned on high-quality fixed income
investments, such as the Moody’s Aa index. In 2008, we
completed the termination of the Employee Retirement Plan of
Rose Hills, and there are no remaining assets or liabilities
under the plan.
Insurance loss reserves
— We purchase
comprehensive general liability, morticians and cemetery
professional liability, automobile liability, and workers’
compensation insurance coverages structured with high
deductibles. This high-deductible insurance program means we are
primarily self-insured for claims and associated costs and
losses covered by these policies. Historical insurance industry
experience indicates a high degree of inherent variability in
assessing the ultimate amount of losses associated with casualty
insurance claims. This is especially true with respect to
liability and workers’ compensation exposures due to the
extended period of time that transpires between when the claim
might occur and the full settlement of such claim, often many
years. We continually evaluate loss estimates associated with
claims and losses related to these insurance coverages falling
within the deductible of each coverage. Assumptions based on
factors such as claim settlement patterns, claim development
trends, claim frequency and severity patterns, inflationary
trends, and data reasonableness will generally affect the
analysis and determination of the “best estimate” of
the projected ultimate claim losses. The results of these
evaluations are used to both analyze and adjust our insurance
loss reserves.
As of December 31, 2010, reported losses within our
retention for workers’ compensation, general liability, and
auto liability incurred during the period May 1, 1991
through December 31, 2010 were approximately
$301.4 million over 19.8 years. The selected fully
developed ultimate settlement value estimated was
$343.4 million for the same period. Paid losses were
$289.5 million indicating a reserve requirement of
$53.9 million.
At December 31, 2010 and 2009, the balances in our reserve
for workers’ compensation, general, and auto liability and
the related activity were as follows:
| (Dollars in millions) | ||||
|
Balance at December 31, 2008
|
$ | 63.6 | ||
|
Additions
|
22.6 | |||
|
Payments
|
(28.3 | ) | ||
|
Balance at December 31, 2009
|
$ | 57.9 | ||
|
Additions
|
24.2 | |||
|
Payments
|
(28.2 | ) | ||
|
Balance at December 31, 2010
|
$ | 53.9 | ||
Fair
Value Measurements
We measure the
available-for-sale
securities held by our funeral merchandise and service, cemetery
merchandise and service, and cemetery perpetual care trusts at
fair value on a recurring basis in accordance with the Fair
Value Measurements Topic of the ASC. This guidance defines fair
value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date, establishes a
framework for measuring fair value, and expands disclosures
about instruments measured at fair value. The guidance
establishes a three-level valuation hierarchy for disclosure of
fair value measurements. The valuation hierarchy is based upon
the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are
defined as follows:
| • | Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; |
42
Table of Contents
| • | Level 2 — inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and | |
| • | Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
An asset’s or liability’s categorization within the
valuation hierarchy is based upon the lowest level of input that
is significant to the fair value measurement. Certain
available-for-sale
securities held by our funeral merchandise and service, cemetery
merchandise and service, and cemetery perpetual care trusts have
been classified in Level 3 of the hierarchy due to
significant management judgment required as a result of the
absence of quoted market prices, inherent lack of liquidity, or
the long-term nature of the securities. For additional
disclosures required by FASB guidance for all of our
available-for-sale
securities, see Notes 4, 5, and 6 in Part II,
Item 8. Financial Statements and Supplementary Data.
On January 1, 2009, we adopted the guidance for our
non-financial assets and liabilities, such as goodwill and
property and equipment, that we disclose or recognize at fair
value on a non-recurring basis. Our adoption for these assets
and liabilities did not have a material impact on our results of
operations, consolidated financial position, or cash flows.
In April 2009, the FASB issued additional guidance on how to
determine the fair value of assets and liabilities in an
environment where the volume and level of activity for the asset
or liability have significantly decreased. The FASB guidance
also re-emphasizes that the objective of a fair value
measurement remains an exit price. The guidance, which was
effective for us in the second quarter of 2009, did not have a
material impact on our results of operations, consolidated
financial position, or cash flows. For more information, see
Notes 4, 5, and 6 in Part II, Item 8. Financial
Statements and Supplementary Data.
Noncontrolling
Interests
The FASB issued authoritative guidance for noncontrolling
interests in December 2007, which establishes accounting and
reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. The
guidance clarifies that a noncontrolling interest in a
subsidiary, which is sometimes referred to as an unconsolidated
investment, is an ownership interest in the consolidated entity
that should be reported as a component of equity in the
consolidated financial statements. Among other requirements, the
guidance requires consolidated net income to be reported at
amounts attributable to both the parent and the noncontrolling
interest. It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated
net income attributable to the parent and to the noncontrolling
interest. We adopted the provisions of the FASB guidance on
January 1, 2009 and applied the provisions retrospectively.
As a result, we have modified our consolidated statement of
operations, consolidated balance sheet, consolidated statement
of cash flows, and consolidated statement of equity to
incorporate the required disclosure of noncontrolling interest
information. For more information, see Note 7 in
Part II, Item 8. Financial Statements and
Supplementary Data.
Recent
Accounting Pronouncements and Accounting Changes
For discussion of recent accounting pronouncements and
accounting changes, see Note 3 in Part II,
Item 8. Financial Statements and Supplementary Data.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
The market risk inherent in our financial instruments and
positions includes the price risk associated with the marketable
equity and debt securities included in our portfolio of trust
investments, the interest rate risk associated with our floating
rate debt, and the currency risk associated with our foreign
operations (primarily in Canada). Our market-sensitive
instruments and positions are considered to be
“other-than-trading”.
Our exposure to market risk as discussed below includes
forward-looking statements and represents an estimate of
possible changes in fair value or future earnings that might
occur, assuming hypothetical changes in equity markets, interest
rates, and currencies. Our views on market risk are not
necessarily indicative of actual results that may occur, and
they do not represent the
43
Table of Contents
maximum possible gains or losses that may occur. Actual fair
value movements related to changes in equity markets, interest
rates and currencies, along with the timing of such movements,
may differ from those estimated.
Marketable
Equity and Debt Securities — Price Risk
In connection with our preneed funeral operations and preneed
cemetery merchandise and service sales, the related funeral and
cemetery trust funds own investments in equity and debt
securities and mutual funds, which are sensitive to current
market prices.
Cost and market values as of December 31, 2010 are
presented in Notes 4, 5, and 6 in Part II,
Item 8, Financial Statements and Supplementary Data. Also,
see Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations,
Financial
Conditions, Liquidity, and Capital Resources
, for discussion
of trust investments.
Market-Rate
Sensitive Instruments — Interest Rate Risk
At December 31, 2010 and 2009, approximately 93% and 85%,
respectively, of our total debt consisted of fixed rate debt at
a weighted average rate of 6.80% and 6.52%, respectively. The
fair market value of our debt was $52.5 million more than
its carrying value at December 31, 2010. A hypothetical 10%
increase in interest rates associated with our floating rate
debt would increase our interest expense by $0.2 million.
See Note 11 and 12 in Part II, Item 8. Financial
Statements and Supplementary Data, for additional information.
Market-Rate
Sensitive Instruments — Currency Risk
At December 31, 2010 and 2009, our foreign currency
exposure was primarily associated with the Canadian dollar and
the euro. A 10% adverse change in the strength of the
U.S. dollar relative to our foreign currency instruments
would have negatively affected our income from our continuing
operations, on an annual basis, by $4.0 million for the
year ended December 31, 2010 and $1.1 million for the
year ended December 31, 2009.
At December 31, 2010, approximately 3% of our
stockholders’ equity and 15% of our operating income were
denominated in foreign currencies, primarily the Canadian
dollar. Approximately 9% of our stockholders’ equity and
11% of our operating income were denominated in foreign
currencies, primarily the Canadian dollar, at December 31,
2009. We do not have an investment in foreign operations
considered to be in highly inflationary economies.
44
Table of Contents
| Item 8. | Financial Statements and Supplementary Data. |
INDEX TO
FINANCIAL STATEMENTS AND RELATED SCHEDULE
| Page | ||||
|
Financial Statements:
|
||||
|
Report of Independent Registered Public Accounting Firm
|
46 | |||
|
Consolidated Statement of Operations for the years ended
December 31, 2010, 2009, and 2008
|
47 | |||
|
Consolidated Balance Sheet as of December 31, 2010 and 2009
|
48 | |||
|
Consolidated Statement of Cash Flows for the years ended
December 31, 2010, 2009, and 2008
|
49 | |||
|
Consolidated Statement of Equity for the three years ended
December 31, 2010
|
50 | |||
|
Notes to Consolidated Financial Statements
|
51 | |||
|
1. Nature of Operations
|
51 | |||
|
2. Summary of Significant Accounting Policies
|
51 | |||
|
3. Recent Accounting Pronouncements and Accounting Changes
|
58 | |||
|
4. Preneed Funeral Activities
|
59 | |||
|
5. Preneed Cemetery Activities
|
66 | |||
|
6. Cemetery Perpetual Care Trusts
|
73 | |||
|
7. Deferred Preneed Funeral and Cemetery Receipts Held in
Trust and Care Trusts’ Corpus
|
78 | |||
|
8. Keystone Acquisition
|
80 | |||
|
9. Goodwill
|
82 | |||
|
10. Income Taxes
|
83 | |||
|
11. Debt
|
88 | |||
|
12. Credit Risk and Fair Value of Financial Instruments
|
90 | |||
|
13. Commitments and Contingencies
|
91 | |||
|
14. Equity
|
94 | |||
|
15. Share-Based Compensation
|
96 | |||
|
16. Retirement Plans
|
98 | |||
|
17. Segment Reporting
|
100 | |||
|
18. Supplementary Information
|
104 | |||
|
19. Earnings Per Share
|
106 | |||
|
20. Divestiture-Related Activities
|
108 | |||
|
21. Quarterly Financial Data (Unaudited)
|
110 | |||
|
Financial Statement Schedule:
|
||||
|
II — Valuation and Qualifying Accounts
|
111 | |||
All other schedules have been omitted because the required
information is not applicable or is not present in amounts
sufficient to require submission or because the information
required is included in the consolidated financial statements or
the related notes thereto.
45
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Service Corporation International:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Service Corporation International and
its subsidiaries at December 31, 2010 and 2009, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2010 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2010,
based on criteria established in
Internal Control —
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial
statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Management’s Report on
Internal Control Over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and
on the Company’s internal control over financial reporting
based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material
misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PriceWaterhouseCooper LLP
Houston, Texas
February 14, 2011
46
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
Revenues
|
$ | 2,190,552 | $ | 2,053,520 | $ | 2,155,622 | ||||||
|
Costs and expenses
|
(1,741,329 | ) | (1,632,125 | ) | (1,735,447 | ) | ||||||
|
Gross profits
|
449,223 | 421,395 | 420,175 | |||||||||
|
General and administrative expenses
|
(103,689 | ) | (102,501 | ) | (88,851 | ) | ||||||
|
Gains (losses) on divestitures and impairment charges, net
|
8,512 | 4,253 | (36,124 | ) | ||||||||
|
Other operating income (expense)
|
— | 740 | (2,528 | ) | ||||||||
|
Operating income
|
354,046 | 323,887 | 292,672 | |||||||||
|
Interest expense
|
(128,196 | ) | (128,981 | ) | (134,274 | ) | ||||||
|
(Losses) gains on early extinguishment of debt
|
(9,400 | ) | 3,146 | — | ||||||||
|
Other income, net
|
3,009 | 1,316 | 4,897 | |||||||||
|
Income from continuing operations before income taxes
|
219,459 | 199,368 | 163,295 | |||||||||
|
Provision for income taxes
|
(92,458 | ) | (76,275 | ) | (65,717 | ) | ||||||
|
Income from continuing operations
|
127,001 | 123,093 | 97,578 | |||||||||
|
Loss from discontinued operations (net of income tax benefit of
$0, $0 and $195, respectively)
|
— | — | (362 | ) | ||||||||
|
Net income
|
127,001 | 123,093 | 97,216 | |||||||||
|
Net (income) loss attributable to noncontrolling interests
|
(584 | ) | 5 | (133 | ) | |||||||
|
Net income attributable to common stockholders
|
$ | 126,417 | $ | 123,098 | $ | 97,083 | ||||||
|
Basic earnings per share:
|
||||||||||||
|
Net income attributable to common stockholders
|
$ | .51 | $ | .49 | $ | .38 | ||||||
|
Basic weighted average number of shares
|
248,871 | 251,709 | 258,106 | |||||||||
|
Diluted earnings per share:
|
||||||||||||
|
Net income attributable to common stockholders
|
$ | .50 | $ | .49 | $ | .37 | ||||||
|
Diluted weighted average number of shares
|
250,602 | 252,484 | 260,983 | |||||||||
|
Dividends declared per share
|
$ | .16 | $ | .16 | $ | .16 | ||||||
(See notes to consolidated financial statements)
47
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands, except share amounts) | ||||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 170,846 | $ | 179,745 | ||||
|
Receivables, net
|
107,185 | 92,189 | ||||||
|
Deferred tax assets
|
41,371 | 51,534 | ||||||
|
Inventories
|
34,770 | 31,117 | ||||||
|
Current assets held for sale
|
552 | 1,197 | ||||||
|
Other
|
27,194 | 21,640 | ||||||
|
Total current assets
|
381,918 | 377,422 | ||||||
|
Preneed funeral receivables, net and trust investments
|
1,424,557 | 1,356,353 | ||||||
|
Preneed cemetery receivables, net and trust investments
|
1,563,893 | 1,382,717 | ||||||
|
Cemetery property, at cost
|
1,508,787 | 1,489,065 | ||||||
|
Property and equipment, net
|
1,627,698 | 1,591,074 | ||||||
|
Non-current assets held for sale
|
1,166 | 80,901 | ||||||
|
Goodwill
|
1,307,484 | 1,201,332 | ||||||
|
Deferred charges and other assets
|
388,018 | 522,389 | ||||||
|
Cemetery perpetual care trust investments
|
987,019 | 889,689 | ||||||
|
Total assets
|
$ | 9,190,540 | $ | 8,890,942 | ||||
| LIABILITIES & EQUITY | ||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable and accrued liabilities
|
$ | 342,651 | $ | 314,277 | ||||
|
Current maturities of long-term debt
|
22,502 | 49,957 | ||||||
|
Current liabilities held for sale
|
— | 501 | ||||||
|
Income taxes
|
1,474 | 2,236 | ||||||
|
Total current liabilities
|
366,627 | 366,971 | ||||||
|
Long-term debt
|
1,832,380 | 1,840,532 | ||||||
|
Deferred preneed funeral revenues
|
580,223 | 596,966 | ||||||
|
Deferred preneed cemetery revenues
|
813,493 | 817,543 | ||||||
|
Deferred tax liability
|
323,304 | 246,730 | ||||||
|
Non-current liabilities held for sale
|
430 | 68,332 | ||||||
|
Other liabilities
|
399,189 | 378,768 | ||||||
|
Deferred preneed funeral and cemetery receipts held in trust
|
2,408,074 | 2,201,403 | ||||||
|
Care trusts’ corpus
|
986,872 | 890,909 | ||||||
|
Commitments and contingencies (Note 13)
|
||||||||
|
Equity:
|
||||||||
|
Common stock, $1 per share par value, 500,000,000 shares
authorized, 242,019,650 and 254,027,384 shares issued,
respectively, and 241,035,250 and 254,017,384 shares
outstanding, respectively
|
241,035 | 254,017 | ||||||
|
Capital in excess of par value
|
1,603,112 | 1,735,493 | ||||||
|
Accumulated deficit
|
(477,459 | ) | (603,876 | ) | ||||
|
Accumulated other comprehensive income
|
112,768 | 97,142 | ||||||
|
Total common stockholders’ equity
|
1,479,456 | 1,482,776 | ||||||
|
Noncontrolling interests
|
492 | 12 | ||||||
|
Total equity
|
1,479,948 | 1,482,788 | ||||||
|
Total liabilities and equity
|
$ | 9,190,540 | $ | 8,890,942 | ||||
(See notes to consolidated financial statements)
48
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income
|
$ | 127,001 | $ | 123,093 | $ | 97,216 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Loss from discontinued operations, net of tax
|
— | — | 362 | |||||||||
|
Losses (gains) on early extinguishments of debt
|
9,400 | (3,146 | ) | — | ||||||||
|
Depreciation and amortization
|
116,391 | 111,102 | 114,157 | |||||||||
|
Amortization of intangible assets
|
25,197 | 21,698 | 23,636 | |||||||||
|
Amortization of cemetery property
|
32,418 | 30,664 | 32,690 | |||||||||
|
Amortization of loan costs
|
4,266 | 7,575 | 3,573 | |||||||||
|
Provision for doubtful accounts
|
8,155 | 11,351 | 9,243 | |||||||||
|
Provision for deferred income taxes
|
76,934 | 57,866 | 109,118 | |||||||||
|
(Gains) losses on divestitures and impairment charges, net
|
(8,512 | ) | (4,253 | ) | 36,124 | |||||||
|
Share-based compensation
|
8,878 | 9,684 | 9,970 | |||||||||
|
Change in assets and liabilities, net of effects from
acquisitions and dispositions:
|
||||||||||||
|
Increase in receivables
|
(14,561 | ) | (8,245 | ) | (409 | ) | ||||||
|
Decrease in other assets
|
2,603 | 11,161 | 26,100 | |||||||||
|
Increase (decrease) in payables and other liabilities
|
16,374 | 30,899 | (143,956 | ) | ||||||||
|
Effect of preneed funeral production maturities:
|
||||||||||||
|
Decrease in preneed funeral receivables, net and trust
investments
|
45,988 | 18,963 | 7,271 | |||||||||
|
(Decrease) increase in deferred preneed funeral revenue
|
(14,778 | ) | 92 | 23,785 | ||||||||
|
Decrease in deferred preneed funeral receipts held in trust
|
(36,322 | ) | (22,558 | ) | (23,334 | ) | ||||||
|
Effect of preneed cemetery production and maturities:
|
||||||||||||
|
(Increase) decrease in preneed cemetery receivables, net and
trust investments
|
(53,224 | ) | (41,427 | ) | 36,333 | |||||||
|
Increase in deferred preneed cemetery revenue
|
10,558 | 24,999 | 11,408 | |||||||||
|
Decrease in deferred preneed cemetery receipts held in trust
|
(648 | ) | (11,702 | ) | (22,388 | ) | ||||||
|
Other
|
(1,739 | ) | 4,254 | (585 | ) | |||||||
|
Net cash provided by operating activities
|
354,379 | 372,070 | 350,314 | |||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Capital expenditures
|
(97,899 | ) | (83,790 | ) | (154,101 | ) | ||||||
|
Acquisitions
|
(299,083 | ) | (84,932 | ) | (8,828 | ) | ||||||
|
Proceeds from divestitures and sales of property and equipment,
net
|
90,835 | 32,696 | 32,543 | |||||||||
|
Net withdrawals (deposits) of restricted funds and other
|
26,437 | (16,459 | ) | (21,741 | ) | |||||||
|
Net cash used in investing activities from continuing operations
|
(279,710 | ) | (152,485 | ) | (152,127 | ) | ||||||
|
Net cash provided by investing activities from discontinued
operations
|
— | — | 858 | |||||||||
|
Net cash used in investing activities
|
(279,710 | ) | (152,485 | ) | (151,269 | ) | ||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Proceeds from issuance of long-term debt
|
510,000 | 150,000 | 82,133 | |||||||||
|
Debt issuance costs
|
(11,828 | ) | (8,146 | ) | — | |||||||
|
Payments of debt
|
(263,063 | ) | (33,058 | ) | (112,302 | ) | ||||||
|
Early extinguishment of debt
|
(119,105 | ) | (236,114 | ) | — | |||||||
|
Principal payments on capital leases
|
(46,214 | ) | (24,288 | ) | (25,851 | ) | ||||||
|
Proceeds from exercise of stock options
|
1,759 | 17,407 | 14,812 | |||||||||
|
Purchase of Company common stock
|
(116,878 | ) | — | (142,155 | ) | |||||||
|
Payments of dividends
|
(40,001 | ) | (40,195 | ) | (41,501 | ) | ||||||
|
Bank overdrafts and other
|
(2,856 | ) | (4,036 | ) | (5,779 | ) | ||||||
|
Net cash used in financing activities
|
(88,186 | ) | (178,430 | ) | (230,643 | ) | ||||||
|
Effect of foreign currency
|
4,618 | 10,193 | (8,599 | ) | ||||||||
|
Net (decrease) increase in cash and cash equivalents
|
(8,899 | ) | 51,348 | (40,197 | ) | |||||||
|
Cash and cash equivalents at beginning of period
|
179,745 | 128,397 | 168,594 | |||||||||
|
Cash and cash equivalents at end of period
|
$ | 170,846 | $ | 179,745 | $ | 128,397 | ||||||
(See notes to consolidated financial statements)
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SERVICE
CORPORATION INTERNATIONAL
|
Accumulated
|
||||||||||||||||||||||||||||
|
Treasury
|
Capital in
|
Other
|
||||||||||||||||||||||||||
|
Common
|
Stock,
|
Excess of
|
Accumulated
|
Comprehensive
|
Noncontrolling
|
|||||||||||||||||||||||
| Stock | Par Value | Par Value | Deficit | Income | Interest | Total | ||||||||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||||||||||
|
Balance at December 31, 2007
|
$ | 264,819 | $ | (1,961 | ) | $ | 1,874,600 | $ | (797,965 | ) | $ | 152,590 | $ | — | $ | 1,492,083 | ||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||
|
Net income
|
97,083 | 133 | 97,216 | |||||||||||||||||||||||||
|
Foreign currency translation
|
(115,941 | ) | (115,941 | ) | ||||||||||||||||||||||||
|
Total comprehensive loss
|
(18,725 | ) | ||||||||||||||||||||||||||
|
Cumulative effect of accounting change
|
(3,265 | ) | (3,265 | ) | ||||||||||||||||||||||||
|
Dividends declared on common stock ($.16 per share)
|
(40,895 | ) | (40,895 | ) | ||||||||||||||||||||||||
|
Stock option exercises
|
3,944 | 10,868 | 14,812 | |||||||||||||||||||||||||
|
Reversal of tax benefits related to share-based awards
|
(18,513 | ) | (18,513 | ) | ||||||||||||||||||||||||
|
Restricted stock award, net of forfeitures and other
|
293 | 61 | 355 | 709 | ||||||||||||||||||||||||
|
Employee share-based compensation earned
|
9,261 | 9,261 | ||||||||||||||||||||||||||
|
Purchase of Company common stock
|
(17,684 | ) | (101,862 | ) | (22,609 | ) | (142,155 | ) | ||||||||||||||||||||
|
Noncontrolling interest payments
|
(133 | ) | (133 | ) | ||||||||||||||||||||||||
|
Retirement of treasury shares
|
(19,103 | ) | 19,103 | — | ||||||||||||||||||||||||
|
Balance at December 31, 2008
|
$ | 249,953 | $ | (481 | ) | $ | 1,733,814 | $ | (726,756 | ) | $ | 36,649 | $ | — | $ | 1,293,179 | ||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||
|
Net income
|
123,098 | (5 | ) | 123,093 | ||||||||||||||||||||||||
|
Foreign currency translation
|
60,493 | 30 | 60,523 | |||||||||||||||||||||||||
|
Total comprehensive income
|
183,616 | |||||||||||||||||||||||||||
|
Tax benefits related to share-based awards
|
19,059 | 19,059 | ||||||||||||||||||||||||||
|
Dividends declared on common stock ($.16 per share)
|
(40,381 | ) | (40,381 | ) | ||||||||||||||||||||||||
|
Stock option exercises
|
3,643 | 13,764 | 17,407 | |||||||||||||||||||||||||
|
Restricted stock awards, net of forfeitures and other
|
830 | (830 | ) | — | ||||||||||||||||||||||||
|
Employee share-based compensation
|
9,684 | 9,684 | ||||||||||||||||||||||||||
|
Issuance of shares from treasury stock
|
1 | 71 | 383 | 455 | ||||||||||||||||||||||||
|
Noncontrolling interest payments
|
(231 | ) | (231 | ) | ||||||||||||||||||||||||
|
Retirement of treasury shares
|
(400 | ) | 400 | — | ||||||||||||||||||||||||
|
Other
|
(218 | ) | 218 | — | ||||||||||||||||||||||||
|
Balance at December 31, 2009
|
$ | 254,027 | $ | (10 | ) | $ | 1,735,493 | $ | (603,876 | ) | $ | 97,142 | $ | 12 | $ | 1,482,788 | ||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||
|
Net income
|
126,417 | 584 | 127,001 | |||||||||||||||||||||||||
|
Foreign currency translation
|
15,626 | 9 | 15,635 | |||||||||||||||||||||||||
|
Total comprehensive income
|
142,636 | |||||||||||||||||||||||||||
|
Tax benefits related to share-based awards
|
(229 | ) | (229 | ) | ||||||||||||||||||||||||
|
Dividends declared on common stock ($.16 per share)
|
(39,442 | ) | (39,442 | ) | ||||||||||||||||||||||||
|
Stock option exercises
|
431 | 1,328 | 1,759 | |||||||||||||||||||||||||
|
Restricted stock awards, net of forfeitures
|
532 | (532 | ) | |||||||||||||||||||||||||
|
Employee share-based compensation earned
|
8,878 | 8,878 | ||||||||||||||||||||||||||
|
Purchase of Company common stock
|
(14,008 | ) | (102,870 | ) | (116,878 | ) | ||||||||||||||||||||||
|
Noncontrolling interest payments
|
(113 | ) | (113 | ) | ||||||||||||||||||||||||
|
Retirement of treasury shares
|
(12,973 | ) | 12,973 | |||||||||||||||||||||||||
|
Other
|
3 | 60 | 486 | 549 | ||||||||||||||||||||||||
|
Balance at December 31, 2010
|
$ | 242,020 | $ | (985 | ) | $ | 1,603,112 | $ | (477,459 | ) | $ | 112,768 | $ | 492 | $ | 1,479,948 | ||||||||||||
(See notes to consolidated financial statements)
50
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SERVICE
CORPORATION INTERNATIONAL
| 1. | Nature of Operations |
We are North America’s largest provider of deathcare
products and services, with a network of funeral service
locations and cemeteries primarily operating in the United
States and Canada. Our operations consist of funeral service
locations, cemeteries, funeral service/cemetery combination
locations, crematoria, and related businesses.
Funeral service locations provide all professional services
relating to funerals and cremations, including the use of
funeral facilities and motor vehicles and preparation and
embalming services. Funeral-related merchandise, including
caskets, casket memorialization products, burial vaults,
cremation receptacles, cremation memorial products, flowers, and
other ancillary products and services, is sold at funeral
service locations. Cemeteries provide cemetery property
interment rights, including mausoleum spaces, lots, and lawn
crypts, and sell cemetery-related merchandise and services,
including stone and bronze memorials, markers, merchandise
installations, and burial openings and closings. We also sell
preneed funeral and cemetery products and services whereby a
customer contractually agrees to the terms of certain products
and services to be provided in the future.
| 2. | Summary of Significant Accounting Policies |
Principles
of Consolidation and Basis of Presentation
Our consolidated financial statements include the accounts of
Service Corporation International (SCI) and all subsidiaries in
which we hold a controlling financial interest. Our financial
statements also include the accounts of the funeral merchandise
and service trusts, cemetery merchandise and service trusts, and
cemetery perpetual care trusts in which we have a variable
interest and are the primary beneficiary. Intercompany balances
and transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to prior years to
conform to current period financial statement presentation with
no effect on our previously reported consolidated financial
position, results of operations, or cash flows.
Use of
Estimates in the Preparation of Financial
Statements
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that may affect the reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting period. As a result, actual results could differ from
these estimates.
Business
Combinations
In December 2007, the Financial Accounting Standards Board
(FASB) revised the authoritative guidance for business
combinations, establishing principles and requirements for how
an acquirer recognizes and measures in its financial statements
the identifiable assets acquired (including goodwill), the
liabilities assumed, and any noncontrolling interest in the
acquiree. Subsequently, on April 1, 2009, the FASB amended
and clarified certain aspects of its authoritative guidance on
initial recognition and measurement, subsequent measurement and
accounting, and disclosure of assets and liabilities arising
from contingencies in a business combination. We apply the FASB
authoritative guidance to all business combinations for which
the acquisition date is on or after January 1, 2009, and to
certain future income tax effects related to our prior business
combinations, should they arise. In these acquisitions, tangible
and intangible assets acquired and liabilities assumed are
recorded at fair value and goodwill is recognized for any
difference between the price of the acquisition and our fair
value determination.
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Cash
and Cash Equivalents
We consider all highly liquid investments with an original
maturity of three months or less to be cash equivalents. At
December 31, 2010, the majority of our cash was invested in
commercial paper. The carrying amounts of our cash and cash
equivalents approximate fair value due to the short-term nature
of these instruments.
Accounts
Receivable and Allowance for Doubtful Accounts
Our trade receivables primarily consist of amounts due for
funeral services already performed. We provide various
allowances and cancellation reserves for our funeral and
cemetery preneed and atneed receivables as well as for our
preneed funeral and preneed cemetery deferred revenues. These
allowances are based on an analysis of historical trends of
collection and cancellation activity. Atneed funeral and
cemetery receivables are considered past due after 30 days.
Collections are generally managed by the locations until a
receivable is 180 days delinquent at which time it is fully
reserved and sent to a collection agency. These estimates are
impacted by a number of factors, including changes in the
economy, relocation, and demographic or competitive changes in
our areas of operation.
Inventories
and Cemetery Property
Funeral and cemetery merchandise are stated at the lower of
average cost or market. Cemetery property is recorded at cost.
Inventory costs and cemetery property are relieved using
specific identification in performance of a contract.
Property
and Equipment, Net
Property and equipment are recorded at cost. Maintenance and
repairs are charged to expense whereas renewals and major
replacements that extend the assets useful lives are
capitalized. Depreciation is recognized ratably over the
estimated useful lives of the various classes of assets.
Buildings are depreciated over a period ranging from seven to
forty years, equipment is depreciated over a period from three
to eight years, and leasehold improvements are depreciated over
the shorter of the lease term or ten years. Depreciation and
amortization expense related to property and equipment was
$116.4 million, $111.1 million, and
$114.2 million for the years ended December 31, 2010,
2009, and 2008, respectively. When property is sold or retired,
the cost and related accumulated depreciation are removed from
the consolidated balance sheet; resulting gains and losses are
included in the consolidated statement of operations in the
period of sale or disposal.
Leases
We have lease arrangements primarily related to funeral service
locations and transportation equipment that were primarily
classified as capital leases at December 31, 2010. Lease
terms related to funeral home properties generally range from
one to 35 years with options to renew at varying terms.
Lease terms related to transportation equipment generally range
from one to five years with options to renew at varying terms.
We calculate operating lease expense ratably over the lease
term. We consider reasonably assured renewal options and fixed
escalation provisions in our calculation. For more information
related to leases, see Note 13.
Goodwill
The excess of purchase price over the fair value of identifiable
net assets acquired in business combinations is recorded as
goodwill. Goodwill is tested annually for impairment by
assessing the fair value of each of our reporting units. We
performed our annual impairment test of goodwill in accordance
with the Intangibles Topic of the Accounting Standards
Codification (ASC) during the fourth quarter.
Our goodwill impairment test involves estimates and management
judgment. In the first step of our goodwill impairment test, we
compare the fair value of a reporting unit to its carrying
amount, including goodwill. We determine fair value of each
reporting unit using both a market and income approach. Our
methodology considers
52
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
discounted cash flows and multiples of EBITDA (earnings before
interest, taxes, depreciation, and amortization) for both SCI
and its competitors. The discounted cash flow valuation uses
projections of future cash flows and includes assumptions
concerning future operating performance and economic conditions
that may differ from actual future cash flows. We do not record
an impairment of goodwill in instances where the fair value of a
reporting unit exceeds its carrying amount. If the aggregate
step one fair value is less than the related carrying amount for
a reporting unit, we compare the implied fair value of goodwill
(as defined in the Intangibles Topic of the ASC) to the carrying
amount of goodwill. If the carrying amount of reporting unit
goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess.
Based on our most recent annual impairment test performed during
the fourth quarter, we concluded that there was no impairment of
goodwill as of December 31, 2010.
For our most recent annual impairment test performed in the
fourth quarter, we used growth rates ranging from 1.6% to 4.3%
over a three-year period, plus a terminal value determined using
the constant growth method in projecting our future cash flows.
We used an 8.5% discount rate, which reflected our weighted
average cost of capital based on our capital structure, as
adjusted for equity risk premiums. Fair value was calculated as
the sum of the projected discounted cash flows of our reporting
units over the next three years plus terminal value at the end
of those three years. Our terminal value was calculated using a
long-term growth rate of 2.6% and 2.9% for our funeral and
cemetery reporting units, respectively.
In addition to our annual review, we assess the impairment of
goodwill whenever events or changes in circumstances indicate
that the carrying value may be greater than fair value. Factors
that could trigger an interim impairment review include, but are
not limited to, significant underperformance relative to
historical or projected future operating results and significant
negative industry or economic trends. No interim goodwill
impairment reviews were required in 2010.
Other
Intangible Assets
Our intangible assets include cemetery customer relationships,
trademarks and tradenames, and other assets primarily resulting
from acquisitions. Our trademark and tradenames and water rights
assets are considered to have an indefinite life and are not
subject to amortization. We test for impairment of intangible
assets in accordance with the Intangibles Topic of the ASC
annually during the fourth quarter.
Our intangible assets impairment tests involve estimates and
management judgment. For trademark and tradenames, our test uses
the relief from royalty method whereby we determine the fair
value of the assets by discounting the cash flows that represent
a savings over having to pay a royalty fee for use of the
trademark and tradenames. The discounted cash flow valuation
uses projections of future cash flows and includes assumptions
concerning future operating performance and economic conditions
that may differ from actual future cash flows. For our most
recent annual impairment test performed in the fourth quarter,
we estimated that the pre-tax savings would be 4% of the
revenues associated with the trademark and tradenames, based
primarily on our research of intellectual property valuation and
licensing databases. We also assumed a terminal growth rate of
2.6% and 2.9% for our funeral and cemetery segments,
respectively, and discounted the cash flows at an 8.7% discount
rate based on the relative risk of these assets to our overall
business. Based on our annual impairment test performed during
the fourth quarter, we recorded a $0.6 million impairment
on certain intangible assets as of December 31, 2010.
In addition to our annual review, we assess the impairment of
intangible assets whenever events or changes in circumstances
indicate that the carrying value may be greater than the fair
value. Factors that could trigger an interim impairment review
include, but are not limited to, significant underperformance
relative to historical or projected future operating results and
significant negative industry or economic trends. No interim
intangible impairment reviews were required in 2010.
Our preneed backlog intangible asset is relieved using specific
identification in performance of a contract. We amortize all
other finite-lived intangible assets on a straight-line basis
over their estimated useful lives of
10-20 years.
53
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Amortization expense for preneed backlog intangible asset and
other intangible assets was $25.2 million,
$21.7 million, and $23.6 million for the years ended
December 31, 2010, 2009, and 2008, respectively.
Valuation
of Long-Lived Assets
We review the carrying value of our long-lived assets for
impairment whenever events or circumstances indicate that the
carrying amount of the asset may not be recoverable, in
accordance with the Intangibles and Property, Plant, and
Equipment Topic of the ASC. Under this guidance, long-lived
assets to be held and used are reported at the lower of their
carrying amount or fair value. Fair value is based on an income
approach that utilizes projections of undiscounted future cash
flows expected to be generated by our long-lived assets. No
long-lived asset impairment reviews were required in 2010. While
we believe our estimates of undiscounted future cash flows used
in performing this test are reasonable, different assumptions
regarding such cash flows and comparable sales values could
materially affect our evaluations.
Assets to be disposed of and assets not expected to provide any
future service potential are recorded at the lower of their
carrying amount or fair value less estimated cost to sell. We
determined the fair value of assets to be disposed of using a
market approach. See Note 20 for additional information
related to assets to be disposed.
Treasury
Stock
We make treasury stock purchases in the open market or through
privately negotiated transactions subject to market conditions
and normal trading restrictions. We account for the repurchase
of our common stock under the par value method. We use the
average cost method upon the subsequent reissuance of treasury
shares. On December 15, 2010, we cancelled
13.0 million shares of common stock held in our treasury.
We cancelled 0.4 million and 19.1 million shares of
common stock held in our treasury in 2009 and 2008,
respectively. These retired treasury shares were changed to
authorized but unissued status.
Foreign
Currency Translation
All assets and liabilities of our foreign subsidiaries are
translated into U.S. dollars at exchange rates in effect as
of the end of the reporting period. Revenue and expense items
are translated at the average exchange rates for the reporting
period. The resulting translation adjustments are included in
Equity
as a component of
Accumulated other
comprehensive income
in the consolidated statement of equity
and consolidated balance sheet.
The functional currency of SCI and its subsidiaries is the
respective local currency. The transactional currency gains and
losses that arise from transactions denominated in currencies
other than the functional currencies of our operations are
recorded in
Other income, net
in the consolidated
statement of operations. We do not operate in countries that are
considered to have hyperinflationary economies.
Noncontrolling
Interests
The FASB issued authoritative guidance for noncontrolling
interests in December 2007, which establishes accounting and
reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. The
guidance clarifies that a noncontrolling interest in a
subsidiary, which is sometimes referred to as an unconsolidated
investment, is an ownership interest in the consolidated entity
that should be reported as a component of equity in the
consolidated financial statements. Among other requirements, the
guidance requires consolidated net income to be reported at
amounts attributable to both the parent and the noncontrolling
interest. It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated
net income attributable to the parent and to the noncontrolling
interest. We adopted the provisions of the FASB guidance on
January 1, 2009 and applied the provisions retrospectively.
As a result, we have modified our consolidated statement of
operations, consolidated balance sheet, consolidated statement
of cash flows, and consolidated statement of equity to
incorporate the required disclosure of noncontrolling interest
information.
54
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Fair
Value Measurements
We measure the
available-for-sale
securities held by our funeral merchandise and service, cemetery
merchandise and service, and cemetery perpetual care trusts at
fair value on a recurring basis in accordance with the Fair
Value Measurements and Disclosure (FVM&D) Topic of the ASC.
This guidance defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date, establishes a framework for measuring fair
value, and expands disclosures about instruments measured at
fair value. The guidance establishes a three-level valuation
hierarchy for disclosure of fair value measurements. The
valuation hierarchy is based upon the transparency of inputs to
the valuation of an asset or liability as of the measurement
date. The three levels are defined as follows:
| • | Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; | |
| • | Level 2 — inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and | |
| • | Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
An asset’s or liability’s categorization within the
valuation hierarchy is based upon the lowest level of input that
is significant to the fair value measurement. Certain
available-for-sale
securities held by our funeral merchandise and service, cemetery
merchandise and service, and cemetery perpetual care trusts have
been classified in Level 3 of the hierarchy due to
significant management judgment required as a result of the
absence of quoted market prices, inherent lack of liquidity, or
the long-term nature of the securities. For additional
disclosures required by FASB guidance for all of our
available-for-sale
securities, see Notes 4, 5, and 6.
On January 1, 2009, we adopted the guidance for our
non-financial assets and liabilities, such as goodwill and
property and equipment, that we disclose or recognize at fair
value on a non-recurring basis. Our adoption for these assets
and liabilities did not have a material impact on our results of
operations, consolidated financial position, or cash flows.
In April 2009, the FASB issued additional guidance on how to
determine the fair value of assets and liabilities in an
environment where the volume and level of activity for the asset
or liability have significantly decreased. The FASB guidance
also re-emphasizes that the objective of a fair value
measurement remains an exit price. The guidance, which was
effective for us in the second quarter of 2009, did not have a
material impact on our results of operations, consolidated
financial position, or cash flows.
Funeral
Operations
Revenue is recognized when funeral services are performed and
funeral merchandise is delivered. We sell price-guaranteed
preneed funeral contracts through various programs providing for
future funeral services at prices prevailing when the agreements
are signed. Revenues associated with sales of preneed funeral
contracts are deferred until such time that the funeral services
are performed. Sales taxes collected are recognized on a net
basis in our consolidated financial statements.
Pursuant to state or provincial law, all or a portion of the
proceeds from funeral merchandise or services sold on a preneed
basis may be required to be paid into trust funds. We defer
investment earnings related to these merchandise and service
trusts until the associated merchandise is delivered or services
are performed. Costs related to sales of merchandise and
services are charged to expense when merchandise is delivered
and services are performed. See Note 4 for more information
regarding preneed funeral activities.
55
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Cemetery
Operations
Revenue associated with sales of cemetery merchandise and
services is recognized when the service is performed or
merchandise is delivered. Revenue associated with sales of
preneed cemetery interment rights is recognized in accordance
with the Revenue Recognition Topic of the ASC. Under this
guidance, revenue from constructed cemetery property is not
recognized until 10% of the sales price has been collected.
Revenue related to the preneed sale of unconstructed cemetery
property is deferred until it is constructed and 10% of the
sales price is collected. Revenue associated with sales of
preneed merchandise and services is not recognized until the
merchandise is delivered or the services are performed. For
services and non-personalized merchandise (such as vaults), we
defer the revenues until the services are performed and the
merchandise is delivered. For personalized marker merchandise,
with the customer’s direction generally obtained at the
time of sale, we can choose to order, store, and transfer title
to the customer. In situations in which we have no further
obligation or involvement related to the merchandise, we
recognize revenues and record the cost of sales in accordance
with the Revenue Recognition Topic of the ASC upon the earlier
of vendor storage of these items or delivery in our cemetery.
Sales taxes collected are recognized on a net basis in our
consolidated financial statements.
Pursuant to state or provincial law, all or a portion of the
proceeds from cemetery merchandise or services sold on a preneed
basis may be required to be paid into trust funds. We defer
investment earnings related to these merchandise and services
trusts until the associated merchandise is delivered or services
are performed.
A portion of the proceeds from the sale of cemetery property
interment rights is required by state or provincial law to be
paid into perpetual care trust funds. Investment earnings from
these trusts are distributed to us regularly, are recognized in
current cemetery revenues, and are intended to defray cemetery
maintenance costs, which are expensed as incurred. The principal
of such perpetual care trust funds generally cannot be withdrawn.
Costs related to the sale of property interment rights include
the property and construction costs specifically identified by
project. At the completion of the project, construction costs
are charged to expense in the same period revenue is recognized.
Costs related to sales of merchandise and services are charged
to expense when merchandise is delivered and when services are
performed. See Notes 5 and 6 for more information regarding
preneed cemetery activities.
Preneed
Funeral and Cemetery Receivables
We sell preneed funeral and cemetery contracts whereby the
customer enters into arrangements for future merchandise and
services prior to the time of need. These receivables are
considered past due after 30 days. As of December 31,
2010, $597.2 million of our receivables were not past due,
$0.5 million were past due between 1 and 90 days, and
$102.0 million were past due for greater than 90 days.
We recorded interest on these receivables on a cash, or
non-accrual, basis. Based on historical experience, we have
provided an allowance for cancellation on these receivables of
$77.8 million as of December 31, 2010. If a preneed
contract is cancelled prior to delivery, state or provincial law
determines the amount of the refund owed to the customer, if
any, including the amount of the attributed investment earnings.
Upon cancellation, we receive the amount of principal deposited
to trust and previously undistributed net investment earnings
and, where required, issue a refund to the customer. We retain
excess funds, if any, and recognize the attributed investment
earnings (net of any investment earnings payable to the
customer) as revenue in our consolidated statement of
operations. In certain jurisdictions, we may be obligated to
fund any shortfall if the amounts deposited by the customer
exceed the funds in trust.
Income
Taxes
We compute income taxes using the liability method. Our ability
to realize the benefit of our federal and state deferred tax
assets requires us to achieve certain future earnings levels. We
have established a valuation allowance against a portion of our
deferred tax assets and we could be required to further adjust
that valuation allowance if
56
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
market conditions change materially and future earnings are, or
are projected to be, significantly different than our current
estimates.
Variable
Interest Entities
In June 2009, the FASB amended its authoritative guidance to
improve financial reporting by enterprises involved with
variable interest entities (VIE). Specifically, the amended
guidance addresses: (1) the impact resulting from the
elimination of the qualifying special-purpose entity concept in
previously issued guidance, and (2) constituent concerns
about the application of certain key provisions of the existing
guidance on the consolidation of variable interest entities,
including those in which the accounting and disclosures under
the existing guidance do not always provide timely and useful
information about an enterprise’s involvement in a VIE. We
adopted the amended guidance on January 1, 2010, and its
adoption did not impact our consolidated financial statements.
In December 2009, the FASB issued additional guidance on
improving financial reporting by enterprises involved with
variable interest entities by clarifying the principal
objectives of required disclosures, which include: (1) the
significant judgments and assumptions made by a reporting unit,
2) the nature of restrictions on a consolidated VIE’s
assets reported by a reporting entity in its statement of
financial position, including the carrying amounts of such
assets and liabilities, (3) the nature of, and changes in,
the risks associated with a reporting entity’s involvement
with the VIE, and (4) how a reporting entity’s
involvement with the VIE affects the reporting entity’s
financial position, financial performance, and cash flows. We
adopted the amended guidance on January 1, 2010, and its
adoption did not impact our consolidated financial statements.
57
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 3. | Recent Accounting Pronouncements and Accounting Changes |
Business
Combinations
In December 2010, the FASB proposed update for the Business
Combinations Topic of the ASC on disclosure requirements of
supplementary Pro Forma Information for Business Combinations.
The amendments specify that if a public entity presents
comparative financial statements, the entity would disclose
revenue and earnings of the combined entity as though the
business combination(s) that occurred during the current year
had occurred as of the beginning of the comparable prior annual
reporting period only. The amended guidance is effective for us
for all acquisitions occurring after January 1, 2011, if
any, for which proforma information is required.
Receivables
In July 2010, the FASB amended the Receivables Topic of the ASC
to require an entity to provide a greater level of disaggregated
information about the credit quality of its financing
receivables and its allowance for credit losses. The guidance
also requires disclosing credit quality indicators, past due
information, and modifications of its financing receivables. The
amended guidance is effective for us with this annual report.
See additional disclosures in Note 2.
In January 2011, the FASB amended the Receivables Topic of the
ASC to defer the effective date of disclosures about troubled
debt restructuring. The update proposed guidance to assist
creditors in determining whether a modification of the terms of
a receivable meets the criteria to be considered a troubled debt
restructuring, both for purposes of recording an impairment and
for disclosure of troubled debt restructurings. The amended
guidance is effective for us in the second quarter of 2011. We
do not believe this guidance will have any impact on our
consolidated financial condition or results of operations.
Stock-Based
Compensation
In April 2010, the FASB issued additional guidance for the
Compensation — Stock Compensation Topic of the ASC to
clarify classification of an employee stock-based payment award
when the exercise price is denominated in the currency of a
market in which the underlying equity security trades. This
guidance becomes effective for us on January 1, 2011. We
are currently evaluating the impact of this guidance on our
consolidated financial statements.
Fair
Value Measurements
In January 2010, the FASB amended the FVM&D Topic of the
ASC to require additional disclosures on 1) transfers
between levels, 2) Level 3 activity presented on a
gross basis, 3) valuation techniques, and 4) inputs
into the valuation. Except for Item 2 above, the additional
disclosures were adopted in the first quarter of 2010 with no
impact on our consolidated financial condition or results of
operations. The disclosures in Item 2 will be required to
be presented in the first quarter of 2011.
Multi-Deliverable
Arrangements
In October 2009, the FASB issued authoritative guidance which
impacts the recognition of revenue in multi-deliverable
arrangements. The guidance establishes a selling-price hierarchy
for determining the selling price of a deliverable. The goal of
this guidance is to clarify disclosures related to
multi-deliverable arrangements and to align the accounting with
the underlying economics of the multi-deliverable transaction.
This guidance is effective for us in the first quarter of 2011,
and its adoption will not impact our consolidated financial
statements.
58
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 4. | Preneed Funeral Activities |
Preneed
funeral receivables, net and trust investments
Preneed funeral receivables, net and trust investments
represent trust investments, including investment earnings,
and customer receivables, net of unearned finance charges,
related to unperformed, price-guaranteed preneed funeral
contracts. Our funeral merchandise and service trusts are
variable interest entities as defined in the Consolidation Topic
of the ASC. In accordance with this guidance, we have determined
that we are the primary beneficiary of these trusts, as we
absorb a majority of the losses and returns associated with
these trusts. Our cemetery trust investments detailed in
Notes 5 and 6 are also accounted for as variable interest
entities. When we receive payments from the customer, we deposit
the amount required by law into the trust and reclassify the
corresponding amount from
Deferred preneed funeral revenues
into
Deferred preneed funeral and cemetery receipts held
in trust.
Amounts are withdrawn from the trusts after the
contract obligations are performed. Cash flows from preneed
funeral contracts are presented as operating cash flows in our
consolidated statement of cash flows.
Preneed funeral receivables, net and trust investments
are reduced by the trust investment earnings (realized and
unrealized) that we have been allowed to withdraw in certain
states prior to maturity. These earnings are recorded in
Deferred preneed funeral revenues
until the service is
performed or the merchandise is delivered.
The table below sets forth certain investment-related activities
associated with our preneed funeral merchandise and service
trusts for the years ended December 31:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Deposits
|
$ | 80,027 | $ | 85,901 | $ | 93,586 | ||||||
|
Withdrawals
|
$ | 103,418 | $ | 104,437 | $ | 122,294 | ||||||
|
Purchases of
available-for-sale
securities
|
$ | 467,221 | $ | 372,058 | $ | 383,975 | ||||||
|
Sales of
available-for-sale
securities
|
$ | 479,128 | $ | 398,984 | $ | 382,940 | ||||||
|
Realized gains from sales of
available-for-sale
securities
|
$ | 36,807 | $ | 28,715 | $ | 46,703 | ||||||
|
Realized losses from sales of
available-for-sale
securities
|
$ | (46,601 | ) | $ | (57,118 | ) | $ | (76,192 | ) | |||
The components of
Preneed funeral receivables, net and trust
investments
in our consolidated balance sheet at December 31
were as follows:
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Trust investments, at market
|
$ | 875,043 | $ | 771,945 | ||||
|
Cash and cash equivalents
|
121,223 | 153,126 | ||||||
|
Insurance-backed fixed income securities
|
220,287 | 214,255 | ||||||
|
Assets associated with businesses held for sale
|
(11 | ) | (377 | ) | ||||
|
Trust investments
|
1,216,542 | 1,138,949 | ||||||
|
Receivables from customers
|
247,434 | 256,009 | ||||||
|
Unearned finance charge
|
(5,620 | ) | (6,129 | ) | ||||
| 1,458,356 | 1,388,829 | |||||||
|
Allowance for cancellation
|
(33,799 | ) | (32,476 | ) | ||||
|
Preneed funeral receivables and trust investments
|
$ | 1,424,557 | $ | 1,356,353 | ||||
59
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The activity in
Preneed funeral receivables, net and trust
investments
for the years ended December 31 was as follows:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Beginning balance — Preneed funeral receivables and
trust investments
|
$ | 1,356,353 | $ | 1,191,692 | $ | 1,434,403 | ||||||
|
Net preneed contract sales
|
126,121 | 155,834 | 155,988 | |||||||||
|
Cash receipts from customers
|
(99,142 | ) | (118,049 | ) | (119,981 | ) | ||||||
|
Deposits to trust
|
80,027 | 85,901 | 93,586 | |||||||||
|
Acquisitions (dispositions) of businesses, net
|
29,607 | (6,226 | ) | 23,838 | ||||||||
|
Net undistributed investment earnings (losses)(1)
|
82,097 | 164,003 | (217,767 | ) | ||||||||
|
Maturities and distributed earnings
|
(140,593 | ) | (141,135 | ) | (144,257 | ) | ||||||
|
Change in cancellation allowance
|
(1,140 | ) | (2,054 | ) | (603 | ) | ||||||
|
Effect of foreign currency and other
|
(8,773 | ) | 26,387 | (33,515 | ) | |||||||
|
Ending balance — Preneed funeral receivables and trust
investments
|
$ | 1,424,557 | $ | 1,356,353 | $ | 1,191,692 | ||||||
| (1) | Includes both realized and unrealized investment earnings (losses). |
60
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The cost and market values associated with our funeral
merchandise and service trust investments recorded at fair
market value at December 31, 2010 and 2009 are detailed
below. Cost reflects the investment (net of redemptions) of
control holders in common trust funds, mutual funds, and private
equity investments. Fair market value represents the value of
the underlying securities held by the common trust funds, mutual
funds at published values, and the estimated market value of
private equity investments. The fair market value of our funeral
merchandise and service trust investments was 104% and 96% of
the related cost basis of such investments as of
December 31, 2010 and 2009, respectively.
| December 31, 2010 | ||||||||||||||||
|
Unrealized
|
Unrealized
|
Fair Market
|
||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Fixed income securities:
|
||||||||||||||||
|
U.S. Treasury
|
$ | 71,948 | $ | 2,061 | $ | (334 | ) | $ | 73,675 | |||||||
|
Canadian government
|
121,137 | 1,004 | (20 | ) | 122,121 | |||||||||||
|
Corporate
|
33,627 | 2,751 | (285 | ) | 36,093 | |||||||||||
|
Residential mortgage-backed
|
5,310 | 135 | (22 | ) | 5,423 | |||||||||||
|
Asset-backed
|
2,984 | 97 | (2 | ) | 3,079 | |||||||||||
|
Equity securities:
|
||||||||||||||||
|
Preferred Stock
|
2,835 | 296 | (78 | ) | 3,053 | |||||||||||
|
Common stock:
|
||||||||||||||||
|
United States
|
268,650 | 63,301 | (8,391 | ) | 323,560 | |||||||||||
|
Canada
|
22,452 | 4,542 | (798 | ) | 26,196 | |||||||||||
|
Other international
|
21,611 | 2,240 | (2,330 | ) | 21,521 | |||||||||||
|
Mutual funds:
|
||||||||||||||||
|
Equity
|
116,260 | 6,123 | (18,289 | ) | 104,094 | |||||||||||
|
Fixed income
|
134,181 | 6,316 | (5,628 | ) | 134,869 | |||||||||||
|
Private equity
|
27,864 | 1,395 | (16,890 | ) | 12,369 | |||||||||||
|
Other
|
8,833 | 615 | (458 | ) | 8,990 | |||||||||||
|
Trust investments
|
$ | 837,692 | $ | 90,876 | $ | (53,525 | ) | $ | 875,043 | |||||||
61
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| December 31, 2009 | ||||||||||||||||
|
Unrealized
|
Unrealized
|
Fair Market
|
||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Fixed income securities:
|
||||||||||||||||
|
U.S. Treasury
|
$ | 40,065 | $ | 1,258 | $ | (65 | ) | $ | 41,258 | |||||||
|
Canadian government
|
104,713 | 1,430 | (47 | ) | 106,096 | |||||||||||
|
Corporate
|
29,778 | 2,091 | (21 | ) | 31,848 | |||||||||||
|
Residential mortgage-backed
|
6,573 | 119 | (10 | ) | 6,682 | |||||||||||
|
Asset-backed
|
3,188 | 76 | — | 3,264 | ||||||||||||
|
Equity securities:
|
||||||||||||||||
|
Common Stock:
|
||||||||||||||||
|
United States
|
284,392 | 37,212 | (22,811 | ) | 298,793 | |||||||||||
|
Canada
|
25,535 | 2,707 | (873 | ) | 27,369 | |||||||||||
|
Other international
|
17,336 | 1,324 | (2,686 | ) | 15,974 | |||||||||||
|
Mutual funds:
|
||||||||||||||||
|
Equity
|
118,018 | 2,277 | (27,153 | ) | 93,142 | |||||||||||
|
Fixed income
|
151,918 | 2,135 | (18,586 | ) | 135,467 | |||||||||||
|
Private equity
|
24,445 | 1,529 | (14,808 | ) | 11,166 | |||||||||||
|
Other
|
1,503 | 359 | (976 | ) | 886 | |||||||||||
|
Trust investments
|
$ | 807,464 | $ | 52,517 | $ | (88,036 | ) | $ | 771,945 | |||||||
Where quoted prices are available in an active market,
securities held by the common trust funds and mutual funds are
classified as Level 1 investments pursuant to the
three-level valuation hierarchy as required by the FVM&D
Topic of the ASC.
Where quoted market prices are not available for the specific
security, fair values are estimated by using either quoted
prices of securities with similar characteristics or an income
approach fair value model with observable inputs that include a
combination of interest rates, yield curves, credit risks,
prepayment speeds, rating, and tax-exempt status. These funds
are classified as Level 2 investments pursuant to the
three-level valuation hierarchy as required by the FVM&D
Topic of the ASC.
The valuation of private equity and other alternative
investments requires significant management judgment due to the
absence of quoted market prices, inherent lack of liquidity, and
the long-term nature of such assets. The fair value of these
investments is estimated based on the market value of the
underlying real estate and private equity investments. The
underlying real estate value is determined using the most recent
available appraisals. Private equity investments are valued
using market appraisals or a discounted cash flow methodology,
which is an income approach fair value model, depending on the
nature of the underlying assets. The appraisals assess value
based on a combination of replacement cost, comparative sales
analysis, and discounted cash flow analysis. These funds are
classified as Level 3 investments pursuant to the
three-level valuation hierarchy as required by the FVM&D
Topic of the ASC.
As of December 31, 2010, our unfunded commitment for our
private equity and other investments was $5.4 million
which, if called, would be funded by the assets of the trusts.
Our private equity and other investments include several funds
that invest in limited partnerships, distressed debt, real
estate, and mezzanine financing. These investments can never be
redeemed by the funds. Instead, the nature of the investments in
this category is that the distributions are received through the
liquidation of the underlying assets of the funds. We estimate
that the underlying assets will be liquidated over the next 2 to
10 years.
62
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Our investments classified as Level 1 securities include
common stock and mutual funds. Level 2 securities include
U.S. Treasury, Canadian government, corporate,
mortgage-backed fixed income securities, and preferred stock.
Our private equity and other alternative investments are
classified as Level 3 securities.
The inputs into the fair value of our market-based funeral
merchandise and service trust investments are categorized as
follows:
|
Quoted Market
|
Significant
|
|||||||||||||||
|
Prices in Active
|
Other
|
Significant
|
||||||||||||||
|
Markets
|
Observable
|
Unobservable
|
Fair Market
|
|||||||||||||
| (Level 1) | Inputs (Level 2) | Inputs (Level 3) | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Trust investments at December 31, 2010
|
$ | 610,240 | $ | 243,444 | $ | 21,359 | $ | 875,043 | ||||||||
|
Trust investments at December 31, 2009
|
$ | 570,745 | $ | 189,148 | $ | 12,052 | $ | 771,945 | ||||||||
The change in our market-based funeral merchandise and service
trust investments with significant unobservable inputs
(Level 3) is as follows for the years ended
December 31, 2010, 2009, and 2008 (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
|
Fair market value, beginning balance at January 1,
|
$ | 12,052 | $ | 40,880 | $ | 37,865 | ||||||
|
Net unrealized losses included in
Accumulated other
comprehensive income
(1)
|
(3,949 | ) | (9,205 | ) | (5,920 | ) | ||||||
|
Net realized (losses) gains included in
Other income,
net
(2)
|
(530 | ) | (27 | ) | 420 | |||||||
|
Purchases, sales, contributions, and distributions, net
|
13,786 | 2,295 | 8,515 | |||||||||
|
Transfers out of Level 3
|
— | (21,891 | ) | — | ||||||||
|
Fair market value, ending balance at December 31,
|
$ | 21,359 | $ | 12,052 | $ | 40,880 | ||||||
| (1) | All unrealized losses recognized in Accumulated other comprehensive income for our funeral merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in Accumulated other comprehensive income to Deferred preneed funeral and cemetery receipts held in trust . See Note 7 for further information related to our Deferred preneed funeral and cemetery receipts held in trust . | |
| (2) | All (losses) gains recognized in Other income, net for our funeral merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in Other income, net to Deferred preneed funeral and cemetery receipts held in trust . See Note 7 for further information related to our Deferred preneed funeral and cemetery receipts held in trust . |
Maturity dates of our fixed income securities range from 2011 to
2041. Maturities of fixed income securities at December 31,
2010 are estimated as follows:
|
Fair Market
|
||||
| Value | ||||
| (In thousands) | ||||
|
Due in one year or less
|
$ | 136,409 | ||
|
Due in one to five years
|
48,019 | |||
|
Due in five to ten years
|
36,815 | |||
|
Thereafter
|
19,148 | |||
| $ | 240,391 | |||
63
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Earnings from all our funeral merchandise and service trust
investments are recognized in funeral revenues when a service is
performed or merchandise is delivered. In addition, we are
entitled to retain, in certain jurisdictions, a portion of
collected customer payments when a customer cancels a preneed
contract; these amounts are also recognized in current revenues.
Recognized earnings (realized and unrealized) related to our
funeral merchandise and service trust investments were
$29.5 million, $23.7 million, and $37.5 million
for the years ended December 31, 2010, 2009, and 2008,
respectively.
We assess our trust investments for
other-than-temporary
declines in fair value on a quarterly basis. Impairment charges
resulting from this assessment are recognized as investment
losses in
Other income, net
and a decrease to
Preneed
funeral receivables, net and trust investments
. These
investment losses, if any, are offset by the corresponding
reclassification in
Other income, net,
which reduces
Deferred preneed funeral receipts held in trust
. See
Note 7 for further information related to our
Deferred
preneed funeral receipts held in trust
. For the years ended
December 31, 2010, 2009, and 2008, we recorded an
$8.1 million, a $22.5 million, and a $9.1 million
impairment charge for
other-than-temporary
declines in fair value related to unrealized losses on certain
investments.
We have determined that the remaining unrealized losses in our
funeral merchandise and service trust investments are considered
temporary in nature, as the unrealized losses were due to
temporary fluctuations in interest rates and equity prices. The
investments are diversified across multiple industry segments
using a balanced allocation strategy to minimize long-term risk.
We believe that none of the securities are
other-than-temporarily
impaired based on our analysis of the investments. Our analysis
included a review of the portfolio holdings and discussions with
the individual money managers as to the sector exposures, credit
ratings, and the severity and duration of the unrealized losses.
Our funeral merchandise and service trust investment unrealized
losses, their associated fair market values, and the duration of
unrealized losses for the years ended December 31, 2010 and
2009, are shown in the following tables.
| December 31, 2010 | ||||||||||||||||||||||||
|
In Loss Position
|
In Loss Position
|
|||||||||||||||||||||||
| Less Than 12 Months | Greater Than 12 Months | Total | ||||||||||||||||||||||
|
Fair
|
Fair
|
Fair
|
||||||||||||||||||||||
|
Market
|
Unrealized
|
Market
|
Unrealized
|
Market
|
Unrealized
|
|||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Fixed income securities:
|
||||||||||||||||||||||||
|
U.S. Treasury
|
$ | 10,433 | $ | (316 | ) | $ | 393 | $ | (18 | ) | $ | 10,826 | $ | (334 | ) | |||||||||
|
Canadian government
|
1,632 | (2 | ) | 668 | (18 | ) | 2,300 | (20 | ) | |||||||||||||||
|
Corporate
|
5,619 | (285 | ) | — | — | 5,619 | (285 | ) | ||||||||||||||||
|
Residential mortgage-backed
|
836 | (9 | ) | 263 | (13 | ) | 1,099 | (22 | ) | |||||||||||||||
|
Asset-backed
|
225 | (1 | ) | 53 | (1 | ) | 278 | (2 | ) | |||||||||||||||
|
Equity securities:
|
||||||||||||||||||||||||
|
Preferred Stock
|
1,045 | (78 | ) | — | — | 1,045 | (78 | ) | ||||||||||||||||
|
Common stock:
|
||||||||||||||||||||||||
|
United States
|
41,491 | (3,019 | ) | 24,919 | (5,372 | ) | 66,410 | (8,391 | ) | |||||||||||||||
|
Canada
|
4,493 | (324 | ) | 1,361 | (474 | ) | 5,854 | (798 | ) | |||||||||||||||
|
Other international
|
5,251 | (862 | ) | 3,446 | (1,468 | ) | 8,697 | (2,330 | ) | |||||||||||||||
|
Mutual funds:
|
||||||||||||||||||||||||
|
Equity
|
3,778 | (110 | ) | 61,844 | (18,179 | ) | 65,622 | (18,289 | ) | |||||||||||||||
|
Fixed income
|
9,630 | (156 | ) | 8,818 | (5,472 | ) | 18,448 | (5,628 | ) | |||||||||||||||
|
Private equity
|
214 | (71 | ) | 6,715 | (16,819 | ) | 6,929 | (16,890 | ) | |||||||||||||||
|
Other
|
8 | (2 | ) | 309 | (456 | ) | 317 | (458 | ) | |||||||||||||||
|
Total temporarily impaired securities
|
$ | 84,655 | $ | (5,235 | ) | $ | 108,789 | $ | (48,290 | ) | $ | 193,444 | $ | (53,525 | ) | |||||||||
64
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| December 31, 2009 | ||||||||||||||||||||||||
|
In Loss Position
|
In Loss Position
|
|||||||||||||||||||||||
| Less Than 12 Months | Greater Than 12 Months | Total | ||||||||||||||||||||||
|
Fair
|
Fair
|
Fair
|
||||||||||||||||||||||
|
Market
|
Unrealized
|
Market
|
Unrealized
|
Market
|
Unrealized
|
|||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Fixed income securities:
|
||||||||||||||||||||||||
|
U.S. Treasury
|
$ | 2,707 | $ | (40 | ) | $ | 2,296 | $ | (25 | ) | $ | 5,003 | $ | (65 | ) | |||||||||
|
Canadian government
|
5,367 | (47 | ) | — | — | 5,367 | (47 | ) | ||||||||||||||||
|
Corporate
|
1,517 | (21 | ) | — | — | 1,517 | (21 | ) | ||||||||||||||||
|
Mortgage-backed
|
1,494 | (10 | ) | — | — | 1,494 | (10 | ) | ||||||||||||||||
|
Equity securities:
|
||||||||||||||||||||||||
|
Common stock:
|
||||||||||||||||||||||||
|
United States
|
67,044 | (6,031 | ) | 56,926 | (16,780 | ) | 123,970 | (22,811 | ) | |||||||||||||||
|
Canada
|
4,153 | (480 | ) | 2,879 | (393 | ) | 7,032 | (873 | ) | |||||||||||||||
|
Other international
|
3,491 | (362 | ) | 6,115 | (2,324 | ) | 9,606 | (2,686 | ) | |||||||||||||||
|
Mutual funds:
|
||||||||||||||||||||||||
|
Equity
|
60,413 | (24,928 | ) | 20,945 | (2,225 | ) | 81,358 | (27,153 | ) | |||||||||||||||
|
Fixed income
|
46,542 | (10,471 | ) | 22,684 | (8,115 | ) | 69,226 | (18,586 | ) | |||||||||||||||
|
Private equity
|
1,801 | (1,743 | ) | 3,067 | (13,065 | ) | 4,868 | (14,808 | ) | |||||||||||||||
|
Other
|
109 | (203 | ) | 143 | (773 | ) | 252 | (976 | ) | |||||||||||||||
|
Total temporarily impaired securities
|
$ | 194,638 | $ | (44,336 | ) | $ | 115,055 | $ | (43,700 | ) | $ | 309,693 | $ | (88,036 | ) | |||||||||
Deferred
Preneed Funeral Revenues
At December 31, 2010 and 2009,
Deferred preneed funeral
revenues
, net of allowance for cancellation, represent
future funeral revenues, including distributed trust investment
earnings associated with unperformed trust-funded preneed
funeral contracts that are not held in trust accounts.
Deferred preneed funeral revenues
are recognized in
current funeral revenues when the service is performed or
merchandise is delivered. Future funeral service revenues and
net trust investment earnings that are held in trust accounts
are included in
Deferred preneed funeral receipts held in
trust.
The following table summarizes the activity in
Deferred
preneed funeral revenues
for the years ended December 31
were as follows:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Beginning balance — Deferred preneed funeral revenues,
net
|
$ | 596,966 | $ | 588,198 | $ | 526,668 | ||||||
|
Net preneed contract sales
|
112,678 | 141,752 | 149,150 | |||||||||
|
Acquisitions (dispositions) of businesses, net
|
26,816 | (794 | ) | 41,469 | ||||||||
|
Net investment earnings (losses)(1)
|
83,605 | 135,842 | (191,601 | ) | ||||||||
|
Recognized deferred preneed revenues
|
(151,484 | ) | (153,382 | ) | (162,409 | ) | ||||||
|
Change in cancellation allowance
|
(761 | ) | (2,972 | ) | (2,336 | ) | ||||||
|
Change in deferred preneed funeral receipts held in trust
|
(69,694 | ) | (117,181 | ) | 222,565 | |||||||
|
Effect of foreign currency and other
|
(17,903 | ) | 5,503 | 4,692 | ||||||||
|
Ending balance — Deferred preneed funeral revenues, net
|
$ | 580,223 | $ | 596,966 | $ | 588,198 | ||||||
| (1) | Includes both realized and unrealized investment earnings (losses). |
65
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Insurance-Funded
Preneed Funeral Contracts
Not included in our consolidated balance sheet are
insurance-funded preneed funeral contracts that will be funded
by life insurance or annuity contracts issued by third party
insurers. 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. These general agency commissions (GA
revenues) are based on a percentage per contract sold and are
recognized as funeral revenues when the insurance purchase
transaction between the customer and third-party insurance
provider is completed. GA revenues recognized in 2010, 2009, and
2008 were $68.3 million, $57.3 million, and
$51.5 million, respectively. Direct selling costs incurred
pursuant to the sale of insurance-funded preneed funeral
contracts are expensed as incurred. 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
consolidated balance sheet. The proceeds of the life insurance
policies or annuity contracts will be reflected in funeral
revenues as these funerals are performed by the Company.
| 5. | Preneed Cemetery Activities |
Preneed
cemetery receivables, net and trust investments
Preneed cemetery receivables, net and trust investments
represent trust investments, including investment earnings,
and customer receivables, net of unearned finance charges, for
contracts sold in advance of when the property interment rights,
merchandise, or services are needed. Our cemetery merchandise
and service trusts are variable interest entities as defined in
the Consolidation Topic of the ASC. In accordance with this
guidance, we have determined that we are the primary beneficiary
of these trusts, as we absorb a majority of the losses and
returns associated with these trusts. The trust investments
detailed in Notes 4 and 6 are also accounted for as
variable interest entities. When we receive payments from the
customer, we deposit the amount required by law into the trust
and reclassify the corresponding amount from
Deferred preneed
cemetery revenues
into
Deferred preneed funeral and
cemetery receipts held in trust.
Amounts are withdrawn from
the trusts when the contract obligations are performed. Cash
flows from preneed cemetery contracts are presented as operating
cash flows in our consolidated statement of cash flows.
Preneed cemetery receivables, net and trust investments
are reduced by the trust investment earnings (realized and
unrealized) that we have been allowed to withdraw in certain
states prior to maturity. These earnings are recorded in
Deferred preneed cemetery revenues
until the service is
performed or the merchandise is delivered.
The table below sets forth certain investment-related activities
associated with our preneed cemetery merchandise and service
trusts for the years ended December 31:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Deposits
|
$ | 96,864 | $ | 92,687 | $ | 106,724 | ||||||
|
Withdrawals
|
100,474 | 104,580 | 132,725 | |||||||||
|
Purchases of
available-for-sale
securities
|
638,368 | 625,248 | 846,679 | |||||||||
|
Sales of
available-for-sale
securities
|
592,813 | 593,133 | 424,009 | |||||||||
|
Realized gains from sales of
available-for-sale
securities
|
43,413 | 44,972 | 47,411 | |||||||||
|
Realized losses from sales of
available-for-sale
securities
|
(51,771 | ) | (75,254 | ) | (85,527 | ) | ||||||
66
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of
Preneed cemetery receivables, net and trust
investments
in the consolidated balance sheet at December 31
were as follows:
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Trust investments, at market
|
$ | 1,062,771 | $ | 957,608 | ||||
|
Cash and cash equivalents
|
123,465 | 145,668 | ||||||
|
Insurance backed fixed income securities
|
9,158 | 10,492 | ||||||
|
Assets associated with businesses held for sale
|
(599 | ) | (47,726 | ) | ||||
|
Trust investments
|
1,194,795 | 1,066,042 | ||||||
|
Receivables from customers
|
452,296 | 396,918 | ||||||
|
Unearned finance charges
|
(39,205 | ) | (41,517 | ) | ||||
| 1,607,886 | 1,421,443 | |||||||
|
Allowance for cancellation
|
(43,993 | ) | (38,726 | ) | ||||
|
Preneed cemetery receivables and trust investments
|
$ | 1,563,893 | $ | 1,382,717 | ||||
The activity in
Preneed cemetery receivables, net and trust
investments
for the years ended December 31 was as follows:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Beginning balance — Preneed cemetery receivables and
trust investments
|
$ | 1,382,717 | $ | 1,062,952 | $ | 1,428,057 | ||||||
|
Net preneed contract sales
|
423,985 | 408,328 | 424,939 | |||||||||
|
Acquisitions of businesses, net
|
5,508 | 7,749 | 8,728 | |||||||||
|
Net undistributed investment earnings (losses)(1)
|
121,225 | 271,804 | (336,263 | ) | ||||||||
|
Cash receipts from customers, net of refunds
|
(373,071 | ) | (351,459 | ) | (432,468 | ) | ||||||
|
Deposits to trust
|
96,864 | 92,687 | 106,724 | |||||||||
|
Maturities, deliveries, and associated earnings
|
(100,474 | ) | (104,580 | ) | (132,725 | ) | ||||||
|
Change in cancellation allowance
|
(3,764 | ) | (10,141 | ) | 8,328 | |||||||
|
Effect of foreign currency and other
|
10,903 | 5,377 | (12,368 | ) | ||||||||
|
Ending balance — Preneed cemetery receivables and
trust investments
|
$ | 1,563,893 | $ | 1,382,717 | $ | 1,062,952 | ||||||
| (1) | Includes both realized and unrealized investment earnings (losses). |
The cost and market values associated with our cemetery
merchandise and service trust investments recorded at fair
market value at December 31, 2010 and 2009 are detailed
below. Cost reflects the investment (net of redemptions) of
control holders in common trust funds, mutual funds, and private
equity investments. Fair market value represents the value of
the underlying securities held by the common trust funds, mutual
funds at published values, and the estimated market value of
private equity investments. The fair market value of our
cemetery merchandise and service trust investments was 106% and
95% of the related cost basis of such investments as of
December 31, 2010 and 2009, respectively.
67
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| December 31, 2010 | ||||||||||||||||
|
Unrealized
|
Unrealized
|
Fair Market
|
||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Fixed income securities:
|
||||||||||||||||
|
U.S. Treasury
|
$ | 50,884 | $ | 2,493 | $ | (307 | ) | $ | 53,070 | |||||||
|
Canadian government
|
15,669 | 362 | (4 | ) | 16,027 | |||||||||||
|
Corporate
|
39,265 | 3,387 | (402 | ) | 42,250 | |||||||||||
|
Residential mortgage-backed
|
863 | 31 | (1 | ) | 893 | |||||||||||
|
Asset-backed
|
6,336 | 261 | (5 | ) | 6,592 | |||||||||||
|
Equity securities:
|
||||||||||||||||
|
Preferred stock
|
4,577 | 453 | (124 | ) | 4,906 | |||||||||||
|
Common stock:
|
||||||||||||||||
|
United States
|
386,537 | 82,385 | (10,821 | ) | 458,101 | |||||||||||
|
Canada
|
17,279 | 3,869 | (850 | ) | 20,298 | |||||||||||
|
Other international
|
31,466 | 2,485 | (3,645 | ) | 30,306 | |||||||||||
|
Mutual funds:
|
||||||||||||||||
|
Equity
|
202,328 | 15,173 | (18,569 | ) | 198,932 | |||||||||||
|
Fixed income
|
226,567 | 8,537 | (9,959 | ) | 225,145 | |||||||||||
|
Private equity
|
19,596 | 13 | (13,890 | ) | 5,719 | |||||||||||
|
Other
|
874 | 43 | (385 | ) | 532 | |||||||||||
|
Trust investments
|
$ | 1,002,241 | $ | 119,492 | $ | (58,962 | ) | $ | 1,062,771 | |||||||
68
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| December 31, 2009 | ||||||||||||||||
|
Unrealized
|
Unrealized
|
Fair Market
|
||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Fixed income securities:
|
||||||||||||||||
|
U.S. Treasury
|
$ | 32,084 | $ | 1,169 | $ | (81 | ) | $ | 33,172 | |||||||
|
Canadian government
|
15,664 | 224 | (53 | ) | 15,835 | |||||||||||
|
Corporate
|
9,065 | 438 | (3 | ) | 9,500 | |||||||||||
|
Residential mortgage-backed
|
1,460 | 19 | (2 | ) | 1,477 | |||||||||||
|
Asset-backed
|
6,476 | 193 | — | 6,669 | ||||||||||||
|
Equity securities:
|
||||||||||||||||
|
Common stock:
|
||||||||||||||||
|
United States
|
403,208 | 47,040 | (26,962 | ) | 423,286 | |||||||||||
|
Canada
|
18,653 | 2,021 | (1,183 | ) | 19,491 | |||||||||||
|
Other international
|
26,567 | 1,433 | (3,841 | ) | 24,159 | |||||||||||
|
Mutual funds:
|
||||||||||||||||
|
Equity
|
241,763 | 4,028 | (38,093 | ) | 207,698 | |||||||||||
|
Fixed income
|
233,999 | 2,699 | (24,718 | ) | 211,980 | |||||||||||
|
Private equity
|
14,968 | 8 | (11,000 | ) | 3,976 | |||||||||||
|
Other
|
1,230 | 34 | (899 | ) | 365 | |||||||||||
|
Trust investments
|
$ | 1,005,137 | $ | 59,306 | $ | (106,835 | ) | $ | 957,608 | |||||||
Where quoted prices are available in an active market,
securities held by the common trust funds and mutual funds are
classified as Level 1 investments pursuant to the
three-level valuation hierarchy as required by the FVM&D
Topic of the ASC.
Where quoted market prices are not available for the specific
security, fair values are estimated by using either quoted
prices of securities with similar characteristics or an income
approach fair value model with observable inputs that include a
combination of interest rates, yield curves, credit risks,
prepayment speeds, rating, and tax-exempt status. These funds
are classified as Level 2 investments pursuant to the
three-level valuation hierarchy as required by the FVM&D
Topic of the ASC.
The valuation of private equity and other alternative
investments requires significant management judgment due to the
absence of quoted market prices, inherent lack of liquidity, and
the long-term nature of such assets. The fair value of these
investments is estimated based on the market value of the
underlying real estate and private equity investments. The
underlying real estate value is determined using the most recent
available appraisals. Private equity investments are valued
using market appraisals or a discounted cash flow methodology,
which is an income approach fair value model, depending on the
nature of the underlying assets. The appraisals assess value
based on a combination of replacement cost, comparative sales
analysis, and discounted cash flow analysis. These funds are
classified as Level 3 investments pursuant to the
three-level valuation hierarchy as required by the FVM&D
Topic of the ASC.
As of December 31, 2010, our unfunded commitment for our
private equity and other investments was $5.6 million
which, if called, would be funded by the assets of the trusts.
Our private equity and other investments include several funds
that invest in limited partnerships, distressed debt, real
estate, and mezzanine financing. These investments can never be
redeemed by the funds. Instead, the nature of the investments in
this category is that the distributions are received through the
liquidation of the underlying assets of the funds. We estimate
that the underlying assets will be liquidated over the next 2 to
10 years.
69
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Our investments classified as Level 1 securities include
common stock and mutual funds. Level 2 securities include
U.S. Treasury, Canadian government, corporate,
mortgage-backed and asset-backed fixed income securities, and
preferred stock. Our private equity and other alternative
investments are classified as Level 3 securities.
The inputs into the fair value of our market-based cemetery
merchandise and service trust investments are categorized as
follows:
|
Quoted Market
|
||||||||||||||||
|
Prices in Active
|
Significant Other
|
Significant
|
||||||||||||||
|
Markets
|
Observable Inputs
|
Unobservable Inputs
|
||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Fair Market Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Trust investments at December 31, 2010
|
$ | 932,782 | $ | 123,738 | $ | 6,251 | $ | 1,062,771 | ||||||||
|
Trust investments at December 31, 2009
|
$ | 886,614 | $ | 66,653 | $ | 4,341 | $ | 957,608 | ||||||||
The change in our market-based cemetery merchandise and service
trust investments with significant unobservable inputs
(Level 3) is as follows for the years ended December
31 (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
|
Fair market value, beginning balance at January 1,
|
$ | 4,341 | $ | 31,837 | $ | 21,809 | ||||||
|
Net unrealized losses included in
Accumulated other
comprehensive income
(1)
|
(4,304 | ) | (14,039 | ) | (3,109 | ) | ||||||
|
Net realized (losses) gains included in
Other income,
net
(2)
|
(529 | ) | (27 | ) | 325 | |||||||
|
Purchases, sales, contributions, and distributions, net
|
6,743 | 2,162 | 12,812 | |||||||||
|
Transfers out of Level 3
|
— | (15,592 | ) | — | ||||||||
|
Fair market value, ending balance at December 31
|
$ | 6,251 | $ | 4,341 | $ | 31,837 | ||||||
| (1) | All unrealized losses recognized in Accumulated other comprehensive income for our cemetery merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in Accumulated other comprehensive income to Deferred preneed funeral and cemetery receipts held in trust . See Note 7 for further information related to our Deferred preneed funeral and cemetery receipts held in trust . | |
| (2) | All (losses) gains recognized in Other income, net for our cemetery merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in Other income, net to Deferred preneed funeral and cemetery receipts held in trust . See Note 7 for further information related to our Deferred preneed funeral and cemetery receipts held in trust . |
Maturity dates of our fixed income securities range from 2011 to
2041. Maturities of fixed income securities (excluding mutual
funds) at December 31, 2010 are estimated as follows:
|
Fair Market
|
||||
| Value | ||||
| (In thousands) | ||||
|
Due in one year or less
|
$ | 1,807 | ||
|
Due in one to five years
|
53,223 | |||
|
Due in five to ten years
|
39,018 | |||
|
Thereafter
|
24,784 | |||
| $ | 118,832 | |||
70
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Earnings from all our cemetery merchandise and service trust
investments are recognized in cemetery revenues when a service
is performed or merchandise is delivered. In addition, we are
entitled to retain, in certain jurisdictions, a portion of
collected customer payments when a customer cancels a preneed
contract; these amounts are also recognized in current revenues.
Recognized earnings (realized and unrealized) related to our
cemetery merchandise and service trust investments were
$15.1 million, $8.6 million, and $9.2 million for
the years ended December 31, 2010, 2009, and 2008,
respectively.
We assess our trust investments for
other-than-temporary
declines in fair value on a quarterly basis. Impairment charges
resulting from this assessment are recognized as investment
losses in
Other income, net
and a decrease to
Preneed
cemetery receivables, net and trust investments
. These
investment losses, if any, are offset by the corresponding
reclassification in
Other income, net,
which reduces
Deferred preneed cemetery receipts held in trust
. See
Note 7 for further information related to our
Deferred
preneed cemetery receipts held in trust
. For the years ended
December 31, 2010, 2009, and 2008, we recorded a
$5.7 million, a $41.2 million, and an
$11.4 million impairment charge for
other-than-temporary
declines in fair value related to unrealized losses on certain
investments.
We have determined that the remaining unrealized losses in our
cemetery merchandise and service trust investments are
considered temporary in nature, as the unrealized losses were
due to temporary fluctuations in interest rates and equity
prices. The investments are diversified across multiple industry
segments using a balanced allocation strategy to minimize
long-term risk. We believe that none of the securities are
other-than-temporarily
impaired based on our analysis of the investments. Our analysis
included a review of the portfolio holdings and discussions with
the individual money managers as to the sector exposures, credit
ratings, and the severity and duration of the unrealized losses.
Our cemetery merchandise and service trust investment unrealized
losses, their associated fair market values, and the duration of
unrealized losses for the years ended December 31, 2010 and
2009, are shown in the following tables:
| December 31, 2010 | ||||||||||||||||||||||||
|
In Loss Position
|
In Loss Position
|
|||||||||||||||||||||||
| Less Than 12 Months | Greater Than 12 Months | Total | ||||||||||||||||||||||
|
Fair Market
|
Unrealized
|
Fair Market
|
Unrealized
|
Fair Market
|
Unrealized
|
|||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Fixed income securities:
|
||||||||||||||||||||||||
|
U.S. Treasury
|
$ | 6,057 | $ | (295 | ) | $ | 315 | $ | (12 | ) | $ | 6,372 | $ | (307 | ) | |||||||||
|
Canadian government
|
2,908 | (4 | ) | — | — | 2,908 | (4 | ) | ||||||||||||||||
|
Corporate
|
8,577 | (402 | ) | — | — | 8,577 | (402 | ) | ||||||||||||||||
|
Residential mortgage-backed
|
— | — | 20 | (1 | ) | 20 | (1 | ) | ||||||||||||||||
|
Asset-backed
|
766 | (4 | ) | 56 | (1 | ) | 822 | (5 | ) | |||||||||||||||
|
Equity securities:
|
||||||||||||||||||||||||
|
Preferred stock:
|
1,749 | (124 | ) | — | — | 1,749 | (124 | ) | ||||||||||||||||
|
Common stock:
|
||||||||||||||||||||||||
|
United States
|
63,027 | (4,450 | ) | 31,108 | (6,371 | ) | 94,135 | (10,821 | ) | |||||||||||||||
|
Canada
|
3,131 | (181 | ) | 1,475 | (669 | ) | 4,606 | (850 | ) | |||||||||||||||
|
Other international
|
8,542 | (1,403 | ) | 5,259 | (2,242 | ) | 13,801 | (3,645 | ) | |||||||||||||||
|
Mutual funds:
|
||||||||||||||||||||||||
|
Equity
|
5,107 | (112 | ) | 92,630 | (18,457 | ) | 97,737 | (18,569 | ) | |||||||||||||||
|
Fixed income
|
25,887 | (354 | ) | 14,600 | (9,605 | ) | 40,487 | (9,959 | ) | |||||||||||||||
|
Private equity
|
— | — | 5,557 | (13,890 | ) | 5,557 | (13,890 | ) | ||||||||||||||||
|
Other
|
7 | (1 | ) | 303 | (384 | ) | 310 | (385 | ) | |||||||||||||||
|
Total temporarily impaired securities
|
$ | 125,758 | $ | (7,330 | ) | $ | 151,323 | $ | (51,632 | ) | $ | 277,081 | $ | (58,962 | ) | |||||||||
71
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| December 31, 2009 | ||||||||||||||||||||||||
|
In Loss Position
|
In Loss Position
|
|||||||||||||||||||||||
| Less Than 12 Months | Greater Than 12 Months | Total | ||||||||||||||||||||||
|
Fair Market
|
Unrealized
|
Fair Market
|
Unrealized
|
Fair Market
|
Unrealized
|
|||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Fixed income securities:
|
||||||||||||||||||||||||
|
U.S. Treasury
|
$ | 2,624 | $ | (65 | ) | $ | 1,171 | $ | (16 | ) | $ | 3,795 | $ | (81 | ) | |||||||||
|
Canadian government
|
5,262 | (53 | ) | — | — | 5,262 | (53 | ) | ||||||||||||||||
|
Corporate
|
212 | (3 | ) | — | — | 212 | (3 | ) | ||||||||||||||||
|
Residential mortgage-backed
|
267 | (2 | ) | — | — | 267 | (2 | ) | ||||||||||||||||
|
Equity securities:
|
||||||||||||||||||||||||
|
Common stock:
|
||||||||||||||||||||||||
|
United States
|
106,741 | (7,151 | ) | 69,731 | (19,811 | ) | 176,472 | (26,962 | ) | |||||||||||||||
|
Canada
|
4,445 | (407 | ) | 2,587 | (776 | ) | 7,032 | (1,183 | ) | |||||||||||||||
|
Other international
|
7,453 | (830 | ) | 9,177 | (3,011 | ) | 16,630 | (3,841 | ) | |||||||||||||||
|
Mutual funds:
|
||||||||||||||||||||||||
|
Equity
|
123,439 | (33,152 | ) | 44,463 | (4,941 | ) | 167,902 | (38,093 | ) | |||||||||||||||
|
Fixed income
|
131,246 | (16,036 | ) | 28,203 | (8,682 | ) | 159,449 | (24,718 | ) | |||||||||||||||
|
Private equity
|
2,398 | (4,056 | ) | 1,571 | (6,944 | ) | 3,969 | (11,000 | ) | |||||||||||||||
|
Other
|
147 | (252 | ) | 95 | (647 | ) | 242 | (899 | ) | |||||||||||||||
|
Total temporarily impaired securities
|
$ | 384,234 | $ | (62,007 | ) | $ | 156,998 | $ | (44,828 | ) | $ | 541,232 | $ | (106,835 | ) | |||||||||
Deferred
Preneed Cemetery Revenues
At December 31, 2010 and 2009,
Deferred preneed cemetery
revenues
, net of allowance for cancellation, represent
future cemetery revenues, including distributed trust investment
earnings associated with unperformed trust-funded preneed
cemetery contracts that are not held in trust accounts.
Deferred preneed cemetery revenues
are recognized in
current cemetery revenues when the service is performed or
merchandise delivered. Future cemetery revenues and net trust
investment earnings that are held in trust accounts are included
in
Deferred preneed cemetery receipts held in trust.
The following table summarizes the activity in
Deferred
preneed cemetery revenues
for the years ended December 31:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Beginning balance — Deferred preneed cemetery revenues
|
$ | 817,543 | $ | 771,117 | $ | 753,876 | ||||||
|
Net preneed and atneed deferred sales
|
349,786 | 342,984 | 338,114 | |||||||||
|
Acquisitions of businesses, net
|
1,090 | 5,461 | 529 | |||||||||
|
Net investment earnings (losses)(1)
|
117,331 | 242,483 | (299,422 | ) | ||||||||
|
Recognized deferred preneed revenues
|
(347,996 | ) | (325,036 | ) | (356,501 | ) | ||||||
|
Change in cancellation allowance
|
(2,457 | ) | 10,855 | 7,866 | ||||||||
|
Change in deferred preneed cemetery receipts held in trust
|
(125,974 | ) | (235,031 | ) | 330,333 | |||||||
|
Effect of foreign currency and other
|
4,170 | 4,710 | (3,678 | ) | ||||||||
|
Ending balance — Deferred preneed cemetery revenues
|
$ | 813,493 | $ | 817,543 | $ | 771,117 | ||||||
| (1) | Includes both realized and unrealized investment earnings (losses). |
72
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 6. | Cemetery Perpetual Care Trusts |
We are required by state and provincial law to pay into cemetery
perpetual care trusts a portion of the proceeds from the sale of
cemetery property interment rights. Our cemetery perpetual care
trusts are variable interest entities as defined in the
Consolidation Topic of the ASC. In accordance with this
guidance, we have determined that we are the primary beneficiary
of these trusts, as we absorb a majority of the losses and
returns associated with these trusts. The merchandise and
service trust investments detailed in Notes 4 and 5 are
also accounted for as variable interest entities. We consolidate
our cemetery perpetual care trust investments with a
corresponding amount recorded as
Care trusts’ corpus.
Cash flows from cemetery perpetual care contracts are
presented as operating cash flows in our consolidated statement
of cash flows.
The table below sets forth certain investment-related activities
associated with our cemetery perpetual care trusts for the years
ended December 31:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Deposits
|
$ | 22,828 | $ | 22,336 | $ | 23,347 | ||||||
|
Withdrawals
|
41,418 | 31,196 | 31,628 | |||||||||
|
Purchases of
available-for-sale
securities
|
442,219 | 369,536 | 218,140 | |||||||||
|
Sales of
available-for-sale
securities
|
365,017 | 285,370 | 222,445 | |||||||||
|
Realized gains from sales of
available-for-sale
securities
|
11,753 | 11,288 | 19,070 | |||||||||
|
Realized losses from sales of
available-for-sale
securities
|
(9,792 | ) | (20,512 | ) | (32,312 | ) | ||||||
The components of
Cemetery perpetual care trust investments
in our consolidated balance sheet at December 31 were as
follows:
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Trust investments, at market
|
$ | 922,228 | $ | 814,640 | ||||
|
Cash and cash equivalents
|
64,791 | 92,153 | ||||||
|
Assets associated with business held for sale
|
— | (17,104 | ) | |||||
|
Cemetery perpetual care trust investments
|
$ | 987,019 | $ | 889,689 | ||||
The cost and market values associated with our cemetery
perpetual care trust investments recorded at fair market value
at December 31, 2010 and 2009 are detailed below. Cost
reflects the investment (net of redemptions) of control holders
in common trust funds, mutual funds, and private equity
investments. Fair market value represents the value of the
underlying securities or cash held by the common trust funds,
mutual funds at published values, and the estimated market value
of private equity investments. The fair market value of our
cemetery perpetual care trust investments was 103% and 95% of
the related cost basis of such investments as of
December 31, 2010 and 2009, respectively.
73
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| December 31, 2010 | ||||||||||||||||
|
Unrealized
|
Unrealized
|
Fair Market
|
||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Fixed income securities:
|
||||||||||||||||
|
U.S. Treasury
|
$ | 5,651 | $ | 863 | $ | (31 | ) | $ | 6,483 | |||||||
|
Canadian government
|
26,702 | 642 | (7 | ) | 27,337 | |||||||||||
|
Corporate
|
48,278 | 5,219 | (249 | ) | 53,248 | |||||||||||
|
Residential mortgage-backed
|
1,764 | 55 | (6 | ) | 1,813 | |||||||||||
|
Asset-backed
|
363 | 5 | — | 368 | ||||||||||||
|
Equity securities:
|
||||||||||||||||
|
Preferred stock
|
7,789 | 1,385 | (112 | ) | 9,062 | |||||||||||
|
Common stock:
|
||||||||||||||||
|
United States
|
116,799 | 16,916 | (6,640 | ) | 127,075 | |||||||||||
|
Canada
|
11,510 | 2,510 | (758 | ) | 13,262 | |||||||||||
|
Other international
|
16,004 | 2,175 | (1,845 | ) | 16,334 | |||||||||||
|
Mutual funds:
|
||||||||||||||||
|
Equity
|
65,114 | 6,964 | (7,239 | ) | 64,839 | |||||||||||
|
Fixed income
|
562,879 | 24,773 | (2,334 | ) | 585,318 | |||||||||||
|
Private equity
|
23,428 | 351 | (13,344 | ) | 10,435 | |||||||||||
|
Other
|
8,475 | 836 | (2,657 | ) | 6,654 | |||||||||||
|
Cemetery perpetual care trust investments
|
$ | 894,756 | $ | 62,694 | $ | (35,222 | ) | $ | 922,228 | |||||||
| December 31, 2009 | ||||||||||||||||
|
Unrealized
|
Unrealized
|
Fair Market
|
||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Fixed income securities:
|
||||||||||||||||
|
U.S. Treasury
|
5,031 | 852 | (9 | ) | 5,874 | |||||||||||
|
Canadian government
|
26,688 | 378 | (92 | ) | 26,974 | |||||||||||
|
Corporate
|
40,703 | 3,079 | (367 | ) | 43,415 | |||||||||||
|
Residential mortgage-backed
|
1,923 | 35 | (9 | ) | 1,949 | |||||||||||
|
Asset-backed
|
520 | 8 | — | 528 | ||||||||||||
|
Equity securities:
|
||||||||||||||||
|
Preferred stock
|
5,803 | 1,389 | (259 | ) | 6,933 | |||||||||||
|
Common stock:
|
||||||||||||||||
|
United States
|
113,147 | 7,348 | (12,016 | ) | 108,479 | |||||||||||
|
Canada
|
10,016 | 677 | (970 | ) | 9,723 | |||||||||||
|
Other international
|
12,558 | 1,237 | (2,450 | ) | 11,345 | |||||||||||
|
Mutual funds:
|
||||||||||||||||
|
Equity
|
69,376 | 2,023 | (15,598 | ) | 55,801 | |||||||||||
|
Fixed income
|
534,137 | 4,384 | (9,845 | ) | 528,676 | |||||||||||
|
Private equity
|
28,853 | 394 | (18,235 | ) | 11,012 | |||||||||||
|
Other
|
8,568 | 748 | (5,385 | ) | 3,931 | |||||||||||
|
Cemetery perpetual care trust investments
|
$ | 857,323 | $ | 22,552 | $ | (65,235 | ) | $ | 814,640 | |||||||
74
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Where quoted prices are available in an active market,
securities held by the common trust funds and mutual funds are
classified as Level 1 investments pursuant to the
three-level valuation hierarchy as required by the FVM&D
Topic of the ASC.
Where quoted market prices are not available for the specific
security, fair values are estimated by using either quoted
prices of securities with similar characteristics or an income
approach fair value model with observable inputs that include a
combination of interest rates, yield curves, credit risks,
prepayment speeds, rating, and tax-exempt status. These funds
are classified as Level 2 investments pursuant to the
three-level valuation hierarchy as required by the FVM&D
Topic of the ASC.
The valuation of private equity and other alternative
investments requires significant management judgment due to the
absence of quoted market prices, inherent lack of liquidity, and
the long-term nature of such assets. The fair value of these
investments is estimated based on the market value of the
underlying real estate and private equity investments. The
underlying real estate value is determined using the most recent
available appraisals. Private equity investments are valued
using market appraisals or a discounted cash flow methodology,
which is an income approach fair value model, depending on the
nature of the underlying assets. The appraisals assess value
based on a combination of replacement cost, comparative sales
analysis, and discounted cash flow analysis. These funds are
classified as Level 3 investments pursuant to the
three-level valuation hierarchy as required by the FVM&D
Topic of the ASC.
Our private equity and other investments include several funds
that invest in limited partnerships, distressed debt, real
estate, and mezzanine financing. These investments can never be
redeemed by the funds. Instead, the nature of the investments in
this category is that the distributions are received through the
liquidation of the underlying assets of the funds. We estimate
that the underlying assets will be liquidated over the next 2 to
10 years.
Our investments classified as Level 1 securities include
common stock and mutual funds. Level 2 securities include
U.S. Treasury, Canadian government, corporate,
mortgage-backed and asset-backed fixed income securities, and
preferred stock. Our private equity and other alternative
investments are classified as Level 3 securities.
The inputs into the fair value of our market-based cemetery
perpetual care investments are categorized as follows:
|
Quoted Market
|
||||||||||||||||
|
Prices in Active
|
Significant Other
|
Significant
|
||||||||||||||
|
Markets
|
Observable Inputs
|
Unobservable Inputs
|
||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Fair Market Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Trust investments at December 31, 2010
|
$ | 806,828 | $ | 98,311 | $ | 17,089 | $ | 922,228 | ||||||||
|
Trust investments at December 31, 2009
|
$ | 714,024 | $ | 85,673 | $ | 14,943 | $ | 814,640 | ||||||||
The change in our market-based cemetery perpetual care trust
investments with significant unobservable inputs
(Level 3) is as follows for the years ended December
31 (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
|
Fair market value, beginning balance
|
$ | 14,943 | $ | 48,276 | $ | 32,644 | ||||||
|
Net unrealized gains (losses) included in
Accumulated other
comprehensive income
(1)
|
7,018 | (27,920 | ) | (13,569 | ) | |||||||
|
Net realized (losses) gains included in
Other income,
net
(2)
|
(2,613 | ) | (121 | ) | 32 | |||||||
|
Purchases, sales, contributions, and distributions, net
|
(2,259 | ) | 1,920 | 29,169 | ||||||||
|
Transfers out of Level 3
|
— | (7,212 | ) | — | ||||||||
|
Fair market value, ending balance
|
$ | 17,089 | $ | 14,943 | $ | 48,276 | ||||||
75
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (1) | All unrealized gains (losses) recognized in Accumulated other comprehensive income for our cemetery perpetual care trust investments are offset by a corresponding reclassification in Accumulated other comprehensive income to Care trusts’ corpus . See Note 7 for further information related to our Care trusts’ corpus . | |
| (2) | All (losses) gains recognized in Other income, net for our cemetery perpetual care trust investments are offset by a corresponding reclassification in Other income, net to Care trusts’ corpus . See Note 7 for further information related to our Care trusts’ corpus . |
Maturity dates of our fixed income securities range from 2011 to
2041. Maturities of fixed income securities at December 31,
2010 are estimated as follows:
|
Fair Market
|
||||
| Value | ||||
| (In thousands) | ||||
|
Due in one year or less
|
$ | 5,477 | ||
|
Due in one to five years
|
41,430 | |||
|
Due in five to ten years
|
27,490 | |||
|
Thereafter
|
14,852 | |||
| $ | 89,249 | |||
Distributable earnings from these cemetery perpetual care trust
investments are recognized in current cemetery revenues to the
extent we incur qualifying cemetery maintenance costs.
Recognized earnings related to these cemetery perpetual care
trust investments were $38.6 million, $37.6 million,
and $36.0 million for the years ended December 31,
2010, 2009, and 2008, respectively.
We assess our trust investments for
other-than-temporary
declines in fair value on a quarterly basis. Impairment charges
resulting from this assessment are recognized as investment
losses in
Other income, net
and a decrease to
Cemetery
perpetual care trust investments
. These investment losses,
if any, are offset by the corresponding reclassification in
Other income, net,
which reduces
Care trusts’
corpus
. See Note 7 for further information related to
our
Care trusts’ corpus
. For the years ended
December 31, 2010, 2009, and 2008, we recorded a
$7.8 million, a $13.1 million, and a $2.0 million
impairment charge for
other-than-temporary
declines in fair value related to unrealized losses on certain
investments.
We have determined that the remaining unrealized losses in our
cemetery perpetual care trust investments are considered
temporary in nature, as the unrealized losses were due to
temporary fluctuations in interest rates and equity prices. The
investments are diversified across multiple industry segments
using a balanced allocation strategy to minimize long-term risk.
We believe that none of the securities are
other-than-temporarily
impaired based on our analysis of the investments. Our analysis
included a review of the portfolio holdings, and discussions
with the individual money managers as to the sector exposures,
credit ratings, and the severity and duration of the unrealized
losses. Our cemetery perpetual care trust investment unrealized
losses, their associated fair market
76
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
values and the duration of unrealized losses for the years ended
December 31, 2010 and 2009, are shown in the following
table:
| December 31, 2010 | ||||||||||||||||||||||||
|
In Loss Position
|
In Loss Position
|
|||||||||||||||||||||||
| Less Than 12 Months | Greater Than 12 Months | Total | ||||||||||||||||||||||
|
Fair
|
Fair
|
Fair
|
||||||||||||||||||||||
|
Market
|
Unrealized
|
Market
|
Unrealized
|
Market
|
Unrealized
|
|||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Fixed income securities:
|
||||||||||||||||||||||||
|
U.S. Treasury
|
$ | 1,669 | $ | (31 | ) | $ | — | $ | — | $ | 1,669 | $ | (31 | ) | ||||||||||
|
Canadian government
|
4,966 | (7 | ) | — | — | 4,966 | (7 | ) | ||||||||||||||||
|
Corporate
|
9,181 | (221 | ) | 675 | (28 | ) | 9,856 | (249 | ) | |||||||||||||||
|
Residential mortgage-backed
|
137 | (2 | ) | 92 | (4 | ) | 229 | (6 | ) | |||||||||||||||
|
Equity securities:
|
||||||||||||||||||||||||
|
Preferred stock
|
1,561 | (90 | ) | 29 | (22 | ) | 1,590 | (112 | ) | |||||||||||||||
|
Common stock:
|
||||||||||||||||||||||||
|
United States
|
15,419 | (1,464 | ) | 16,419 | (5,176 | ) | 31,838 | (6,640 | ) | |||||||||||||||
|
Canada
|
1,545 | (82 | ) | 1,454 | (676 | ) | 2,999 | (758 | ) | |||||||||||||||
|
Other international
|
3,175 | (242 | ) | 2,383 | (1,603 | ) | 5,558 | (1,845 | ) | |||||||||||||||
|
Mutual funds:
|
||||||||||||||||||||||||
|
Equity
|
866 | (10 | ) | 29,974 | (7,229 | ) | 30,840 | (7,239 | ) | |||||||||||||||
|
Fixed income
|
18,166 | (134 | ) | 53,553 | (2,200 | ) | 71,719 | (2,334 | ) | |||||||||||||||
|
Private equity
|
1 | (1 | ) | 10,060 | (13,343 | ) | 10,061 | (13,344 | ) | |||||||||||||||
|
Other
|
1 | (2 | ) | 5,568 | (2,655 | ) | 5,569 | (2,657 | ) | |||||||||||||||
|
Total temporarily impaired securities
|
$ | 56,687 | $ | (2,286 | ) | $ | 120,207 | $ | (32,936 | ) | $ | 176,894 | $ | (35,222 | ) | |||||||||
77
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| December 31, 2009 | ||||||||||||||||||||||||
|
In Loss Position
|
In Loss Position
|
|||||||||||||||||||||||
| Less Than 12 Months | Greater Than 12 Months | Total | ||||||||||||||||||||||
|
Fair
|
Fair
|
Fair
|
||||||||||||||||||||||
|
Market
|
Unrealized
|
Market
|
Unrealized
|
Market
|
Unrealized
|
|||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Fixed income securities:
|
||||||||||||||||||||||||
|
U.S. Treasury
|
$ | 1,029 | $ | (9 | ) | $ | — | $ | — | $ | 1,029 | $ | (9 | ) | ||||||||||
|
Canadian government
|
9,053 | (92 | ) | — | — | 9,053 | (92 | ) | ||||||||||||||||
|
Corporate
|
4,739 | (92 | ) | 2,780 | (275 | ) | 7,519 | (367 | ) | |||||||||||||||
|
Residential mortgage-backed
|
1,426 | (9 | ) | — | — | 1,426 | (9 | ) | ||||||||||||||||
|
Equity securities:
|
||||||||||||||||||||||||
|
Preferred stock
|
511 | (47 | ) | 734 | (212 | ) | 1,245 | (259 | ) | |||||||||||||||
|
Common stock:
|
||||||||||||||||||||||||
|
United States
|
19,069 | (1,529 | ) | 31,553 | (10,487 | ) | 50,622 | (12,016 | ) | |||||||||||||||
|
Canada
|
1,253 | (229 | ) | 2,637 | (741 | ) | 3,890 | (970 | ) | |||||||||||||||
|
Other international
|
1,102 | (17 | ) | 3,086 | (2,433 | ) | 4,188 | (2,450 | ) | |||||||||||||||
|
Mutual funds:
|
||||||||||||||||||||||||
|
Equity
|
21,152 | (9,290 | ) | 16,051 | (6,308 | ) | 37,203 | (15,598 | ) | |||||||||||||||
|
Fixed income
|
285,936 | (7,512 | ) | 36,141 | (2,333 | ) | 322,077 | (9,845 | ) | |||||||||||||||
|
Private equity
|
4,387 | (7,249 | ) | 6,201 | (10,986 | ) | 10,588 | (18,235 | ) | |||||||||||||||
|
Other
|
1,220 | (2,017 | ) | 1,720 | (3,368 | ) | 2,940 | (5,385 | ) | |||||||||||||||
|
Total temporarily impaired securities
|
$ | 350,877 | $ | (28,092 | ) | $ | 100,903 | $ | (37,143 | ) | $ | 451,780 | $ | (65,235 | ) | |||||||||
| 7. | Deferred Preneed Funeral and Cemetery Receipts Held in Trust and Care Trusts’ Corpus |
Deferred
Preneed Funeral and Cemetery Receipts Held in
Trust
We consolidate the merchandise and service trusts associated
with our preneed funeral and cemetery activities in accordance
with the Consolidation Topic of the ASC. Although the guidance
requires the consolidation of the merchandise and service
trusts, it does not change the legal relationships among the
trusts, us, or our customers. The customers are the legal
beneficiaries of these merchandise and service trusts, and
therefore their interests in these trusts represent a liability
to us.
78
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of
Deferred preneed funeral and cemetery
receipts held in trust
in our consolidated balance sheet at
December 31, 2010 and 2009 are detailed below.
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
|
Preneed
|
Preneed
|
Preneed
|
Preneed
|
|||||||||||||||||||||
| Funeral | Cemetery | Total | Funeral | Cemetery | Total | |||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||
|
Trust investments
|
$ | 1,216,542 | $ | 1,194,795 | $ | 2,411,337 | $ | 1,138,949 | $ | 1,066,042 | $ | 2,204,991 | ||||||||||||
|
Accrued trust operating payables, deferred tax assets, and other
|
(975 | ) | (2,288 | ) | (3,263 | ) | (1,449 | ) | (2,139 | ) | (3,588 | ) | ||||||||||||
|
Deferred preneed funeral and cemetery receipts held in trust
|
$ | 1,215,567 | $ | 1,192,507 | $ | 2,408,074 | $ | 1,137,500 | $ | 1,063,903 | $ | 2,201,403 | ||||||||||||
Care
Trusts’ Corpus
The
Care trusts’ corpus
reflected in our
consolidated balance sheet represents the cemetery perpetual
care trusts, including the related accrued expenses.
The components of
Care trusts’ corpus
in our
consolidated balance sheet at December 31, 2010 and 2009
are detailed below.
| December 31, 2010 | December 31, 2009 | |||||||
| (In thousands) | ||||||||
|
Cemetery perpetual care trust investments
|
$ | 987,019 | $ | 889,689 | ||||
|
Accrued trust operating payables, deferred tax assets, and other
|
(147 | ) | 1,220 | |||||
|
Care trusts’ corpus
|
$ | 986,872 | $ | 890,909 | ||||
Other
Income, Net
The components of
Other income, net
in our consolidated
statement of operations for the years ended December 31,
2010, 2009, and 2008 are detailed below. See Notes 4, 5,
and 6 for further discussion of the amounts related to our
funeral, cemetery, and cemetery perpetual care trusts.
| Year Ended December 31, 2010 | ||||||||||||||||||||
|
Funeral
|
Cemetery
|
Cemetery Perpetual
|
||||||||||||||||||
| Trusts | Trusts | Care Trusts | Other, Net | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Realized gains
|
$ | 36,807 | $ | 43,413 | $ | 11,753 | $ | — | $ | 91,973 | ||||||||||
|
Realized losses and impairment charges
|
(54,736 | ) | (57,520 | ) | (17,563 | ) | — | (129,819 | ) | |||||||||||
|
Interest, dividend, and other ordinary income
|
18,571 | 22,464 | 34,356 | — | 75,391 | |||||||||||||||
|
Trust expenses and income taxes
|
(4,920 | ) | (9,708 | ) | (1,872 | ) | — | (16,500 | ) | |||||||||||
|
Net trust investment (loss) income
|
(4,278 | ) | (1,351 | ) | 26,674 | — | 21,045 | |||||||||||||
|
Reclassification to deferred preneed funeral and cemetery
receipts held in trust and care trusts’ corpus
|
4,278 | 1,351 | (26,674 | ) | — | (21,045 | ) | |||||||||||||
|
Other income, net
|
— | — | — | 3,009 | 3,009 | |||||||||||||||
|
Total other income, net
|
$ | — | $ | — | $ | — | $ | 3,009 | $ | 3,009 | ||||||||||
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CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Year Ended December 31, 2009 | ||||||||||||||||||||
|
Funeral
|
Cemetery
|
Cemetery Perpetual
|
||||||||||||||||||
| Trusts | Trusts | Care Trusts | Other, Net | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Realized gains
|
$ | 28,715 | $ | 44,972 | $ | 11,288 | $ | — | $ | 84,975 | ||||||||||
|
Realized losses and impairment charges
|
(79,594 | ) | (116,499 | ) | (33,579 | ) | — | (229,672 | ) | |||||||||||
|
Interest, dividend, and other ordinary income
|
21,694 | 25,273 | 37,436 | — | 84,403 | |||||||||||||||
|
Trust expenses and income taxes
|
(4,127 | ) | (3,789 | ) | (3,240 | ) | — | (11,156 | ) | |||||||||||
|
Net trust investment (loss) income
|
(33,312 | ) | (50,043 | ) | 11,905 | — | (71,450 | ) | ||||||||||||
|
Reclassification to deferred preneed funeral and cemetery
receipts held in trust and care trusts’ corpus
|
33,312 | 50,043 | (11,905 | ) | — | 71,450 | ||||||||||||||
|
Other income, net
|
— | — | — | 1,316 | 1,316 | |||||||||||||||
|
Total other income, net
|
$ | — | $ | — | $ | — | $ | 1,316 | $ | 1,316 | ||||||||||
| Year Ended December 31, 2008 | ||||||||||||||||||||
|
Funeral
|
Cemetery
|
Cemetery Perpetual
|
||||||||||||||||||
| Trusts | Trusts | Care Trusts | Other, Net | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Realized gains
|
$ | 46,703 | $ | 47,411 | $ | 19,070 | $ | — | $ | 113,184 | ||||||||||
|
Realized losses and impairment charges
|
(85,298 | ) | (96,919 | ) | (34,338 | ) | — | (216,555 | ) | |||||||||||
|
Interest, dividend, and other ordinary income
|
43,265 | 31,894 | 37,177 | — | 112,336 | |||||||||||||||
|
Trust expenses and income taxes
|
(14,090 | ) | (22,619 | ) | (837 | ) | — | (37,546 | ) | |||||||||||
|
Net trust investment (loss) income
|
(9,420 | ) | (40,233 | ) | 21,072 | — | (28,581 | ) | ||||||||||||
|
Reclassification to deferred preneed funeral and cemetery
receipts held in trust and care trusts’ corpus
|
9,420 | 40,233 | (21,072 | ) | — | 28,581 | ||||||||||||||
|
Other income, net
|
— | — | — | 4,897 | 4,897 | |||||||||||||||
|
Total other income, net
|
$ | — | $ | — | $ | — | $ | 4,897 | $ | 4,897 | ||||||||||
| 8. | Keystone Acquisition |
In March 2010, pursuant to a tender offer, we acquired Keystone
North America, Inc. (Keystone) for C$8.07 per share in cash,
resulting in a purchase price of $288.9 million, which
includes the refinancing of $80.7 million of
Keystone’s debt.
We incurred acquisition costs of $7.1 million of which
$3.7 million is included in
General and Administrative
Expenses
for the year ended December 31, 2010,
respectively, and the remainder was incurred in prior periods.
The primary reasons for the merger and the principal factors
that contributed to the recognition of goodwill in this
acquisition were:
| • | the acquisition of Keystone enhances our network footprint, enabling us to serve a number of new, complementary areas; |
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CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| • | combining the two companies’ operations provides synergies and related cost savings through the elimination of duplicate home office functions and economies of scale; and | |
| • | the acquisition of Keystone’s preneed backlog of deferred revenues enhances our long-term stability. |
The following table summarizes the adjusted fair values of the
assets acquired and liabilities assumed as of March 26,
2010, for various purchase price allocation adjustments made
subsequent to our first quarter results:
| (In thousands) | ||||
|
Accounts receivable
|
$ | 6,131 | ||
|
Other current assets
|
20,204 | |||
|
Cemetery property
|
19,949 | |||
|
Property and equipment, net
|
105,888 | |||
|
Preneed funeral and cemetery receivables and trust investments
|
66,395 | |||
|
Intangible assets
|
68,012 | |||
|
Deferred charges and other assets
|
6,533 | |||
|
Goodwill
|
107,908 | |||
|
Total assets acquired
|
401,020 | |||
|
Current liabilities
|
11,371 | |||
|
Long-term debt
|
2,548 | |||
|
Deferred preneed funeral and cemetery revenues and deferred
receipts held in trusts
|
69,052 | |||
|
Deferred tax liability
|
20,939 | |||
|
Other liabilities
|
8,248 | |||
|
Total liabilities assumed
|
112,158 | |||
|
Net assets acquired
|
$ | 288,862 | ||
The gross amount of accounts receivable is $8.2 million, of
which $2.1 million is not expected to be collected.
Included in Preneed funeral and cemetery receivables and trust
investments are receivables under preneed contracts with a fair
value of $5.2 million. The gross amount due under the
contracts is $5.5 million, of which $0.3 million is
not expected to be collected.
We have not finalized our assessment of the fair values as there
has been insufficient time between the acquisition date and the
issuance of this
Form 10-K
to complete our review of individual contracts, agreements, and
accounting records of Keystone.
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CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Goodwill, land, and certain identifiable intangible assets
recorded in the acquisition are not subject to amortization;
however, the goodwill and intangible assets will be tested
periodically for impairment as required by the Intangible Assets
Topic of the ASC. Of the $107.9 million in goodwill
recognized, $4.3 million was allocated to our cemetery
segment and $103.6 million was allocated to our funeral
segment. As a result of the carryover of Keystone’s tax
basis, $26.0 million of this goodwill is deductible for tax
purposes. The $68.0 million in identified intangible assets
consists of the following:
| Useful Life | Fair Value | |||||
| (In thousands) | ||||||
|
Preneed customer relationships related to insurance claims
|
10 years | $ | 15,200 | |||
|
Preneed deferred revenue
|
10 — 14 years | 1,740 | ||||
|
Covenants-not-to-compete
|
5 — 15 years | 13,332 | ||||
|
Operating leases
|
5 — 15 years | 440 | ||||
|
Tradenames
|
5 years | 3,600 | ||||
|
Tradenames
|
Indefinite | 33,200 | ||||
|
Licenses and permits
|
Indefinite | 500 | ||||
|
Total intangible assets
|
$ | 68,012 | ||||
Included in our results of operations for the twelve months
ended December 31, 2010 is revenue of $83.7 million
and net income of $16.7 million for the period from the
acquisition date (March 26, 2010) through
December 31, 2010. The following unaudited pro forma
summary presents financial information as if the acquisition had
occurred at the beginning of each year presented for the
consolidated company:
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Revenue
|
$ | 2,220,204 | $ | 2,176,166 | ||||
|
Net income
|
$ | 129,970 | $ | 141,177 | ||||
| 9. | Goodwill |
The changes in the carrying amounts of goodwill for our funeral
and cemetery reporting units are as follows (in thousands):
| 2010 | 2009 | |||||||||||||||||||||||
| Funeral | Cemetery | Total | Funeral | Cemetery | Total | |||||||||||||||||||
|
Balance as of January 1:
|
||||||||||||||||||||||||
|
Goodwill
|
$ | 1,140,742 | $ | 207,384 | $ | 1,348,126 | $ | 1,124,219 | $ | 201,544 | $ | 1,325,763 | ||||||||||||
|
Accumulated impairment losses
|
— | (146,794 | ) | (146,794 | ) | — | (146,794 | ) | (146,794 | ) | ||||||||||||||
| 1,140,742 | 60,590 | 1,201,332 | 1,124,219 | 54,750 | 1,178,969 | |||||||||||||||||||
|
Increase in goodwill related to acquisitions
|
114,020 | 6,076 | 120,096 | 13,661 | 2,602 | 16,263 | ||||||||||||||||||
|
Reduction of goodwill related to divestitures
|
(16,581 | ) | (3,388 | ) | (19,969 | ) | (11,682 | ) | (44 | ) | (11,726 | ) | ||||||||||||
|
Effect of foreign currency and other
|
6,025 | — | 6,025 | 14,544 | 3,282 | 17,826 | ||||||||||||||||||
| 103,464 | 2,688 | 106,152 | 16,523 | 5,840 | 22,363 | |||||||||||||||||||
|
Balance as of December 31:
|
||||||||||||||||||||||||
|
Goodwill
|
1,244,206 | 210,072 | 1,454,278 | 1,140,742 | 207,384 | 1,348,126 | ||||||||||||||||||
|
Accumulated impairment losses
|
— | (146,794 | ) | (146,794 | ) | — | (146,794 | ) | (146,794 | ) | ||||||||||||||
| $ | 1,244,206 | $ | 63,278 | $ | 1,307,484 | $ | 1,140,742 | $ | 60,590 | $ | 1,201,332 | |||||||||||||
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CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 10. | Income Taxes |
The provision or benefit for income taxes includes
U.S. federal income taxes (determined on a consolidated
return basis), foreign income taxes, and state income taxes.
Income from continuing operations before income taxes for the
years ended December 31 was comprised of the following
components:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
United States
|
$ | 169,544 | $ | 175,212 | $ | 125,694 | ||||||
|
Foreign
|
49,915 | 24,156 | 37,601 | |||||||||
| $ | 219,459 | $ | 199,368 | $ | 163,295 | |||||||
Income tax provision (benefit) for the years ended December 31
consisted of the following:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Current:
|
||||||||||||
|
United States
|
$ | 1,752 | $ | 13 | $ | (60,270 | ) | |||||
|
Foreign
|
12,326 | 9,200 | 11,285 | |||||||||
|
State
|
1,446 | 9,196 | 5,584 | |||||||||
|
Total current income taxes
|
15,524 | 18,409 | (43,401 | ) | ||||||||
|
Deferred:
|
||||||||||||
|
United States
|
$ | 64,814 | $ | 57,767 | $ | 99,752 | ||||||
|
Foreign
|
185 | (806 | ) | 645 | ||||||||
|
State
|
11,935 | 905 | 8,721 | |||||||||
|
Total deferred income taxes
|
76,934 | 57,866 | 109,118 | |||||||||
|
Total income taxes
|
$ | 92,458 | $ | 76,275 | $ | 65,717 | ||||||
The current benefit associated with U.S. income taxes in
2008 reflects a refund of 2007 estimated taxes. We made income
tax payments, net of refunds, of $20.9 million,
$21.1 million, and $20.1 million in 2010, 2009, and
2008, respectively.
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CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The differences between the U.S. federal statutory income
tax rate and our effective tax rate for the years ended December
31 were as follows:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Computed tax provision at the applicable federal statutory
income tax rate
|
$ | 76,811 | $ | 69,779 | $ | 57,107 | ||||||
|
State and local taxes, net of federal income tax benefits
|
8,775 | 6,565 | 9,298 | |||||||||
|
Dividends received deduction and tax exempt interest
|
(1,168 | ) | (947 | ) | (1,177 | ) | ||||||
|
Foreign jurisdiction differences
|
(3,101 | ) | (3,707 | ) | (4,975 | ) | ||||||
|
Permanent differences associated with dispositions
|
7,192 | 2,950 | 2,586 | |||||||||
|
Changes in uncertain tax positions
|
1,138 | (134 | ) | 818 | ||||||||
|
Other
|
2,811 | 1,769 | 2,060 | |||||||||
|
Provision for income taxes
|
$ | 92,458 | $ | 76,275 | $ | 65,717 | ||||||
|
Total effective tax rate
|
42.1 | % | 38.3 | % | 40.2 | % | ||||||
Our 2010, 2009, and 2008 effective tax rate was negatively
impacted by permanent book and tax basis differences related to
North American asset divestitures. During 2010 we recognized
U.S. tax on post-acquisition integration of certain keystone
entities into SCI’s structure. Our overall foreign tax
expense increased in 2010 due to an increase in foreign
earnings. This increase was partially offset by a decrease in
foreign statutory rates. In 2010 our state tax expense was
impacted by permanent items affecting our overall effective rate
as well as an increase in state statutory tax rates. During 2009
we experienced a decrease in state tax expense due to a
restructuring of some of our state operating entities.
During 2010, the Internal Revenue Service approved three
requests for tax accounting method changes relating to the
recognition of trust earnings accumulated in cemetery and
funeral trusts, revenue from pre-need sales of cemetery
merchandise, and revenue from non-trusted customer payments for
pre-need funeral contracts. The effective date for these tax
accounting method changes is for the fiscal year ended
December 31, 2010. In accordance with § 481(a) of
the U.S. Internal Revenue Code this adjustment recalculates the
income previously recognized to determine what should have been
recognized under the new tax accounting method. The cumulative
impact of these accounting method changes resulted in an
adjustment under § 481(a) for 2010 of
$190.3 million that represents a decrease in current year
taxable income, a decrease in a previously recognized deferred
tax asset related to deferred revenue, and an increase in our
deferred tax asset related to our net operating loss carryover.
Although these changes have no tax impact on the overall
effective tax rate, there is a savings in cash taxes including
SCI’s eligibility for a quick refund of its 2010 Federal
estimated tax payments of $7.1 million which should be
received in 2011. This refund has been reflected as a receivable
in other current assets.
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CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Deferred taxes are determined based on differences between the
financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates. The tax effects of
temporary differences and carry-forwards that give rise to
significant portions of deferred tax assets and liabilities as
of December 31 consisted of the following:
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Inventories and cemetery property, principally due to purchase
accounting adjustments
|
$ | (344,160 | ) | $ | (332,465 | ) | ||
|
Property and equipment, principally due to differences in
depreciation methods and purchase accounting adjustments
|
(170,305 | ) | (150,312 | ) | ||||
|
Intangibles
|
(82,587 | ) | (55,976 | ) | ||||
|
Payables, principally due to sales of cemetery interment rights
and related products
|
(28,779 | ) | (1,390 | ) | ||||
|
Deferred tax liabilities
|
(625,831 | ) | (540,143 | ) | ||||
|
Loss and tax credit carry-forwards
|
235,393 | 180,897 | ||||||
|
Deferred revenue on preneed funeral and cemetery contracts,
principally due to earnings from trust funds
|
98,335 | 172,944 | ||||||
|
Accrued liabilities
|
24,469 | 28,090 | ||||||
|
Other
|
49,316 | 31,208 | ||||||
|
Deferred tax assets
|
407,513 | 413,139 | ||||||
|
Less: Valuation allowance
|
(63,614 | ) | (68,192 | ) | ||||
|
Net deferred income tax liability
|
$ | (281,932 | ) | $ | (195,196 | ) | ||
Deferred tax assets
and
Deferred income tax
liabilities
consisted of the following as of December 31:
| 2010 | 2009 | |||||||
|
Current deferred tax assets
|
$ | 40,740 | $ | 50,807 | ||||
|
Non-current deferred tax assets
|
631 | 727 | ||||||
|
Non-current deferred tax liabilities
|
(323,303 | ) | (246,730 | ) | ||||
|
Net deferred tax liability
|
$ | (281,932 | ) | $ | (195,196 | ) | ||
In addition to the loss and tax credit carry-forward amounts
reflected as deferred tax assets in the table above, we have
taken certain tax deductions related to the exercised employee
stock options and vested restricted shares that are in excess of
the stock-based compensation amounts recorded in our
consolidated financial statements (“windfall tax
benefits”). Pursuant to the Stock Compensation Topic under
the ASC, such windfall tax benefits are not recognized in our
consolidated financial statements unless they reduce income
taxes payable. As of December 31, 2010 and 2009, we have
windfall tax benefits of $9.5 million and
$8.1 million, respectively, which when realized will be
recorded as a reduction to current taxes payable and credit to
Capital in excess of par value in our consolidated financial
statements.
During the fourth quarter of 2010, the Company underwent a
restructuring of its Canadian subsidiaries. The restructuring
triggered a U.S. dividend of $6.9 million for which
U.S. federal taxes have been provided for the year ended
December 31, 2010. The dividend is less than current year
earnings and other prior year earnings required to
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
be permanently reinvested. At December 31, 2010 and 2009,
U.S. income taxes had not been provided on
$256.0 million and $200.2 million, respectively, of
the remaining undistributed earnings of our Canadian
subsidiaries. We intend to permanently reinvest these
undistributed foreign earnings in those businesses outside the
United States. It is not practicable to determine the amount of
federal income taxes, if any, that might become due if such
earnings are repatriated.
The following table summarizes the activity related to our gross
unrecognized tax benefits from January 1, 2008 to
December 31, 2010 (in thousands):
|
Federal, State and
|
||||
| Foreign Tax | ||||
| (In thousands) | ||||
|
Balance at January 1, 2008
|
$ | 147,888 | ||
|
Additions to tax positions related to prior years
|
8,132 | |||
|
Reductions to tax positions related to acquired entities in
prior years, offset to goodwill
|
(8,700 | ) | ||
|
Statute expirations
|
(4,863 | ) | ||
|
Balance at December 31, 2008
|
$ | 142,457 | ||
|
Additions to tax positions related to the current year
|
5,154 | |||
|
Additions to tax positions related to prior years
|
1,076 | |||
|
Statute expirations
|
(4,243 | ) | ||
|
Balance at December 31, 2009
|
$ | 144,444 | ||
|
Additions to tax positions related to the current year
|
10,215 | |||
|
Additions to tax positions related to prior years
|
110 | |||
|
Statute expirations
|
(2,004 | ) | ||
|
Balance at December 31, 2010
|
$ | 152,765 | ||
Our total unrecognized tax benefits that, if recognized, would
affect our effective tax rates were $39.3 million,
$41.2 million, and $51.6 million as of
December 31, 2010, 2009, and 2008, respectively.
During 2010, in accordance with the Income Tax Topic under the
ASC, we recorded an increase of $10.3 million in our
liability for unrecognized tax benefits, of which
$10.2 million was an increase to U.S. tax positions
taken in the current year and $0.1 million was an increase
related to U.S. tax positions taken in prior years. In
addition, we recorded a $2.0 million decrease to our tax
liability due to the expiration of statute of limitations on
positions taken in previous fiscal years.
During 2009, we recorded an increase of $6.3 million to our
liability for unrecognized tax benefits of which
$1.1 million related to U.S. and foreign tax positions
taken in previous fiscal years. In addition, we recorded a
$4.2 million decrease to our tax liability, due to the
expiration of statute of limitation on positions taken in
previous fiscal years.
Consistent with our historical financial reporting, we include
potential accrued interest and penalties related to unrecognized
tax benefits within our income tax provision account. We have
accrued $38.8 million, $36.0 million and
$32.2 million for the payment of interest, net of tax
benefits, and penalties as of December 31, 2010, 2009, and
2008, respectively. We recognized interest and penalties of
$3.6 million, $3.8 million, and $2.4 million for
the years ended December 31, 2010, 2009, and 2008,
respectively. To the extent interest and penalties are not
assessed with respect to uncertain tax positions or the
uncertainty of deductions in the future, amounts accrued will be
reduced and reflected as a reduction of the overall income tax
provision.
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CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We file income tax returns, including tax returns for our
subsidiaries, with federal, state, local, and foreign
jurisdictions. Our tax returns are subject to routine compliance
review by the taxing authorities in the jurisdictions in which
we file tax returns in the ordinary course of business. We
consider the United States to be our most significant tax
jurisdiction; however, the taxing authorities in Canada and
Spain are auditing various tax returns. Current audits are
occurring in the United States and various state and foreign
locations covering open tax years through 2008. The Internal
Revenue Service is in various stages of auditing tax years 1999
through 2005. It is reasonably possible that changes to our
global unrecognized tax benefits could be significant; however,
due to the uncertainty regarding the timing of completion of
audits and possible outcomes, a current estimate of the range of
increases or decreases that may occur within the next twelve
months cannot be made.
Various subsidiaries have foreign, federal, and state
carry-forwards in the aggregate of $3 billion with
expiration dates through 2030. Such loss carry-forwards will
expire as follows:
| Federal | State | Foreign | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
|
2011
|
$ | 308 | $ | 19,161 | $ | — | $ | 19,469 | ||||||||
|
2012
|
232 | 60,475 | — | 60,707 | ||||||||||||
|
2013
|
1,733 | 15,174 | — | 16,907 | ||||||||||||
|
2014
|
115 | 42,224 | — | 42,339 | ||||||||||||
|
Thereafter
|
297,759 | 2,585,295 | 5,978 | 2,889,032 | ||||||||||||
|
Total
|
$ | 300,147 | $ | 2,722,329 | $ | 5,978 | $ | 3,028,454 | ||||||||
In addition to the above loss carry-forwards, we have
$65.5 million of foreign losses that have an indefinite
expiration.
A valuation allowance has been established because
more-likely-than-not uncertainties exist with respect to our
future realization of certain loss carry-forwards. The valuation
allowance is primarily attributable to state net operating
losses and reflects our expectation that the net operating
losses in certain jurisdictions will expire before we generate
sufficient taxable income to utilize the losses. In 2010, we
recorded a net $0.5 million increase in our state valuation
allowances, which is comprised of adjustments of
$0.3 million to goodwill related to the Keystone
acquisition and a $0.2 million increase in estimated net
operating losses expected to expire unutilized. We also incurred
a $0.5 million decrease in valuation allowances on federal
operating losses due to current year utilization and a
$4.6 million decrease in foreign valuation allowances on
tax losses in foreign jurisdictions primarily related to foreign
exchange rate fluctuations. At December 31, 2010, our loss
and tax credit carry-forward deferred tax assets and related
valuation allowances by jurisdiction are as follows:
| Federal | State(1) | Foreign | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Loss and tax credit carry-forwards
|
$ | 118,732 | $ | 91,772 | $ | 24,889 | $ | 235,393 | ||||||||
|
Valuation allowance
|
$ | 4,289 | $ | 36,278 | $ | 23,047 | $ | 63,614 | ||||||||
| (1) | Presented net of Federal benefit |
87
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 11. | Debt |
Debt as of December 31 was as follows:
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
7.875% Debentures due February 2013
|
8,557 | 32,127 | ||||||
|
7.375% Senior Notes due October 2014
|
180,692 | 245,000 | ||||||
|
6.75% Notes due April 2015
|
157,250 | 160,250 | ||||||
|
6.75% Notes due April 2016
|
212,927 | 233,143 | ||||||
|
7.0% Notes due June 2017
|
295,000 | 295,000 | ||||||
|
7.625% Senior Notes due October 2018
|
250,000 | 250,000 | ||||||
|
7.0% Senior Notes due May 2019
|
250,000 | — | ||||||
|
8.0% Notes due November 2021
|
150,000 | 150,000 | ||||||
|
7.5% Notes due April 2027
|
200,000 | 200,000 | ||||||
|
Bank credit facility due November 2013
|
— | 150,000 | ||||||
|
Obligations under capital leases
|
118,339 | 142,946 | ||||||
|
Mortgage notes and other debt, maturities through 2047
|
38,223 | 38,631 | ||||||
|
Unamortized pricing discounts and other
|
(6,106 | ) | (6,608 | ) | ||||
|
Total debt
|
1,854,882 | 1,890,489 | ||||||
|
Less current maturities
|
(22,502 | ) | (49,957 | ) | ||||
|
Total long-term debt
|
$ | 1,832,380 | $ | 1,840,532 | ||||
Current maturities of debt at December 31, 2010 were
primarily comprised of our capital lease obligations and
mortgage notes. Our consolidated debt had a weighted average
interest rate of 6.80% and 6.52% at December 31, 2010 and
2009, respectively. Approximately 93% and 85% of our total debt
had a fixed interest rate at December 31, 2010 and 2009,
respectively.
The aggregate maturities of our debt for the five years
subsequent to December 31, 2010 and thereafter (in
thousands) are as follows:
|
2011
|
$ | 22,502 | ||
|
2012
|
18,615 | |||
|
2013
|
25,436 | |||
|
2014
|
226,325 | |||
|
2015
|
190,678 | |||
|
2016 and thereafter
|
1,371,326 | |||
| $ | 1,854,882 | |||
Bank
Credit Facility
We entered into a five-year $450 million bank credit
facility in November 2006 with a syndicate of financial
institutions, comprised of a $300 million bank credit
facility and a $150 million term loan facility, including a
sublimit of $175 million for letters of credit. In the
fourth quarter of 2009, we amended our bank credit facility to
increase the availability thereunder from $300 million to
$400 million and extended the maturity date by two years to
November 2013. We used 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.
88
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2010, we had no outstanding cash
advances but used it to support $42.1 million of letters of
credit. The bank credit facility provides us with flexibility
for refinancing debt and acquisitions, if needed, and is
guaranteed by our domestic subsidiaries. The subsidiary guaranty
is a guaranty of payment of the outstanding amount of the total
lending commitment, including letters of credit. The bank credit
facility contains certain financial covenants, including a
minimum interest coverage ratio, a maximum leverage ratio, and
certain dividend and share repurchase restrictions. We pay a
quarterly fee on the unused commitment, which ranges from 0.50%
to 0.625%. As of December 31, 2010, we have
$357.9 million in borrowing capacity under the facility.
Debt
Issuances and Additions
In November 2010, we issued $250.0 million of unsecured
7.0% Senior Notes due May 2019. The notes are subject to
the provisions of the Company’s Senior Indenture dated as
of February 1, 1993, as amended, which includes covenants
limiting, among other things, the creation of liens securing
indebtedness and sale-leaseback transactions. We used the net
proceeds from the offering to repay our indebtedness under our
amended and restated credit facility and for general corporate
purposes.
In November 2009, we issued $150.0 million of unsecured
8.0% Senior Notes due 2021, which were held in escrow at
December 31, 2009. On March 26, 2010, the net proceeds
of these notes were released from escrow and used in connection
with the closing of the Keystone acquisition. As a result, the
proceeds were classified as
Proceeds from issuance of
long-term debt
in our consolidated statement of cash flows
at December 31, 2010. The notes are subject to the
provisions of the Company’s Senior Indenture dated as of
February 1, 1993, as amended, which includes covenants
limiting, among other things, the creation of liens securing
indebtedness and sale-leaseback transactions.
Debt
Extinguishments and Reductions
During 2010, we repaid $260 million of amounts drawn on our
bank credit facility and made debt payments of
$122.2 million, which included the following purchases on
the open market:
| • | $25.5 million aggregate principal amount of our 7.875% Notes due February 2013; | |
| • | $70.5 million aggregate principal amount of our 7.375% Notes due October 2014; | |
| • | $3.0 million aggregate principal amount of our 6.75% Notes due April 2015; and | |
| • | $20.1 million aggregate principal amount of our 6.75% Notes due April 2016. |
Certain of the above transactions resulted in the recognition of
a loss of $9.4 million recorded in
(Losses) gains on
early extinguishment of debt
in our consolidated statement
of operations, which represents the write-off of unamortized
deferred loan costs of $1.4 million and $8.0 million
in premium on the purchase of these notes.
During 2009, we made debt payments of $269.2 million,
including the following scheduled payments and purchases on the
open market:
| • | $28.7 million balance of our 7.7% Notes due April 2009; | |
| • | $150.0 million aggregate principal amount of our Series B senior Notes due November 2011; | |
| • | $23.5 million aggregate principal amount of our 7.875% Debentures due February 2013; | |
| • | $5.0 million aggregate principal amount of our 7.375% Senior Notes due October 2014; | |
| • | $39.8 million aggregate principal amount of our 6.75% Notes due April 2015; | |
| • | $16.9 million aggregate principal amount of our 6.75% Notes due April 2016; and | |
| • | $5.0 million aggregate principal amount of our 7.0% Notes due June 2017. |
89
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Certain of the above transactions resulted in the recognition of
a $3.1 million gain recorded in
(Losses) gains on early
extinguishment of debt
during the year ended
December 31, 2009, which represents the write-off of
unamortized deferred loan costs of $2.0 million and a
$5.1 million net discount on the purchase of the notes.
Capital
Leases
In 2010, 2009, and 2008 we acquired $22.8 million,
$64.1 million, and $27.5 million, respectively, of
transportation equipment using capital leases. See additional
information regarding these leases in Note 13.
Additional
Debt Disclosures
At December 31, 2010 and 2009, we have deposits of
$15.6 million and $184.1 million, respectively, in
restricted, interest-bearing accounts that were pledged as
collateral for various credit instruments and commercial
commitments. Our restricted cash is included in
Deferred
charges and other assets
in our consolidated balance sheet.
Unamortized pricing discounts, totaling $6.1 million and
$6.6 million at December 31, 2010 and 2009,
respectively, primarily relate to our 7.0% Notes due June
2017, 7.0% Senior Notes due May 2019, and our
8.0% Senior Notes due November 2021.
We had assets of approximately $3.6 million and
$2.5 million pledged as collateral for the mortgage notes
and other debt at December 31, 2010 and 2009, respectively.
Cash interest payments for the three years ended December 31 (in
thousands) were as follows:
|
2010
|
$ | 125,138 | ||
|
2009
|
$ | 122,224 | ||
|
2008
|
$ | 131,844 |
Cash interest payments forecasted as of December 31, 2010
for the five years subsequent to December 31, 2010 (in
thousands) are as follows:
|
2011
|
$ | 126,397 | ||
|
2012
|
$ | 126,409 | ||
|
2013
|
$ | 126,143 | ||
|
2014
|
$ | 124,604 | ||
|
2015
|
$ | 105,185 | ||
|
2016 and thereafter
|
$ | 425,835 |
| 12. | Credit Risk and Fair Value of Financial Instruments |
Fair
Value Estimates
The fair value estimates of the following financial instruments
have been determined using available market information and
appropriate valuation methodologies. The carrying values of cash
and cash equivalents, trade receivables, and trade payables
approximate the fair values of those instruments due to the
short-term nature of the instruments. The fair values of
receivables on preneed funeral contracts and cemetery contracts
are impracticable to estimate because of the lack of a trading
market and the diverse number of individual contracts with
varying terms.
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The fair value of our debt instruments at December 31 was as
follows:
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
7.875% Debentures due February 2013
|
9,092 | 31,330 | ||||||
|
7.375% Senior Notes due October 2014
|
194,244 | 247,450 | ||||||
|
6.75% Notes due April 2015
|
161,968 | 157,846 | ||||||
|
6.75% Notes due April 2016
|
216,653 | 222,069 | ||||||
|
7.0% Notes due June 2017
|
302,375 | 289,100 | ||||||
|
7.625% Senior Notes due October 2018
|
262,500 | 250,625 | ||||||
|
7.0% Senior Notes due May 2019
|
251,250 | — | ||||||
|
8.0% Notes due November 2021
|
158,063 | 148,500 | ||||||
|
7.5% Notes due April 2027
|
194,920 | 179,000 | ||||||
|
Bank credit facility due November 2013
|
— | 148,875 | ||||||
|
Mortgage notes and other debt, maturities through 2047
|
37,991 | 34,898 | ||||||
|
Total fair value of debt instruments
|
$ | 1,789,056 | $ | 1,709,693 | ||||
The fair values of our long-term, fixed rate securities were
estimated using market prices for those securities, and
therefore they are classified within Level 1 of the Fair
Value Measurements hierarchy as required by the FVM&D Topic
of the ASC. The bank credit facility and the mortgage and other
debt are classified within Level 3 of the Fair Value
Measurements hierarchy. The fair values of these instruments
have been estimated using discounted cash flow analysis based on
our incremental borrowing rate for similar borrowing
arrangements.
Credit
Risk Exposure
Our cash deposits, some of which exceed insured limits, are
distributed among various market and national banks in the
jurisdictions in which we operate. In addition, we regularly
invest excess cash in financial instruments which are not
insured, such as money-market funds and Eurodollar time
deposits, that are offered by a variety of reputable financial
institutions and commercial paper that is offered by
corporations with quality credit ratings. We believe that the
credit risk associated with such instruments is minimal.
We grant credit to customers in the normal course of business.
The credit risk associated with our funeral, cemetery, and
preneed funeral and preneed cemetery receivables due from
customers is generally considered minimal because of the
diversification of the customers served. Furthermore, bad debts
have not been significant relative to the volume of deferred
revenues. Customer payments on preneed funeral or preneed
cemetery contracts that are either placed into state-regulated
trusts or used to pay premiums on life insurance contracts
generally do not subject us to collection risk. Insurance-funded
contracts are subject to supervision by state insurance
departments and are protected in the majority of states by
insurance guaranty acts.
| 13. | Commitments and Contingencies |
Leases
Our leases principally relate to funeral home facilities and
transportation equipment. The majority of our lease arrangements
contain options to (i) purchase the property at fair value
on the exercise date, (ii) purchase the property for a
value determined at the inception of the lease, or
(iii) renew the lease for the fair rental value at the end
of the primary lease term. Rental expense for operating leases
was $24.7 million, $22.8 million, and
$26.9 million for the
91
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
years ended December 31, 2010, 2009, and 2008,
respectively. As of December 31, 2010, future minimum lease
payments for non-cancelable operating and capital leases
exceeding one year were as follows:
| Operating | Capital | |||||||
| (In thousands) | ||||||||
|
2011
|
$ | 10,645 | $ | 23,644 | ||||
|
2012
|
9,363 | 19,453 | ||||||
|
2013
|
8,667 | 16,065 | ||||||
|
2014
|
7,396 | 21,974 | ||||||
|
2015
|
5,674 | 35,027 | ||||||
|
2016 and thereafter
|
44,648 | 18,483 | ||||||
|
Total
|
$ | 86,393 | $ | 134,646 | ||||
|
Less: Interest on capital leases
|
(16,307 | ) | ||||||
|
Total principal payable on capital leases
|
$ | 118,339 | ||||||
Management,
Consulting, and Non-Competition Agreements
We have entered into management, employment, consulting, and
non-competition agreements, generally for five to ten years,
with certain officers and employees and former owners of
businesses that we acquired. At December 31, 2010, the
maximum estimated future cash commitments under agreements with
remaining commitment terms, and with original terms of more than
one year, were as follows:
| Employment | Consulting | Non-Competition | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
|
2011
|
$ | 2,505 | $ | 627 | $ | 3,225 | $ | 6,357 | ||||||||
|
2012
|
2,340 | 354 | 2,864 | 5,558 | ||||||||||||
|
2013
|
1,032 | 210 | 2,370 | 3,612 | ||||||||||||
|
2014
|
902 | 129 | 1,973 | 3,004 | ||||||||||||
|
2015
|
355 | 84 | 1,535 | 1,974 | ||||||||||||
|
2016 and thereafter
|
664 | 99 | 6,035 | 6,798 | ||||||||||||
|
Total
|
$ | 7,798 | $ | 1,503 | $ | 18,002 | $ | 27,303 | ||||||||
Insurance
Loss Reserves
We purchase comprehensive general liability, morticians and
cemetery professional liability, automobile liability, and
workers’ compensation insurance coverage structured with
high deductibles. The high-deductible insurance program means we
are primarily self-insured for claims and associated costs and
losses covered by these policies. As of December 31, 2010
and 2009, we have self-insurance reserves of $53.9 million
and $57.9 million, respectively.
Litigation
We are a party to various litigation matters, investigations,
and proceedings. For each of our outstanding legal matters, we
evaluate the merits of the case, our exposure to the matter,
possible legal or settlement strategies, and the likelihood of
an unfavorable outcome. We intend to vigorously defend ourselves
in the lawsuits described herein; however, if we determine that
an unfavorable outcome is probable and can be reasonably
estimated, we establish the necessary accruals. We hold certain
insurance policies that may reduce cash outflows with respect to
an adverse
92
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
outcome of certain of these litigation matters. We accrue such
insurance recoveries when they become probable of being paid and
can be reasonably estimated.
Burial Practices Claims.
We are named as a
defendant in various lawsuits alleging improper burial practices
at certain of our cemetery locations. These lawsuits include but
are not limited to the
Garcia
and
Sands
lawsuits
described in the following paragraphs.
Reyvis Garcia and Alicia Garcia v. Alderwoods Group,
Inc., Osiris Holding of Florida, Inc, a Florida corporation,
d/b/a Graceland Memorial Park South, f/k/a Paradise Memorial
Gardens, Inc.
, was filed in December 2004, in the Circuit
Court of the Eleventh Judicial Circuit in and for Miami-Dade
County, Florida, Case
No. 04-25646
CA 32. Plaintiffs are the son and sister of the decedent, Eloisa
Garcia, who was buried at Graceland Memorial Park South in March
1986, when the cemetery was owned by Paradise Memorial Gardens,
Inc. Initially, the suit sought damages on the individual claims
of the plaintiffs relating to the burial of Eloisa Garcia.
Plaintiffs claimed that due to poor recordkeeping, spacing
issues and maps, and the fact that the family could not afford
to purchase a marker for the grave, the burial location of the
decedent could not be readily located. Subsequently, the
decedent’s grave was located and verified. In July 2006,
plaintiffs amended their complaint, seeking to certify a class
of all persons buried at this cemetery whose burial sites cannot
be located, claiming that this was due to poor recordkeeping,
maps, and surveys at the cemetery. Plaintiffs subsequently filed
a third amended class action complaint and added two additional
named plaintiffs. The plaintiffs are seeking unspecified
monetary damages, as well as equitable and injunctive relief. No
class has been certified in this matter. We cannot quantify our
ultimate liability, if any, for the payment of any damages.
F. Charles Sands, individually and on behalf of all
others similarly situated, v. Eden Memorial Park, et al.;
Case No. BC421528; in the Superior Court of the State
of California for the County of Los Angeles — Central
District. This case was filed in September 2009 against SCI and
certain subsidiaries regarding our Eden Memorial Park cemetery
in Mission Hills, California. The plaintiff seeks to certify a
class of cemetery plot owners and their families. The plaintiff
also seeks the appointment of a receiver to oversee cemetery
operations. The plaintiff claims the cemetery damaged and
desecrated burials in order to prepare adjoining graves for
subsequent burials. Since the case is in its preliminary stages,
we cannot quantify our ultimate liability, if any, for the
payment of any damages.
Antitrust Claims.
We are named as a defendant
in an antitrust case filed in 2005. The case is Cause
No 4:05-CV-03394;
Funeral Consumers Alliance, Inc. v. Service Corporation
International, et al
.; in the United States District Court
for the Southern District of Texas — Houston
(“Funeral Consumers Case”). This was a purported class
action on behalf of casket consumers throughout the United
States alleging that we and several other companies involved in
the funeral industry violated federal antitrust laws and state
consumer laws by engaging in various anti-competitive conduct
associated with the sale of caskets. Based on the case
proceeding as a class action, the plaintiffs filed an expert
report indicating that the damages sought from all defendants
range from approximately $950 million to $1.5 billion,
before trebling. However, the trial court denied the
plaintiffs’ motion to certify the case as a class action.
We deny that we engaged in anticompetitive practices related to
our casket sales and we have filed reports of our experts, which
vigorously dispute the validity of the plaintiffs’ damages
theories and calculations. The trial court dismissed
plaintiffs’ claims on September 24, 2010, and the
plaintiffs filed an appeal on October 19, 2010.
Wage and Hour Claims.
We are named a defendant
in various lawsuits alleging violations of federal and state
laws regulating wage and hour overtime pay, including but not
limited to the
Prise, Bryant, Bryant, Helm, and Stickle
lawsuits described in the following paragraphs.
Prise, et al., v. Alderwoods Group, Inc., and Service
Corporation International
; Cause
No. 06-164;
in the United States District Court for the Western District of
Pennsylvania (the “Wage and Hour Lawsuit”). The Wage
and Hour Lawsuit was filed by two former Alderwoods
(Pennsylvania), Inc. employees in December 2006 and purports to
have been brought under the Fair Labor Standards Act
(“FLSA”) on behalf of all Alderwoods and
SCI-affiliated
employees who performed work for which they were not fully
compensated, including work for
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
which overtime pay was owed. The court has conditionally
certified a class of claims as to certain job positions for
Alderwoods employees.
Plaintiffs allege causes of action for violations of the FLSA,
failure to maintain proper records, breach of contract,
violations of state wage and hour laws, unjust enrichment, fraud
and deceit, quantum meruit, negligent misrepresentation, and
negligence. Plaintiffs seek injunctive relief, unpaid wages,
liquidated, compensatory, consequential and punitive damages,
attorneys’ fees and costs, and pre- and post-judgment
interest. We cannot quantify our ultimate liability, if any, in
this lawsuit.
Bryant, et al. v. Alderwoods Group, Inc., Service Corporation
International, et al
.; Case
No. 3:07-CV-5696-SI;
in the U.S. District Court for the Northern District of
California. This lawsuit was filed on November 8, 2007
against SCI and various subsidiaries and individuals. It is
related to the Wage and Hour Lawsuit, raising similar claims and
brought by the same attorneys. This lawsuit has been transferred
to the U.S. District Court for the Western District of
Pennsylvania and is now Case
No. 08-CV-00891-JFC.
We cannot quantify our ultimate liability, if any, in this
lawsuit.
Bryant, et al. v. Service Corporation International, et
al
.; Case
No. RG-07359593;
and
Helm, et al. v. AWGI & SCI
; Case
No. RG-07359602;
in the Superior Court of the State of California, County of
Alameda. These cases were filed on December 5, 2007 by
counsel for plaintiffs in the Wage and Hour Lawsuit. These cases
assert state law claims similar to the federal claims asserted
in the Wage and Hour Lawsuit. These cases were removed to
federal court in the U.S. District Court for the Northern
District of California, San Francisco/Oakland Division. The
Bryant
case is now Case
No. 3:08-CV-01190-SI
and the
Helm
case is now Case No. C
08-01184-SI.
On December 29, 2009, the court in the
Helm
case
denied the plaintiffs’ motion to certify the case as a
class action. The plaintiffs have modified and refiled their
motion for certification. The plaintiffs have also filed 21
additional lawsuits with similar allegations seeking class
certification of state law claims in different states. We cannot
quantify our ultimate liability, if any, in these lawsuits.
Stickle, et al. v. Service Corporation International, et
al
.; Case
No. 08-CV-83;
in the U.S. District Court for Arizona, Phoenix Division.
Counsel for plaintiffs in the Wage and Hour Lawsuit filed this
case on January 17, 2008, against SCI and various related
entities and individuals asserting FLSA and other ancillary
claims based on the alleged failure to pay for overtime. In
September 2009, the Court conditionally certified a class of
claims as to certain job positions of SCI affiliated employees.
We cannot quantify our ultimate liability, if any, in this
lawsuit.
The ultimate outcome of the matters described above cannot be
determined at this time. We intend to vigorously defend all of
the above lawsuits; however, an adverse decision in one or more
of such matters could have a material effect on us, our
financial condition, results of operations, and cash flows.
| 14. | Equity |
(All
shares reported in whole numbers)
Share
Authorization
We are authorized to issue 1,000,000 shares of preferred
stock, $1 per share par value. No preferred shares were issued
as of December 31, 2010 or 2009. At December 31, 2010
and 2009, 500,000,000 common shares of $1 par value were
authorized. We had 241,035,250 and 254,017,384 shares
issued and outstanding, net of 984,400 and 10,000 shares
held in treasury at par at December 31, 2010 and 2009,
respectively.
94
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Accumulated
Other Comprehensive Income
Our components of
Accumulated other comprehensive income
are as follows:
|
Foreign
|
Accumulated
|
|||||||||||
|
Currency
|
Unrealized
|
Other
|
||||||||||
|
Translation
|
Gains and
|
Comprehensive
|
||||||||||
| Adjustment | Losses | (Loss) Income | ||||||||||
| (In thousands) | ||||||||||||
|
Balance at December 31, 2007
|
$ | 152,590 | $ | $ | 152,590 | |||||||
|
Activity in 2008
|
(115,941 | ) | (115,941 | ) | ||||||||
|
Reduction in net unrealized gains associated with
available-for-sale
securities of the trusts, net of taxes
|
— | (605,355 | ) | (605,355 | ) | |||||||
|
Reclassification of net unrealized losses activity attributable
to the
Deferred preneed funeral and cemetery receipts held in
trust
and
Care trusts’ corpus,
net of taxes
|
— | 605,355 | 605,355 | |||||||||
|
Balance at December 31, 2008
|
$ | 36,649 | $ | — | $ | 36,649 | ||||||
|
Activity in 2009
|
60,493 | — | 60,493 | |||||||||
|
Reduction in net unrealized gains associated with
available-for-sale
securities of the trusts, net of taxes
|
— | 323,131 | 323,131 | |||||||||
|
Reclassification of net unrealized losses activity attributable
to the
Deferred preneed funeral and cemetery receipts held in
trust
and
Care trusts’ corpus
, net of taxes
|
— | (323,131 | ) | (323,131 | ) | |||||||
|
Balance at December 31, 2009
|
$ | 97,142 | $ | — | $ | 97,142 | ||||||
|
Activity in 2010
|
15,626 | — | 15,626 | |||||||||
|
Increase in net unrealized gains associated with
available-for-
sale securities of the trusts, net of taxes
|
— | 147,688 | 147,688 | |||||||||
|
Reclassification of net unrealized gains activity attributable
to the
Deferred preneed funeral and cemetery receipts held in
trust and Care trusts’ corpus,
net of taxes
|
— | (147,688 | ) | (147,688 | ) | |||||||
|
Balance at December 31, 2010
|
$ | 112,768 | $ | — | $ | 112,768 | ||||||
The assets and liabilities of foreign operations are translated
into U.S. dollars using the current exchange rate. The
U.S. dollar amount that arises from such translation, as
well as exchange gains and losses on intercompany balances of a
long-term investment nature, are included in the cumulative
currency translation adjustments in
Accumulated other
comprehensive income.
Income taxes are generally not
provided for foreign currency translation.
Share
Repurchase Program
Subject to market conditions, normal trading restrictions, and
limitations in our debt covenants, we may make purchases in the
open market or through privately negotiated transactions under
our share repurchase program. During 2010, we repurchased
13,927,510 shares of common stock at an aggregate cost of
$116.2 million, which is an average cost per share of
$8.34. During 2009, we did not repurchase any shares of our
common stock. During 2008, we repurchased 17,683,747 shares
of common stock at an aggregate cost of $142.2 million
including commissions, or an average cost per share of $8.03. In
November 2010, our Board of Directors approved an increase in
our share repurchase program authorizing the investment of up to
an additional $171.5 million to repurchase our common
stock. The remaining dollar value of shares authorized to be
purchased under the share repurchase program was
$178.8 million at December 31, 2010.
95
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Subsequent to December 31, 2010, we repurchased an
additional 1,845,373 shares of common stock at an aggregate
cost of $15.6 million including commissions (average cost
per share of $8.44). After these purchases, the remaining dollar
value of shares authorized to be purchased under our share
repurchase program was approximately $163.2 million.
Cash
Dividends
On November 10, 2010, our Board of Directors approved a
cash dividend of $.04 per common share. At December 31,
2010, this dividend totaling $9.6 million was recorded in
Accounts payable and accrued liabilities
and
Capital
in Excess of Par Value
in our consolidated balance sheet. We
paid this dividend subsequent to December 31, 2010. We paid
$40.0 million, $40.2 million, and $41.5 million
in cash dividends in 2010, 2009, and 2008, respectively. On
February 9, 2011, our Board of Directors approved a cash
dividend of $.05 per common share payable on April 30, 2011
to stockholders of record as of April 15, 2011.
| 15. | Share-Based Compensation |
Stock
Benefit Plans
We maintain benefit plans whereby shares of our common stock may
be issued pursuant to the exercise of stock options or
restricted stock granted to officers and key employees. Our
Amended 1996 Incentive Plan reserves 34,000,000 shares of
common stock for outstanding and future awards of stock options,
restricted stock, and other stock based awards to officers and
key employees.
Our benefit plans allow for options to be granted as either
non-qualified or incentive stock options. The options
historically have been granted annually, or upon hire, as
approved by the Compensation Committee of the Board of
Directors. The options are granted with an exercise price equal
to the market price of our common stock on the date the grant,
as approved by the Compensation Committee of the Board of
Directors. The options are generally exercisable at a rate of
33
1
/
3
%
each year unless alternative vesting methods are approved by the
Compensation Committee of the Board of Directors. Restricted
stock awards are generally expensed to income ratably over the
period during which the restrictions lapse. At December 31,
2010 and 2009, 4,297,186 and 7,157,477 shares,
respectively, were reserved for future option and restricted
stock grants under our stock benefit plans.
We utilize the Black-Scholes option valuation model for
estimating the fair value of our stock options. This model
allows the use of a range of assumptions related to volatility,
risk-free interest rate, expected holding period, and dividend
yield. The expected volatility utilized in the valuation model
is based on the historical volatility of our stock price. The
dividend yield and expected holding period are based on
historical experience and management’s estimate of future
events. The risk-free interest rate is derived from the
U.S. Treasury yield curve based on the expected life of the
option in effect at the time of grant. The fair values of our
stock options are calculated using the following weighted
average assumptions, based on the methods described above for
the years ended December 31, 2010, 2009, and 2008:
| Years Ended December 31, | ||||||||||||
| Assumptions | 2010 | 2009 | 2008 | |||||||||
|
Dividend yield
|
1.9 | % | 3.5 | % | 1.3 | % | ||||||
|
Expected volatility
|
37.5 | % | 32.3 | % | 45.9 | % | ||||||
|
Risk-free interest rate
|
2.3 | % | 1.8 | % | 2.9 | % | ||||||
|
Expected holding period
|
5.0 years | 5.0 years | 5.7 years | |||||||||
96
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes certain information with respect
to stock option and restricted share compensation for 2010,
2009, and 2008, as included in our consolidated statement of
operations for those respective periods:
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Total pretax employee share-based compensation expense included
in net income
|
$ | 8,878 | $ | 9,684 | $ | 9,261 | ||||||
|
Income tax benefit related to share-based compensation included
in net income
|
$ | 3,740 | $ | 3,705 | $ | 3,732 | ||||||
We realized windfall tax deductions of $2.7 million,
$7.1 million, and $17.9 million in excess of
previously recorded tax benefits, based on the option and
restricted share value at the time of grant for the years ended
December 31, 2010, 2009, and 2008, respectively. Pursuant
to the Stock-Based Compensation Topic of the ASC, the additional
tax benefit associated with the windfall is not recognized until
the deduction reduces taxes payable.
Stock
Options
The following table sets forth stock option activity for the
year ended December 31, 2010:
(Shares reported in whole numbers and not in thousands)
|
Weighted-Average
|
||||||||
| Options | Exercise Price | |||||||
|
Outstanding at December 31, 2009
|
10,495,142 | $ | 7.36 | |||||
|
Granted
|
2,255,120 | $ | 7.66 | |||||
|
Exercised
|
(416,469 | ) | $ | 4.04 | ||||
|
Expired
|
(21,010 | ) | $ | 7.28 | ||||
|
Outstanding at December 31, 2010
|
12,312,783 | $ | 7.53 | |||||
|
Exercisable at December 31, 2010
|
6,990,732 | $ | 8.47 | |||||
No stock options were forfeited during the twelve months ended
December 31, 2010. The aggregate intrinsic value for stock
options outstanding and exercisable was $19.0 million and
$7.0 million, respectively, at December 31, 2010. Set
forth below is certain information related to stock options
outstanding and exercisable at December 31, 2010:
(Shares reported in whole numbers and not in thousands)
| Options Outstanding | Options Exercisable | |||||||||||||||||||
|
Number
|
Weighted-
|
Number
|
||||||||||||||||||
|
Outstanding at
|
Average
|
Weighted-
|
Exercisable at
|
Weighted-
|
||||||||||||||||
|
December 31,
|
Remaining
|
Average
|
December 31,
|
Average
|
||||||||||||||||
| Range of Exercise Price | 2010 | Contractual Life | Exercise Price | 2010 | Exercise Price | |||||||||||||||
|
$4.01 — 6.00
|
3,911,794 | 6.0 | $ | 4.19 | 1,293,314 | $ | 4.20 | |||||||||||||
|
$6.01 — 9.00
|
4,927,989 | 4.6 | $ | 7.62 | 2,701,769 | $ | 7.61 | |||||||||||||
|
$9.01 — 15.00
|
3,473,000 | 4.6 | $ | 11.15 | 2,995,649 | $ | 11.10 | |||||||||||||
|
$4.01 — 15.00
|
12,312,783 | 5.0 | $ | 7.53 | 6,990,732 | $ | 8.47 | |||||||||||||
97
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Other information pertaining to option activity during the years
ended December 31 is as follows:
| 2010 | 2009 | 2008 | ||||||||||
|
Weighted average grant-date fair value of stock options granted
|
$ | 2.31 | $ | 0.87 | $ | 4.78 | ||||||
|
Total fair value of stock options vested (in thousands)
|
$ | 6,022 | $ | 6,439 | $ | 5,627 | ||||||
|
Total intrinsic value of stock options exercised (in thousands)
|
$ | 1,804 | $ | 7,001 | $ | 16,559 | ||||||
For the years ended December 31, 2010, 2009, and 2008, cash
received from the exercise of stock options was
$1.8 million, $17.4 million, and $14.8 million,
respectively. We recognized compensation expense of
$5.3 million, $6.5 million, and $6.2 million
related to stock options for the years ended December 31,
2010, 2009, and 2008, respectively. As of December 31,
2010, the unrecognized compensation expense related to stock
options of $5.2 million is expected to be recognized over a
weighted average period of 1.3 years.
Restricted
Shares
Restricted share activity was as follows:
(Shares reported in whole numbers)
|
Weighted-Average
|
||||||||
|
Restricted
|
Grant-Date
|
|||||||
| Shares | Fair Value | |||||||
|
Nonvested restricted shares at December 31, 2009
|
1,101,440 | $ | 6.01 | |||||
|
Granted
|
532,050 | $ | 7.66 | |||||
|
Vested
|
(466,217 | ) | $ | 7.05 | ||||
|
Nonvested restricted shares at December 31, 2010
|
1,167,273 | $ | 6.35 | |||||
The fair market value of our restricted stock, as determined on
the grant date, is being amortized and charged to income (with
an offsetting credit to
Capital in excess of par value
)
generally over the average period during which the restrictions
lapse. At December 31, 2010, unrecognized compensation
expense of $4.3 million related to restricted shares, which
is recorded in
Capital in excess of par value
on our
balance sheet, is expected to be recognized over a weighted
average period of 1.3 years. We recognized compensation
expense of $3.6 million, $3.2 million, and
$3.0 million during the years ended December 31, 2010,
2009, and 2008, respectively, related to our restricted shares.
| 16. | Retirement Plans |
We currently have a supplemental retirement plan for certain
current and former key employees (SERP), a supplemental
retirement plan for officers and certain key employees (Senior
SERP), a retirement plan for certain non-employee directors
(Directors’ Plan), a Retirement Plan for Rose Hills
Trustees, and a Rose Hills Supplemental Retirement Plan (Rose
Hills SERP) (collectively, the “Plans”). We also
provide a 401(k) employee savings plan. We terminated the
Employee Retirement Plan of Rose Hills in 2008. All of our Plans
have a measurement date of December 31.
The Plans are frozen; therefore, the participants do not earn
incremental benefits from additional years of service, and we do
not incur any additional service cost since December 31,
2000.
Retirement benefits under the SERP are based on years of service
and average monthly compensation, reduced by benefits under
Social Security. The Senior SERP provides retirement benefits
based on years of service and position. The Directors’ Plan
provides for an annual benefit to directors following
retirement, based on a vesting schedule.
98
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of the Plans’ net periodic benefit cost for
the years ended December 31 were as follows:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Interest cost on projected benefit obligation
|
$ | 1,498 | $ | 1,849 | $ | 2,590 | ||||||
|
Actual return on plan assets
|
— | — | (294 | ) | ||||||||
|
Recognized net actuarial losses (gains)
|
534 | 2,197 | (2,512 | ) | ||||||||
|
Plan dissolution and other
|
— | — | 1,968 | |||||||||
| $ | 2,032 | $ | 4,046 | $ | 1,752 | |||||||
The Plans’ funded status at December 31 was as follows:
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Change in Benefit Obligation:
|
||||||||
|
Benefit obligation at beginning of year
|
$ | 32,891 | $ | 32,951 | ||||
|
Interest cost
|
1,498 | 1,849 | ||||||
|
Actuarial loss
|
846 | 2,518 | ||||||
|
Benefits paid
|
(3,858 | ) | (4,427 | ) | ||||
|
Benefit obligation at end of year
|
$ | 31,377 | $ | 32,891 | ||||
|
Change in Plan Assets:
|
||||||||
|
Fair value of plan assets at beginning of year
|
$ | — | $ | — | ||||
|
Employer contributions
|
3,858 | 4,427 | ||||||
|
Benefits paid, including expenses
|
(3,858 | ) | (4,427 | ) | ||||
|
Fair value of plan assets at end of year
|
$ | — | $ | — | ||||
|
Funded status of plan
|
$ | (31,377 | ) | $ | (32,891 | ) | ||
|
Net amount recognized in the Consolidated Balance Sheet
|
$ | (31,377 | ) | $ | (32,891 | ) | ||
|
Funding Summary:
|
||||||||
|
Projected benefit obligations
|
$ | 31,377 | $ | 32,891 | ||||
|
Accumulated benefit obligation
|
$ | 31,377 | $ | 32,891 | ||||
|
Amounts Recognized in the Consolidated Balance Sheet:
|
||||||||
|
Accrued benefit liability
|
$ | (31,377 | ) | $ | (32,891 | ) | ||
The retirement benefits under the Plans are unfunded obligations
of the Company. We have purchased various life insurance
policies on the participants in the Plans with the intent to use
the proceeds or any cash value buildup from such policies to
assist in meeting, at least to the extent of such assets, the
Plan’s funding requirements. The face value of these
insurance policies at December 31, 2010 and 2009 was
$51.6 million and $54.7 million, respectively, and the
cash surrender value was $37.3 million and
$37.6 million, respectively. The outstanding loans against
the policies are minimal and there are no restrictions in the
policies regarding loans.
The Plans’ weighted-average assumptions used to determine
the benefit obligation and net benefit cost are as follows: we
base our discount rate used to compute future benefit
obligations using an analysis of expected future benefit
payments. The reasonableness of our discount rate is verified by
comparing the rate to the rate earned on high-quality fixed
income investments, such as the Moody’s Aa index, plus
50 basis points. The assumed rate of
99
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
return on plan assets was not applicable as we pay plan benefits
as they come due. As all Plans are curtailed, the assumed rate
of compensation increase is zero.
| 2010 | 2009 | 2008 | ||||||||||
|
Weighted average discount rate used to determine obligations
|
4.45 | % | 5.00 | % | 5.95 | % | ||||||
|
Weighted average discount rate used to determine net periodic
pension cost
|
4.80 | % | 5.97 | % | 5.75 | % | ||||||
Our Employee Retirement Plan of Rose Hills was terminated in
2008. In 2008, we made a contribution of $3.0 million to
purchase annuities for participants of this plan. To effect the
termination of the plan, we settled all remaining liabilities in
the fourth quarter of 2008.
The following benefit payments are expected to be paid in future
years related to our Plans:
|
2011
|
$ | 3,797 | ||
|
2012
|
3,654 | |||
|
2013
|
3,566 | |||
|
2014
|
3,586 | |||
|
2015
|
2,995 | |||
|
Years 2016 through 2020
|
11,424 |
We have an employee savings plan that qualifies under
section 401(k) of the Internal Revenue Code for the
exclusive benefit of our United States employees. Under the
plan, participating employees may contribute a portion of their
pretax
and/or
after-tax income in accordance with specified guidelines up to a
maximum of 50%.
During 2010, 2009, and 2008 we matched a percentage of the
employee contributions through contributions of cash. For these
years, our matching contribution was based upon the following:
| Years of Vesting Service | Percentage of Deferred Compensation | |
|
0 — 5 years
|
75% of the first 6% of deferred compensation | |
|
6 — 10 years
|
100% of the first 6% of deferred compensation | |
|
11 or more years
|
125% of the first 6% of deferred compensation |
The amount of our matched contributions in 2010, 2009, and 2008
was $20.3 million, $18.1 million, and
$18.1 million, respectively.
| 17. | Segment Reporting |
Our operations are both product based and geographically based,
and the reportable operating segments presented below include
our funeral and cemetery operations. Our geographic areas
include United States, Canada, and Germany. We conduct both
funeral and cemetery operations in the United States and Canada
and funeral operations in Germany.
100
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Our reportable segment information is as follows:
|
Reportable
|
||||||||||||
| Funeral | Cemetery | Segments | ||||||||||
| (In thousands) | ||||||||||||
|
2010
|
||||||||||||
|
Revenues from external customers
|
$ | 1,492,838 | $ | 697,714 | $ | 2,190,552 | ||||||
|
Interest expense
|
3,033 | 257 | 3,290 | |||||||||
|
Depreciation and amortization
|
87,897 | 20,909 | 108,806 | |||||||||
|
Amortization of intangible assets
|
17,464 | 6,095 | 23,559 | |||||||||
|
Gross profit
|
317,068 | 132,155 | 449,223 | |||||||||
|
Amortization of cemetery property
|
— | 32,418 | 32,418 | |||||||||
|
Total assets
|
4,262,675 | 4,450,028 | 8,712,703 | |||||||||
|
Capital expenditures
|
34,762 | 48,427 | 83,189 | |||||||||
|
2009
|
||||||||||||
|
Revenues from external customers
|
$ | 1,391,894 | $ | 661,626 | $ | 2,053,520 | ||||||
|
Interest expense
|
2,548 | 847 | 3,395 | |||||||||
|
Depreciation and amortization
|
85,324 | 21,889 | 107,213 | |||||||||
|
Amortization of intangible assets
|
15,473 | 6,105 | 21,578 | |||||||||
|
Gross profit
|
305,809 | 115,586 | 421,395 | |||||||||
|
Amortization of cemetery property
|
— | 30,664 | 30,664 | |||||||||
|
Total assets
|
4,081,512 | 4,215,968 | 8,297,480 | |||||||||
|
Capital expenditures
|
38,348 | 38,726 | 77,074 | |||||||||
|
2008
|
||||||||||||
|
Revenues from external customers
|
$ | 1,475,736 | $ | 679,886 | $ | 2,155,622 | ||||||
|
Interest expense
|
4,466 | 1,054 | 5,520 | |||||||||
|
Depreciation and amortization
|
87,108 | 21,981 | 109,089 | |||||||||
|
Amortization of intangible assets
|
17,171 | 6,344 | 23,515 | |||||||||
|
Gross profit
|
313,397 | 106,778 | 420,175 | |||||||||
|
Amortization of cemetery property
|
— | 32,690 | 32,690 | |||||||||
|
Total assets
|
3,866,526 | 3,813,676 | 7,680,202 | |||||||||
|
Capital expenditures
|
65,879 | 77,304 | 143,183 | |||||||||
101
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table reconciles certain reportable segment
amounts to our corresponding consolidated amounts:
|
Reportable
|
||||||||||||
| Segments | Corporate | Consolidated | ||||||||||
| (In thousands) | ||||||||||||
|
2010
|
||||||||||||
|
Revenue from external customers
|
$ | 2,190,552 | $ | — | $ | 2,190,552 | ||||||
|
Interest expense
|
3,290 | 124,906 | 128,196 | |||||||||
|
Depreciation and amortization
|
108,806 | 7,585 | 116,391 | |||||||||
|
Amortization of intangible assets
|
23,559 | 1,638 | 25,197 | |||||||||
|
Total assets
|
8,712,703 | 477,837 | 9,190,540 | |||||||||
|
Capital expenditures
|
83,189 | 14,710 | 97,899 | |||||||||
|
2009
|
||||||||||||
|
Revenue from external customers
|
$ | 2,053,520 | $ | — | $ | 2,053,520 | ||||||
|
Interest expense
|
3,395 | 125,586 | 128,981 | |||||||||
|
Depreciation and amortization
|
107,213 | 3,889 | 111,102 | |||||||||
|
Amortization of intangible assets
|
21,578 | 120 | 21,698 | |||||||||
|
Total assets
|
8,297,480 | 593,462 | 8,890,942 | |||||||||
|
Capital expenditures
|
77,074 | 6,716 | 83,790 | |||||||||
|
2008
|
||||||||||||
|
Revenue from external customers
|
$ | 2,155,622 | $ | — | $ | 2,155,622 | ||||||
|
Interest expense
|
5,520 | 128,754 | 134,274 | |||||||||
|
Depreciation and amortization
|
109,089 | 5,068 | 114,157 | |||||||||
|
Amortization of intangible assets
|
23,515 | 121 | 23,636 | |||||||||
|
Total assets
|
7,680,202 | 430,681 | 8,110,883 | |||||||||
|
Capital expenditures
|
143,183 | 10,918 | 154,101 | |||||||||
The following table reconciles gross profits from reportable
segments shown above to our consolidated income from continuing
operations before income taxes:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Gross profit from reportable segments
|
$ | 449,223 | $ | 421,395 | $ | 420,175 | ||||||
|
General and administrative expenses
|
(103,689 | ) | (102,501 | ) | (88,851 | ) | ||||||
|
Gains (losses) on divestitures and impairment charges, net
|
8,512 | 4,253 | (36,124 | ) | ||||||||
|
Other operating income (expense)
|
— | 740 | (2,528 | ) | ||||||||
|
Operating income
|
354,046 | 323,887 | 292,672 | |||||||||
|
Interest expense
|
(128,196 | ) | (128,981 | ) | (134,274 | ) | ||||||
|
(Losses) gains on early extinguishment of debt
|
(9,400 | ) | 3,146 | — | ||||||||
|
Other income, net
|
3,009 | 1,316 | 4,897 | |||||||||
|
Income from continuing operations before income taxes
|
$ | 219,459 | $ | 199,368 | $ | 163,295 | ||||||
102
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Our geographic area information was as follows:
| United States | Canada | Germany | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
|
2010
|
||||||||||||||||
|
Revenues from external customers
|
$ | 1,981,190 | $ | 202,760 | $ | 6,602 | $ | 2,190,552 | ||||||||
|
Interest expense
|
127,971 | 225 | — | 128,196 | ||||||||||||
|
Depreciation and amortization
|
104,496 | 11,507 | 388 | 116,391 | ||||||||||||
|
Amortization of intangible assets
|
23,524 | 1,673 | — | 25,197 | ||||||||||||
|
Amortization of cemetery property
|
27,688 | 4,730 | — | 32,418 | ||||||||||||
|
Operating income
|
301,297 | 51,799 | 950 | 354,046 | ||||||||||||
|
Gains on divestitures and impairment charges, net
|
6,837 | 1,600 | 75 | 8,512 | ||||||||||||
|
Long-lived assets
|
4,467,176 | 363,008 | 3,600 | 4,833,784 | ||||||||||||
|
2009
|
||||||||||||||||
|
Revenues from external customers
|
$ | 1,869,042 | $ | 177,665 | $ | 6,813 | $ | 2,053,520 | ||||||||
|
Interest expense
|
128,798 | 140 | 43 | 128,981 | ||||||||||||
|
Depreciation and amortization
|
100,380 | 10,273 | 449 | 111,102 | ||||||||||||
|
Amortization of intangible assets
|
19,969 | 1,729 | — | 21,698 | ||||||||||||
|
Amortization of cemetery property
|
27,545 | 3,119 | — | 30,664 | ||||||||||||
|
Operating income
|
288,108 | 35,462 | 317 | 323,887 | ||||||||||||
|
Gains (losses) on divestitures and impairment charges, net
|
8,906 | (4,614 | ) | (39 | ) | 4,253 | ||||||||||
|
Long-lived assets
|
4,526,789 | 354,677 | 4,022 | 4,885,488 | ||||||||||||
|
2008
|
||||||||||||||||
|
Revenues from external customers
|
$ | 1,942,682 | $ | 205,950 | $ | 6,990 | $ | 2,155,622 | ||||||||
|
Interest expense
|
133,961 | 313 | — | 134,274 | ||||||||||||
|
Depreciation and amortization
|
101,905 | 11,575 | 677 | 114,157 | ||||||||||||
|
Amortization of intangible assets
|
21,371 | 2,265 | — | 23,636 | ||||||||||||
|
Amortization of cemetery property
|
28,317 | 4,373 | — | 32,690 | ||||||||||||
|
Operating income
|
244,954 | 47,395 | 323 | 292,672 | ||||||||||||
|
(Losses) gains on divestitures and impairment charges, net
|
(32,750 | ) | (3,395 | ) | 21 | (36,124 | ) | |||||||||
|
Long-lived assets
|
4,434,810 | 318,409 | 2,753 | 4,755,972 | ||||||||||||
103
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SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 18. | Supplementary Information |
The detail of certain balance sheet accounts is as follows:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Cash and cash equivalents:
|
||||||||
|
Cash
|
$ | 78,382 | $ | 30,728 | ||||
|
Commercial paper and temporary investments
|
92,464 | 149,017 | ||||||
| $ | 170,846 | $ | 179,745 | |||||
|
Receivables, net:
|
||||||||
|
Notes receivable
|
$ | 1,395 | $ | 1,500 | ||||
|
Atneed funeral receivables, net of allowances of $10,852 and
$8,401, respectively
|
85,853 | 68,241 | ||||||
|
Atneed cemetery receivables, net of allowances of $3,121 and
$5,770, respectively
|
10,235 | 11,420 | ||||||
|
Other
|
9,702 | 11,028 | ||||||
| $ | 107,185 | $ | 92,189 | |||||
|
Other current assets:
|
||||||||
|
Income tax receivable
|
$ | 14,499 | $ | 11,405 | ||||
|
Prepaid insurance
|
4,182 | 3,794 | ||||||
|
Other
|
8,513 | 6,441 | ||||||
| $ | 27,194 | $ | 21,640 | |||||
|
Cemetery property:
|
||||||||
|
Undeveloped land
|
$ | 1,083,290 | $ | 1,075,544 | ||||
|
Developed land, lawn crypts, and mausoleums
|
425,497 | 413,521 | ||||||
| $ | 1,508,787 | $ | 1,489,065 | |||||
|
Property and equipment:
|
||||||||
|
Land
|
$ | 509,100 | $ | 485,409 | ||||
|
Buildings and improvements
|
1,496,310 | 1,404,495 | ||||||
|
Operating equipment
|
427,607 | 488,528 | ||||||
|
Leasehold improvements
|
23,302 | 24,387 | ||||||
|
Capital leases
|
156,235 | 141,453 | ||||||
| 2,612,554 | 2,544,272 | |||||||
|
Less: Accumulated depreciation
|
(891,846 | ) | (872,724 | ) | ||||
|
Accumulated amortization of capital leases
|
(93,010 | ) | (80,474 | ) | ||||
| $ | 1,627,698 | $ | 1,591,074 | |||||
|
Deferred charges and other assets:
|
||||||||
|
Prepaid covenants-not-to-compete, net
|
$ | 48,775 | $ | 46,297 | ||||
|
Preneed backlog intangible assets, net
|
31,796 | 33,807 | ||||||
|
Amortizable intangible assets, net
|
40,375 | 25,391 | ||||||
|
Non-amortizable
intangible assets
|
93,104 | 57,868 | ||||||
|
Restricted cash
|
14,755 | 186,871 | ||||||
|
Notes receivable, net of allowances of $3,111 and $3,135,
respectively
|
11,781 | 12,105 | ||||||
|
Cash surrender value of insurance policies
|
72,420 | 72,552 | ||||||
|
Other
|
75,012 | 87,498 | ||||||
| $ | 388,018 | $ | 522,389 | |||||
104
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Accounts payable and accrued liabilities:
|
||||||||
|
Accounts payable
|
$ | 116,543 | $ | 88,683 | ||||
|
Accrued compensation
|
69,988 | 66,060 | ||||||
|
Accrued dividend
|
9,602 | 10,161 | ||||||
|
Accrued interest
|
22,923 | 24,091 | ||||||
|
Accrued property taxes
|
13,726 | 15,053 | ||||||
|
Self insurance reserves
|
53,892 | 57,928 | ||||||
|
Bank overdraft.
|
15,582 | 18,239 | ||||||
|
Other accrued liabilities
|
40,395 | 34,062 | ||||||
| $ | 342,651 | $ | 314,277 | |||||
|
Other liabilities:
|
||||||||
|
Accrued pension
|
$ | 31,377 | $ | 32,891 | ||||
|
Deferred compensation
|
42,246 | 32,293 | ||||||
|
Customer refund obligation reserve
|
75,517 | 76,689 | ||||||
|
Tax liability
|
201,183 | 189,999 | ||||||
|
Indemnification liability
|
2,689 | 2,542 | ||||||
|
Other
|
46,177 | 44,354 | ||||||
| $ | 399,189 | $ | 378,768 | |||||
105
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Revenues
and Costs and Expenses
The detail of certain income statement accounts is as follows
for the years ended December 31:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Merchandise revenues:
|
||||||||||||
|
Funeral
|
$ | 490,237 | $ | 450,892 | $ | 482,988 | ||||||
|
Cemetery
|
481,540 | 446,035 | 456,035 | |||||||||
|
Total merchandise revenues
|
971,777 | 896,927 | 939,023 | |||||||||
|
Services revenues:
|
||||||||||||
|
Funeral
|
929,668 | 882,186 | 938,204 | |||||||||
|
Cemetery
|
186,203 | 183,288 | 187,942 | |||||||||
|
Total services revenues
|
1,115,871 | 1,065,474 | 1,126,146 | |||||||||
|
Other revenues
|
102,904 | 91,119 | 90,453 | |||||||||
|
Total revenues
|
$ | 2,190,552 | $ | 2,053,520 | $ | 2,155,622 | ||||||
|
Merchandise costs and expenses:
|
||||||||||||
|
Funeral
|
$ | 248,186 | $ | 226,931 | $ | 246,973 | ||||||
|
Cemetery
|
204,669 | 191,489 | 198,635 | |||||||||
|
Total cost of merchandise
|
452,855 | 418,420 | 445,608 | |||||||||
|
Services costs and expenses:
|
||||||||||||
|
Funeral
|
452,903 | 419,855 | 453,915 | |||||||||
|
Cemetery
|
94,772 | 98,923 | 105,865 | |||||||||
|
Total cost of services
|
547,675 | 518,778 | 559,780 | |||||||||
|
Overhead and other expenses
|
740,799 | 694,927 | 730,059 | |||||||||
|
Total cost and expenses
|
$ | 1,741,329 | $ | 1,632,125 | $ | 1,735,447 | ||||||
Certain
Non-Cash Financing and Investing Transactions
| Years Ended December 31, | ||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||
| (In thousands) | ||||||||||||||||
|
Dividends accrued but not paid
|
$ | 9,602 | $ | 10,161 | $ | 9,981 | ||||||||||
|
Financing held in escrow
|
$ | — | $ | 147,173 | $ | — | ||||||||||
| 19. | Earnings Per Share |
Basic earnings per common share (EPS) excludes dilution and is
computed by dividing
Net income attributable to common
stockholders
by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other obligations to
issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that shared in our
earnings.
106
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A reconciliation of the numerators and denominators of the basic
and diluted EPS for the three years ended December 31 is
presented below:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
Amounts attributable to common stockholders:
|
||||||||||||
|
Income from continuing operations:
|
||||||||||||
|
Income from continuing operations — basic
|
$ | 126,417 | $ | 123,098 | $ | 97,445 | ||||||
|
After tax interest on convertible debt
|
51 | 51 | — | |||||||||
|
Income from continuing operations — diluted
|
$ | 126,468 | $ | 123,149 | $ | 97,445 | ||||||
|
Loss from discontinued operations, net of tax
|
$ | — | $ | — | $ | (362 | ) | |||||
|
Net income:
|
||||||||||||
|
Net income — basic
|
$ | 126,417 | $ | 123,098 | $ | 97,083 | ||||||
|
After tax interest on convertible debt
|
51 | 51 | — | |||||||||
|
Net income — diluted
|
$ | 126,468 | $ | 123,149 | $ | 97,083 | ||||||
|
Weighted average shares:
|
||||||||||||
|
Weighted average shares — basic
|
248,871 | 251,709 | 258,106 | |||||||||
|
Stock options
|
1,610 | 654 | 2,877 | |||||||||
|
Convertible debt
|
121 | 121 | — | |||||||||
|
Weighted average shares — diluted
|
250,602 | 252,484 | 260,983 | |||||||||
|
Income per share from continuing operations:
|
||||||||||||
|
Basic
|
$ | .51 | $ | .49 | $ | .38 | ||||||
|
Diluted
|
$ | .50 | $ | .49 | $ | .37 | ||||||
|
Income per share from discontinued operations, net of tax:
|
||||||||||||
|
Basic
|
$ | — | $ | — | $ | — | ||||||
|
Diluted
|
$ | — | $ | — | $ | — | ||||||
|
Net income per share:
|
||||||||||||
|
Basic
|
$ | .51 | $ | .49 | $ | .38 | ||||||
|
Diluted
|
$ | .50 | $ | .49 | $ | .37 | ||||||
The computation of diluted earnings per share excludes
outstanding stock options and convertible debt in certain
periods in which the inclusion of such options and debt would be
antidilutive to the periods presented. Total options and
convertible debentures not currently included in the computation
of diluted EPS are as follows (in shares):
| 2010 | 2009 | 2008 | ||||||||||
|
Antidilutive options
|
4,815 | 6,244 | 3,135 | |||||||||
|
Antidilutive convertible debentures
|
— | — | 167 | |||||||||
|
Total common stock equivalents excluded from computations
|
4,815 | 6,244 | 3,302 | |||||||||
We adopted the FASB’s recent authoritative guidance on
determining whether instruments granted in share-based payment
transactions are participating securities, effective
January 1, 2009. Our adoption had an immaterial impact on
our reported EPS as reflected in these consolidated financial
statements.
107
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 20. | Divestiture-Related Activities |
As divestitures occur in the normal course of business, gains or
losses on the sale of such businesses are recognized in the
income statement line item
Gains (losses) on
divestitures and impairment charges, net.
Additionally, as
divestitures occur pursuant to our ongoing asset sale programs,
adjustments are made through this income statement line item to
reflect the difference between actual proceeds received from the
sale compared to the original estimates.
Gains (losses) on divestitures and impairment charges, net
consist of the following for the years ended December 31:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Gains (losses) on divestitures, net
|
$ | 16,547 | $ | 20,787 | $ | (4,695 | ) | |||||
|
Impairment losses
|
(8,035 | ) | (16,534 | ) | (31,429 | ) | ||||||
| $ | 8,512 | $ | 4,253 | $ | (36,124 | ) | ||||||
Keystone
In conjunction with our acquisition of Keystone, we entered into
an agreement with the Federal Trade Commission to sell 22
funeral homes and five cemeteries, which were sold for
$34.9 million in the second quarter of 2010. We recognized
a gain on divestitures of $6.2 million associated with the
former SCI properties.
Assets
Held for Sale
We committed to a plan to sell certain operating properties as
of both December 31, 2010 and 2009. In connection with
these assets held for sale, we recorded impairment losses of
approximately $8 million and $17 million,
respectively, in our consolidated statement of operations for
the years ended December 31, 2010 and 2009.
108
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Net assets held for sale were as follows:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Assets:
|
||||||||
|
Current assets
|
$ | 552 | $ | 1,197 | ||||
|
Preneed funeral receivables, net and trust investments
|
24 | 377 | ||||||
|
Preneed cemetery receivables, net and trust investments
|
707 | 50,952 | ||||||
|
Cemetery property, at cost
|
298 | 2,111 | ||||||
|
Property and equipment, net
|
— | 120 | ||||||
|
Deferred charges and other assets
|
137 | 10,237 | ||||||
|
Cemetery perpetual care trust investments
|
— | 17,104 | ||||||
|
Total assets
|
1,718 | 82,098 | ||||||
|
Liabilities:
|
||||||||
|
Accounts payable and accrued liabilities
|
— | 501 | ||||||
|
Deferred preneed cemetery revenues
|
423 | 49,346 | ||||||
|
Other liabilities
|
7 | 1,882 | ||||||
|
Care trusts’ corpus
|
— | 17,104 | ||||||
|
Total liabilities
|
430 | 68,833 | ||||||
|
Net assets held for sale
|
$ | 1,288 | $ | 13,265 | ||||
109
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 21. | Quarterly Financial Data (Unaudited) |
Quarterly financial data for 2010 and 2009 is as follows:
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
|
2010
|
||||||||||||||||
|
Revenues
|
$ | 530,863 | $ | 555,273 | $ | 533,165 | $ | 571,251 | ||||||||
|
Costs and expenses
|
(418,556 | ) | (445,975 | ) | (430,518 | ) | (446,280 | ) | ||||||||
|
Gross profits
|
112,307 | 109,298 | 102,647 | 124,971 | ||||||||||||
|
Operating income
|
85,626 | 95,926 | 68,496 | 103,998 | ||||||||||||
|
Income from continuing operations before income taxes(1)
|
51,441 | 67,425 | 28,621 | 71,972 | ||||||||||||
|
Provision for income taxes
|
(20,116 | ) | (27,198 | ) | (9,941 | ) | (35,203 | ) | ||||||||
|
Net income
|
31,325 | 40,227 | 18,680 | 36,769 | ||||||||||||
|
Net (income) loss attributable to noncontrolling interests
|
(413 | ) | 58 | 85 | (314 | ) | ||||||||||
|
Net income attributable to common stockholders
|
30,912 | 40,285 | 18,765 | 36,455 | ||||||||||||
|
Net income attributable to common stockholders per share(2):
|
||||||||||||||||
|
Basic — EPS
|
.12 | .16 | .08 | .15 | ||||||||||||
|
Diluted — EPS
|
.12 | .16 | .08 | .15 | ||||||||||||
|
2009
|
||||||||||||||||
|
Revenues
|
$ | 510,595 | $ | 513,949 | $ | 497,217 | $ | 531,759 | ||||||||
|
Costs and expenses
|
(410,475 | ) | (412,124 | ) | (396,054 | ) | (413,472 | ) | ||||||||
|
Gross profits
|
100,120 | 101,825 | 101,163 | 118,287 | ||||||||||||
|
Operating income
|
85,564 | 69,070 | 77,981 | 91,272 | ||||||||||||
|
Income from continuing operations before income taxes(1)
|
54,661 | 39,902 | 49,965 | 54,840 | ||||||||||||
|
Provision for income taxes
|
(20,281 | ) | (16,322 | ) | (19,403 | ) | (20,269 | ) | ||||||||
|
Net income
|
34,380 | 23,580 | 30,562 | 34,571 | ||||||||||||
|
Net loss (income) attributable to noncontrolling interests
|
150 | (476 | ) | 600 | (269 | ) | ||||||||||
|
Net income attributable to common stockholders
|
34,530 | 23,104 | 31,162 | 34,302 | ||||||||||||
|
Net income attributable to common stockholders per share(2):
|
||||||||||||||||
|
Basic — EPS
|
.14 | .09 | .12 | .14 | ||||||||||||
|
Diluted — EPS
|
.14 | .09 | .12 | .13 | ||||||||||||
| (1) | Includes Gains (losses) on divestitures and impairment charges, net , as described in Note 20. | |
| (2) | Net income per share is computed independently for each of the quarters presented. Therefore, the sum of the quarters’ net income per share may not equal the total computed for the year. |
110
Table of Contents
SERVICE
CORPORATION INTERNATIONAL
Three
Years Ended December 31, 2010
|
Charged
|
Charged
|
|||||||||||||||||||
|
Balance at
|
(Credited) to
|
(Credited) to
|
Balance at
|
|||||||||||||||||
|
Beginning
|
Costs and
|
Other
|
End of
|
|||||||||||||||||
| Description | of Period | Expenses | Accounts(1) | Write-Offs(2) | Period | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Current provision:
|
||||||||||||||||||||
|
Allowance for doubtful accounts:
|
||||||||||||||||||||
|
Year ended December 31, 2010
|
$ | 14,171 | $ | 8,153 | $ | 17,926 | $ | (26,277 | ) | $ | 13,973 | |||||||||
|
Year ended December 31, 2009
|
$ | 19,735 | $ | 11,346 | $ | 56 | $ | (16,966 | ) | $ | 14,171 | |||||||||
|
Year ended December 31, 2008
|
$ | 19,475 | $ | 9,314 | $ | 305 | $ | (9,359 | ) | $ | 19,735 | |||||||||
|
Due After One Year:
|
||||||||||||||||||||
|
Allowance for doubtful accounts:
|
||||||||||||||||||||
|
Year ended December 31, 2010
|
$ | 3,135 | $ | — | $ | — | $ | (24 | ) | $ | 3,111 | |||||||||
|
Year ended December 31, 2009
|
$ | 2,775 | $ | — | $ | 720 | $ | (360 | ) | $ | 3,135 | |||||||||
|
Year ended December 31, 2008
|
$ | 2,825 | $ | — | $ | — | $ | (50 | ) | $ | 2,775 | |||||||||
|
Preneed Funeral and Preneed Cemetery
|
||||||||||||||||||||
|
Asset allowance for cancellation:
|
||||||||||||||||||||
|
Year ended December 31, 2010
|
$ | 71,202 | $ | 3,204 | $ | 3,386 | $ | — | $ | 77,792 | ||||||||||
|
Year ended December 31, 2009
|
$ | 58,618 | $ | 3,249 | $ | 9,335 | $ | — | $ | 71,202 | ||||||||||
|
Year ended December 31, 2008
|
$ | 64,062 | $ | 1,305 | $ | (6,749 | ) | $ | — | $ | 58,618 | |||||||||
|
Deferred Preneed Funeral and Cemetery
|
||||||||||||||||||||
|
Revenue allowance for cancellation:
|
||||||||||||||||||||
|
Year ended December 31, 2010
|
$ | (130,897 | ) | $ | — | $ | (3,863 | ) | $ | — | $ | (134,760 | ) | |||||||
|
Year ended December 31, 2009
|
$ | (137,769 | ) | $ | — | $ | 6,872 | $ | — | $ | (130,897 | ) | ||||||||
|
Year ended December 31, 2008
|
$ | (143,730 | ) | $ | — | $ | 5,961 | $ | — | $ | (137,769 | ) | ||||||||
|
Deferred tax valuation allowance:
|
||||||||||||||||||||
|
Year ended December 31, 2010
|
$ | 68,192 | $ | 76 | $ | (4,654 | ) | $ | — | $ | 63,614 | |||||||||
|
Year ended December 31, 2009
|
$ | 54,225 | $ | 13,967 | $ | — | $ | — | $ | 68,192 | ||||||||||
|
Year ended December 31, 2008
|
$ | 50,931 | $ | (414 | ) | $ | 3,708 | $ | — | $ | 54,225 | |||||||||
| (1) | Primarily relates to acquisitions and dispositions of operations. | |
| (2) | Uncollected receivables written off, net of recoveries. |
111
Table of Contents
| Item 9. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
Evaluation
of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), conducted an
evaluation of the effectiveness of our disclosure controls and
procedures, as such term is defined under
Rules 13a-15(e)
and
15d-15(e)
of
the Securities Exchange Act of 1934, as amended (the Exchange
Act), as of the end of the period covered by this Annual Report
on
Form 10-K.
Based on this evaluation, our CEO and CFO concluded that our
disclosure controls and procedures as of December 31, 2010
were effective to ensure that information we are required to
disclose in the reports that we file or submit under the
Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the SEC’s
rules and forms, and (ii) accumulated and communicated to
our management, including our CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure.
Management’s
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13-a-15(f)).
SCI’s internal control over financial reporting is a
process, under the supervision of our CEO and CFO, designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Our management, with the participation of our CEO and CFO, has
assessed the effectiveness of our internal control over
financial reporting as of December 31, 2010 based on the
framework in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
assessment, our management concluded that our internal control
over financial reporting was effective as of December 31,
2010.
The effectiveness of our internal control over financial
reporting as of December 31, 2010 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included in
this Annual Report on
Form 10-K.
Changes
in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting during the quarter ended December 31, 2010 that
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
| Item 9B. | Other Information |
None.
112
Table of Contents
| Item 10. | Directors, Executive Officers and Corporate Governance |
| Item 11. | Executive Compensation |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
| Item 13. | Certain Relationships and Related Transactions and Director Independence |
| Item 14. | Principal Accountant Fees and Services |
Information required by PART III (Items 10, 11, 12, 13
and 14) has been omitted as we intend to file with the
Commission not later than 120 days after the end of our
fiscal year a definitive proxy statement that includes such
information. Such information is set forth in such proxy
statement (i) with respect to Item 10, under the
captions “Proxy Voting: Questions and Answers,”
“Election of Directors,” “Other
Matters — Section 16(a) Beneficial Ownership
Reporting Compliance” and “Report of the Audit
Committee,” (ii) with respect to Items 11 and 13,
under the captions “Election of Directors,”
“Compensation Discussion and Analysis,”
“Compensation Committee Report,” “Certain
Information with Respect to Officers and Directors,”
“Compensation Committee Interlocks and Insider
Participation” and “Certain Transactions”,
(iii) with respect to Item 12, under the caption
“Voting Securities and Principal Holders”, and
(iv) with respect to Item 14, under the caption
“Proposal to Approve the Selection of Independent
Accountants — Audit Fees and All Other Fees”. The
information as specified in the preceding sentence is
incorporated herein by reference; provided however,
notwithstanding anything set forth in this
Form 10-K,
the information under the captions “Compensation Committee
Report” and “Report of the Audit Committee” in
such proxy statement, is not incorporated by reference into this
Form 10-K.
The information regarding our executive officers called for by
Item 401 of
Regulation S-K
and the information regarding our code of ethics called for by
Item 406 of
Regulation S-K
has been included in PART I of this report. The information
regarding our equity compensation plan information called for by
Item 201(d) of
Regulation S-K
is set forth below.
Equity Compensation Plan Information at December 31, 2010:
|
Number of Securities
|
||||||||||||
|
Remaining Available for
|
||||||||||||
|
Number of Securities to be
|
Weighted-Average
|
Future Issuance Under
|
||||||||||
|
Issued upon Exercise of
|
Exercise Price of
|
Equity Compensation Plans
|
||||||||||
|
Outstanding Options,
|
Outstanding Options,
|
(Excluding Securities
|
||||||||||
|
Warrants and Rights
|
Warrants and Rights
|
Reflected in Column (a))
|
||||||||||
| Plan Category | (a) | (b) | (c) | |||||||||
|
Equity compensation plans approved by security holders
|
11,287,248 | $ | 7.53 | 4,297,186 | ||||||||
|
Equity compensation plans not approved by security holders(1)
|
1,025,535 | $ | 7.45 | 1,128,590 | (2) | |||||||
|
Total
|
12,312,783 | $ | 7.53 | 5,425,776 | ||||||||
| (1) | Includes options outstanding under the 1996 Nonqualified Incentive Plan under which nonqualified stock options were granted to employees who are not officers or directors. We have 1,025,535 total options outstanding under the 1996 Non-qualified Incentive Plan. No shares of our common stock are available for any future grants under this plan. See Note 15 in Part II, Item 8. Financial Statements and Supplementary Data, for a further description of 1996 Nonqualified Incentive Plan. This plan has not been submitted for stockholder approval. | |
| (2) | Includes an estimated 1,128,590 shares available under the Employee Stock Purchase Plan. Under such plan, a dollar value of shares (not an amount of shares) is registered. The above estimate was determined by dividing |
113
Table of Contents
| (i) the remaining unissued dollar value of registered shares at December 31, 2010, which was $9.3 million, by (ii) the closing price of $8.25 per share of common stock at December 31, 2010. |
The Employee Stock Purchase Plan enables Company employees in
North America to invest via payroll deductions up to $500 (or
$600 Canadian) per month in our common stock. Contributions are
utilized to purchase the stock in the open market. With respect
to Canadian employees who meet certain requirements, we will
provide annually a match equal to 25% of the amount of the
employee’s contribution subject to a maximum contribution
per participant of $1,800 Canadian. This plan has not been
submitted for stockholder approval.
114
Table of Contents
| Item 15. | Exhibits and Financial Statement Schedule |
(a)(1)-(2)
Financial Statements and Schedule:
The financial statements and schedule are listed in the
accompanying Index to Financial Statements and Related Schedule
on page 45 of this report.
(3)
Exhibits:
The exhibits listed on the accompanying Exhibit Index on
pages 118-121
are filed as part of this report.
(b)
Included in (a) above.
(c)
Included in (a) above.
115
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant, Service
Corporation International, has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
SERVICE CORPORATION INTERNATIONAL
| By: |
/s/
Gregory
T. Sangalis
|
(Gregory T. Sangalis,
Senior Vice President, General
Counsel, and Secretary)
Dated: February 14, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
date indicated.
| Signature | Title | Date | ||||
|
/s/
R.
L. WALTRIP*
|
Chairman of the Board | February 14, 2011 | ||||
|
/s/
THOMAS
L. RYAN*
|
President, Chief Executive Officer, and Director (Principal Executive Officer) | February 14, 2011 | ||||
|
/s/
ERIC
D. TANZBERGER*
|
Senior Vice President, Chief Financial Officer, and Treasurer (Principal Financial Officer) | February 14, 2011 | ||||
|
/s/
TAMMY
R. MOORE*
|
Vice President and Corporate Controller (Principal Accounting Officer) | February 14, 2011 | ||||
|
/s/
ALAN
R. BUCKWALTER, III*
|
Director | February 14, 2011 | ||||
|
/s/
ANTHONY
L. COELHO*
|
Director | February 14, 2011 | ||||
|
/s/
A.
J. FOYT, JR.*
|
Director | February 14, 2011 | ||||
|
/s/
MALCOLM
GILLIS*
|
Director | February 14, 2011 | ||||
|
/s/
VICTOR
L. LUND*
|
Director | February 14, 2011 | ||||
|
/s/
JOHN
W. MECOM, JR.*
|
Director | February 14, 2011 | ||||
116
Table of Contents
| Signature | Title | Date | ||||
|
/s/
CLIFTON
H. MORRIS, JR.*
|
Director | February 14, 2011 | ||||
|
/s/
W.
BLAIR WALTRIP*
|
Director | February 14, 2011 | ||||
|
/s/
EDWARD
E. WILLIAMS*
|
Director | February 14, 2011 | ||||
| *By |
/s/
GREGORY
T. SANGALIS
Attorney-In-Fact for each of the Persons indicated) |
February 14, 2011 | ||||
117
Table of Contents
EXHIBIT INDEX
PURSUANT
TO ITEM 601 OF REG. S-K
|
Exhibit
|
||||||
| Number | Description | |||||
| 3 | .1 | — | Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to Registration Statement No. 333-10867 on Form S-3). | |||
| 3 | .2 | — | Articles of Amendment to Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the fiscal quarter ended September 30, 1996). | |||
| 3 | .3 | — | Statement of Resolution Establishing Series of Shares of Series D Junior Participating Preferred Stock, dated July 27, 1998. (Incorporated by reference to Exhibit 3.2 to Form 10-Q for the fiscal quarter ended June 30, 1998). | |||
| 3 | .4 | — | Bylaws, as amended. (Incorporated by reference to Exhibit 3.1 to Form 8-K dated November 16, 2007). | |||
| 4 | .1 | — | Senior Indenture dated as of February 1, 1993 by and between the Company and The Bank of New York, as trustee. (Incorporated by reference as Exhibit 4.1 to Form S-4 filed September 2, 2004 (File No. 333-118763)). | |||
| 4 | .2 | — | Agreement of Resignation, Appointment of Acceptance, dated October 21, 2005, among the Company, The Bank of New York and The Bank of New York Trust Company, N.A., appointing a successor trustee for the Senior Indenture dated as of February 1, 1993. (Incorporated by reference to Exhibit 4.1 to Form 10-Q for the fiscal quarter ended June 30, 2005). | |||
| 10 | .1 | — | Retirement Plan For Non-Employee Directors. (Incorporated by reference to Exhibit 10.1 to Form 10-K for the fiscal year ended December 31, 1991). | |||
| 10 | .2 | — | First Amendment to Retirement Plan For Non-Employee Directors. (Incorporated by reference to Exhibit 10.2 to Form 10-K for the fiscal year ended December 31, 2000). | |||
| 10 | .3 | — | Second Amendment to Retirement Plan for Non-Employee Directors | |||
| 10 | .4 | — | Agreement dated May 14, 1992 between the Company, R. L. Waltrip and related parties relating to life insurance. (Incorporated by reference to Exhibit 10.4 to Form 10-K for the fiscal year ended December 31, 1992). | |||
| 10 | .5 | — | Employment Agreement, dated December 28, 2006, between SCI Executive Services, Inc. and R.L. Waltrip (including Non-Competition Agreement and Amendment to Employment Agreement, dated November 11, 1991, among the Company, R. L. Waltrip and Claire Waltrip). (Incorporated by reference to Exhibit 10.4 to Form 10-K for the fiscal year ended December 31, 2006). | |||
| 10 | .6 | — | Amendment to Employment and Noncompetition Agreement, dated November 30, 2007, between SCI Executive Services, Inc. and R. L. Waltrip. (Incorporated by reference to Exhibit 10.5 to Form 10-K for the fiscal year ended December 31, 2007). | |||
| 10 | .7 | — | Amendment to Employment and Noncompetition Agreement, dated December 1, 2010, between SCI Executive Services, Inc. and R.L. Waltrip. | |||
| 10 | .8 | — | Employment and Noncompetition Agreement, dated January 1, 2004, between SCI Executive Services, Inc. and Thomas L. Ryan. (Incorporated by reference to Exhibit 10.9 to Form 10-K for the fiscal year ended December 31, 2003). | |||
| 10 | .9 | — | Addendum to Employment and Noncompetition Agreement, dated December 1, 2005, between SCI Executive Services, Inc. and Thomas L. Ryan. (Incorporated by reference to Exhibit 10.12 to Form 10-K for the fiscal year ended December 31, 2005). | |||
| 10 | .10 | — | Amendment to Employment and Noncompetition Agreement, dated November 30, 2007, between SCI Executive Services, Inc. and Thomas L. Ryan. (Incorporated by reference to Exhibit 10.8 to Form 10-K for fiscal year ended December 31, 2007). | |||
| 10 | .11 | — | Amendment to Employment and Noncompetition Agreement, dated December 1, 2010, between SCI Executive Services, Inc. and Thomas L. Ryan. | |||
| 10 | .12 | — | Employment and Noncompetition Agreement, dated January 1, 2004, between SCI Executive Services, Inc. and Michael R. Webb. (Incorporated by reference to Exhibit 10.10 to Form 10-K for the fiscal year ended December 31, 2003). | |||
118
Table of Contents
|
Exhibit
|
||||||
| Number | Description | |||||
| 10 | .13 | — | Addendum to Employment and Noncompetition Agreement, dated December 1, 2005, between SCI Executive Services, Inc. and Michael R. Webb. (Incorporated by reference to Exhibit 10.14 to Form 10-K for the fiscal year ended December 31, 2005). | |||
| 10 | .14 | — | Amendment to Employment and Noncompetition Agreement, dated November 30, 2007, between SCI Executive Services, Inc. and Michael R. Webb. (Incorporated by reference to Exhibit 10.11 to Form 10-K for the fiscal year ended December 31, 2007). | |||
| 10 | .15 | — | Amendment to Employment and Noncompetition Agreement, dated December 1, 2010, between SCI Executive Services, Inc. and Michael R. Webb. | |||
| 10 | .16 | — | Employment and Noncompetition Agreement, dated December 28, 2006 between SCI Executive Services, Inc. and Eric D. Tanzberger. (Incorporated by reference to Exhibit 10.11 to Form 10-K for the fiscal year ended December 31, 2006). | |||
| 10 | .17 | — | Amendment to Employment and Noncompetition Agreement, dated November 30, 2007, between SCI Executive Services, Inc. and Eric D. Tanzberger. (Incorporated by reference to Exhibit 10.13 to Form 10-K for the fiscal year ended December 31, 2007). | |||
| 10 | .18 | — | Amendment to Employment and Noncompetition Agreement , dated December 1, 2010, between SCI Executive Services, Inc. and Eric D. Tanzberger | |||
| 10 | .19 | — | Employment and Noncompetition Agreement, dated December 28, 2006, between SCI Executive Services, Inc. and Sumner J. Waring, III. (Incorporated by reference to Exhibit 10.9 to Form 10-K for the fiscal year ended December 31, 2006). | |||
| 10 | .20 | — | Amendment to Employment and Noncompetition Agreement, dated November 30, 2007, between SCI Executive Services, Inc. and Sumner J. Waring, III. (Incorporated by reference to Exhibit 10.15 to Form 10-K for the fiscal year ended December 31, 2009). | |||
| 10 | .21 | — | Amendment to Employment and Noncompetition Agreement, dated December 1, 2010, between SCI Executive Services, Inc. and Sumner J. Waring, III. | |||
| 10 | .22 | — | Form of Employment and Noncompetition Agreement pertaining to non-senior officers. (Incorporated by reference to Exhibit 10.12 to Form 10-K for the fiscal year ended December 31, 2003). | |||
| 10 | .23 | — | Form of Addendum to Employment and Noncompetition Agreement pertaining to the preceding exhibit. (Incorporated by reference to Exhibit 10.20 to Form 10-K for the fiscal year ended December 31, 2005). | |||
| 10 | .24 | — | Form of Amendment to Employment and Noncompetition Agreement dated November 30, 2007, between SCI Executive Services, Inc. and non-senior officers. (Incorporated by reference to Exhibit 10.18 to Form 10-K for the fiscal year ended December 31, 2007). | |||
| 10 | .25 | — | Form of Amendment to Employment and Noncompetition Agreement, dated December 1, 2010, between SCI Executive Services, Inc. and non-senior officers. | |||
| 10 | .26 | — | Amended 1996 Incentive Plan. (Incorporated by reference to Appendix A to Proxy Statement dated April 6, 2007). | |||
| 10 | .27 | — | Split Dollar Life Insurance Plan. (Incorporated by reference to Exhibit 10.36 to Form 10-K for the fiscal year ended December 31, 1995). | |||
| 10 | .28 | — | Supplemental Executive Retirement Plan for Senior Officers (as Amended and Restated Effective as of January 1, 1998). (Incorporated by reference to Exhibit 10.28 to Form 10-K for the fiscal year ended December 31, 1998). | |||
| 10 | .29 | — | First Amendment to Supplemental Executive Retirement Plan for Senior Officers. (Incorporated by reference to Exhibit 10.28 to Form 10-K for the fiscal year ended December 31, 2000). | |||
| 10 | .30 | — | SCI 401(k) Retirement Savings Plan as Amended and Restated. (Incorporated by reference to Exhibit 4.7 to Registration Statement No. 333-119681). | |||
| 10 | .31 | — | First Amendment to the SCI 401(k) Retirement Savings Plan. (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarterly period ended September 30, 2004). | |||
| 10 | .32 | — | Second Amendment to the SCI 401(k) Retirement Savings Plan, and Third Amendment to the SCI 401(k) Retirement Savings Plan. (Incorporated by reference to Exhibit 10.26 to Form 10-K for the fiscal year ended December 31, 2004). | |||
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|
Exhibit
|
||||||
| Number | Description | |||||
| 10 | .33 | — | Fourth Amendment to the SCI 401(k) Retirement Savings Plan. (Incorporated by reference to Exhibit 10.27 to Form 10-K for the fiscal year ended December 31, 2006). | |||
| 10 | .34 | — | Fifth Amendment to the SCI 401(k) Retirement Savings Plan. (Incorporated by reference to Exhibit 10.30 to Form 10-K for the fiscal year ended December 31, 2007). | |||
| 10 | .35 | — | Sixth Amendment to the SCI 401(k) Retirement Savings Plan. (Incorporated by reference to Exhibit 10.30 to Form 10-K for the fiscal year ended December 31, 2008). | |||
| 10 | .36 | — | Amended and Restated Director Fee Plan. (Incorporated by reference to Annex A to Proxy Statement dated April 17, 2006). | |||
| 10 | .37 | — | Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 1.1 to Registration Statement No. 2-62484 on Form S-8). | |||
| 10 | .38 | — | Amendment No. 1 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 15.1 to Registration Statement No. 2-62484 on Form S-8). | |||
| 10 | .39 | — | Amendment No. 2 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 28.3 to Registration Statement No. 33-25061 on Form S-8). | |||
| 10 | .40 | — | Amendment No. 3 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 28.4 to Registration Statement No. 33-35708 on Form S-8). | |||
| 10 | .41 | — | Amendment No. 4 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.34 to Form 10-K for the fiscal year ended December 31, 2009.) | |||
| 10 | .42 | — | Amendment No. 5 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.31 to Form 10-K for the fiscal year ended December 31, 1999). | |||
| 10 | .43 | — | Amendment No. 6 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.44 to Form 10-K for the fiscal year ended December 31, 2002). | |||
| 10 | .44 | — | Amendment No. 7 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.45 to Form 10-K for the fiscal year ended December 31, 2002). | |||
| 10 | .45 | — | Agreement between Merrill Lynch Canada Inc. and Service Corporation International. (Incorporated by reference to Exhibit 28.5 to Post-Effective Amendment No. 1 to Registration Statement No. 33-8907 on Form S-8). | |||
| 10 | .46 | — | First Amendment to Agreement between Merrill Lynch Canada Inc. and Service Corporation International. (Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K dated December 21, 1993). | |||
| 10 | .47 | — | Employee Stock Purchase Plan Administration Agreement dated July 25, 2001 between Service Corporation International (Canada) Limited and Fastrak Systems Inc. (Incorporated by reference to Exhibit 10.48 to Form 10-K for the fiscal year ended December 31, 2002). | |||
| 10 | .48 | — | Form of Indemnification Agreement for officers and directors. (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarterly period ended September 30, 2004). | |||
| 10 | .49 | — | Form of Executive Deferred Compensation Plan as Amended and Restated Effective December 8, 2009. (Incorporated by reference to Exhibit 10.42 to Form 10-K for the fiscal year ended December 31, 2009.) | |||
| 10 | .50 | — | Amendment One to Executive Deferred Compensation Plan. | |||
| 10 | .51 | — | Form of Performance Unit Grant Award Agreement. (Incorporated by reference to Exhibit 10.43 to Form 10-K for the fiscal year ended December 31, 2008). | |||
| 10 | .52 | — | Amended and Restated Revolving Credit Agreement, dated November 18, 2009 among Service Corporation International, the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated November 24, 2009). | |||
| 12 | .1 | — | Ratio of Earnings to Fixed Charges. | |||
| 21 | .1 | — | Subsidiaries of the Company. | |||
| 23 | .1 | — | Consent of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP). | |||
| 24 | .1 | — | Powers of Attorney. | |||
120
Table of Contents
|
Exhibit
|
||||||
| Number | Description | |||||
| 31 | .1 | — | Certification of Thomas L. Ryan as Principal Executive Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002. | |||
| 31 | .2 | — | Certification of Eric D. Tanzberger as Principal Financial Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002. | |||
| 32 | .1 | — | Certification of Periodic Financial Reports by Thomas L. Ryan as Principal Executive Officer in satisfaction of Section 906 of the Sarbanes- Oxley Act of 2002. | |||
| 32 | .2 | — | Certification of Periodic Financial Reports by Eric D. Tanzberger as Principal Financial Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002. | |||
| 101 | — | The following materials from Service Corporation International’s Annual Report on Form 10-K for the year ended December 31, 2010, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheet, (ii) Consolidated Statement of Operations, (iii) Consolidated Statement of Equity, (iv) Consolidated Statement of Cash Flows, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text. | ||||
In the above list, the management contracts or compensatory
plans or arrangements are set forth in Exhibits 10.1
through 10.51.
Pursuant to Item 601(b)(4) of
Regulation S-K,
there are not filed as exhibits to this report certain
instruments with respect to long-term debt under which the total
amount of securities authorized thereunder does not exceed
10 percent of the total assets of Registrant and its
subsidiaries on a consolidated basis. Registrant agrees to
furnish a copy of any such instrument to the Commission upon
request.
121
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedule