| SERVICE CORPORATION INTERNATIONAL 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 |
| We assume no obligation to publicly update or revise any forward-looking statements made herein or 4 _________________________________________________________________ [67]Table of Contents any other forward-looking statements made by the Company, whether as a result of new information, future events or otherwise |
| Our ability to execute our business plan depends on many factors, many of which are beyond our control |
| Our strategic plan is focused on cost management and the development of key revenue initiatives designed to generate future internal growth in our core funeral and cemetery operations |
| Many of the factors necessary for the execution of our strategic plan are beyond our control |
| 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 the strategic plan could have a material adverse effect on us, our financial condition, results of operations, or cash flows |
| Our existing credit agreements and indentures contain covenants that may prevent us from engaging in certain transactions |
| Our existing credit agreements and indentures contain, 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 |
| These covenants limit, among other things, our and our subsidiaries’ ability to: • Borrow money; • Make investments; • Engage in transactions with affiliates; • Engage in sale-leaseback transactions; and • Consummate certain liens on assets |
| Our bank credit facility also requires us to maintain certain financial ratios and satisfy other financial condition tests |
| See note ten to the consolidated financial statements in Item 8 of this Form 10-K for further information related to our bank credit facility |
| If we lost the ability to use surety bonding to support our preneed funeral and preneed cemetery activities, we could have 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 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 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 are generally renewed for twelve-month periods, we would be required to either obtain replacement coverage or fund approximately dlra285dtta7 million as of December 31, 2005 into state-mandated trust accounts |
| The funeral home and cemetery industry continues to be increasingly competitive |
| In North America and most international regions in which we operate, the funeral 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 in the industry, as well as offer attractive products and services at competitive prices |
| In addition, we must market our 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 Company, our financial condition, results of operations and cash flows could be materially adversely affected |
| 5 _________________________________________________________________ [68]Table of Contents Our affiliated funeral and cemetery trust funds own investments in equity securities and mutual funds, which are affected by financial market conditions that are beyond our control |
| In connection with our preneed funeral operations and preneed cemetery merchandise and service sales, most affiliated funeral and cemetery trust funds own investments in equity securities and mutual funds |
| Our earnings and investment gains and losses on these equity securities and mutual funds are affected by financial market conditions that are beyond our control |
| If our earnings from our trust funds decline, we would likely experience a decline in future revenues |
| In addition, if the trust funds experienced significant investment losses, there would likely 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, which could have a material adverse effect on us, our financial condition, results of operations, or cash flows |
| As of December 31, 2005, net unrealized appreciation in the preneed funeral and cemetery merchandise and services trust funds amounted to dlra13dtta9 million and dlra48dtta2 million, respectively |
| The perpetual care trust funds had net unrealized appreciation of dlra21dtta4 million as of December 31, 2005 |
| The following table summarizes the investment returns excluding fees on our trust funds for the last three years |
| 2005 2004 2003 Preneed funeral trust funds 6dtta6prca 7dtta1prca 17dtta9prca Cemetery merchandise services trust funds 6dtta9prca 6dtta7prca 17dtta1prca Perpetual care trust funds 3dtta9prca 8dtta6prca 12dtta6prca 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 14prca of the total sale from the third party insurance company |
| Additionally, there is an increasing death benefit associated with the contract of approximately 1prca per year to be received in cash by us 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, which could materially adversely affect our future cash flows, revenues and operating margins |
| Unfavorable results of litigation could have a material adverse impact on our financial statements |
| Adverse outcomes in some or all of the pending cases may result in significant monetary damages or injunctive relief against us |
| We are also subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business |
| While 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 or results of operations, 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 and the results of operations for the period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable |
| The United States Bureau of the Census estimates that the number of deaths in the United States will increase up to one percent per year until 2010 |
| However, longer life spans could reduce the number of deaths during this period |
| If the number of deaths 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 |
| 6 _________________________________________________________________ [69]Table of Contents The continuing upward trend in the number of cremations performed in North America could result in lower revenue and gross profit dollars |
| There is a continuing upward trend in the number of cremations performed in North America as an alternative to traditional funeral service dispositions |
| In North America during 2005, 40dtta2prca of the comparable funeral services performed by us were cremation cases compared to 38dtta9prca and 37dtta6prca performed in 2004 and 2003, respectively |
| We continue to expand our cremation memorialization products and services, which has resulted in higher average sales for cremation services |
| If we are unable to successfully expand our cremation memorialization products and services to meet the continuing trends, our financial condition, results of operations, and cash flows could be materially adversely affected |
| The funeral home and cemetery businesses are high fixed-cost businesses |
| The majority of our operations are managed in groups called “regions” |
| Regions 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 of our 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 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 to us |
| In addition, from time to time, governments and agencies propose to amend or add regulations, which would 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, such as 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 and prohibit the common ownership of funeral homes and cemeteries in the same region |
| 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 us, 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 Company |
| Litigation and regulatory proceedings regarding these issues could have a material adverse effect on us, 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 |
| Our foreign operations and investments involve special risks |
| Our activities in areas outside the United States are subject to risks inherent in foreign operations, including the following: • Loss of revenue, property and equipment as a result of hazards such as expropriation, nationalization, wars, insurrection and other political risks; • The effects of currency fluctuations and exchange controls, such as devaluation of foreign currencies and other economic problems; and 7 _________________________________________________________________ [70]Table of Contents • Changes in laws, regulations, and policies of foreign governments, including those associated with changes in the governing parties |
| 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 2002 and various state jurisdictions are auditing years through 2004 |
| 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 asset or require the use of cash |
| Favorable resolution could result in reduced income tax expense reported in the financial statements in the future |
| The tax accruals are presented in the balance sheet within Deferred income taxes and Other liabilities |