Service Corporation International — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparison is with Q1 2014. SCI operates funeral homes, cemeteries and related deathcare businesses across the U.S. and Canada. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $748.1 million | $745.5 million | Up 0.4% |
| Gross profit | $177.9 million | $166.1 million | Up 7.2% |
| Operating income | $141.1 million | $107.4 million | Up 31.4% |
| Net income attributable to common stockholders | $61.4 million | $41.1 million | Up 49.3% |
| Diluted EPS | $0.30 | $0.19 | Up $0.11 |
| Operating cash flow | $188.8 million | $127.9 million | Up $60.9 million |
- Gross margin was approximately 23.8%, compared with 22.3% a year earlier. The filing attributes improvement chiefly to higher comparable funeral and cemetery revenue and operating leverage.
- Funeral segment revenue was $507.7 million and gross profit was $124.7 million. Cemetery revenue was $240.5 million and gross profit was $53.3 million.
- Cash and cash equivalents were $217.1 million at March 31, 2015, versus $177.3 million at year-end 2014. Total debt was $3.054 billion, including $91.0 million of current maturities; long-term debt was $2.963 billion.
- The $500 million credit facility had $250.0 million drawn, $31.6 million of letters of credit and $218.4 million of available borrowing capacity. SCI reported compliance with debt covenants: leverage ratio 3.57 versus a 4.75 maximum, and interest coverage 4.84 versus a 3.00 minimum.
- Investing activities used $52.2 million, including $30.6 million for acquisitions and $28.3 million in capital expenditures. Financing activities used $93.0 million, including $73.2 million in share repurchases and $20.5 million in dividends.
Material changes and operating drivers
- Consolidated revenue was nearly flat, while reported gross profit rose. Comparable funeral services performed increased 4.1%, partly attributed to a strong flu season; total consolidated funeral services performed declined 0.9%, reflecting divested locations.
- Comparable funeral gross profit increased 12.5%, with comparable margin rising to 24.8% from 23.0%. Comparable cemetery gross profit increased 19.4%, with margin rising to 22.3% from 20.2%.
- General and administrative expense fell to $35.1 million from $55.8 million, principally because Q1 2014 included substantial Stewart acquisition/transition, legal and system-integration costs. Excluding identified special costs in both periods, SCI said G&A increased $5.6 million, mainly due to the combined company’s ongoing costs and incentive compensation.
- Diluted weighted-average shares declined to 207.8 million from 217.2 million, reflecting share repurchases. The company repurchased 3.08 million shares for $73.2 million in Q1, at an average $23.74 per share; authorization remaining at quarter-end was approximately $167.1 million.
- Trust-funded funeral preneed production was $65.1 million, up from $59.3 million; insurance-funded funeral production was $128.8 million, down from $155.1 million. Cemetery total sales production rose to $239.7 million from $232.7 million, driven by preneed sales.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said cash on hand, expected operating cash flows and available credit capacity should meet short-term liquidity needs. Its capital priorities include acquisitions and new construction, dividends, share repurchases and opportunistic debt repurchases.
- SCI reported a $9.3 billion preneed backlog at March 31, 2015, including trust-funded and insurance-funded future funeral and cemetery revenues. Insurance-funded contract amounts are not recorded as balance-sheet assets or liabilities before contract fulfillment.
- Risks highlighted include market fluctuations in trust investments, potential trust-funding requirements, loss or cancellation of surety capacity, debt and covenant constraints, competition, rising cremation rates and lower average cremation revenue, changes in death rates or consumer preferences, regulation, litigation, tax uncertainty, foreign currency exposure and cybersecurity.
- Disclosure controls and procedures were deemed ineffective at March 31, 2015 because a previously reported material weakness in income-tax accounting remained unremediated. Management described ongoing remediation efforts, including tax-basis balance-sheet preparation and review.
- Unrecognized tax benefits were $191.7 million, with $48.5 million of accrued interest. Tax audits and proceedings are ongoing; the company said the possible range of changes in unrecognized tax benefits over the next 12 months could not be estimated.
- SCI disclosed wage-and-hour litigation and a dispute involving six leased properties and the Los Angeles Archdiocese, among other matters. It could not quantify ultimate exposure in the identified cases and warned an adverse outcome could materially affect results, financial condition or cash flows.
- Trust investment returns were volatile. Management reported Q1 returns of approximately 1.9% for combined SCI trusts, compared with increases of about 1.0% for the S&P 500 and 1.6% for the Barclays Aggregate Index. Trust investment gains and losses generally accrue to customers or care-trust corpus rather than current earnings; Q1 included $1.5 million of trust impairment charges.
Most important facts for investors to verify
- Whether comparable volume, pricing and margin improvements continue after the reported flu-season benefit and despite divestitures.
- Whether operating cash-flow growth persists, given the quarter’s effects from lower acquisition and transition costs, compensation, taxes and interest payments.
- Debt maturity, covenant headroom and credit-facility availability, particularly as senior-note maturities begin in April 2016.
- Progress in remediating the material weakness in income-tax accounting and the outcome of tax audits and unrecognized-tax-benefit positions.
- Exposure to trust-portfolio market declines, private-equity commitments, surety-bond availability and the disclosed litigation.
- Whether share repurchases and dividend payments remain sustainable alongside acquisition spending and debt obligations.