Service Corporation International — Q3 2013 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2013; comparisons are with Q3 and the first nine months of 2012. SCI operates funeral homes, cemeteries and related businesses, primarily in the U.S. and Canada. At quarter-end it operated 1,431 funeral locations and 374 cemeteries. Management reported a $7.6 billion preneed backlog of future revenues.
Key financial metrics
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $610.0 | $581.2 | $1,887.8 | $1,781.1 |
| Gross profit (margin) | $116.1 (19.0%) | $121.3 (20.9%) | $401.5 (21.3%) | $377.0 (21.2%) |
| Operating income | $83.3 | $95.2 | $300.2 | $296.0 |
| Net income attributable to common stockholders | $26.8 | $41.1 | $118.0 | $126.2 |
| Diluted EPS | $0.12 | $0.19 | $0.55 | $0.57 |
| Cash from operating activities | — | $326.4 | $280.3 |
- Q3 revenue rose about 5%, but gross profit fell about 4%, operating income fell about 12%, and common-stockholder net income fell about 35% year over year. For the nine-month period, revenue rose about 6%, gross profit about 6%, operating income about 1%, and common-stockholder net income fell about 6%.
- Nine-month capital expenditures were $79.6 million; operating cash flow less capital expenditures was approximately $246.8 million, versus $199.3 million in 2012.
- At September 30, cash and cash equivalents were $182.6 million; restricted cash was $419.5 million. Total debt was $2.294 billion, up from $1.948 billion at December 31, 2012. The weighted-average debt rate was 5.72%. The $500 million revolving facility had no cash borrowings and $468.2 million available.
- Current assets were $358.0 million and current liabilities $431.8 million. A substantial portion of reported assets and liabilities relates to consolidated preneed and perpetual-care trusts and is not freely available for general corporate liquidity.
Material changes and management commentary
- Q3 funeral gross profit declined $8.9 million (11.7%); comparable funeral gross margin fell to 17.1% from 19.8%. Management cited higher fixed costs, selling and infrastructure expenses, event-related costs, health insurance costs, and fewer comparable services performed.
- Q3 cemetery gross profit increased $3.7 million (8.2%), driven mainly by higher recognized preneed property revenue and production. Nine-month cemetery gross profit rose $14.7 million (12.3%).
- Q3 comparable funeral services performed declined 2.9%; the comparable cremation rate increased to 50.2% from 48.6%. Comparable average revenue per funeral service increased 2.3% to $5,283. For the first nine months, comparable services rose 0.4%, while the cremation rate increased to 49.7% from 48.4%.
- Q3 general and administrative expense increased $7.4 million to $33.8 million, including $6.9 million of Stewart acquisition costs and $2.3 million of other system integration costs. Nine-month G&A included $10.1 million of Stewart costs and $4.9 million of other system integration costs.
- Nine-month results included a $5.5 million pretax net loss on divestitures and impairment charges, versus a $0.9 million gain in 2012. Q3 interest expense rose to $38.1 million, including $5.7 million associated with incremental debt raised in anticipation of the Stewart transaction.
Outlook, financing, risks and contingencies
- SCI agreed to acquire Stewart Enterprises for $13.25 per share in cash; the transaction was valued at approximately $1.5 billion, including about $331.6 million of Stewart debt. Closing was expected by year-end 2013 or early 2014, subject to conditions including antitrust clearance; completion was not assured.
- To finance the acquisition, SCI issued $425 million of 5.375% senior notes due 2022, with proceeds held in escrow, and entered a $1.1 billion credit agreement comprising a $500 million revolver and a $600 million term loan. The term loan was expected to be drawn at closing. If the acquisition does not close, the new notes must be redeemed at par.
- SCI said it had adequate liquidity for near-term needs and was in compliance with debt covenants. At quarter-end its leverage ratio was 2.69 against a 4.00 maximum and interest coverage was 4.93 against a 3.00 minimum. The leverage ceiling was to rise to 5.00 after the acquisition closes. No significant long-term debt maturities were expected before April 2015.
- The board-approved quarterly dividend was $0.07 per share; $42.4 million of dividends were paid in the first nine months. Management said future dividends depend on cash generation, covenants and board approval. The company had approximately $190.1 million remaining under its share-repurchase authorization.
- Key risks include acquisition completion, integration and realizing expected synergies; higher post-acquisition leverage and interest costs; market volatility and possible funding needs for trust obligations; loss of surety-bond capacity; rising cremation rates and changing consumer preferences; competition; litigation over alleged burial practices and wage matters; tax uncertainties; and cybersecurity incidents.
- SCI reported $132.5 million of gross unrecognized tax benefits and $43.8 million of accrued interest. Outcomes of tax audits and litigation could not be predicted; the company stated adverse legal outcomes could materially affect results, financial condition or cash flows. It also reported $60.7 million of self-insurance reserves.
Most important facts for investors to verify
- Whether the Stewart acquisition closed as planned, the final funding and debt levels, and realized integration costs and synergies.
- Whether funeral service volume and funeral gross margins stabilize, and how cremation mix affects revenue and profitability.
- Cash generation and liquidity after acquisition, including covenant headroom, interest burden and the availability of restricted versus unrestricted cash.
- Trust investment performance, valuation assumptions for less-liquid investments, and any required trust replenishments or changes in surety capacity.
- Developments in burial-practices and wage litigation, tax examinations, and other contingencies.