Service Corporation International — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. SCI operates funeral homes, cemeteries, crematoria, and related businesses, principally in the United States and Canada. At June 30, it operated 1,435 funeral service locations and 374 cemeteries.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2012 periods.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $625.5 | $597.4 | $1,277.9 | $1,199.9 |
| Gross profit | $125.8 | $128.2 | $285.4 | $255.8 |
| Operating income | $89.1 | $99.7 | $216.9 | $200.8 |
| Net income attributable to common stockholders | $33.6 | $37.1 | $91.2 | $85.1 |
| Diluted EPS | $0.16 | $0.17 | $0.42 | $0.39 |
| Gross margin | 20.1% | 21.5% | 22.3% | 21.3% |
- Q2 revenue grew 4.7%, while gross profit fell 1.8% and common-stockholder net income declined 9.3%. First-half revenue rose 6.5%, gross profit rose 11.6%, and common-stockholder net income rose 7.2%.
- Q2 funeral and cemetery gross profit both declined year over year. Comparable funeral and cemetery margins were pressured by selling costs, overhead investments, and higher self-insurance casualty reserves. For the first half, funeral and cemetery gross profit increased 10.2% and 15.0%, respectively.
- Six-month operating cash flow was $226.9, up from $158.4. Investing activities used $48.5; financing activities used $48.5. Cash increased $128.4 to $221.1.
- At June 30, total debt was $1,956.8, including $36.4 current maturities; cash was $221.1. Approximately 87% of debt had fixed rates, and the weighted-average interest rate was 6.24%. The company reported covenant compliance, with a 2.75 leverage ratio versus a 4.00 maximum and 4.94 interest coverage versus a 3.00 minimum.
- Current assets were $404.0 and current liabilities $394.7. These include substantial trust-related balances; trust investments and perpetual-care assets are restricted or associated with customer and care-trust obligations, and should not be treated as freely available liquidity.
Material developments, outlook, and risks
- Stewart acquisition: SCI agreed in May to acquire Stewart Enterprises for $13.25 per share in cash, in a transaction valued at approximately $1.5 billion, including about $331.6 million of Stewart debt. Closing was anticipated for late 2013 or early 2014, subject to shareholder, antitrust, and other conditions; completion was not assured. SCI said it expected synergies and operating efficiencies.
- After quarter-end, SCI entered into a $1.1 billion credit agreement, consisting of a $500 million revolving facility and a $600 million term loan, and issued $425 million of 5.375% senior notes due 2022. The notes’ proceeds were held in escrow pending the acquisition; if it did not close, the notes were to be redeemed at par. SCI stated that it believed it had arranged the financing for the acquisition.
- SCI reported a $7.5 billion preneed backlog of future revenue. Management cited preneed sales as supporting longer-term revenue and cash-flow predictability. No quantified full-year earnings or revenue guidance is provided in the filing text.
- Q2 results included a $5.5 million pretax net loss on divestitures and impairment charges, versus a $1.1 million gain a year earlier. The first half also included $6.5 million of such net losses, including losses on divestitures and settlement of a Spain-related indemnification liability. Q2 G&A included $3.2 million of pending-acquisition costs and $1.7 million of other system integration costs.
- Key risks include pending cemetery burial-practices and wage-and-hour litigation, higher indebtedness if the Stewart deal closes, integration and synergy execution, trust investment-market volatility and possible trust funding requirements, surety-bond availability, tax audits, increasing cremation rates, and cybersecurity. The company disclosed $61.0 million of self-insurance reserves and $133.6 million of gross unrecognized tax benefits, plus $42.7 million of accrued interest.
- Management stated disclosure controls were effective as of June 30, 2013, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Stewart acquisition received required approvals and closed, and the final purchase price, financing, leverage, and realized synergies.
- Whether operating margins recover after Q2 selling, overhead, and self-insurance cost increases, particularly in comparable funeral and cemetery operations.
- How much of reported cash and operating cash flow is available for general corporate use after trust, preneed, and regulatory requirements.
- Developments in burial-practices litigation, tax audits, surety arrangements, and trust-fund investment performance or funding obligations.
- Whether rising cremation mix and the company’s related products and services affect average revenue and profitability as management expects.