Service Corporation International — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; financial statements are unaudited. Amounts below are in U.S. dollars. SCI operates funeral homes, cemeteries and related deathcare businesses, primarily in the U.S. and Canada.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $581.2m | $573.0m | $1,781.1m | $1,729.5m |
| Gross profit | $121.3m | $107.1m | $377.0m | $348.5m |
| Operating income | $95.2m | $78.2m | $296.0m | $255.9m |
| Net income attributable to common stockholders | $41.1m | $35.5m | $126.2m | $100.4m |
| Diluted EPS | $0.19 | $0.15 | $0.57 | $0.42 |
| Operating cash flow | Not reported for quarter | Not reported for quarter | $280.3m | $291.3m |
- Revenue increased 1.4% in Q3 and 3.0% for the first nine months. Gross margin was approximately 20.9% versus 18.7% in Q3, and 21.2% versus 20.2% year to date.
- Q3 gross profit growth was reported in both funeral and cemetery operations. Funeral gross profit rose 10.1%; cemetery gross profit rose 19.2%.
- Cash provided by operating activities fell $11.0m year to date. Capital expenditures were $81.0m; operating cash flow less capital expenditures was approximately $199.3m, a calculated measure.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $151.5m; current assets were $333.5m and current liabilities $404.7m.
- Total debt was $1.914bn, including $31.3m of current maturities, versus $1.885bn at year-end 2011. Weighted-average interest rate was 6.54%; approximately 88% of debt was fixed-rate.
- The $500m bank facility had $77.0m of cash advances, $32.4m of letters of credit and $390.6m of available borrowing capacity. SCI reported compliance with covenants: leverage ratio 3.03 against a 4.00 maximum and interest coverage 4.64 against a 3.00 minimum.
- Management said it expected cash on hand, operating cash flow and available facility capacity to meet short- and long-term needs. No significant debt maturities were expected before October 2014; the facility expires in March 2016.
- SCI repurchased 12.2m shares for $142.7m during the nine months and paid $34.8m in dividends. The quarterly dividend was increased to $0.06 per share. Subsequent to quarter-end, it repurchased another 1.4m shares for $19.4m.
Changes and operating trends
- Q3 net income attributable to common stockholders increased 15.7%; year-to-date it increased 25.7%. The prior-year comparisons included larger divestiture and impairment losses and early-debt-extinguishment losses; the 2011 tax rate also benefited from the Puerto Rico subsidiary sale.
- Comparable funeral services performed declined 1.8% in Q3 and 3.1% year to date. The comparable cremation rate rose to 45.3% in Q3 from 44.7%, and to 45.1% year to date from 44.4%. Management noted cremations typically generate lower average revenue than traditional burials.
- Comparable average revenue per funeral service increased 0.7% in Q3 and 2.2% year to date. Comparable cemetery revenue benefited from preneed sales and completed construction projects; year-to-date cemetery gross margin improved to 20.9% from 19.2%.
- North American preneed backlog was reported at approximately $7.1bn, including trust-funded and insurance-funded future funeral and cemetery revenue. This is a future-revenue measure, not current-period revenue or unrestricted cash.
Outlook, unusual items and risks
- The filing provides no specific earnings or revenue guidance. Management described ongoing investment in growth and customer offerings, including cremation memorialization, and said future dividends and repurchases remain subject to board decisions, market conditions and debt covenants.
- Q3 general and administrative expense included $2.3m of purchase-order-system and administrative-provider transition costs; year-to-date costs were $4.5m. An IRS partial settlement resulted in a $6.6m payment; management estimated additional payments of approximately $25m over the next 12 months.
- Gross unrecognized tax benefits were $146.9m, with $40.8m of accrued interest. Tax audits and outcomes remain uncertain. Q3 effective tax rate was 34.6%, compared with 20.5% in 2011, when the Puerto Rico sale reduced the comparative rate.
- SCI disclosed multiple burial-practice and wage-and-hour lawsuits. Certain burial-practice matters involve proposed or certified classes; the company said it could not quantify potential liability. It warned an adverse outcome could materially affect financial condition, results or cash flows. The Funeral Consumers antitrust case was settled in September 2012 for an amount described as not material.
- Other stated risks include investment-market volatility in trusts, possible trust-funding requirements, loss of access to surety bonding, competition, rising cremation rates, regulation, insurance-company credit quality, and changes in death rates. SCI reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether comparable funeral volume and revenue trends stabilize, and how cremation mix affects revenue and margins.
- Progress and costs of the systems and administrative transition, and the timing and amount of expected tax payments.
- Developments in burial-practice class actions and other litigation, including any change in the company’s ability to estimate exposure.
- Trust portfolio performance, valuation of less-liquid investments, and any requirements to replenish trusts; trust assets are subject to customer, regulatory or perpetual-care obligations.
- Debt covenant headroom, capital allocation, and the extent to which ongoing repurchases and dividends are supported by operating cash flow.