Service Corporation International — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; comparisons are with the same periods in 2010. SCI is a North American funeral and cemetery operator, with funeral operations also in Germany. It reported 1,429 funeral locations and 379 cemeteries. Its approximately $7.0 billion preneed backlog represents expected future revenue, not current-period sales.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $576.8 million, up 3.9% | $1,156.5 million, up 6.5% |
| Gross profit / margin | $115.0 million / 19.9%; prior year $109.3 million / 19.7% | $241.5 million / 20.9%; prior year $221.7 million / 20.4% |
| Operating income | $80.5 million, down from $95.9 million | $177.7 million, down from $181.6 million |
| Net income attributable to common stockholders | $26.1 million; diluted EPS $0.11, versus $40.3 million and $0.16 | $64.9 million; diluted EPS $0.27, versus $71.2 million and $0.28 |
| Operating cash flow | Not separately presented in the filing excerpt | $175.5 million, versus $186.0 million |
Q2 funeral revenue increased to $385.9 million, while cemetery revenue rose to $190.9 million. In the first half, funeral and cemetery revenues were $794.4 million and $362.1 million, respectively. Overall reported operating income was affected by a $9.8 million Q2 net pretax loss on divestitures and impairment charges, compared with a $13.6 million gain in Q2 2010; first-half figures were a $10.3 million loss versus a $13.1 million gain.
For Q2, comparable funeral gross profit was nearly flat, with lower case volume and increased preneed selling costs offsetting higher revenue per service and insurance commissions. Comparable cemetery gross profit rose 26%, reflecting stronger preneed property sales and trust income, including a $3.1 million distribution from a long-term alternative investment. First-half comparable funeral and cemetery gross profit increased 5.5% and 11.8%, respectively.
Cash, debt, and liquidity
- Cash and equivalents were $133.0 million at June 30, down from $170.8 million at year-end 2010. Total debt was $1.836 billion, versus $1.855 billion; approximately 92% was fixed-rate, at a 6.79% weighted-average rate.
- First-half cash flows: $175.5 million provided by operations, $108.7 million used in investing, and $106.5 million used in financing. Capital expenditures were $57.1 million; acquisitions used $66.2 million.
- The amended bank facility was increased to $500 million and extended to March 2016. There were no cash advances outstanding; $33.3 million supported letters of credit, leaving $466.7 million available.
- SCI reported compliance with debt covenants: leverage ratio 3.10 against a 4.00 maximum; interest coverage 4.35 against a 3.00 minimum. Management said cash, expected operating cash flow, and available facility capacity should cover obligations for the next 12 months.
- First-half share repurchases cost $55.6 million and dividends paid were $21.5 million. The quarterly dividend increased to $0.05 per share. Following additional post-quarter repurchases, approximately $116.3 million remained authorized.
Material changes, outlook, and risks
- SCI acquired 70% of The Neptune Society on June 3 for $44 million, adding a direct-cremation business. The acquisition generated $60.0 million of goodwill and $54.3 million of intangible assets. Management cited market expansion and expected support-function synergies.
- First-half operating cash flow declined $10.5 million. Management attributed the decrease principally to higher vendor payments and employee compensation, partly offset by increased customer receipts, tax refunds, and general-agency receipts.
- Funeral services performed fell 1.0% in Q2; comparable services fell 2.7%. The comparable cremation rate increased to 44.1% from 41.6%. Management cited lower case volume and industry trends; it also noted that cremation memorialization offerings supported average sales.
- Management intends to pursue selected growth investments and acquisitions, and expects to continue regular quarterly dividends subject to board approval and debt-covenant limits. No specific earnings or revenue forecast was provided.
- Risks include market volatility in trust investments, consumer demand and cremation trends, litigation, tax audits, regulatory and trust-funding requirements, surety availability, and the ability to realize acquisition synergies. Two cemetery burial-practices cases and wage-and-hour matters remain unresolved; the company said potential exposure could not be quantified. The antitrust case was dismissed, but plaintiffs appealed.
- SCI recorded $2.1 million of first-half pretax losses on early debt extinguishment. It also disclosed self-insurance reserves of $54.8 million and ongoing IRS and other tax examinations; the filing did not provide a reliable estimate of possible audit adjustments.
Most important facts for investors to verify
- Whether higher preneed sales and cemetery trust income persist, and how much reported growth depends on acquisitions or investment distributions.
- Whether funeral case volumes, cremation mix, selling costs, and comparable margins improve or deteriorate.
- Trust investment performance, valuation assumptions for illiquid Level 3 assets, and any future impairment or funding requirements; trust assets are not the same as unrestricted corporate cash.
- Debt covenant headroom, cash generation after capital spending and shareholder returns, and the impact of further repurchases or acquisitions.
- Developments in burial-practices, wage-and-hour, tax, and other legal matters, for which ultimate outcomes or liabilities were not quantified.