Service Corporation International — Q1 2011 Form 10-Q
Business context and period: North American deathcare provider operating funeral homes, cemeteries and related businesses, with 12 funeral homes in Germany that it plans to exit when conditions permit. This unaudited report covers the three months ended March 31, 2011, compared with Q1 2010; balance-sheet comparisons are to December 31, 2010. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $579.7 million | $530.9 million | +9.2% |
| Gross profit and margin | $126.4 million; 21.8% | $112.4 million; 21.2% | Profit +12.5% |
| Operating income and margin | $97.2 million; 16.8% | $85.6 million; 16.1% | +13.5% |
| Net income attributable to common stockholders | $38.8 million | $30.9 million | +25.4% |
| Diluted EPS | $0.16 | $0.12 | +33.3% |
| Operating cash flow | $108.0 million | $108.9 million | Down $0.9 million |
| Capital expenditures | $25.1 million | $18.3 million | Up $6.8 million |
Net income attributable to common stockholders equaled approximately 6.7% of revenue, versus 5.8% a year earlier. Interest expense was $33.6 million, up from $32.3 million. The effective tax rate declined to 37.6% from 39.1%.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $210.3 million, total current assets $400.0 million and current liabilities $365.4 million; the current ratio was approximately 1.09.
- Total debt was $1.853 billion, including $22.7 million of current maturities; cash less total debt was approximately $1.642 billion. The weighted-average debt rate was 6.80%, and approximately 92% of debt carried fixed interest rates.
- The amended revolving credit facility increased from $400 million to $500 million and was extended to March 2016. There were no cash advances outstanding; $42.1 million supported letters of credit, leaving $457.9 million in borrowing capacity. The company reported compliance with covenants: leverage ratio 3.10 versus a 4.00 maximum; interest coverage 4.26 versus a 3.00 minimum.
- Management said cash, expected operating cash flows and available facility capacity should be adequate for obligations over the next 12 months. It reported no significant long-term debt maturities until October 2014.
Material changes and operating drivers
- Funeral revenue increased to $408.4 million from $369.0 million. Funeral gross profit rose 17.4%, with management citing higher atneed case volume, average revenue per service and insurance commissions. Comparable funeral gross margin increased to 24.5% from 23.1%.
- Cemetery revenue increased to $171.3 million from $161.9 million, but gross profit declined 2.5% to $27.1 million. Comparable cemetery gross margin fell to 16.1% from 17.7%, as higher property, merchandise and selling costs outweighed revenue growth.
- Consolidated funeral services performed increased 7.7%, including acquisition effects; comparable services increased 1.0%. Comparable cremation mix rose to 43.9% from 41.6%. Consolidated average revenue per service increased 2.1% to $5,298; comparable average revenue rose 1.9% to $5,291.
- Keystone acquisition results were included in Q1 2011. Management attributed much of the revenue growth and increased compensation and vendor costs to acquisitions. Q1 2010 included substantial Keystone acquisition spending, making year-over-year investing cash flow markedly different.
- General and administrative expense rose $2.5 million to $28.8 million, primarily from higher compensation costs tied to total shareholder return. Interest expense increased mainly following the November 2010 issuance of 7.0% senior notes due 2019. Other income improved by $2.6 million, primarily from a $2.2 million foreign-exchange gain.
Cash allocation, outlook and risks
- Investing activities used $27.4 million, compared with $227.0 million in Q1 2010, mainly because prior-year spending included the Keystone acquisition. Financing activities used $43.4 million versus $114.5 million provided a year earlier; Q1 2011 included $30.2 million of share repurchases and $9.6 million of dividends.
- The quarterly dividend increased to $0.05 per share from $0.04. SCI repurchased 3.06 million shares for $28.7 million at an average $9.37 per share; approximately $150.1 million remained authorized at quarter-end. Management’s stated plans for capital include profitable growth initiatives, selected acquisitions, dividends and repurchases, subject to market conditions and debt covenants.
- Management reported a $6.9 billion preneed backlog of future revenue, including trust- and insurance-funded contracts. This is not equivalent to current revenue or unrestricted cash; insurance-funded contracts are not recorded as assets on the balance sheet.
- Operating cash flow was nearly flat year over year. Management cited higher employee compensation and vendor payments, partly offset by increased customer receipts and tax refunds.
- Market performance affects trust investments. SCI said the combined trusts increased approximately 13.3% over the 12 months ended March 31, 2011, compared with increases of approximately 15.6% for the S&P 500 and 5.1% for the Barclays Aggregate Index. Trust assets and related customer or care-trust liabilities should be considered together; they are not simply corporate liquidity.
- Risks include pending burial-practices, wage-and-hour and other litigation; the company says outcomes cannot currently be quantified. It also cited ongoing tax examinations, potential trust-funding requirements, market and interest-rate exposure, changes in death rates and cremation mix, cost pressures, and access to surety and insurance markets. It reported $54.7 million of self-insurance reserves.
- No specific full-year earnings or revenue guidance was provided in the filing. Management noted that interim operating results are not necessarily indicative of full-year results. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether funeral revenue, case volume and margins continue to improve on a comparable-location basis, and whether the cemetery margin decline reverses.
- How much reported growth and cash generation depends on Keystone and other acquisitions versus existing operations.
- Trust portfolio performance, valuation assumptions for less-liquid Level 3 investments, and the distinction between trust assets and funds available for corporate use.
- Debt covenant headroom, refinancing and interest costs, and the sustainability of dividends and share repurchases alongside planned investment.
- Developments in litigation and tax audits, including any effect on reserves, cash flows or liquidity.