Service Corporation International (SCI) - Q1 2010 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2010. SCI is North America's largest provider of deathcare products and services, operating funeral homes and cemeteries across the U.S., Canada, and Germany. A significant event during the period was the acquisition of Keystone North America, Inc. on March 26, 2010, for approximately $288.9 million, expanding SCI's footprint and preneed backlog.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $530.9 million | $510.6 million |
| Gross Profit | $112.3 million | $100.1 million |
| Operating Income | $85.6 million | $85.6 million |
| Net Income (Attributable to Common Stockholders) | $30.9 million | $34.5 million |
| Diluted Earnings Per Share | $0.12 | $0.14 |
| Operating Cash Flow | $108.9 million | $141.4 million |
| Total Debt (Long-term + Current) | $1.887 billion | $1.890 billion |
| Cash and Cash Equivalents | $180.5 million | $179.7 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 4.0% year-over-year, driven by a 11.1% increase in cemetery revenues (due to higher preneed property sales and trust income) and a 1.1% increase in funeral revenues.
- Profitability: While gross profit increased 12.2%, net income declined 10.3%. This was primarily due to a $4.4 million increase in General and Administrative expenses (largely acquisition-related costs for Keystone) and the absence of a $1.6 million gain on early debt extinguishment recorded in Q1 2009.
- Segment Performance:
- Funeral: Gross profit was flat ($0.5M increase). Comparable funeral services performed decreased 3.5%, but average revenue per service increased 3.2%.
- Cemetery: Gross profit surged 73.1% ($11.7M increase) due to a significant rise in preneed property sales and trust fund income.
- Cash Flow: Operating cash flow decreased $32.4 million compared to Q1 2009, attributed to higher incentive compensation payments and timing of payroll. Investing cash outflows increased significantly due to the $259.4 million acquisition of Keystone.
Guidance, Outlook, and Risks
- Acquisition Integration: Management expects the Keystone acquisition to enhance long-term stability through its preneed backlog. However, integration costs of $2.3 million (after-tax) impacted Q1 results.
- Trust Fund Performance: Combined trust fund assets returned 3.8% in Q1 2010. Despite market volatility, SCI recorded $8.8 million in impairment charges for other-than-temporary declines in fair value. Management believes remaining unrealized losses are temporary.
- Liquidity: SCI maintains strong liquidity with $180.5 million in cash and $207.6 million in available borrowing capacity under its credit facility. The company is in compliance with all debt covenants (Leverage ratio: 3.26 vs. 4.25 max).
- Risks: Key risks include the outcome of pending litigation (including antitrust and wage/hour claims), potential changes in trust funding regulations, and the financial condition of third-party insurers funding preneed contracts.
Investor Verification Checklist
- Keystone Acquisition Details: Verify the final purchase price allocation and the specific contribution of Keystone's preneed backlog to future revenue streams.
- Trust Fund Impairments: Review the $8.8 million impairment charge and the composition of remaining unrealized losses to assess potential future earnings volatility.
- Legal Contingencies: Monitor the status of the "2003 Securities Lawsuit," antitrust claims, and wage/hour litigation, as adverse outcomes could materially impact financial results.
- Comparable vs. Consolidated Metrics: Distinguish between consolidated results (which include new acquisitions) and "same store" comparable results to gauge organic operational performance.
- Debt Covenants: Confirm continued compliance with leverage and interest coverage ratios, noting that covenants become more restrictive in September 2010.