Service Corporation International — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. SCI is a North American funeral and cemetery services provider, with operations also in Germany. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $555.3M | $513.9M | $1,086.1M | $1,024.5M |
| Gross profit | $109.3M | $101.8M | $221.6M | $201.9M |
| Operating income | $95.9M | $69.1M | $181.6M | $154.6M |
| Net income attributable to common stockholders | $40.3M | $23.1M | $71.2M | $57.6M |
| Diluted EPS | $0.16 | $0.09 | $0.28 | $0.23 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $186.0M | $211.1M |
- Q2 revenue increased 8.0% and common-stockholder net income increased 74.4% year over year. The filing attributes performance in part to Keystone, higher general agency revenue and asset-sale gains.
- Q2 gross margin was approximately 19.7%, versus 19.8%; operating margin was 17.3%, versus 13.4%; net income attributable to common stockholders was 7.3% of revenue, versus 4.5%.
- For the first half, revenue rose 6.0%, gross profit 9.7%, operating income 17.4%, and common-stockholder net income 23.5%. Gross margin increased to approximately 20.4% from 19.7%.
- Cash and cash equivalents were $152.2M at June 30, down from $179.7M at year-end. Total current assets were $345.7M and current liabilities $334.0M.
- Total debt was $1.862B, compared with $1.890B at year-end; long-term debt was $1.836B. The weighted-average debt interest rate was 6.55%, and approximately 85% of debt carried fixed rates. The company reported $145M drawn on its credit facility, $44.3M of letters of credit and $210.7M of remaining borrowing capacity.
- SCI reported first-half dividends paid of $20.4M and common-stock repurchases of $55.2M in cash-flow reporting. It repurchased 6.2M shares at an average $8.76 per share; a further 2.4M shares were repurchased after quarter-end for $18.0M.
Changes versus comparable periods
- Keystone was acquired on March 26, 2010 for approximately $288.9M, including refinancing of $80.7M of its debt. It contributed $30.0M of revenue and $6.2M of net income from acquisition through June 30. Purchase accounting remained provisional.
- Q2 consolidated funeral gross profit rose $6.4M, but comparable funeral gross profit fell $1.7M; comparable funeral services performed declined 2.2%. Comparable average revenue per service increased 3.1% to $5,274.
- Q2 consolidated cemetery gross profit increased $1.1M and comparable cemetery revenue rose 2.7%. For the first half, cemetery gross profit rose $12.8M and margin improved to approximately 17.5% from 14.7%, reflecting stronger sales and trust income and lower maintenance costs.
- First-half operating cash flow declined $25.1M, which management attributed mainly to higher incentive-compensation and trade-payable payments and prior-year life-insurance liquidation proceeds, partly offset by improved atneed collections. Investing cash outflow increased substantially, primarily because of the Keystone acquisition.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said cash on hand, expected operating cash flow and credit-facility capacity should meet liquidity needs; it expects to seek renewal of the facility before its November 2013 expiration and expects access to capital markets to refinance long-term debt as needed.
- At June 30, SCI reported compliance with debt covenants: leverage ratio 3.28 against a 4.25 maximum and interest coverage 4.18 against a 2.75 minimum. Requirements become more restrictive from September 2010: maximum leverage 4.00 and minimum interest coverage 3.00.
- Management cited soft comparable funeral demand and a higher cremation rate (41.1% in Q2 versus 40.4%); it identified market conditions, trust-investment values, consumer demand and pricing, acquisition integration, litigation, tax audits, surety access and covenant limits among risks.
- Q2 included a $13.6M net pretax gain on divestitures and impairment charges, including a $6.0M gain related to FTC-required sales of 22 funeral homes and five cemeteries associated with Keystone. Management identified a $5.8M after-tax asset-sale gain and $2.3M after-tax Keystone acquisition/integration costs among Q2 results’ impacts.
- SCI recorded immaterial prior-period error adjustments that reduced pretax income by $2.6M and net income by $1.6M in Q2; for the first half, reductions were $1.3M and $1.0M, respectively.
- Legal matters include burial-practices, securities, antitrust and wage-and-hour claims. The company said ultimate outcomes cannot be determined for described matters and an adverse decision could materially affect financial condition, results and cash flows. It also carries $54.4M of self-insurance reserves.
- Funeral and cemetery merchandise/service trust investments had fair values below cost: 92% and 91% of cost, respectively. SCI recorded trust investment impairment charges and characterized remaining unrealized losses as temporary. Trust assets are largely held for contract beneficiaries or cemetery care and are not equivalent to unrestricted corporate liquidity.
Important facts for investors to verify
- How much reported growth and earnings improvement is attributable to Keystone, divestiture gains and other nonrecurring items versus ongoing comparable operations.
- Keystone purchase-price allocation, integration costs, expected synergies and the final valuation of acquired assets and liabilities.
- Trends in comparable funeral volumes, cremation, pricing, preneed production and cemetery margins.
- Liquidity and covenant headroom as requirements tighten, together with debt refinancing and credit-facility renewal assumptions.
- Developments in material litigation and tax audits, and any resulting cash exposure or reserve changes.
- Trust portfolio performance, impairment assessments and the distinction between trust-held assets and cash available for corporate purposes.