Service Corporation International — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless noted. SCI is a North American deathcare provider operating funeral homes, cemeteries, crematoria, and related businesses. It reported 1,419 funeral locations and 373 cemeteries in North America, plus 12 funeral homes in Germany, which it intends to exit when conditions permit. Financial statements are unaudited.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $602.5 million | $579.7 million | +3.9% |
| Gross profit | $127.6 million | $126.4 million | +0.9% |
| Operating income | $101.1 million | $97.2 million | +4.0% |
| Net income attributable to common stockholders | $48.0 million | $38.8 million | +23.9% |
| Diluted EPS | $0.22 | $0.16 | +37.5% |
| Operating cash flow | $95.8 million | $108.0 million | Down $12.2 million |
- Gross margin was approximately 21.2%, versus 21.8% a year earlier; operating margin was approximately 16.8% in both periods.
- Revenue growth included acquired businesses. Funeral segment revenue rose to $424.3 million from $408.4 million; cemetery revenue rose to $178.2 million from $171.3 million. Comparable funeral revenue declined, while comparable cemetery revenue increased.
- Average revenue per funeral service was $5,191, down 2.0% consolidated, reflecting the lower average selling price of the Neptune acquisition. Comparable average revenue increased 3.1%, but comparable funeral services performed fell 4.6%. Comparable cremation rate increased to 45.0% from 44.1%.
- Cash and cash equivalents were $113.8 million at quarter-end, down from $128.6 million at December 31, 2011. Total debt was $1.887 billion, including $28.4 million of current maturities; net debt was approximately $1.774 billion. The weighted average debt rate was 6.61%, and approximately 89% of debt was fixed-rate.
- The $500 million bank credit facility had $65.0 million outstanding, $32.7 million of letters of credit, and $402.3 million of available borrowing capacity. SCI reported covenant compliance: leverage ratio 3.18 versus a 4.00 maximum; interest coverage 4.31 versus a 3.00 minimum.
- Investing activities used $22.7 million, including $23.4 million of capital expenditures. Financing activities used $89.1 million, including $75.1 million for share repurchases and $11.1 million of dividends. The quarterly dividend was $0.05 per share.
Material changes and drivers
- Common-stockholder net income increased despite only modest gross-profit growth. Lower G&A expense, higher other income, and a lower effective tax rate contributed; the tax benefit included a $3.3 million reduction in tax expense from an IRS settlement and related tax matters.
- Operating cash flow declined primarily because net cash tax payments rose by $7.4 million and incentive-compensation payments increased by $9.6 million. Management also cited higher net trust withdrawals as a partial offset.
- SCI repurchased 6.6 million shares in Q1 for approximately $73.2 million under its repurchase program (cash-flow and equity statements report approximately $75.1 million for total purchases). The lower average diluted share count—223.2 million versus 242.1 million—supported EPS growth.
- Neptune, acquired in 2011, contributed to higher funeral volumes and preneed production; management said its lower average contract price reduced consolidated average revenue per funeral service.
- The company reported a $7.2 billion backlog of future funeral and cemetery revenues from preneed sales at March 31, including trust- and insurance-funded contracts.
Outlook, risks, and unusual items
- No specific quantitative earnings or revenue guidance is provided. Management said cash on hand, expected operating cash flows, and credit-facility availability should be adequate for obligations over the next 12 months. It expects to pursue profitable growth, including cemetery and funeral-home investments and selective acquisitions. Dividends and repurchases remain subject to board decisions, market conditions, and debt covenants.
- An IRS settlement reached March 28, 2012 is expected to require a one-time payment of approximately $6.3 million in Q2 2012. Other tax years and jurisdictions remain under review or audit; the company could not estimate a range of possible changes in unrecognized tax benefits over the next year.
- SCI faces cemetery burial-practice lawsuits, wage-and-hour claims, and other litigation. It said ultimate exposure in the described matters could not be quantified; an adverse outcome could materially affect financial condition, results, or cash flows. A separate casket antitrust case was dismissed, but plaintiffs appealed.
- Trust investment values and earnings are exposed to equity, debt-market, and valuation risk. Certain alternative investments are illiquid and use significant unobservable valuation inputs. Management characterized remaining unrealized losses as temporary; reported trust investment impairments were lower than in Q1 2011.
- Other identified risks include weaker death volumes, rising cremation rates, competition, high fixed costs, regulation, surety-bond availability, insurance-company financial strength, and possible trust-funding requirements. SCI said it intends to exit its German funeral operations when economic conditions permit.
- Self-insurance reserves were $53.1 million at March 31, 2012. Total surety bonds outstanding were $249.1 million; management did not expect material future funding needs from surety cancellation or nonperformance.
Most important facts for investors to verify
- How much of the revenue and earnings growth is attributable to acquisitions and the one-time tax benefit, versus comparable operating performance.
- Whether the decline in comparable funeral volume and the lower consolidated average revenue per service persist, and how cremation trends affect revenue and margins.
- Whether preneed sales and the reported backlog convert to cash and recognized revenue as expected, including the performance and valuation of related trusts and third-party insurance funding.
- Cash-flow trajectory, share-repurchase pace, debt covenants, and the effect of the Q2 IRS settlement payment.
- Developments in burial-practice, wage-and-hour, and other litigation, for which the filing does not provide a clear estimate of ultimate exposure.