Service Corporation International Announces Second Quarter 2010 Financial Results and Increases Cash Flow Outlook for 2010

HOUSTON, July 28 /PRNewswire-FirstCall/ -- Service Corporation International (NYSE: SCI), the largest provider of deathcare products and services in North America, today reported results for the second quarter 2010.  Our unaudited condensed consolidated financial statements can be found at the end of this press release.  The table below summarizes our key financial results:

Highlights:

• Diluted earnings per share from continuing operations excluding special items was $0.15 in the second quarter 2010 compared to $0.12 in the prior year second quarter. The increase was primary attributable to higher revenues and gross profit, particularly in the funeral segment, reflecting the Keystone and Palm Mortuaries acquisitions.        
• Funeral gross profit increased $6.4 million, or 9.0%, and the funeral gross margin percentage declined marginally to 20.5%.  On a comparable or same-store basis, funeral gross profits were relatively flat; however, increased funeral case volume and profits from the Keystone and Palm Mortuaries acquisitions delivered an overall increase in funeral gross profit.
• Cemetery gross profit increased $1.1 million, or 3.6%, led by higher preneed revenues, particularly merchandise deliveries, while cemetery gross margin percentage was consistent with the prior year at 17.9%.
• Net cash provided by operating activities excluding special items for the quarter increased $8.9 million to $78.6 million primarily as a result of higher pretax income.

Tom Ryan, the Company's President and Chief Executive Officer, commented on the second quarter of 2010:

"We are very pleased with the operating performance of our Company for the second quarter. Earnings and free cash flow exceeded our internal expectations as strong comparable business performance was enhanced by the accretive contribution from the acquisitions of Keystone and Palm Mortuaries. We are also excited about our ability to grow comparable preneed funeral sales production, which increased 23% for the quarter and 17% on a year to date basis. While these sales do not have a material impact on current earnings, they increase our ability to deliver future growth in operating results and enhance shareholder value."

Comparable Funeral Results

The table below details comparable funeral results of operations ("same store") for the three months ended June 30, 2010 and 2009. We consider comparable operations to be those owned for the entire period beginning January 1, 2009 and ending June 30, 2010.  

• Comparable funeral revenues increased $4.8 million, as higher average revenues per funeral service and higher General Agency revenues and trust fund income more than offset a decline in funeral services performed.
• Comparable funeral gross profit was $1.7 million below the prior year and gross margin percentage decreased slightly to 20.1%, primarily reflecting the impact of higher selling compensation from increased preneed funeral sales production.  The revenues associated with these selling costs are deferred until the funeral service is performed.
• Comparable funeral services performed decreased 2.2%, primarily related to soft demand in our relevant markets. We believe this decline is consistent with trends experienced by other funeral service providers and industry vendors.
• The comparable average revenue per funeral service grew 3.1% over the prior year quarter. Excluding a favorable Canadian currency impact and higher funeral trust fund income, the average revenue per funeral service grew approximately 0.9%.  
• Preneed funeral sales production increased $27.3 million, or 22.8%. Total funeral contracts sold increased 20.0% while the average revenue per contract sold increased 2.3%.  A large percentage of the increase was from the performance of our Canadian operations as the implementation of a sales tax effective July 1, 2010, resulted in an increase in preneed funeral sales activity for the quarter.  Preneed funeral sales are deferred and recognized as revenues in the future when the funeral service is performed.
• The cremation rate increased to 41.1% in the second quarter of 2010 compared to 40.4% for the same period of 2009.

Comparable Cemetery Results

The table below details comparable cemetery results of operations ("same store") for the three months ended June 30, 2010 and 2009. We consider comparable operations to be those owned for the entire period beginning January 1, 2009 and ending June 30, 2010.  

• Comparable recognized preneed cemetery revenues increased $4.3 million, or 4.9%, primarily as a result of increased cemetery property sales production and higher merchandise deliveries in the current period.  
• Cemetery gross profit increased $0.3 million, or 1.0%, and gross margin percentage decreased slightly to 17.7% compared to 18.0%.  The increased revenues associated with the cemetery sales production growth was substantially offset by higher selling expenses.  Part of the increased selling expenses relates to selling costs recognized in association with an increase in deferred preneed cemetery revenue.  We expect this increase in deferred revenues to positively impact cemetery operating results in future periods.  
• Preneed and atneed cemetery sales production increased $4.4 million, or 2.7%, primarily attributable to higher property sales in the current quarter.

Other Financial Results

• General and administrative expenses were $27.0 million in the second quarter of 2010, an increase of $0.5 million compared to the second quarter of 2009.  The current quarter included acquisition and transition expenses of $3.8 million, which were largely offset by other net overhead expense reductions.
• Other income, net, was $4.3 million for the current quarter, reflecting the favorable foreign currency exchange impact from liability settlements between U.S. and Canadian subsidiaries.

Cash Flow and Capital Spending  

Set forth below is a reconciliation of net cash provided by operating activities excluding special items to our reported net cash provided by operating activities prepared in accordance with GAAP.  We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP.

• Net cash provided by operating activities excluding special items for the quarter was $78.6 million, an increase of $8.9 million compared to the prior year.  In the second quarter of 2010, cash flow benefited by $15.7 million from funding an April payroll on March 31, 2010.  This was largely offset by $14.9 million of proceeds received in the second quarter of 2009 from liquidating certain life insurance assets.  Excluding these items, cash flow increased $8.1 million primarily as a result of higher pretax income in the current quarter compared to the prior year.  We also benefited from higher atneed cash receipts resulting from initiatives that improved collection rates in the current period which was offset by higher payments for trade payables.

Consistent with our financial objectives, we were successful in prudently managing our capital expenditures during the three and six month periods ended June 30, 2010.  The increase in capital spending in 2010 primarily reflects the additional properties owned as a result of the Keystone acquisition.  A summary of our capital expenditures is set forth below:

2010 OUTLOOK

Eric Tanzberger, the Company's Senior Vice President and Chief Financial Officer, commented on the Company's outlook for 2010:

"SCI continues to generate strong cash flow, even during the recent recession and ongoing weak economic times.  During 2010 we have had particularly good success with working capital initiatives that have contributed to cash flow, including improved collection rates, especially in our atneed accounts.  We now believe that cash flow for the year will be higher than our previous guidance range provided.  While our guidance ranges for earnings and capital spending remain unchanged, we do believe that it is more likely we will report earnings in the middle to upper end of the earnings per share range below."

Our outlook for potential earnings and cash flow in 2010 is as follows:

This outlook reflects management's current views and estimates regarding future economic and financial market conditions, company performance and financial results, business prospects, the competitive environment and other events.  This outlook is subject to a number of risks and uncertainties, many of which are beyond the control of SCI, that could cause actual results to differ materially from the potential results highlighted above.  A further list and description of these risks and uncertainties and other matters can be found later in this press release under "Cautionary Statement on Forward-Looking Statements".

TRUST FUND RETURNS

Total trust fund returns include realized and unrealized gains and losses and dividends.  A summary of our consolidated trust fund returns for the three and six months ended June 30, 2010 is set forth below:

NON-GAAP FINANCIAL MEASURES

Earnings from continuing operations excluding special items, diluted earnings per share from continuing operations excluding special items, and net cash provided by operating activities excluding special items shown above are all non-GAAP financial measures.  We believe these non-GAAP financial measures provide a consistent basis for comparison between quarters and better reflect the performance of our core operations, as they are not influenced by certain income, expense, and cash items not affecting continuing operations.  We also believe these measures help facilitate comparisons to our competitors' operating results.

Set forth below is a reconciliation of earnings from continuing operations excluding special items to our reported net income attributable to common stockholders and diluted earnings per share from continuing operations excluding special items to our GAAP diluted earnings per share.  We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP.

Conference Call and Webcast

We will host a conference call on Thursday, July 29, 2010, at 9:00 a.m. Central Time.  A question and answer session will follow a brief presentation made by management.  The conference call dial-in number is (617) 786-2905 with the passcode of 91118618.  The conference call will also be broadcast live via the Internet and can be accessed through our website at www.sci-corp.com.  A replay of the conference call will be available through August 5, 2010 and can be accessed at (617) 801-6888 with the passcode of 70013657.  Additionally, a replay of the conference call will be available on our website for approximately ninety days.

Cautionary Statement on Forward-Looking Statements  

The statements in this press release that are not historical facts are forward-looking statements made in reliance on the "safe harbor" protections provided under the Private Securities Litigation Reform Act of 1995. These statements may be accompanied by words such as "believe," "estimate," "project," "expect," "anticipate" or "predict," that convey the uncertainty of future events or outcomes. These statements are based on assumptions that we believe are reasonable; however, many important factors could cause our actual results in the future to differ materially from the forward-looking statements made herein and in any other documents or oral presentations made by us, or on our behalf.  Important factors, which could cause actual results to differ materially from those in forward-looking statements include, among others, the following:

• Changes in general economic conditions, both domestically and internationally, impacting financial markets (e.g., marketable security values, access to capital markets, as well as currency and interest rate fluctuations) that could negatively affect us, particularly, but not limited to, levels of trust fund income, interest expense, and negative currency translation effects.
• Changes in operating conditions such as supply disruptions and labor disputes.  
• Our inability to achieve the level of cost savings, productivity improvements or earnings growth anticipated by management, whether due to significant increases in energy costs (e.g., electricity, natural gas and fuel oil), costs of other materials, employee-related costs or other factors.
• Our inability to complete acquisitions, divestitures or strategic alliances as planned or to realize expected synergies and strategic benefits.
• The outcomes of pending lawsuits, proceedings, and claims against us and the possibility that insurance coverage is deemed not to apply to these matters or that an insurance carrier is unable to pay any covered amounts to us.
• Allegations regarding compliance with laws, regulations, industry standards, and customs regarding funeral or burial procedures and practices.
• The amounts payable by us with respect to our outstanding legal matters exceeding our established reserves.
• Amounts that we may be required to replenish into our affiliated funeral and cemetery trust funds in order to meet minimum funding requirements.
• The outcome of pending Internal Revenue Service audits.  We maintain accruals for tax liabilities which relate to uncertain tax matters.  If these tax matters are unfavorably resolved, we will make any required payments to tax authorities. While such payments would affect our cash flow, we do not believe it would impair our ability to service debt or our overall liquidity.  If these tax matters are favorably resolved, the accruals maintained by us will no longer be required, and these amounts will be released through the tax provision at the time of resolution.
• Our ability to manage changes in consumer demand and/or pricing for our products and services due to several factors, such as changes in numbers of deaths, cremation rates, competitive pressures, and local economic conditions.
• Changes in domestic and international political and/or regulatory environments in which we operate, including potential changes in tax, accounting, and trusting policies.
• Changes in credit relationships impacting the availability of credit and the general availability of credit in the marketplace.
• Our ability to successfully access surety and insurance markets at a reasonable cost.
• Our ability to successfully leverage our substantial purchasing power with certain of our vendors.
• The effectiveness of our internal control over financial reporting, and our ability to certify the effectiveness of the internal controls and to obtain an unqualified attestation report of our auditors regarding the effectiveness of our internal control over financial reporting.
• The possibility that restrictive covenants in our credit agreement may prevent us from engaging in certain transactions.
• Our ability to buy our common stock under our share repurchase programs, which could be impacted by, among others, restrictive covenants in our bank agreements, unfavorable market conditions, the market price of our common stock, the nature of other investment opportunities presented to us from time to time, and the availability of funds necessary to continue purchasing common stock.
• The financial conditions of third-party insurance companies that fund our preneed funeral contracts may impact our future revenues.
• Declines in overall economic conditions beyond our control could reduce future potential earnings and cash flows and could result in future goodwill impairments.
• Our funeral and cemetery trust funds' investments in equity securities, fixed income securities, and mutual funds may be impacted by market conditions that are beyond our control.
• Failure to realize the anticipated benefits and/or successful implementation of the acquisition of Keystone, which could prove to be disruptive and could result in the combined business failing to meet our expectations.

For further information on these and other risks and uncertainties, see our Securities and Exchange Commission filings included in our 2009 Annual Report on Form 10-K, which was filed February 25, 2010.  Copies of this document as well as other SEC filings can be obtained from our website at www.sci-corp.com. We assume no obligation to publicly update or revise any forward-looking statements made herein or any other forward-looking statements made by us, whether as a result of new information, future events or otherwise.

About Service Corporation International

Service Corporation International (NYSE: SCI), headquartered in Houston, Texas, is North America's leading provider of deathcare products and services.  At June 30, 2010, we owned and operated 1,412 funeral homes and 382 cemeteries (of which 218 are combination locations) in 44 states, eight Canadian provinces, the District of Columbia and Puerto Rico.  Through our businesses, we market the Dignity Memorial® brand which offers assurance of quality, value, caring service, and exceptional customer satisfaction.  For more information about Service Corporation International, please visit our website at www.sci-corp.com.  For more information about Dignity Memorial®, please visit www.dignitymemorial.com.

SOURCE Service Corporation International

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