Service Corporation International — Q2 2019 Form 10-Q
Business context and period. SCI operates funeral homes, cemeteries, crematoria, and related businesses in the United States and Canada. This unaudited report covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
Key financial results
Amounts below are in millions, except per-share data. Revenue and earnings comparisons are year over year.
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $812.6 | $796.1 | $1,610.8 | $1,590.6 |
| Operating income | $150.1 | $162.0 | $297.1 | $325.6 |
| Net income attributable to common stockholders | $72.3 | $103.2 | $151.7 | $185.2 |
| Diluted EPS | $0.39 | $0.55 | $0.82 | $0.98 |
| Operating cash flow | Not separately presented | Not separately presented | $262.9 | $315.4 |
- Q2 revenue rose 2.1%, while operating income fell 7.3% and diluted EPS fell 29.1%. Q2 net margin was approximately 8.9%, versus 13.0% a year earlier.
- First-half revenue rose 1.3%, but operating income declined 8.8%, common-stockholder net income declined 18.1%, and diluted EPS declined 16.3%. First-half net margin was approximately 9.4%, versus 11.6%.
- At June 30, cash and cash equivalents were $243.7; current assets were $394.2 and current liabilities $614.5. Total debt was $3,632.0, including $167.1 of current maturities; long-term debt was $3,464.9.
- First-half operating cash flow of $262.9 was down $52.5 year over year. Capital expenditures were $112.7; investing activities used $142.7 and financing activities used $79.8. Cash, cash equivalents, and restricted cash totaled $251.1 at period-end.
- SCI reported $967.1 of available capacity under its bank credit facility and compliance with debt covenants. Actual leverage ratio was 3.89 against a maximum of 4.75; interest coverage was 4.83 against a minimum of 3.00.
Performance changes and management commentary
- Funeral: First-half revenue was $971.8, down from $983.0, and operating profit was $196.0 versus $210.9. Comparable services performed declined 2.1%, which management attributed mainly to a weaker 2019 flu season. Comparable average revenue per service fell 1.4%; management cited a higher cremation mix, with the comparable cremation rate rising to 56.5% from 54.7%.
- Cemetery: First-half revenue increased 5.2% to $639.0 and operating profit increased 8.1% to $187.0. Management cited higher recognized preneed property revenue, higher first-half endowment-care trust income, and cost-reduction initiatives.
- Q2 consolidated cemetery operating profit increased 3.0%; funeral operating profit was essentially flat. Management said cemetery growth helped offset higher interest expense and, for the first half, fewer funeral services.
- SCI’s preneed backlog of expected future revenue was approximately $11.6 billion at June 30, up from $11.1 billion at year-end. This includes insurance-funded contracts that are not recorded as assets and liabilities on the balance sheet; trust assets and customer funds are subject to legal restrictions.
Outlook, financing, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management described liquidity as adequate and highlighted the preneed backlog, cash generation, and capacity under its credit agreement. Its stated capital priorities include acquisitions and new locations, dividends, share repurchases, and debt management.
- In May 2019, SCI entered a new $1.7 billion bank credit agreement due 2024, including a $1.0 billion revolving facility and a $0.7 billion term loan. It also issued $750 million of 5.125% senior notes due 2029. Refinancing and debt reductions contributed to a $7.6 million first-half loss on early extinguishment; the January 2022 notes were redeemed in July 2019.
- First-half results included $13.7 million of net divestiture and impairment losses, versus $7.3 million of gains in the prior-year period. The current period also included $6.4 million in legal-settlement costs. Interest expense rose to $94.7 million from $88.1 million, primarily due to higher rates on floating-rate debt.
- Key risks include trust-portfolio market exposure and possible required trust funding; high fixed operating costs; increasing cremation rates and changing consumer preferences; competition, regulation, litigation, and insurance-provider risk; and debt, covenant, and surety-bond risks. SCI reported $80.3 million of self-insurance reserves.
- SCI disclosed ongoing litigation and regulatory matters, including a California state DOJ letter received in July 2019 seeking injunctive terms and $15 million in monetary relief concerning certain cremation contracts. SCI disputes the allegations and intends to defend itself. The filing says an adverse decision in one or more disclosed matters could materially affect results, financial condition, or cash flows; possible losses for several cases could not be reasonably estimated.
- The company adopted lease accounting in 2019, recording $261.8 million of lease liabilities at June 30; management said adoption did not affect results of operations or cash flows. Disclosure controls were assessed as effective, and no material changes to internal control were reported.
Important facts for investors to verify
- Whether funeral volume, average revenue per service, and cremation mix continue to pressure funeral profitability, and whether cemetery growth can offset that trend.
- How much of the reported backlog converts into revenue and cash over time, including the distinction between trust-funded, insurance-funded, and bonded preneed obligations.
- Debt maturities, refinancing effects, floating-rate exposure, covenant headroom, and the use of available revolving credit capacity.
- Developments and potential financial effects of the California DOJ matter, other litigation, and the Illinois perpetual-care trust inquiry.
- Trust investment returns and funding requirements: trust assets are not equivalent to unrestricted corporate cash and are subject to customer claims and applicable laws.