Service Corporation International — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. SCI is a North American funeral and cemetery operator. At quarter-end it operated 1,472 funeral locations and 483 cemeteries. Unless stated otherwise, financial amounts below are in millions.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $820.0 | $812.6 | $1,623.0 | $1,610.8 |
| Operating income | $182.3 | $150.1 | $334.1 | $297.1 |
| Net income attributable to common stockholders | $105.5 | $72.3 | $187.4 | $151.7 |
| Diluted EPS | $0.59 | $0.39 | $1.03 | $0.82 |
| Gross margin | 26.7% | 23.5% | 24.5% | 23.8% |
Q2 revenue grew about 0.9%; common-stockholder net income rose about 46%. First-half revenue increased about 0.8%, and common-stockholder net income increased about 24%. Gross margin is gross profit divided by revenue; percentages are approximate.
- Cash flow: First-half operating cash flow was $364.3, versus $262.9 in 2019. Capital expenditures were $104.8; investing activities used $152.1. Financing activities used $199.7, including $210.6 of share repurchases and $68.1 of dividends.
- Liquidity: Cash and cash equivalents were $222.2 at June 30, compared with $186.3 at year-end 2019. The company reported $576.0 of available revolver capacity at June 30; after a subsequent $20.0 borrowing, capacity was $556.0.
- Debt: Total debt was $3,661.0, including $87.3 current maturities, versus $3,583.4 at December 31, 2019. Weighted-average interest rate was 4.22%; 68% of debt was fixed-rate. SCI reported compliance with debt covenants at quarter-end.
- Other: The company reported an $11.9 billion preneed backlog, including insurance-funded contracts not recorded on the balance sheet. Trust investments are subject to market fluctuations.
Material changes and operating drivers
- Funeral services performed at comparable locations rose 12.7% in Q2, primarily due to COVID-19-related deaths. However, comparable average revenue per funeral service fell 8.2%, as social-distancing restrictions led to fewer and smaller services and more direct cremations.
- Q2 comparable funeral gross profit increased 23.4%; management cited stronger core-business incremental margins and cost reductions implemented in response to the pandemic. Cemetery revenue and gross profit also increased modestly in Q2.
- For the first half, comparable cemetery gross profit fell 4.7%, with lower recognized preneed revenue and higher selling costs partly offset by cost reductions. First-half funeral gross profit increased 12.0%.
- Preneed sales were disrupted by social distancing: Q2 insurance-funded production fell to $104.9 from $149.5 a year earlier. SCI said cemetery preneed sales velocity improved as local governments reopened in the latter half of Q2.
- First-half operating cash flow benefited from lower tax, vendor, interest and compensation payments. Capital spending was temporarily deferred in response to COVID-19.
Outlook, risks and unusual items
- SCI provided no numerical earnings or revenue guidance in the supplied filing text. Management said the scope, severity and duration of COVID-19’s effects could not be predicted with certainty. It described liquidity as adequate and cited operating cash flows and revolver availability as sources of financial flexibility.
- COVID-19 risks include weaker preneed sales, higher installment defaults, trust-investment volatility, restrictions or deferrals of services, workforce disruption, supply-chain issues and increased operating costs.
- Q2 results included a $0.7 net gain on divestitures and impairments, versus an $11.8 loss in Q2 2019. First-half 2020 included a $5.3 net gain, reflecting $8.4 of divestiture gains partly offset by $3.1 of impairment charges, primarily related to tradenames. First-half 2019 included a $7.6 debt-extinguishment loss.
- SCI adopted the expected-credit-loss accounting standard on January 1, 2020, increasing retained earnings by $17.0 at adoption. It also increased credit-loss provisions during the first half in response to COVID-19’s economic effects.
- Legal and regulatory exposures include wage-and-hour claims; California and Florida matters concerning cremation contract pricing, preneed trust funding and sales practices; an unclaimed-property inquiry; and an Illinois claim concerning $13.6 of perpetual-care trust withdrawals. SCI disputes the allegations in the described matters and said potential losses could not be reasonably estimated for several cases.
- Other key risks include trust-fund market losses or required replenishment, surety-bond availability, third-party insurance-company performance, high debt, litigation, regulation, and changing consumer preferences including the continued shift toward cremation.
Important facts for investors to verify
- Whether COVID-19 restrictions, service mix and death rates continue to affect funeral volumes, average revenue per service and preneed production.
- Trust investment values, returns and any related funding requirements; the backlog is not equivalent to immediately available company cash.
- Debt balances, revolver availability, covenant headroom and the timing of maturities, particularly the $150.0 of 8.0% notes due November 2021.
- Developments and potential financial exposure in the California, Florida, Illinois and unclaimed-property matters; several potential losses are not estimable in the filing.
- Whether share repurchases and dividends remain consistent with liquidity, debt covenants and the company’s capital-allocation priorities.