Service Corporation International — Q1 2019 Form 10-Q
Business and period: North American funeral and cemetery operator reporting unaudited results for the three months ended March 31, 2019, compared with Q1 2018. At quarter-end, SCI operated 1,479 funeral locations and 482 cemeteries. Amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior period | Change |
|---|---|---|---|
| Revenue | $798.2 | $794.5 | Up 0.5% |
| Operating income | $147.0 | $163.7 | Down 10.2% |
| Net income attributable to common stockholders | $79.3 | $82.0 | Down 3.3% |
| Diluted EPS | $0.43 | $0.43 | Flat |
| Operating income margin | 18.4% | 20.6% | Down 2.2 percentage points |
| Cash from operating activities | $184.9 | $211.5 | Down $26.6 |
Funeral revenue declined to $492.8 from $514.4; cemetery revenue rose to $305.4 from $280.1. Funeral operating profit fell to $105.4 from $120.5, while cemetery operating profit increased to $86.4 from $75.3. The filing reports no standalone consolidated gross-margin measure.
Capital spending was $51.6; investing cash outflow was $70.9. Financing cash outflow was $162.7, including $135.0 of early debt payments, $32.8 of dividends paid, and $14.5 of share repurchases. Cash and cash equivalents were $153.7 at March 31, down from $198.9 at year-end; cash, cash equivalents, and restricted cash totaled $160.4.
Total debt was $3,477.8, down from $3,602.1 at December 31, 2018. The weighted-average interest rate was 5.03%; approximately 69% of debt was fixed-rate. SCI reported $692.1 of available bank-facility capacity at quarter-end and compliance with debt covenants; actual leverage and interest coverage ratios were 3.83x and 4.90x, respectively. After quarter-end, bank-facility borrowings increased by $40.0.
Current assets were $290.1 and current liabilities $604.5. The balance sheet included $4,498.5 of preneed receivables and trust investments, $3,598.2 of deferred receipts held in trust, and $1,573.9 of cemetery perpetual-care trust investments; these trust-related balances are not equivalent to unrestricted corporate cash. Reported preneed backlog was approximately $11.39 billion.
Material changes and management commentary
- Management attributed lower funeral activity primarily to a weaker 2019 flu season. Comparable funeral services performed declined 5.7%, and comparable average revenue per service fell 1.4%. The comparable cremation rate rose to 56.3% from 54.7%, which weighed on average revenue because cremation services generally generate less revenue than traditional burials.
- Cemetery revenue growth reflected higher recognized preneed property revenue, completed construction projects, and higher endowment-care trust income; lower atneed activity partly offset the increase.
- Operating income included an $8.0 legal reserve recorded in general and administrative expenses. Excluding this reserve, G&A decreased $0.3 year over year. Q1 2018 included a $10.1 loss on early debt extinguishment, versus none in Q1 2019.
- Operating cash flow fell $26.6; excluding a $5.6 tax refund received in the prior-year period, management said the decline was $21.0. The company cited lower customer and other receipts and higher net trust deposits.
- SCI said it reduced total debt by $123.0 during the quarter, partly to manage leverage amid anticipated pressure from weaker seasonal funeral volume. It described liquidity as adequate and intended to continue evaluating acquisitions, dividends, repurchases, and debt management. No specific full-year earnings or revenue guidance is provided in the filing text.
- Adoption of the new lease standard on January 1, 2019 added operating lease right-of-use assets and liabilities; SCI stated adoption did not affect results of operations or cash flows.
Risks, contingencies, and unusual items
- SCI is involved in wage-and-hour, operational, acquisition-related, and other litigation. The $8.0 legal reserve relates to future settlements; the filing does not provide a clear estimate of possible losses for several pending matters. A $2.5 settlement covering two lawsuits remained subject to court approval. A preliminary decision in another matter awarded approximately $0.3 million, and post-trial motions were pending in a separate case.
- SCI disputes an Illinois Comptroller claim that $13.6 million was improperly withdrawn from cemetery perpetual-care trusts. The company also described an unclaimed-property inquiry concerning certain preneed contracts; no actual audits had commenced, and possible losses could not be estimated.
- Other stated risks include trust investment-market declines or required trust replenishments, reduced surety-bond availability, rising cremation rates, changes in death volumes and consumer preferences, high fixed costs, litigation and regulatory outcomes, insurance-company financial condition, and substantial indebtedness.
- SCI reported $83.3 million of self-insurance reserves at March 31, 2019. Its $135.4 million unfunded private-equity and other investment commitment was associated with trust assets.
Important facts for investors to verify
- Whether funeral volumes recover and whether the higher cremation mix continues to pressure average revenue and funeral margins.
- How much of the $8.0 million legal reserve is ultimately used, and the potential exposure from unresolved litigation, the Illinois trust dispute, and unclaimed-property inquiries.
- The composition, investment performance, liquidity restrictions, and funding obligations of trust assets supporting the preneed backlog; these assets are not all available for corporate use.
- Debt levels, interest costs, covenant headroom, and the effect of the $40.0 million post-quarter borrowing increase.
- Whether operating cash flow and cemetery growth can offset weaker funeral activity while SCI continues dividends, repurchases, acquisitions, and capital spending.