Service Corporation International — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Figures are unaudited. SCI operates funeral homes, cemeteries, crematoria and related businesses in the U.S. and Canada.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $769.2m | $778.8m | $2,380.0m | $2,369.4m |
| Operating income | $128.6m | $132.3m | $425.7m | $457.9m |
| Net income attributable to common stockholders | $70.8m | $68.9m | $222.4m | $254.2m |
| Diluted EPS | $0.38 | $0.37 | $1.20 | $1.36 |
| Cash provided by operating activities | Not separately reported for Q3 | $472.2m | $452.3m |
Consolidated operating margin was approximately 16.7% in Q3 (about 17.0% in 2018) and 17.9% for the first nine months (about 19.3% in 2018). SCI attributed the nine-month earnings decline principally to lower comparable funeral results, increased interest expense, and unfavorable divestiture and impairment results. Q3 common-stockholder income increased despite lower operating income, aided by a much lower tax provision.
Segments and operating trends
- Funeral: Q3 revenue rose 2.0% to $460.1m and operating profit increased 9.3% to $74.4m. Comparable services performed increased 1.7%, while average revenue per service fell 0.5%; the comparable cremation rate rose to 56.8% from 55.3%. For nine months, revenue was $1,431.9m versus $1,434.0m and operating profit declined 3.1% to $270.4m. Management cited a weaker flu season, lower comparable service volume and a higher cremation mix.
- Cemetery: Q3 revenue declined 5.7% to $309.1m and operating profit fell 12.9% to $85.4m, mainly from lower recognized preneed property revenue and endowment-care trust distributions. Nine-month revenue increased 1.4% to $948.1m and operating profit rose 0.5% to $272.4m.
- SCI reported approximately $11.6bn of total preneed backlog at September 30, 2019, including insurance-funded contracts not recorded as balance-sheet assets or liabilities.
Cash, debt and liquidity
- Cash and cash equivalents were $194.7m at September 30, versus $198.9m at December 31, 2018. Total assets were $13.32bn; equity was $1.78bn.
- Total debt was $3.54bn, including $69.5m of current maturities; debt was $3.60bn at year-end 2018. Weighted-average interest rate was 4.69%, and approximately 70% of debt carried fixed rates.
- Operating cash flow for the first nine months was $472.2m. Capital expenditures were $177.2m, acquisitions net of cash acquired were $67.4m, and financing activities used $242.0m. Cash, cash equivalents and restricted cash ended at $200.3m.
- A new $1.7bn credit agreement due 2024 supported refinancing; unused borrowing capacity was $729.5m. SCI reported compliance with debt covenants, with actual leverage of 3.83 against a 4.75 maximum and interest coverage of 4.83 against a 3.00 minimum.
- SCI paid $98.6m of dividends and repurchased $52.2m of shares in the first nine months. The board increased repurchase authorization to $400m; approximately $389.0m remained at quarter-end.
Changes, outlook and material items
- Q3 revenue decreased 1.2% year over year; nine-month revenue increased 0.5%. Nine-month diluted EPS declined from $1.36 to $1.20, while Q3 diluted EPS increased from $0.37 to $0.38.
- Refinancing and debt retirements generated a $16.6m early-extinguishment loss for the nine months, including $9.1m in Q3. Nine-month divestiture and impairment losses were $15.2m, compared with net gains of $15.3m in 2018.
- The effective tax rate was 2.7% in Q3 versus 19.8% in 2018, primarily because a tax liability was reduced after a statute of limitations expired. The nine-month rate was 17.3% versus 19.4%.
- Management said it believes liquidity is adequate and expects operating cash flow and credit availability to support obligations, investment, dividends and repurchases. The filing provides no specific forward revenue or earnings guidance. Management identified demographic trends, pricing, costs and adapting to cremation preferences as important operating factors.
- Key risks include trust-investment market volatility and possible trust-funding requirements; surety-bond availability; the growing cremation mix; competition, regulation and litigation; third-party insurer strength; and leverage. Management said it could not reasonably estimate potential losses for certain claims. A California DOJ letter sought $15m and other relief over cremation-contract practices; SCI disputed the allegations. Illinois authorities alleged $13.6m in perpetual-care trust withdrawals were improper; SCI stated it believes the withdrawals complied with law.
Most important facts for investors to verify
- Whether funeral volume, sales average and cremation-related revenue trends improve or continue to pressure comparable results.
- How much cemetery results depend on timing of preneed property recognition and trust-fund distributions.
- Debt refinancing costs, interest expense, covenant headroom and the sustainability of capital returns.
- Performance and funding adequacy of preneed and perpetual-care trusts, including exposure to investment markets and surety-bond requirements.
- Developments and potential financial exposure from the California DOJ, Illinois trust, wage-and-hour, burial-practice and unclaimed-property matters.