Service Corporation International Announces Fourth Quarter 2017 Financial Results And Outlook For 2018

HOUSTON, Feb. 13, 2018 /PRNewswire/ -- Service Corporation International (NYSE: SCI), the largest provider of deathcare products and services in North America, today reported results for the fourth quarter 2017. Our consolidated financial statements can be found at the end of this press release. The table below summarizes our key financial results:

Quarterly Highlights:

• Diluted earnings per share were $1.29 in the fourth quarter of 2017 compared to $0.34 in the fourth quarter of 2016. The fourth quarter of 2017 benefited primarily from the reduction of our deferred long-term tax liabilities due to lower rates resulting from the Tax Act (see page 8 footnote ⁽¹⁾). Diluted earnings per share excluding special items was $0.50 in the fourth quarter of 2017 compared to $0.47 in the fourth quarter of 2016. Operationally, improved funeral results were offset by lower cemetery earnings. A lower effective tax rate contributed about $0.05 per share during the quarter and was partially offset by approximately $0.02 of net hurricane related expenses.
• Net cash provided by operating activities was $112.7 million in the fourth quarter of 2017 compared to $105.1 million in the fourth quarter of 2016. The fourth quarter of 2017 was impacted by a legal settlement while the fourth quarter of 2016 had minimal impact from special items. Net cash provided by operating activities excluding special items increased to $124.2 million in the fourth quarter of 2017 compared to $106.9 million in the prior year quarter. This increase was partially due to increased cash earnings and favorable working capital impacts from improved cash collections. This helped to offset higher cash tax payments (including approximately $25 million of tax payments deferred from the third quarter as part of federal tax hurricane relief).
• During the fourth quarter, we returned $78.9 million to shareholders through share repurchases and dividends, and deployed $4.4 million of capital to build new funeral homes. Our annual capital deployment for 2017 returned $308.4 million to shareholders through share repurchases and dividends, and $94.0 million to accretive acquisitions and the construction of new funeral homes.

Tom Ryan, the Company's Chairman and Chief Executive Officer, commented on the fourth quarter of 2017:

"We delivered a solid quarter as we close out 2017 and are pleased to report a 6.4% increase in adjusted earnings per share and a 16.2% increase in adjusted operating cash flow. Growth in our funeral segment was somewhat offset by an anticipated tough comparison in our cemetery segment for the fourth quarter. Tax planning and tax reform also had a significant impact for the quarter. For the full year 2017, we reported over 20% growth in adjusted earnings per share and over 9% growth in adjusted operating cash flows, while we expanded funeral and cemetery segment profit margin by 70 and 140 basis points, respectively. The resulting cash flows allowed us to deploy capital of $402 million through acquisitions, dividends, and share repurchases.

Looking ahead to 2018, we believe we are well-positioned to deliver solid results, with expected adjusted earnings per share growth within our long term targeted growth range of 8%-12% prior to the expected positive impact from revenue recognition accounting changes and tax reform in 2018. We are announcing an adjusted earnings per share range of $1.72 to $1.90 per share and an adjusted cash flow operations range of $540 million to $600 million expected for 2018.

We attribute our success to the hard work and dedication of our 23,000 associates, and I thank them for their continued focus on delivering extraordinary service to our client families despite the impact of significant challenges, including multiple hurricanes and wild fires. Looking forward we are confident that our solid operating platform and healthy financial position will allow us to continue to grow revenue, leverage our unparalleled scale, and deploy our capital wisely to enhance shareholder value."

OUTLOOK FOR 2018

Our outlook for diluted earnings per share from continuing operations excluding special items is anticipated to be in line with our expected long-term growth framework of 8%-12% after consideration of special items expected positive impact from revenue recognition accounting changes and tax reform. Our outlook for net cash provided by operating activities excluding special items reflects an anticipated $20 million net decrease in cash taxes compared to 2017 recurring levels as a result of the decreased US statutory tax rate. Our 2018 capital improvements at existing facilities and cemetery development expenditures guidance of $185 million includes only minimal capital expenditures related to hurricane recovery.

REVIEW OF FINANCIAL RESULTS FOR THE FOURTH QUARTER OF 2017

Comparable Funeral Results

The table below details comparable funeral results of operations ("same store") for the three months ended December 31, 2017 and 2016. We consider comparable operations to be those businesses owned for the entire period beginning January 1, 2016 and ending December 31, 2017.

• Total comparable funeral revenue increased by $9.9 million in the fourth quarter of 2017 compared to the same period of 2016. This increase was driven by an increase in core revenue of $5.8 million, recognized preneed revenue of $2.8 million, and non-funeral home revenue of $1.1 million.
• The $5.8 million, or 1.5% core revenue increase was primarily the result of a 0.8% increase in core services performed and a 0.7% increase in core average revenue per service. Organic sales average, excluding impacts from foreign currency and cremation rate, was essentially flat. The core cremation rate increased 90 basis points.
• The $1.1 million, or 10.3% non-funeral home revenue increase was the result of a 4.4% increase in services performed and a 5.1% increase in the average revenue per service.
• The $2.8 million, or 10.9% increase in recognized preneed revenue was primarily the result of an increase in the number of contracts sold.
• Comparable funeral operating profit increased $8.4 million to $97.0 million and the operating margin percentage increased 140 basis points to 21.0%, which is primarily due to the increase in revenue mentioned above and effective cost management.
• Comparable preneed funeral sales production increased $2.7 million, or 1.4%, in the fourth quarter of 2017 compared to 2016, resulting from an increase in the number of preneed contracts sold.

Comparable Cemetery Results

The table below details comparable cemetery results of operations ("same store") for the three months ended December 31, 2017 and 2016. We consider comparable operations to be those businesses owned for the entire period beginning January 1, 2016 and ending December 31, 2017.

• Comparable cemetery revenue decreased $6.9 million, or 2.0% in the fourth quarter of 2017 compared to 2016, led by a $13.0 million decrease in recognized preneed revenue, partially offset by higher atneed revenue and higher other revenue. The decrease in recognized preneed revenue is due to a lower recognition rate for the quarter, which is associated with premier inventory projects sold over multiple quarters that were recognized cumulatively upon completion in the fourth quarter of 2016. During 2017, revenue from these projects was recognized upon sale more evenly as we continued to sell into these developed inventory projects throughout 2017. Completed projects during the fourth quarter of 2017 did not have as material of an impact for revenue as the prior year quarter.
• Comparable preneed cemetery sales production increased $2.1 million, or 1.0%, quarter over quarter. Certain markets continued to feel the impact of the hurricanes from the prior quarter. However, the slight growth over the prior year quarter is primarily due to an increase in large sales activity and an increase in the average revenue per contract sold somewhat offset by a decline in contracts sold.
• Comparable cemetery operating profit decreased $7.1 million to $114.3 million and the operating margin percentage decreased 140 basis points to 33.9%, which is primarily due to the decrease in recognized preneed revenue mentioned above and normal fixed cost growth.

Other Financial Results

• General and administrative expenses decreased $2.9 million to $32.1 million in the fourth quarter of 2017. The prior year quarter includes a $5.6 million charge related to a pension termination settlement and $0.8 million of system integration costs related to the 2016 implementation of a new general ledger system. Excluding these costs, general and administrative expenses increased $3.5 million compared to the prior year quarter due to expenses related to improving our business location websites and increased charitable donations related to hurricane relief efforts.
• Interest expense increased $3.5 million to $43.7 million in the fourth quarter of 2017, as we increased the balance of our lower rate variable debt to maintain our leverage ratio. Additionally, we incurred higher rates as LIBOR increased in the fourth quarter of 2017.
• The GAAP effective income tax rate for the fourth quarter of 2017 was a benefit of 85.1%, which compared to the prior year fourth quarter provision of 52.3%. The GAAP effective tax rate for the three months ended December 31, 2017 is lower than the federal statutory tax rate of 35% primarily due to the favorable effects of the corporate income tax rate reduction from 35% to 21% under the Tax Act signed in December 2017 requiring the remeasurement of deferred tax assets and liabilities. The higher GAAP effective tax rate for the prior year quarter was primarily a result of a valuation allowance recorded against foreign net deferred tax assets for which a future net benefit may not be realized. Our adjusted effective income tax rate was 28.2% in the fourth quarter of 2017 compared to 36.3% in the prior year quarter. The reduction in our adjusted effective income tax rate was from certain tax planning initiatives, hurricane related federal tax credits and the result of tax benefits recognized during the quarter on the settlement of employee share-based awards in accordance with a revised accounting standard for share-based compensation^(A).

Footnotes

^(A) In the first quarter of 2017, as required, the Company adopted ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting," which recognizes the tax effect related to the settlement of share-based awards in income tax benefit or expense in the statements of earnings rather than in additional paid-in-capital. This ASU guidance also eliminates the requirement to reclassify excess tax benefits from operating activities to financing activities within the statement of cash flows. The impact of the restricted stock deliveries and option exercises in the fourth quarter of 2017 was a reduction to our adjusted provision for income taxes of $1.7 million, which had the effect of increasing our diluted earnings per share excluding special items by less than a penny per share. The impact of the restricted stock deliveries and option exercises for the full year of 2017 was a reduction to our adjusted provision for income taxes of $18.6 million, which had the effect of increasing our diluted earnings per share excluding special items by approximately nine and a half cents per share.

Cash Flow and Capital Spending

Set forth below is a reconciliation of our reported net cash provided by operating activities prepared in accordance with GAAP to net cash provided by operating activities excluding special items (or sometimes referred to as adjusted operating cash flow). 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 was $124.2 million in the fourth quarter of 2017 compared to $106.9 million in the prior year quarter. The increase was partially due to increased cash earnings and favorable working capital impacts from improved preneed cemetery and atneed funeral cash collections. This helped to offset higher cash tax payments of approximately $34 million, which included $25 million of deferred cash tax payments from the third quarter as allowed by hurricane relief federal tax provisions. We also had $16 million of non-earnings trust fund withdrawals as a result of 2017 working capital initiatives that we do not expect to recur in 2018.

A summary of our capital expenditures is set forth below:

Total capital expenditures increased in the current quarter by $10.5 million. We incurred $6.0 million of additional spend on locations affected by the hurricanes during the quarter. We also invested more this quarter on infrastructure improvements within our facilities.

For the full year 2017, we spent $196.7 million on capital improvements at existing facilities and cemetery development expenditures, which we expect to be $185 million in 2018 after reduction of hurricane related spending and less expenditures on customer-facing technology projects.

TRUST FUND RETURNS

Total trust fund returns include realized and unrealized gains and losses and dividends and are shown gross without netting of certain fees. A summary of our consolidated trust fund returns for the three and twelve months ended December 31, 2017 is set forth below:

NON-GAAP FINANCIAL MEASURES

Earnings excluding special items and diluted earnings per share excluding special items shown above are 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 or expense items not affecting operations. We also believe these measures help facilitate comparisons to our competitors' operating results.

Set forth below is a reconciliation of our reported net income attributable to common stockholders to earnings excluding special items and our GAAP diluted earnings per share to diluted earnings per share excluding special items. 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 Wednesday, February 14, 2018, at 8:00 a.m. Central Time. A question and answer session will follow a brief presentation made by management. The conference call dial-in number is (847) 585-4405 with the passcode of 46371379. 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 February 21, 2018 and can be accessed at (630) 652-3042 with the passcode of 46371379#. Additionally, a replay of the conference call will be available on our website for approximately one week.

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:

• Our affiliated funeral and cemetery trust funds own investments in equity securities, fixed income securities, and mutual funds, which are affected by market conditions that are beyond our control.
• We may be required to replenish our affiliated funeral and cemetery trust funds to meet minimum funding requirements, which would have a negative effect on our earnings and cash flow.
• Our ability to execute our strategic plan depends on many factors, some of which are beyond our control.
• Our credit agreements contain covenants that may prevent us from engaging in certain transactions.
• If we lost the ability to use surety bonding to support our preneed funeral and preneed cemetery activities, we may be required to make material cash payments to fund certain trust funds.
• The funeral and cemetery industry is competitive.
• Increasing death benefits related to preneed contracts funded through life insurance or annuity contracts may not cover future increases in the cost of providing a price-guaranteed service.
• The financial condition of third-party insurance companies that fund our preneed contracts may impact our future revenue.
• Unfavorable results of litigation could have a material adverse impact on our financial statements.
• Unfavorable publicity could affect our reputation and business.
• If the number of deaths in our markets decline, our cash flows and revenue may decrease.
• If we are not able to respond effectively to changing consumer preferences, our market share, revenue, and/or profitability could decrease.
• The continuing upward trend in the number of cremations performed in North America could result in lower revenue, operating profit, and cash flows.
• Our funeral home and cemetery businesses are high fixed-cost businesses.
• Regulation and compliance could have a material adverse impact on our financial results.
• Cemetery burial practice claims could have a material adverse impact on our financial results.
• We use a combination of insurance, self-insurance, and large deductibles in managing our exposure to certain inherent risks, therefore, we could be exposed to unexpected costs that could negatively affect our financial performance.
• A number of years may elapse before particular tax matters, for which we have established accruals, are audited and finally resolved.
• Changes in taxation as well as the inherent difficulty in quantifying potential tax effects of business decisions could have a material adverse effect on the results of our operations, financial condition, or cash flows.
• Declines in overall economic conditions beyond our control could reduce future potential earnings and cash flows and could result in future impairments to goodwill and/or other intangible assets.
• Any failure to maintain the security of the information relating to our customers, their loved ones, our associates, and our vendors could damage our reputation, could cause us to incur substantial additional costs and to become subject to litigation, and could adversely affect our operating results, financial condition, or cash flow.
• Our Canadian business exposes us to operational, economic, and currency risks.
• Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, and may prevent us from fulfilling our obligations under our indebtedness.
• A failure of a key information technology system or process could disrupt and adversely affect our business.
• Failure to maintain effective internal control over financial reporting could adversely affect our results of operations, investor confidence, and our stock price.
• The application of unclaimed property laws by certain states to our preneed funeral and cemetery backlog could have a material adverse impact on our liquidity, cash flows, and our financial results.

For further information on these and other risks and uncertainties, see our Securities and Exchange Commission filings, including our 2017 Annual Report on Form 10-K and as updated in our Form 10-Q filings. 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 and make no undertaking 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 December 31, 2017, we owned and operated 1,488 funeral homes and 473 cemeteries (of which 281 are combination locations) in 45 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